Table of Contents

As filed with the Securities and Exchange Commission on October 14, 2011

Registration No. 333-            

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

C HEMO C ENTRYX , I NC .

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

  

2834

(Primary Standard Industrial

Classification Code Number)

  

94-3254365

(I.R.S. Employer

Identification Number)

 

 

850 Maude Avenue

Mountain View, CA 94043

(650) 210-2900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Thomas J. Schall, Ph.D.

President and Chief Executive Officer

ChemoCentryx, Inc.

850 Maude Avenue Mountain View, CA 94043

(650) 210-2900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Thomas A. Edwards, Esq.      Alan F. Denenberg, Esq.
Michael E. Sullivan, Esq.      Davis Polk & Wardwell LLP
Latham & Watkins LLP      1600 El Camino Real
12636 High Bluff Drive, Suite 400      Menlo Park, CA 94025
San Diego, CA 92130      (650) 752-2000
(858) 523-5400     

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

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.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨

 

Accelerated filer   ¨

  

Non-accelerated filer   x

 

Smaller reporting company   ¨

                                       (Do not check if a smaller reporting company)  

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Securities

to be Registered

  Proposed Maximum
Aggregate
Offering Price (1)(2)
  Amount of
Registration Fee

Common Stock, $0.001 par value

  $69,000,000   $7,907.40

 

 

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

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 the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated October 14, 2011

Prospectus

             Shares

LOGO

Common Stock

 

 

This is an initial public offering of common stock by ChemoCentryx, Inc. We are selling              shares of common stock. The estimated initial public offering price is between $             and $             per share.

 

 

We expect to apply for listing of our common stock on the Nasdaq Global Market under the symbol “CCXI.”

 

 

 

    

Per share

     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds to ChemoCentryx, before expenses

   $                    $                

We have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of common stock to cover their over-allotment.

Glaxo Group Limited and Techne Corporation, two of our principal stockholders, have agreed to purchase $7.0 million and $5.0 million, respectively, of our common stock in separate private placements concurrent with the completion of this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered under the Securities Act of 1933, as amended.

 

 

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 10.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about                     , 2012.

 

 

 

J.P. Morgan   Citi

Cowen and Company

                    , 2012


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     10   

Cautionary Note Regarding Forward-Looking Statements

     41   

Use of Proceeds

     42   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     45   

Selected Financial Data

     47   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

Business

     62   

Management

     99   
     Page  

Executive and Director Compensation

     104   

Certain Relationships and Related Party Transactions

     132   

Principal Stockholders

     134   

Description of Capital Stock

     137   

Shares Eligible for Future Sale

     141   

Material United States Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

     144   

Underwriting

     148   

Legal Matters

     152   

Experts

     152   

Where You Can Find More Information

     152   
 

 

 

Neither we nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may only be used where it is legal to offer and sell shares of our common stock. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Neither we nor the underwriters are making an offer of these securities in any jurisdiction where the offer is not permitted.

Until                     , 2012 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

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PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before buying our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 10 and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock.

Overview

ChemoCentryx is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. Our approach has been to target the chemokine system, a network of molecules including chemokine ligands and their associated receptors, as well as related chemo-attractant receptors, all of which are known to drive inflammation. Chemokine ligands concentrate at the site of an inflammatory event, serving as signals that attract and guide inflammatory cells to the tissue, where, based on the chemokine ligand and receptor combination, a specific inflammatory response is initiated. In certain diseases, discrete chemokine receptors that play a specific role in the pathology of interest have been identified, and the therapeutic goal is to specifically inhibit that receptor to provide clinical benefit. Accordingly, each of our drug candidates is a small molecule designed to target a specific chemokine or chemo-attractant receptor, thereby blocking the inflammatory response driven by that particular chemokine while leaving the rest of the immune system unaffected. Using our pioneering insights and proprietary technologies designed to better understand the chemokine system, we believe that we have established the broadest pipeline of novel drugs targeting chemokine receptors. Our compounds are designed to be highly potent, selective to minimize the risk of off-target effects and orally-available for improved patient compliance. As small molecules, they are also easier and less costly to manufacture than protein therapeutics, or biologics.

We currently have five drug candidates in clinical development and expect to advance one additional drug candidate into clinical development in 2012. The following table summarizes the status of our drug candidates and preclinical programs:

LOGO

 

 

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Our drug candidates include: Traficet-EN (CCX282 or GSK’786), our most advanced drug candidate, currently in three pivotal Phase III clinical trials being conducted by our partner Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline, for the treatment of patients with moderate-to-severe Crohn’s disease; CCX140, our lead independent drug candidate, which successfully completed a Phase II clinical trial in type 2 diabetics and is currently in two Phase II clinical trials in patients with diabetic nephropathy, a form of kidney disease; CCX354, which successfully completed a Phase II proof-of-concept clinical trial for the treatment of rheumatoid arthritis, or RA; CCX168, currently in a Phase II proof-of-concept clinical trial for the treatment of anti-neutrophil cytoplasmic antibody, or ANCA-associated vasculitis, or AAV; CCX832, which completed a Phase I clinical trial and, subject to further discussion with GSK, is expected to enter a Phase II proof-of-concept clinical trial for the treatment of skin inflammation; and CCX662, our independent drug candidate for the treatment of glioblastoma multiforme, or GBM, which is expected to enter a Phase I clinical trial in the second half of 2012. CCX140 and CCX662 are wholly owned and are being developed independently by us, while Traficet-EN, CCX354, CCX168 and CCX832 are subject to our collaboration agreement with GSK. We are also advancing several additional independent drug candidates through preclinical development. In addition, our strategy has been to identify next generation compounds related to our drug candidates. All of our drug candidates, including those under our collaboration agreement with GSK, have been internally discovered.

Traficet-EN is intended to control the inflammatory response underlying inflammatory bowel disease, or IBD, by targeting the chemokine receptor known as CCR9. In adults, CCR9 is found primarily on a population of T cells, a subset of the body’s inflammatory cells, that migrate selectively to the digestive tract. It is believed that when CCR9’s ligand, CCL25 (also known as TECK), is over-expressed, the migration of T cells to the small and large intestine causes persistent inflammation that may result in Crohn’s disease or ulcerative colitis, the two forms of IBD. We have completed nine clinical trials with Traficet-EN in a total of 785 subjects, including five Phase I clinical trials, one Thorough QT study (an assessment of cardiovascular safety which is required for regulatory approval), and three Phase II clinical trials. We completed our PROTECT-1 Phase II clinical trial in 436 patients with moderate-to-severe Crohn’s disease in 2009. Results from this clinical trial indicated that Traficet-EN was effective in inducing a clinical response over a 12-week treatment period. The results also indicated that Traficet-EN was effective in maintaining clinical remission over a 36-week treatment period. Traficet-EN was safe and well tolerated in all clinical trials completed to date. In December 2009, GSK exercised its option to obtain an exclusive license to further develop and commercialize Traficet-EN. To date, GSK has initiated three pivotal Phase III clinical trials with Traficet-EN in Crohn’s disease. If approved, Traficet-EN would be the first oral agent with a novel mechanism of action introduced for the treatment of Crohn’s disease since the introduction of corticosteroids and oral immunosuppressants.

CCX140, our lead independent drug candidate, targets the chemokine receptor known as CCR2. CCX140 is a potent and selective antagonist of CCR2 that is found on subsets of monocytes and macrophages, which are cells of the immune system believed to play an important role in inflammatory processes. Blocking CCR2 is intended to reduce the abnormal monocyte and macrophage driven inflammatory response implicated in renal disease. In addition, we have shown that levels of CCL2, the main ligand for CCR2, are elevated in the kidneys of patients with diabetic nephropathy, which is characterized by a persistent and usually progressive decline in renal function. Current treatments of patients with diabetic nephropathy primarily focus on treatment of the underlying type 2 diabetes and hypertension. Given that the current standard of care does not halt or reverse the progression of diabetic patients with impaired kidney function to end-stage renal disease, we believe that an unmet medical need persists for the treatment of diabetic nephropathy. As a precursor to our clinical trials in patients with diabetic nephropathy, in January 2011, we completed a 159-patient randomized Phase II clinical trial to assess the safety and tolerability of CCX140 in patients with type 2 diabetes, the most common cause of diabetic nephropathy. CCX140 was safe and well tolerated in this trial. In addition, CCX140 demonstrated biological activity through a dose-dependent decrease in fasting plasma glucose. The highest dose of 10mg CCX140 administered once-daily also lowered hemoglobin A1c, or HbA1c, with statistical significance over a four-week period. CCX140 is currently in two Phase II clinical trials in patients with diabetic nephropathy and we expect to complete these clinical trials by the end of 2012.

 

 

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CCX354 targets the chemokine receptor known as CCR1. Synovial fluid from the joints of RA patients contains high levels of activated CCR1 chemokine ligands. Blocking CCR1 is intended to reduce inflammation and prevent subsequent joint destruction by suppressing the infiltration of inflammatory cells into the arthritic joint. We successfully completed two Phase I clinical trials in a total of 84 healthy subjects, followed by a Phase I/II clinical trial in 24 patients with stable RA and a Phase II proof-of-concept clinical trial in 160 patients with moderate-to-severe RA. This successful Phase II proof-of-concept clinical trial triggered GSK’s option rights under our collaboration agreement, and we expect GSK’s decision whether to exercise its option to further develop and commercialize CCX354 by the end of 2011. If GSK exercises its option, it would have an exclusive right to initiate a Phase IIb clinical trial for CCX354 in RA.

CCX168 targets the chemo-attractant C5a receptor, or C5aR, which binds to a biologically activated fragment of the complement protein known as C5. Chemo-attractant receptors are related to the chemokine receptor family and similarly regulate the migration of certain types of inflammatory cells. C5aR is thought to play a role in a range of inflammatory and autoimmune diseases such as AAV, lupus, and psoriasis. We completed a Phase I clinical trial for CCX168, which showed that CCX168 was well tolerated at doses up to 100mg. We initiated a Phase II proof-of-concept clinical trial in AAV in the fourth quarter of 2011 and expect to complete this clinical trial by the end of 2012. Following the successful completion of this clinical trial, GSK may exercise its option to further develop and commercialize CCX168 under our collaboration agreement.

CCX832 targets the chemo-attractant receptor known as ChemR23. This molecule has been designed to block the pro-inflammatory effects of chemerin, the ligand for ChemR23. Elevated chemerin levels are seen in multiple inflammatory skin diseases, including cutaneous lupus, oral lichen planus and psoriasis. In preclinical studies to date, CCX832 has demonstrated the ability to successfully block ChemR23 and to interrupt the early steps associated with the development of skin inflammation. CCX832 has completed a Phase I clinical trial in 40 healthy subjects and, subject to further discussion with GSK, we expect to advance this drug candidate into a Phase II proof-of-concept clinical trial for the treatment of skin inflammation. Following the successful completion of this clinical trial, GSK may exercise its option to further develop and commercialize CCX832 under our collaboration agreement.

CCX662 is our independent drug candidate that is a highly potent and selective small molecule compound which targets CXCR7, a novel chemokine receptor that we believe plays a key role in the survival of certain tumor cells. Of particular interest is the role that CXCR7 appears to play in the development of GBM, the deadliest of all brain cancers. In animal studies, CCX662 demonstrated safety and efficacy against GBM. We are in preclinical development with this drug candidate and anticipate initiation of clinical trials in patients with GBM in the second half of 2012.

We have developed a suite of proprietary technologies, which we call the EnabaLink drug discovery engine, to better understand the chemokine system and to accelerate the identification of small molecule lead compounds that target and inhibit the function of specific chemokine receptors. We believe this platform provides us with an advantage in the rapid identification of highly specific drug candidates. An important element of this platform is our thorough map of the chemokine network which allows us to better understand how a given chemokine-chemokine receptor interaction impacts the migration of cells in a given disease. With this understanding, we can apply our advanced screening methodologies, including a purpose-built high-throughput robotic screening technology, known as the Reverse Activation of Migration, or RAM, Assay, to identify small molecule antagonists for the chemokine receptor most closely associated with a specific disease. The RAM Assay is designed to markedly reduce or eliminate non-specific inhibitors and toxic inhibitors of cell migration, resulting in highly specific lead candidates. This technology allows us to screen against targets that are not accessible with traditional technologies, providing us with what we believe to be a competitive advantage in drug discovery. We have used our EnabaLink drug discovery engine in our drug candidate programs and continue to apply these powerful research tools in our early stage drug discovery efforts.

 

 

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Thomas Schall, Ph.D., our founder, President and Chief Executive Officer, has more than 25 years of research experience in the field of chemokine biology and has contributed broadly to the understanding of chemokines and their receptors in human disease. Since our founding, we have raised approximately $350 million, of which approximately $185 million has been in the form of collaboration funding and government grants and contract. As of June 30, 2011, we had $79.9 million of cash, cash equivalents and investments. We believe that our broad pipeline of oral drug candidates, our ability to advance unique, highly specific compounds into and through clinical development across diverse indications and our proprietary drug discovery technologies provide us with distinct advantages that will enable us to continue to exploit the extensive pharmacologic potential of the chemokine system.

Strategic Alliance with GSK

In August 2006, we entered into our strategic alliance with GSK. We have received approximately $220.0 million from GSK, consisting of up-front and milestone payments, equity investments, research funding and an option exercise fee. Under the terms of our agreement with GSK, we are responsible for the discovery and development of small molecule antagonists targeting four defined chemokine and chemo-attractant receptor targets (CCR9, CCR1, C5aR and ChemR23) and for advancing them through clinical proof-of-concept. After we demonstrate successful clinical proof-of-concept, GSK is entitled to options to exclusively license drug candidates that are subject to the collaboration and two defined back-up compounds for each drug candidate for further development and commercialization on a worldwide basis. Upon exercising any of its options to drug candidates under the collaboration, GSK is solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that drug candidate. In exchange for the rights granted to GSK upon the exercise of its options, we are also entitled to receive regulatory and commercial milestone payments, as earned under the terms of our agreement, and royalties on the net sales of licensed drugs. The agreement contemplated up to six drug options, each of which covers a drug candidate against the four defined targets, including Traficet-EN (CCR9), CCX354 (CCR1), CCX168 (C5aR) and CCX832 (ChemR23), and their associated back-up compounds. The other two drug options were for second generation drug candidates and their associated back-up compounds. However, we and GSK chose not to nominate second generation drug candidates against any of the four defined targets during the agreement’s research term, which has expired. GSK has already exercised its option to Traficet-EN and its two defined back-up compounds. Thus, GSK’s only remaining options are to CCX354, CCX168 and CCX832 and their associated back-up compounds. If GSK does not exercise its options to CCX354, CCX168 or CCX832, we will evaluate our alternatives for further development of these drug candidates, which may entail internally developing these drug candidates or identifying other collaboration partners for their development.

Strategy

Our strategy includes the following key elements:

 

   

Collaborate with GSK in the Phase III clinical development and commercialization of Traficet-EN for IBD;

 

   

Forward integrate into a commercial biopharmaceutical company by driving the development and commercialization of our lead independent drug candidate, CCX140, currently in Phase II clinical development for diabetic nephropathy;

 

   

Advance our other three drug candidates under our collaboration with GSK;

 

   

Expand our clinical stage portfolio of internally discovered, independent drug candidates;

 

   

Leverage our expertise and proprietary technologies to continue discovering and developing a broad pipeline of novel chemokine-based therapeutics; and

 

   

Commercialize our drug candidates in specialty markets in North America and partner outside North America and in primary care markets worldwide.

 

 

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Risks Related to Our Business

Our ability to implement our current business strategy is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, among others, our dependence on the success of Traficet-EN, CCX140 and our other drug candidates; delays in obtaining, or a failure to obtain, regulatory approval for our drug candidates; our dependence on GSK for the success of the drug candidates that it licenses from us; failure of any approved product to achieve significant commercial acceptance in the medical community or receive reimbursement by third-party payors; unfavorable clinical trial results; our dependence upon third parties under our licensing, collaboration, contract research and manufacturing agreements; delays in product launch; failure to maintain and protect our proprietary intellectual property assets; and failure to acquire licenses necessary to commercialize any of our drug candidates, including Traficet-EN and CCX140. In addition, all of our drug candidates are subject to regulatory approval by the FDA and comparable agencies in other countries. Traficet-EN, CCX140, CCX354, CCX168 and CCX832 are our only drug candidates currently in clinical trials and none of them has received regulatory approval. We cannot give any assurance that they, or any other drug candidates we may develop or acquire, will receive regulatory approval or be successfully commercialized.

We have not generated any revenue to date from product sales and have incurred significant operating losses since our inception in 1997 (other than during the year ended December 31, 2009, when we generated net income of $15.6 million). We incurred net losses of $18.5 million in 2008, $3.1 million in 2010, and $14.2 million for the six months ended June 30, 2011. As of June 30, 2011, we had an accumulated deficit of approximately $103.9 million and we expect to incur losses for the foreseeable future. We are unable to predict the extent of future losses or when we will become profitable, if at all. Even if we succeed in developing and commercializing one or more of our drug candidates, we may never generate sufficient revenue to achieve and sustain profitability.

Concurrent Private Placements

GSK and Techne Corporation, or Techne, have agreed to purchase $7.0 million and $5.0 million, respectively, of our common stock in separate private placements concurrent with the completion of this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered under the Securities Act of 1933, as amended, or the Securities Act.

Corporate Information

We commenced operations in 1997. Our principal offices are located at 850 Maude Avenue, Mountain View, California 94043, and our telephone number is (650) 210-2900. Our website address is http://www.chemocentryx.com. The information contained in, or that can be accessed through, our website is not part of this prospectus. We have a wholly owned subsidiary, ChemoCentryx Limited, organized under the laws of the United Kingdom that is currently inactive. Unless the context requires otherwise, in this prospectus the terms “ChemoCentryx,” “we,” “us” and “our” refer to ChemoCentryx, Inc., a Delaware corporation, and our subsidiary taken as a whole unless otherwise noted.

ChemoCentryx ® , the ChemoCentryx logo, Traficet™ and Traficet-EN™ are our trademarks in the United States, the European Community, Australia and Japan. EnabaLink ® and RAM ® are our trademarks in the United States. Each of the other trademarks, trade names or service marks appearing in this prospectus belongs to its respective holder.

 

 

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THE OFFERING

 

Common stock offered by us in this offering

             Shares

 

Common stock to be sold by us to GSK in the concurrent private placement (assuming an initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus))

             Shares

 

Common stock to be sold by us to Techne in the concurrent private placement (assuming an initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus))

             Shares

 

Common stock to be outstanding after this offering and the concurrent private placements to GSK and Techne

             Shares

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $             million, or approximately $             million if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will also receive $12.0 million from the sale of              shares of common stock in the concurrent private placements to GSK and Techne, at a price per share equal to the initial public offering price. We intend to use the net proceeds from this offering and the concurrent private placements to GSK and Techne to further develop our lead independent drug candidate CCX140, to advance CCX168, CCX832 and CCX662 further in clinical development, for the research and development of additional drug candidates and for working capital and general corporate purposes.

 

Proposed Nasdaq Global Market symbol

CCXI

The number of shares of common stock to be outstanding after (1) this offering, (2) the concurrent private placements to GSK and Techne and (3) the automatic conversion of the convertible note held by Techne (see “Certain Relationships and Related Party Transactions—Relationships with Techne”), is based on 57,010,584 shares of common stock outstanding as of June 30, 2011 (assuming conversion of all of our outstanding shares of preferred stock), and an assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus) and excludes the following:

 

   

7,752,112 shares of common stock issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $2.24 per share;

 

   

319,000 shares of common stock issuable upon the exercise of outstanding warrants having an exercise price of $2.60 per share;

 

 

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803,780 shares of common stock reserved for issuance pursuant to future option grants under our 1997 Stock Option/Stock Issuance Plan, or the 1997 Plan, or our 2002 Equity Incentive Plan;

 

   

300,000 shares of common stock issuable upon the exercise of warrants, with an exercise price per share equal to 200% of the initial public offering price of our common stock, which warrants will be issued to Techne upon the completion of this offering.

 

   

             shares of common stock reserved for issuance pursuant to future option grants under our 2012 Equity Incentive Award Plan; and

 

   

             shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan.

Except as otherwise indicated, all information contained in this prospectus:

 

   

reflects the conversion of all of our outstanding shares of preferred stock into an aggregate of 48,664,392 shares of common stock prior to the completion of this offering;

 

   

assumes the adoption of our amended and restated certificate of incorporation and amended and restated bylaws upon the completion of this offering;

 

   

assumes that the underwriters do not exercise their over-allotment option;

 

   

reflects the issuance and sale of              shares of common stock in the concurrent private placements to GSK and Techne at the assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus);

 

   

reflects the issuance of              shares of common stock upon the completion of this offering, as a result of the automatic conversion of the convertible note held by Techne, at a conversion price equal to the assumed initial public offering price of $             per share (the midpoint of the range set forth on the cover page of this prospectus); and

 

   

reflects a one-for      reverse stock split of our common stock to be effected before the completion of this offering.

 

 

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SUMMARY FINANCIAL DATA

The following summary consolidated financial data for the years ended December 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary financial data for the six months ended June 30, 2010 and 2011 and as of June 30, 2011 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus and are not indicative of results to be expected for the full year. You should read this data together with our audited and unaudited consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results.

The pro forma as adjusted consolidated balance sheet data reflects (1) the conversion of all outstanding shares of our preferred stock into an aggregate of 48,664,392 shares of common stock prior to the completion of this offering, (2) the issuance and sale by us of              shares of our common stock in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (3) the concurrent private placements to GSK and Techne of $7.0 million and $5.0 million of our common stock, respectively, and (4) the automatic conversion of the convertible note held by Techne at a conversion price equal to the initial public offering price, in each case at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

 

    Years Ended December 31,     Six Months Ended
June 30,
 
    2008     2009     2010     2010     2011  
                      (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statement of Operations Data:

         

Revenues:

         

Collaborative research and development revenue from related party

  $ 23,551      $ 49,744      $ 34,861      $ 19,774      $ 4,180   

Grant revenue

    536                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues:

    24,087        49,744        34,861        19,774        4,180   

Operating expenses:

         

Research and development

    35,056        27,474        33,527        16,190        14,593   

General and administrative

    9,157        6,575        7,292        3,711        3,949   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    44,213        34,049        40,819        19,901        18,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (20,126     15,695        (5,958     (127     (14,362

Interest income

    1,762        297        436        206        224   

Interest expense

    (129     (76     (81     (36     (53

Other income

                  2,434        500          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (18,493     15,916        (3,169     543        (14,191

Income tax benefit (expense)

    23        (293     73                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (18,470   $ 15,623      $ (3,096   $ 543      $ (14,191
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share (1)

  $ (2.26   $ 0.28      $ (0.38   $ 0.01      $ (1.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share (1)

  $ (2.26   $ 0.27      $ (0.38   $ 0.01      $ (1.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic net income (loss) per share

    8,174,380        7,923,302        8,163,318        8,137,787        8,286,143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute diluted net income (loss) per share

    8,174,380        58,512,902        8,163,318        58,665,714        8,286,143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net income (loss) per share (unaudited) (1)

      $          $     
     

 

 

     

 

 

 

Shares used to compute pro forma basic and diluted net income (loss) per share

         
     

 

 

     

 

 

 

 

 

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     As of June 30, 2011  
     Actual     Pro Forma
As Adjusted (2)
 
     (in thousands)  

Consolidated Balance Sheet Data

    

Cash, cash equivalents and investments

   $ 79,936      $                

Working capital

     63,333     

Total assets

     83,399     

Non-current portion of deferred revenue

     6,349     

Non-current equipment financing obligations

     1,223     

Accumulated deficit

     (103,872  

Total stockholders’ equity

     64,891     

 

(1)

See Note 2 within the notes to our consolidated financial statements which are included elsewhere in this prospectus for a description of the method used to compute basic and diluted loss per share.

 

(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, the amount of cash, cash equivalents and investments, working capital, total assets and total stockholders’ equity by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this prospectus before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects would likely be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business

We anticipate that we will continue to incur significant losses for the foreseeable future, and if we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.

We are a clinical-stage biopharmaceutical company. We do not currently have any products approved for sale, and we continue to incur significant research and development and general and administrative expenses related to our operations. Our net loss for the years ended December 31, 2008 and 2010 and the six months ended June 30, 2011 was $18.5 million, $3.1 million and $14.2 million, respectively (we generated net income of $15.6 million for the year ended December 31, 2009). As of June 30, 2011, we had an accumulated deficit of $103.9 million. We expect to continue to incur significant losses for the foreseeable future. We expect these losses and our cash utilization to increase in the near term as we continue to conduct clinical trials for CCX140, CCX168, CCX832 and CCX662 and conduct research and development of our other drug candidates. Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline, has assumed all funding obligations for the further clinical development and commercialization of Traficet-EN. If GSK exercises its option for further development and commercialization of any of our drug candidates subject to the agreement, it will assume all funding obligations with respect to further clinical development of such drug candidates, but if it does not exercise such options, we will be responsible for such funding obligations. All of our products are in development and none has been approved for sale. To date, we have derived all of our revenues from up-front fees and milestone payments, other payments pursuant to our collaboration agreements and government grants and contracts for research and development. We do not anticipate that we will generate revenue from the sale of our products for the foreseeable future. In addition, if approved, we expect to incur significant costs to commercialize our drug candidates and our drugs may never gain market acceptance. If our drug candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or whether we will become profitable.

The commercial success of Traficet-EN depends, in large part, on the development and marketing efforts of GSK, and if GSK is unable to perform in accordance with the terms of our agreement, or is unable to obtain the required regulatory approvals for Traficet-EN our potential to generate future revenue from this drug candidate would be significantly reduced and our business would be materially and adversely harmed.

Since inception, we have invested a significant portion of our time and financial resources in the development of our most advanced drug candidate, Traficet-EN. We currently have four other drug candidates in clinical trials, but we anticipate that our ability to generate significant product revenues in the near term will depend primarily on the successful development, regulatory approval, marketing and commercialization of Traficet-EN by us or by GSK, which is subject to significant uncertainty. In particular, we rely on GSK to fund and conduct the current pivotal Phase III trials with respect to Traficet-EN. Any of the following events or factors could have a material adverse effect on our ability to generate revenue from the commercialization of Traficet-EN:

 

   

GSK may be unable to successfully complete the clinical development of Traficet-EN;

 

   

GSK must comply with additional requests and recommendations from the FDA, including additional clinical trials;

 

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GSK may not obtain all necessary approvals from the FDA and similar foreign regulatory agencies;

 

   

GSK may not commit sufficient resources to the development, regulatory approval, marketing and distribution of Traficet-EN;

 

   

Traficet-EN must be manufactured in compliance with requirements of the FDA and similar foreign regulatory agencies and in commercial quantities sufficient to meet market demand;

 

   

Traficet-EN may not achieve market acceptance by physicians, patients and third party payors;

 

   

Traficet-EN may not compete successfully against alternative products and therapies; and

 

   

We, GSK or any other pharmaceutical organization may independently develop products that compete with Traficet-EN.

In order to obtain approval from the FDA of a new drug application, or NDA, for Traficet-EN, GSK will need to demonstrate through evidence from adequate and well-controlled clinical trials that Traficet-EN is safe and effective for each proposed indication. However, Traficet-EN may not be approved even though it achieved its specified endpoints in the current and/or future pivotal Phase III clinical trials intended to support an NDA which may be conducted by GSK. The FDA may disagree with the trial design and the interpretation of data from clinical trials, may ask GSK to conduct additional costly and time consuming clinical trials in order to obtain marketing approval or approval to enter into an advanced phase of development, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA may also approve Traficet-EN for fewer or more limited indications than GSK may request, or may grant approval contingent on the performance of costly post-approval clinical trials. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of Traficet-EN.

If GSK or any of our future collaboration partners does not perform in the manner we expect or fulfill its responsibilities in a timely manner, or at all, the clinical development, regulatory approval, and commercialization efforts related to Traficet-EN could be delayed or terminated. It may be necessary for us to assume the responsibility at our own expense for the development of Traficet-EN. In that event, we would likely be required to limit the size and scope of one or more of our programs or increase our expenditures and seek additional funding and our potential to generate future revenue from Traficet-EN would be significantly reduced and our business would be materially and adversely harmed.

If clinical proof-of-concept is not achieved with respect to our remaining drug candidates under our strategic alliance with GSK or if GSK does not exercise its options thereunder, or if GSK terminates the alliance or a particular program thereunder, we will not receive any additional revenue under the alliance with respect to such programs and our results of operations and financial condition will be materially adversely affected.

In August 2006, we entered into our strategic alliance with GSK. Under the terms of our agreement, we are responsible for the discovery and development of small molecule antagonists targeting four defined chemokine and chemo-attractant receptor targets (CCR9, CCR1, C5aR and ChemR23) and taking them through clinical proof-of-concept. After we demonstrate successful clinical proof-of-concept, GSK is entitled to options to exclusively license drug candidates that are subject to the collaboration and two defined back-up compounds for each drug candidate for further development and commercialization on a worldwide basis. The agreement contemplated up to six drug options, each of which covers a drug candidate against four defined targets, including Traficet-EN (CCR9), CCX354 (CCR1), CCX168 (C5aR) and CCX832 (ChemR23), and their associated back-up compounds. The other two drug options were for second generation drug candidates and their associated back-up compounds that would target any of the four collaboration targets. However, we and GSK chose not to nominate second generation drug candidates against any of the four defined targets during the agreement’s research term, which has expired. GSK has already exercised its option to Traficet-EN and its two defined back-up compounds. Thus, GSK’s only remaining options are to CCX354, CCX168 and CCX832 and their associated back-up compounds.

 

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In December 2009, GSK exercised its option under the agreement to obtain an exclusive license for the further development and commercialization of Traficet-EN, our CCR9 drug candidate, and two identified back-up compounds. As a result of GSK’s exercise of this option, we are entitled to receive (x) up to $82.0 million, in the aggregate, consisting of (1) a non-refundable option exercise fee of $35.0 million and (2) regulatory filing milestones of up to $47.0 million in the aggregate, and (y) regulatory approval milestones of up to $75.0 million in the aggregate. In January 2010, after GSK obtained Hart-Scott-Rodino clearance for its option exercise, it paid us the option exercise fee of $35.0 million and assumed sole responsibility for the further development and commercialization of Traficet-EN and related compounds, at its expense, subject to our specified co-development and commercial participation rights.

Should GSK elect to exercise its option following successful completion of a given proof-of-concept trial for our CCX354, CCX168 or CCX832 drug candidates, we would be entitled to receive, per drug candidate, (x) up to $72.0 million, in the aggregate, consisting of (1) option exercise fees following successful completion of a given proof-of-concept trial and (2) regulatory filing milestones and (y) regulatory approval milestones of up to $75.0 million in the aggregate for its license to the lead collaboration compound, plus two back up compounds. We cannot assure you that we will be able to successfully complete a proof-of-concept trial for CCX168 or CCX832 of that the relevant regulatory filing or approval milestones can be achieved for any our programs so that we will receive the related option exercise fees and milestone payments. In addition, even if proof-of-concept trials for any of our drug candidates result in positive outcomes, GSK is under no obligation to exercise its option and we cannot assure you that GSK will exercise any of its remaining options, or that GSK will obtain Hart-Scott-Rodino clearance with respect to such options. We successfully completed a Phase II proof-of-concept clinical trial for one of our lead drug candidates, CCX354, which targets CCR1 and is covered by the alliance. We expect GSK’s decision as to whether it will exercise its option with respect to CCX354 by the end of 2011.

GSK may terminate the entire collaboration agreement or any collaboration program on a program-by-program basis for any reason upon 90 days prior written notice to us. The agreement or any program under the agreement may also be terminated for cause under certain circumstances, including material breach and insolvency. In addition, GSK may terminate its rights with respect to the licensed product if it determines in good faith, for any reason, to cease the development and commercialization of such product and provides us with a written notice of such intent.

If GSK does not exercise its options with respect to our other development candidates, terminates its rights with respect to a licensed product, or terminates the agreement:

 

   

we would not be entitled to receive the relevant option exercise fees or milestone payments;

 

   

we would owe GSK up to 5% royalties with respect to drug candidates covered by the agreement which we elected to subsequently commercialize, depending upon the stage of development at which such product commercialization rights reverted back to us;

 

   

the development of our drug candidates subject to the agreement may be terminated or significantly delayed;

 

   

we may be required to hire additional employees and allocate scarce resources to the development and commercialization of drug candidates that were previously the subject of the GSK agreement and as a result our cash expenditures could increase significantly;

 

   

we would bear all of the risks and costs related to the further development and commercialization of drug candidates that were previously the subject of the GSK agreement, including the reimbursement of third parties; and

 

   

we may need to establish alternative collaboration arrangements, and we may not be able to do so, or may not be able to do so on terms which are acceptable to us, in which case we would likely be

 

required to limit the size or scope of one or more of our programs or increase our expenditures and seek substantial additional funding.

 

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Any of these events would have a material adverse effect on our results of operations and financial condition.

The development of new drugs is a highly risky undertaking which involves a lengthy process, and our drug discovery and development activities therefore may not result in products that are approved by the applicable regulatory authorities on the time schedule we have planned, or at all.

Our drug candidates are in the early stages of drug discovery or clinical trials and are prone to the risks of failure inherent in drug development. As of the date of this prospectus, only five of our current drug candidates, Traficet-EN, CCX140, CCX354, CCX168 and CCX832 have been tested in human beings. We will need to conduct significant additional preclinical studies and clinical trials before we can demonstrate that any of our drug candidates is safe and effective to the satisfaction of the FDA and other regulatory authorities. Preclinical studies and clinical trials are expensive and uncertain processes that take years to complete. For example, we incurred significant expenses related to the IND filing and the completed single ascending dose Phase I clinical trial for CCX915, our first generation CCR2 drug candidate, which did not advance into Phase II clinical trials because its pharmacokinetic properties in humans did not meet our expectations. Failure can occur at any stage of the process, and we cannot assure you that any of our drug candidates will result in commercially successful products.

We cannot assure you that our ongoing clinical trials or any future clinical trial of any of our other drug candidates, will be completed on schedule, or at all, or whether our planned clinical trials will start in a timely manner. The commencement of our planned clinical trials could be substantially delayed or prevented by a number of factors, including:

 

   

delays or failures in obtaining sufficient quantities of the active pharmaceutical ingredient, or API, and/or drug product;

 

   

delays or failures in reaching agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites;

 

   

delays or failures in obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site;

 

   

the need to successfully complete, on a timely basis, preclinical safety pharmacology studies;

 

   

the limited number of, and competition for, suitable sites to conduct the clinical trials;

 

   

the limited number of, and competition for, suitable patients for enrollment in the clinical trials; and

 

   

delays or failures in obtaining regulatory approval to commence a clinical trial.

The completion of our clinical trials could also be substantially delayed or prevented by a number of factors, including:

 

   

slower than expected rates of patient recruitment and enrollment;

 

   

failure of patients to complete the clinical trials;

 

   

failure of our third party vendors to timely or adequately perform their contractual obligations relating to the clinical trials;

 

   

inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;

 

   

inability to monitor patients adequately during or after treatment;

 

   

termination of the clinical trials by one or more clinical trial sites;

 

   

unforeseen safety issues;

 

   

lack of efficacy demonstrated during clinical trials;

 

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lack of adequate funding to continue the clinical trials;

 

   

the need for unexpected discussions with the FDA or other foreign regulatory agencies regarding the scope or design of our clinical trials or the need to conduct additional trials;

 

   

unforeseen delays by the FDA or other foreign regulatory agencies after submission of our results;

 

   

an unfavorable FDA inspection of our contract manufacturers of API or drug product; and

 

   

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold.

Any failure or significant delay in completing clinical trials for our drug candidates would harm the commercial prospects for our drug candidates and adversely affect our financial results.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our drug candidates may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a drug candidate.

If we are required to suspend or discontinue clinical trials due to side effects or other safety risks, or if we are required to conduct studies on the long-term effects associated with the use of our drug candidates, our efforts to commercialize our products could be delayed or halted.

Our clinical trials may be suspended or terminated at any time for a number of safety-related reasons. For example, we may voluntarily suspend or terminate our clinical trials if at any time we believe that our drug candidates present an unacceptable safety risk to the clinical trial patients. In addition, IRBs or regulatory agencies may order the temporary discontinuation or termination of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, including if they present an unacceptable safety risk to patients. Administering any drug candidate to humans may produce undesirable side effects. The existence of undesirable side effects resulting from our drug candidates could cause us or regulatory authorities, such as the FDA, to interrupt, delay or halt clinical trials of our drug candidates and could result in the FDA or other regulatory agencies denying further development or approval of our drug candidates for any or all targeted indications. This, in turn, could affect whether GSK exercises its remaining license options under our strategic alliance and could prevent us from commercializing our drug candidates.

Further, chemokine receptors and chemo-attractant receptors are a novel class of targets. As a result, we may experience unforeseen adverse side effects with our existing and future drug candidates, including Traficet-EN and CCX140. As of the date of this prospectus, five of our current drug candidates have been tested in human beings. Although we have not observed significant harmful side effects in prior studies of Traficet-EN, CCX140 or our other drug candidates, later trials could reveal such side effects. The pharmacokinetic profile of preclinical studies may not be indicative of results in any clinical trial. For example, prior to commencing our preclinical studies of our CCX140 drug candidate, we studied another drug candidate that targeted CCR2, which we abandoned after pharmacokinetic results were not as favorable in humans as in earlier preclinical animal studies. We have not conducted studies on the long-term effects associated with the use of our drug candidates. Studies of these long-term effects may be required for regulatory approval and would delay our introduction of Traficet-EN, CCX140 or our other drug candidates into the market. These studies could also be required at any time after regulatory approval of any of our drug candidates. Absence of long-term data may also limit the approved uses of our products, if any, to short-term use. Some or all of our drug candidates may prove to be unsafe for human use.

 

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Even if our drug candidates do obtain regulatory approval they may never achieve market acceptance or commercial success.

Even if we obtain FDA or other regulatory approvals, our drug candidates may not achieve market acceptance among physicians, patients and third party payors and, ultimately, may not be commercially successful. Market acceptance of our drug candidates for which we receive approval depends on a number of factors, including:

 

   

the efficacy and safety as demonstrated in clinical trials;

 

   

the clinical indications for which the drug is approved;

 

   

acceptance by physicians, major operators of clinics and patients of the drug as a safe and effective treatment;

 

   

the potential and perceived advantages of our drug candidates over alternative treatments;

 

   

the safety of drug candidates seen in a broader patient group, including its use outside the approved indications;

 

   

the cost of treatment in relation to alternative treatments;

 

   

the availability of adequate reimbursement and pricing by third parties and government authorities;

 

   

relative convenience and ease of administration;

 

   

the prevalence and severity of adverse side effects; and

 

   

the effectiveness of our sales and marketing efforts.

Any failure by our drug candidates that obtain regulatory approval to achieve market acceptance or commercial success would adversely affect our financial results.

The commercial success of CCX140 depends, in part, on our ability to develop and market the drug in North America and to find partners to co-develop and commercialize the drug outside North America, and if we fail in these initiatives, our ability to generate future revenue could be significantly reduced.

Upon successful completion of the Phase II program for our lead independent drug candidate, CCX140, we plan to initiate Phase III clinical trials either alone or together with a co-development partner. We plan to retain commercial rights to CCX140 in North America and find partners for co-development and commercialization outside North America. We have invested a significant amount of our time and financial resources in the development of CCX140 and our ability to generate future revenue will depend, in part, on our ability to identify a co-development partner and the development, regulatory approval, marketing and commercialization of CCX140 by us and any future partners. Any of the following events or factors could have a material adverse effect on our ability to generate revenue from the commercialization of CCX140:

 

   

We may be unable to successfully complete the clinical development of CCX140;

 

   

Our lack of experience in commercializing and marketing drug products;

 

   

We may not have or be able to obtain sufficient financial resources to develop and commercialize CCX140;

 

   

We may not be able to identify a suitable co-development partner;

 

   

We or any of our future partners may fail to fulfill our responsibilities in a timely manner or fail to commit sufficient resources to the development, regulatory approval, and commercialization efforts related to CCX140;

 

   

We or any of our future partners must comply with additional requests and recommendations from the FDA, including additional clinical trials;

 

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We or any of our future partners may not obtain all necessary approvals from the FDA and similar foreign regulatory agencies;

 

   

CCX140 must be manufactured in compliance with requirements of FDA and similar foreign regulatory agencies and in commercial quantities sufficient to meet market demand;

 

   

CCX140 may not achieve market acceptance by physicians, patients and third party payors;

 

   

CCX140 may not compete successfully against alternative products and therapies; and

 

   

We or any pharmaceutical company may independently develop products that compete with CCX140.

We rely on third parties to conduct all our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our drug candidates.

We currently do not have the ability to independently conduct preclinical studies or clinical trials. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as clinical research organizations, or CROs, to conduct clinical trials on our drug candidates. The third parties with which we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. These third parties are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs. In particular, we rely on GSK to fund and conduct the current pivotal Phase III trials with respect to Traficet-EN. Although we rely on these third parties to conduct our preclinical studies and clinical trials, we remain responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as current good clinical practices, or cGCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials.

In addition, the execution of preclinical studies and clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. In most cases, these third parties may terminate their agreements with us upon 30 days prior written notice of a material breach by us that is not cured within 30 days. Many of these agreements may also be terminated by such third parties under certain other circumstances, including our insolvency or our failure to comply with applicable laws. In general, these agreements require such third parties to reasonably cooperate with us at our expense for an orderly winding down of services of such third parties under the agreements. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or cGCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties, which could be costly, and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the drug candidate being tested in such trials.

 

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If any of our drug candidates receives marketing approval and we or others later identify undesirable side effects caused by the drug candidate, our ability to market and derive revenue from the drugs could be compromised.

If we or others identify undesirable side effects caused by one of our drugs, any of the following adverse events could occur:

 

   

regulatory authorities may withdraw their approval of the drug or seize the drug;

 

   

we may be required to recall the drug or change the way the drug is administered;

 

   

additional restrictions may be imposed on the marketing of the particular drug or the manufacturing processes;

 

   

we may be subject to fines, injunctions or the imposition of civil or criminal penalties;

 

   

regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

   

we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;

 

   

we could be sued and held liable for harm caused to patients;

 

   

the drug may become less competitive; and

 

   

our reputation may suffer.

Any of these could result in the loss of significant revenues, which would materially and adversely affect our results of operations and business.

We will need additional financing and may be unable to raise capital on acceptable terms, or at all, when needed, which would force us to delay, reduce or eliminate our research and development programs and other operations or commercialization efforts.

We are advancing multiple drug candidates through discovery and development and will require substantial funds to conduct development, including preclinical studies and clinical trials, of our drug candidates. Commercialization of any drug candidate will also require substantial expenditures. While we currently expect GSK to assist us in our development and commercialization efforts with respect to those of our drug candidates for which GSK exercises an option under our agreement, we may also need additional financing to the extent that we are required to hire additional employees to co-promote drug candidates or to commercialize drug candidates that may not be covered by our collaboration agreement.

As of June 30, 2011, we had approximately $79.9 million in cash, cash equivalents and investments. We believe that our available cash, cash equivalents and investments, together with the net proceeds of this offering, will be sufficient to fund our anticipated level of operations for at least the next 12 months. Our future financing requirements will depend on many factors, some of which are beyond our control, including:

 

   

the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;

 

   

the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;

 

   

the continuation and success of our strategic alliance with GSK and future collaboration partners;

 

   

the exercise of options under the GSK agreement;

 

   

the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;

 

   

our ability to enter into additional collaboration, licensing, government or other arrangements and the terms and timing of such arrangements;

 

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potential acquisition or in-licensing of other products or technologies; and

 

   

the emergence of competing technologies or other adverse market developments.

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies. We currently have no understandings, commitments or agreements relating to any of these types of transactions.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, government grants and contracts and/or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available on favorable terms, if at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs or our commercialization efforts. We may be required to enter into collaborative partnerships for one or more of our drug candidate programs at an earlier stage of development or on less favorable terms, which may require us to relinquish rights to some of our drug candidates that we would otherwise have pursued on our own.

We may form additional strategic alliances in the future with respect to our independent programs, and we may not realize the benefits of such alliances.

We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties with respect to our independent programs that we believe will complement or augment our existing business. For example, we plan to find a partner for co-development and commercialization of CCX140 and CCX662 outside North America upon completion of clinical development of CCX140 for the treatment of patients with diabetic nephropathy and CCX662 for the treatment of glioblastoma multiforme, or GBM. We face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our product candidates could also delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

Key elements of our proprietary suite of drug discovery technologies, known as EnabaLink, including our RAM screening technology, are new approaches to the discovery and development of new drug candidates and may not result in the discovery of any small molecule compounds of commercial value.

We must continue to identify and develop compounds that target the chemokine network and expand our portfolio of drug candidates. Research programs to identify new disease targets and drug candidates require substantial technical, financial and human resources. We have limited resources to study the more than 50 known chemokine ligands, as described in a February 2006 article in the New England Journal of Medicine, and approximately 25 identified chemokine receptors. EnabaLink represents a new approach to the development of new drug candidates (see “Business—Our Proprietary Drug Discovery Platform, EnabaLink”) and we cannot assure you that EnabaLink will result in the discovery of new drug candidates. EnabaLink has only resulted in a limited number of clinical and preclinical stage programs to date, and we may not identify any therapeutic small molecule compounds of commercial value using EnabaLink or other commercially available drug discovery technologies.

If our Reverse Activation of Migration, or RAM, screening technology or any other screening technologies fail to identify highly specific “hits” that lead to the development of new drug candidates, our business may be materially and adversely affected. Our scientists may be unable to optimize the chemical “hits” identified by our RAM screening technology and develop the identified starting material into a candidate for further development

 

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that meets the desired product criteria. Our research and development programs may initially show promise in identifying chemokine receptors and their impact on the body’s immune system, yet fail to yield drug candidates that are suitable for preclinical and clinical development. We cannot assure you that our current efforts will be successful or that we will not abandon any of our efforts in the future related to a particular chemokine receptor or small molecule program.

We rely on third party contract manufacturing organizations to manufacture and supply our drug candidates for us, other than Traficet-EN for which GSK has manufacturing responsibility. If one of our suppliers or manufacturers fails to perform adequately or fulfill our needs, we may be required to incur significant costs and devote significant efforts to find new suppliers or manufacturers. We may also face delays in the development and commercialization of our drug candidates.

Following GSK’s exercise of its option for the further development of Traficet-EN, it assumed sole manufacturing responsibility for this drug candidate and we are no longer involved in its manufacture. We currently have limited experience in, and we do not own facilities for, manufacturing our other drug candidates. We rely upon third party contract manufacturing organizations to manufacture and supply larger quantities of these other drug candidates. The manufacture of pharmaceutical products in compliance with cGMPs requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, including difficulties with production costs and yields, quality control, including stability of the drug candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced FDA current good manufacturing practice, or cGMP, requirements, other federal and state regulatory requirements, and foreign regulations. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us or under applicable regulations, our ability to provide study drugs in our preclinical studies and clinical trials would be jeopardized. Any delay or interruption in the supply of preclinical study or clinical trial materials could delay the completion of our preclinical studies and clinical trials, increase the costs associated with maintaining our preclinical study and clinical trial programs and, depending upon the period of delay, require us to commence new trials at significant additional expense or terminate the studies and trials completely.

All manufacturers of our drug candidates must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our component materials may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. The FDA or similar foreign regulatory agencies at any time may also implement new standards, or change their interpretation and enforcement of existing standards for manufacture, packaging or testing of products. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of our drug candidates or entail higher costs or impair our reputation.

We currently rely on a single source supplier for API for each of our drug candidates, other than Traficet-EN for which the responsibility for supplying the API and drug product has been assumed by GSK. IRIX Pharmaceuticals, Inc., currently manufactures the API for CCX140 and CCX168, Carbogen Amcis AG currently manufactures the API for CCX354 and Ricera Biosciences, LLC, currently manufactures the API for CCX832. Our current agreements with our suppliers do not provide for the entire supply of the API necessary for additional clinical trials or for full-scale commercialization. We have agreements with the University of Iowa Pharmaceticals to manufacture the drug product for CCX140, GSK to manufacture the drug product for CCX168 and Almac Pharma Services to manufacture the drug product for CCX354, but we have not yet identified a manufacturer for the drug product for CCX832. In the event that we and our suppliers cannot agree to the terms

 

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and conditions for them to provide some or all of our API clinical and commercial supply needs, or if any single source supplier terminates the agreement in response to a breach by us, we would not be able to manufacture the API on a commercial scale until a qualified alternative supplier is identified, which could also delay the development of, and impair our ability to commercialize, drug candidates.

Although alternative sources of supply exist, the number of third-party suppliers with the necessary manufacturing and regulatory expertise and facilities is limited, and it could be expensive and take a significant amount of time to arrange for alternative suppliers, which could have a material adverse effect on our business. New suppliers of any API would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing such ingredients. Obtaining the necessary FDA approvals or other qualifications under applicable regulatory requirements and ensuring non-infringement of third-party intellectual property rights could result in a significant interruption of supply and could require the new manufacturer to bear significant additional costs which may be passed on to us.

We currently have no sales and marketing staff or distribution organization. If we are unable to develop a sales and marketing and distribution capability on our own or through collaborations with GSK or other marketing partners, we will not be successful in commercializing our future products.

We currently have no sales, marketing or distribution capabilities or experience. If our products are approved for sale, we intend to rely on GSK to assist us in the marketing and distribution of our products for which GSK has exercised an option under our agreement, but there can be no assurance it will elect to market and distribute our products or that it will not terminate our collaboration arrangement. If GSK does not exercise its remaining options, we may need to enter into distribution or co-marketing arrangements with other third parties. To the extent we rely on third parties for marketing and distributing our approved products, any revenue we receive will depend upon the efforts of third parties, which may not be successful and are only partially within our control and our product revenue is likely to be lower than if we directly marketed or sold our products. GSK or other future collaborators may fail to develop or effectively commercialize our drug candidates because they cannot obtain necessary regulatory approvals, development or commercialization is not commercially reasonable, they elect to pursue competitive products outside of the collaboration; or for other reasons. If we are unable to enter into arrangements with third parties to commercialize the approved products on acceptable terms or at all, we may not be able to successfully commercialize our future products or we will have to market these products ourselves, which will be expensive and require us to build our own sales force, which we do not have experience doing. For example, we plan to retain commercial rights to CCX140 in North America and intend to build a small specialty sales force calling on nephrologists in North America. In addition, under our collaboration agreement with GSK, we have co-promotion rights with respect to certain drugs, but we do not have experience managing a sales force, selling drugs or marketing drugs. We cannot assure you we will be successful in any of these initiatives. If we are not successful in commercializing our future products, either on our own or through collaborations with GSK or one or more third parties, or co-promoting drugs with GSK, any future product revenue will be materially adversely affected.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of June 30, 2011, we had 64 full-time employees. We will need to continue to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize our drug candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

   

manage our clinical trials effectively, including our Phase II clinical trials for CCX140 and CCX168 and our Phase I clinical trial for CCX832, which are being conducted at numerous trial sites throughout the world;

 

   

manage our internal development efforts effectively while carrying out our contractual obligations to licensors, contractors, collaborators, government agencies and other third parties;

 

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continue to improve our operational, financial and management controls, reporting systems and procedures; and

 

   

identify, recruit, maintain, motivate and integrate additional employees.

We face substantial competition and our competitors may discover, develop or commercialize products faster or more successfully than us.

The biotechnology and pharmaceutical industries are highly competitive, and we face significant competition from companies in the pharmaceutical, biotechnology and other related markets that are researching and marketing products designed to address IBD, chronic kidney disease, including diabetic nephropathy, rheumatoid arthritis, other autoimmune diseases and inflammatory disorders, and cancer. Established pharmaceutical companies that currently sell or are developing drugs in our markets of interest include, for example, Abbott, Amgen, AstraZeneca, Biogen Idec, Bayer, Elan, GSK, Johnson & Johnson, Merck, Merck Serono, Takeda, Novartis, Pfizer, Reata, Sanofi-aventis and Teva. Many or all of these established competitors are also involved in research and drug development regarding various chemokine receptors. Pharmaceutical and biotechnology companies which are known to be involved in chemokine research and related drug development include Pfizer, GSK, Bristol-Myers Squibb, Merck, Takeda, Sanofi-aventis, Incyte, and UCB Pharma among others.

We are developing small molecule therapeutics that will compete with other drugs and alternative therapies that are currently marketed or are being developed to treat IBD, chronic kidney disease and diabetic nephropathy, rheumatoid arthritis, other autoimmune diseases and inflammatory disorders, and cancer. If approved for marketing by the FDA, Traficet-EN, our lead IBD drug candidate, would compete against existing IBD treatments such as Remicade, Humira, and other TNF- a inhibitors, immunomodulatory drugs and corticosteroids and potentially against other novel IBD drug candidates that are currently in development. Similarly, other future drug candidates we are pursuing would compete against numerous existing and established drugs and potentially against other novel drugs and therapies that are currently in development. See “Business—Competition.” We also anticipate that we will face increased competition in the future as new companies enter into our target markets and scientific developments surrounding the chemokine system continue to develop.

Many of our competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with our competitors.

We may be subject to costly product liability claims related to our clinical trials and drug candidates and, if we are unable to obtain adequate insurance or are required to pay for liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage, a material liability claim could adversely affect our financial condition.

Because we conduct clinical trials with human patients, we face the risk that the use of our drug candidates may result in adverse side effects to patients and to otherwise healthy volunteers in our clinical trials. We face even greater risks upon any commercialization of our drug candidates. Although we have product liability insurance for clinical trials for up to $10.0 million, our insurance may be insufficient to reimburse us for any expenses or losses we may suffer, and we will be required to increase our product liability insurance coverage for our advanced clinical trials that we plan to initiate. We do not know whether we will be able to continue to obtain product liability coverage and obtain expanded coverage on acceptable terms, or at all. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, our

 

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insurance coverage. There is also a risk that third parties that we have agreed to indemnify could incur liability. An individual may bring a product liability claim against us if one of our drug candidates or products causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without merit, could result in:

 

   

withdrawal of clinical trial volunteers, investigators, patients or trial sites;

 

   

the inability to commercialize our drug candidates;

 

   

decreased demand for our drug candidates;

 

   

regulatory investigations that could require costly recalls or product modifications;

 

   

loss of revenues;

 

   

substantial costs of litigation;

 

   

liabilities that substantially exceed our product liability insurance, which we would then be required to pay ourselves;

 

   

an increase in our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;

 

   

the diversion of management’s attention from our business; and

 

   

damage to our reputation and the reputation of our products.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials, including the components of our pharmaceutical products, test samples and reagents, biological materials and other hazardous compounds. We and our manufacturers are subject to federal, state and local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and/or interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. The substantial unexpected costs we may incur could significantly harm our financial condition and results of operations.

Future financings may adversely affect our stockholders or impose restrictions on our assets or operations, which may harm our business.

If we raise additional capital by issuing equity securities or convertible debt securities, then our existing stockholders’ ownership will be diluted and the terms of any new equity securities may have preferences over our common stock. If we raise additional capital through the issuance of debt securities, the debt will have rights senior to the holders of our common stock and may contain covenants that restrict our operational flexibility or impose liens or other restrictions on our assets. In addition, the terms of future financings may restrict our ability to raise additional capital, which would delay or prevent the further development or commercialization of our drug candidates.

 

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If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our current drug candidates, potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. If adequate funds are not available, our ability to achieve profitability or to respond to competitive pressures would be significantly limited and we may be required to delay, significantly curtail or eliminate the development of one or more of our drug candidates.

We are highly dependent on the services of our founder, President and Chief Executive Officer, Dr. Thomas J. Schall, and if we are not able to retain Dr. Schall or other members of our management or recruit additional management, clinical and scientific personnel, our business will suffer.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay area. Our industry has experienced a high rate of turnover of management personnel in recent years. If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We are highly dependent on the principal members of our management and scientific staff. The loss of service of any of our management could harm our business. In addition, we are dependent on our continued ability to attract, retain and motivate highly qualified additional management, clinical and scientific personnel. The competition for qualified personnel in the pharmaceutical industry is intense. Due to our limited resources, we may not be able to effectively attract and recruit additional qualified personnel. If we are not able to retain our management, particularly our founder, President and Chief Executive Officer, Dr. Schall, and attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, including Dr. Schall, these agreements are terminable at will with or without notice and, therefore, we may not be able to retain their services as expected. In addition to the competition for personnel, the San Francisco Bay area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.

In addition, we have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.

Requirements associated with being a public company will increase our costs significantly, as well as divert significant company resources and management attention.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We are working with our legal, independent accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required in order to adequately prepare for being a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

 

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In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory authorities.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and beginning with our annual report for fiscal 2012 provide a management report on the internal control over financial reporting. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission, or SEC, or The Nasdaq Stock Market LLC, or Nasdaq. Any such action could adversely affect our financial results or investors’ confidence in us and could cause our stock price to fall. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources and could materially adversely affect our stock price.

We may be adversely affected by the current economic environment.

Our ability to attract and retain collaboration partners or customers, invest in and grow our business and meet our financial obligations depends on our operating and financial performance, which, in turn, is subject to numerous factors, including the prevailing economic conditions and financial, business and other factors beyond our control, such as the rate of unemployment, the number of uninsured persons in the United States and inflationary pressures. We cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.

We are exposed to risks associated with reduced profitability and the potential financial instability of our collaboration partners or customers, many of which may be adversely affected by volatile conditions in the financial markets. For example, unemployment and underemployment, and the resultant loss of insurance, may decrease the demand for healthcare services and pharmaceuticals. If fewer patients are seeking medical care because they do not have insurance coverage, our collaboration partners or customers may experience reductions in revenues, profitability and/or cash flow that could lead them to reduce their support of our programs or financing activities. If collaboration partners or customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. This, in turn, could adversely affect our financial condition and liquidity. In addition, if economic challenges in the United States result in widespread and prolonged unemployment, either regionally or on a national basis, prior to the effectiveness of certain provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively known as the Affordable Care Act, a substantial number of people may become uninsured or underinsured. To the extent economic challenges result in fewer individuals pursuing or being able to afford our products once commercialized, our business, results of operations, financial condition and cash flows could be adversely affected.

 

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Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our drug development programs.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our drug candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our drug candidates could be delayed.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change, by value, in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change taxable income and taxes may be limited. We previously determined that we had ownership changes that occurred in July 1999 and June 2004, which limit our ability to use our then existing tax attributes. We have not yet determined whether, as a result of our initial public offering and other transactions that have occurred over the past three years, we have experienced or may, upon completion of this offering, experience an additional ownership change. In addition, future changes in our stock ownership, many of the causes of which are outside our control, could result in an ownership change. Any such ownership changes could further limit our ability to use net operating loss carryforwards and other pre-change tax attributes.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. Our corporate headquarters is located in

 

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California and certain clinical sites for our drug candidates, operations of our existing and future partners and suppliers are or will be located in California near major earthquake faults and fire zones. The ultimate impact on us, our significant partners, suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural or manmade disaster.

Risks Related to Intellectual Property

We may have to license rights from a third party or engage in patent litigation in order to secure the rights necessary to commercialize Traficet-EN or other related CCR9 drug candidates. Patent litigation could absorb significant management time and financial resources, and, if we do not prevail, could have a material adverse effect on our ability to derive revenues from our agreement with GSK.

Millennium Pharmaceuticals, Inc., or Millennium, has obtained certain U.S. patents which include claims to small molecules that modulate CCR9, compositions thereof, and methods of using them to treat conditions such as IBD. Millennium, which was acquired by Takeda Pharmaceutical Company Limited, or Takeda, in May 2008 and is currently a wholly owned subsidiary of Takeda, may contend that the claims of these patents cover our patented Traficet-EN drug candidate. We believe that our activities related to Traficet-EN are currently exempt from patent infringement liability because these activities are strictly limited to obtaining information for regulatory approval. However, if and when our Traficet-EN related activities extend beyond those related to seeking regulatory approval, such as, for example, if and when we commercialize Traficet-EN, Millennium might then commence an infringement action against us based on these patents and/or other related patents that it may be granted in the future. If Millennium elects to sue us, we believe that we may have viable defenses to any such infringement suit. However, we cannot assure you that the relevant court would find in our favor with respect to such defenses. Intellectual property litigation and patent litigation in particular, is expensive, complex and lengthy and its outcome is difficult to predict. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our strategic partners from using, selling, offering to sell or importing out current or future drug candidates or could enter an order mandating that we undertake certain remedial activities. Under our agreement with GSK, GSK has the right, but not the obligation, to defend against third party patent infringement claims for licensed drugs. If GSK elects to defend against any such claims, it has the sole right to direct the defense of such claims and settle such claims at its own cost and expense. If GSK elects not to defend against such claims, we have the right, but not the obligation, to defend against such claims.

We may also be subject to negative publicity due to litigation. Pending or future patent litigation against us or any strategic partners by Millennium or anyone else may force us or any strategic partners to stop or delay developing, manufacturing or selling potential drug candidates that are claimed to infringe a third party’s intellectual property, unless that party grants us or any strategic partners rights to use its intellectual property. If Millennium is able to obtain an injunction and neither we nor our strategic partners are able to obtain a license, both we and our strategic partners would be precluded from the manufacture and sale of Traficet-EN. U.S. patents are entitled to a presumption of validity and the burden of proving invalidity would be heavily weighted against us. Specifically, we would be required to show by clear and convincing evidence that Millennium’s patents are invalid. Such decisions on patent validity often favor the patent owner because of the presumption of validity. If we or our strategic partners are unable to show that Millennium’s patent is invalid and neither we nor our strategic partners are able to obtain a license from Millennium for the use of their intellectual property at all or on commercially acceptable terms, this would preclude both us and our strategic partners from the manufacture and sale of Traficet-EN or related candidate compounds found to be covered by Millennium’s patent claims. If we are able to obtain a license from Millennium, we will be solely responsible for all fees required to be paid to Millennium in connection with such license and GSK will bear no responsibility for such license fees. See “Business—Intellectual Property.”

The cost to us of any patent litigation or other proceedings, such as interference proceedings, which are meant to determine who first invented any of the claims covered by the patent even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Discovery proceedings in the United States might lead to the disclosure of some of our proprietary confidential information. Uncertainties

 

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resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management and technical staff’s time which may materially and adversely impact our financial position and results of operations.

Our proprietary rights may not adequately protect our technologies and drug candidates. If we are unable to protect our drug candidates and our intellectual property rights, it may materially adversely affect our position in the market.

Our commercial success will depend on our ability to obtain patents and maintain adequate protection for our technologies, intellectual property and drug candidates in the United States and other countries. Our patent estate, on a worldwide basis, includes approximately 390 issued or allowed patents and approximately 325 pending patent applications, with claims relating to all of our current clinical stage drug candidates. With respect to our lead drug candidates in the CCR1, CCR2 and CCR9 programs, we have approximately 100 issued or allowed patents worldwide relating to their chemical composition or use thereof. There are approximately 40 patent applications pending for our other clinical stage compounds in the C5aR and ChemR23 programs. We have approximately 180 issued patents relating to other small molecule compounds and approximately 60 issued patents relating to our novel biological discoveries. We also have approximately 50 issued patents relating to our proprietary screening and drug development technologies. We cannot assure you that any of our patent applications will result in issued patents. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets. If third parties disclose or misappropriate our proprietary rights, it may materially and adversely impact our position in the market.

We apply for patents covering both our technologies and drug candidates, as we deem appropriate. However, we may fail to apply for patents on important technologies or drug candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technologies or from developing competing products and technologies. Moreover, the patent positions of numerous biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of our patents cannot be predicted with certainty. In addition, we cannot assure you that:

 

   

we were the first to make the inventions covered by each of our issued patents and pending patent applications;

 

   

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

 

   

others will not independently develop similar or alternative technologies or duplicate any of our technologies by inventing around our claims;

 

   

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

 

   

a third party will not challenge our proprietary rights or that a court will hold that our patents are valid and enforceable;

 

   

any patents issued to us or our collaboration partners will provide us with any competitive advantages, or will not be challenged by third parties;

 

   

we will develop additional proprietary technologies that are patentable; or

 

   

the patents of others will not have an adverse effect on our business.

In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the U.S. Patent and Trademark Office, or USPTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, on September 16, 2011, President Obama signed the America Invents Act which codifies several significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent’ to a “first inventor to file” system, limiting where a

 

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patentee may file a patent suit, requiring the apportionment of patent damages, replacing interference

proceedings with derivation actions, and creating a post-grant opposition process to challenge patents after they have issued. The effects of these changes are currently unclear as the USPTO must still implement various regulations, the courts have yet to address any of these provisions, and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed.

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. However, it is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect our intellectual property to the same extent as the laws of the United States.

We may become subject to third parties’ claims alleging infringement of patents and proprietary rights or seeking to invalidate our patents or proprietary rights, which would be costly, time consuming and, if successfully asserted against us, delay or prevent the development and commercialization of our products.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. We may be subject to third-party claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing a third party’s patents. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or drug candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to redesign it, or to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.

In addition to infringement claims against us, if third parties prepare and file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the USPTO to determine the priority of invention. We may also become involved in similar opposition proceedings in the European Patent Office regarding our intellectual property rights with respect to our products and technology.

Restrictions on our patent rights relating to our drug candidates may limit our ability to prevent third parties from competing against us.

Our success will depend, in part, on our ability to obtain and maintain patent protection for our drug candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. Composition-of-matter patents on APIs are generally considered to be the strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use. Entirely new individual chemical compounds, often referred to as new chemical entities, are typically entitled to composition-of-matter coverage. However, we cannot be certain that the current law will remain the same, or that our drug candidates will be considered novel and non-obvious by the USPTO and courts.

 

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In addition to composition-of-matter patents and patent applications, we also have filed method-of-use patent applications. This type of patent protects the use of the product only for the specified method. However, this type of patent does not prevent a competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if these competitors do not actively promote their product for our targeted indication, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Patent applications in the United States and most other countries are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months or more. As a result, we cannot be certain that we and the inventors of the issued patents and applications that we may in-license were the first to conceive of the inventions covered by such patents and pending patent applications or that we and those inventors were the first to file patent applications covering such inventions. Also, we have numerous issued patents and some patent applications pending before the USPTO and the patent protection may lapse before we manage to obtain commercial value from them, which might result in increased competition and materially affect our position in the market.

We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable intellectual property rights or personnel.

Many of our employees were previously employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to commercialize, or prevent us from commercializing our drug candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Some of our intellectual property which is discovered through government funded programs is subject to federal regulation such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with foreign manufacturers.

Some of our existing drug candidates, including CCX140, and some of our research and development work were funded, at least in part, by the U.S. government and are therefore subject to certain federal regulations. For example, some of our research and development work on vaccine adjuvants and immunomodulation for biothreat applications was funded by government research grants. In addition, as noted on several of our patents including U.S. Patent Nos. 7,884,110; 7,622,583; 7,776,877; and 7,683,176, inventions covering various CCR9 and CCR2 antagonists were supported at least in part by NIH funding (U19-AI056690-01). Under the “march-in” provisions of the Bayh-Dole Act, the government may have the right under limited circumstances to require us to grant exclusive, partially exclusive or non-exclusive rights to third parties for intellectual property discovered through the government funded program. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the new invention or because action is necessary to alleviate health or safety needs of the public. Intellectual property discovered under the government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. Such intellectual property is also subject to a preference for U.S. industry, which may limit our ability to contract with foreign product manufacturers for products covered by such intellectual property. We plan to apply for additional U.S. government funding, and it is possible that we may discover compounds or drug candidates as a result of such funding. Intellectual property under such discoveries would be subject to the applicable provisions of the Bayh-Dole Act.

 

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Risks Related to Government Regulation

The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our drug candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Neither we nor our collaboration partners are permitted to market our drug candidates in the United States until we receive approval of an NDA from the FDA. Neither we nor our collaboration partners have submitted an application for or received marketing approval for any of our drug candidates. Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including:

 

   

warning letters;

 

   

civil and criminal penalties;

 

   

injunctions;

 

   

withdrawal of approved products;

 

   

product seizure or detention;

 

   

product recalls;

 

   

total or partial suspension of production; and

 

   

refusal to approve pending NDAs or supplements to approved NDAs.

Prior to receiving approval to commercialize any of our drug candidates in the United States or abroad, we and our collaboration partners must demonstrate with substantial evidence from well controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities abroad, that such drug candidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we and our collaboration partners believe the preclinical or clinical data for our drug candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any of our drug candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of our drug candidates and result in the FDA or other regulatory authorities denying approval of our drug candidates for any or all targeted indications.

Regulatory approval of an NDA or NDA supplement is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following:

 

   

a drug candidate may not be deemed safe or effective;

 

   

FDA officials may not find the data from preclinical studies and clinical trials sufficient;

 

   

the FDA might not approve our or our third party manufacturer’s processes or facilities; or

 

   

the FDA may change its approval policies or adopt new regulations.

If any of our drug candidates fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, our business and results of operations will be materially and adversely harmed.

 

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Even if we receive regulatory approval for a drug candidate, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and subject us to penalties if we fail to comply with applicable regulatory requirements.

Once regulatory approval has been granted, the approved product and its manufacturer are subject to continual review by the FDA and/or non-U.S. regulatory authorities. Any regulatory approval that we or our collaboration partners receive for our drug candidates may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for potentially costly post-marketing follow-up studies to monitor the safety and efficacy of the product. In addition, if the FDA and/or non-U.S. regulatory authorities approve any of our drug candidates, we will be subject to extensive and ongoing regulatory requirements by the FDA and other regulatory authorities with regard to the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for our products. In addition, manufacturers of our drug products are required to comply with current cGMP regulations, which include requirements related to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve these manufacturing facilities before they can be used to manufacture our drug products, and these facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If we or a regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory authority may impose restrictions on that product, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, our drug candidates or the manufacturing facilities for our drug candidates fail to comply with regulatory requirements of the FDA and/or other non-U.S. regulatory authorities, we could be subject to administrative or judicially imposed sanctions, including:

 

   

warning letters;

 

   

civil or criminal penalties;

 

   

injunctions;

 

   

suspension of or withdrawal of regulatory approval;

 

   

suspension of any ongoing clinical trials;

 

   

voluntary or mandatory product recalls and publicity requirements;

 

   

refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications filed by us;

 

   

restrictions on operations, including costly new manufacturing requirements; or

 

   

seizure or detention of our products or import bans.

The regulatory requirements and policies may change and additional government regulations may be enacted for which we may also be required to comply. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or in other countries. If we are not able to maintain regulatory compliance, we will not be permitted to market our future products and our business will suffer.

The availability of adequate third-party coverage and reimbursement for newly approved drugs is uncertain, and failure to obtain adequate coverage and reimbursement from third-party payors could impede our ability to market any future products we may develop and could limit our ability to generate revenue.

There is significant uncertainty related to the third-party payor coverage and reimbursement of newly approved drugs. The commercial success of our future products in both domestic and international markets depends on whether such third-party coverage and reimbursement is available for our future products. Governmental payors, including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to manage their healthcare expenditures by limiting both coverage and the

 

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level of reimbursement of new drugs and, as a result, they may not cover or provide adequate reimbursement for our future products. These payors may not view our future products as cost-effective, and coverage and reimbursement may not be available to our customers or may not be sufficient to allow our future products to be marketed on a competitive basis. Third-party payors are exerting increasing influence on decisions regarding the use of, and coverage and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay coverage and reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could cause us to decrease the price we might establish for products, which could result in lower than anticipated product revenues. If the prices for our drug candidates decrease or if governmental and other third-party payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.

Failure to obtain regulatory approvals in foreign jurisdictions will prevent us from marketing our products internationally.

We intend to seek a distribution and marketing partner for CCX140 outside North America and may market future products in international markets. In order to market our future products in the EEA (which is comprised of the 27 Member States of the EU plus Norway, Iceland and Liechtenstein) and many other foreign jurisdictions, we must obtain separate regulatory approvals. More concretely, in the EEA, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketing authorizations:

 

   

The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use of the EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.

 

   

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

We have had limited interactions with foreign regulatory authorities, and the approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and even if we file we may not receive necessary approvals to commercialize our products in any market.

 

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Healthcare reform measures could hinder or prevent our drug candidates’ commercial success.

In the United States, there have been and we expect there will continue to be a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in March 2010, the President signed one of the most significant healthcare reform measures in decades, the Affordable Care Act. It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things:

 

   

imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” effective 2011;

 

   

increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%;

 

   

requires collection of rebates for drugs paid by Medicaid managed care organizations;

 

   

requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning January 2011; and

 

   

mandates a further shift in the burden of Medicaid payments to the states.

A number of states have challenged the constitutionality of certain provisions of the Affordable Care Act, and many of these challenges are still pending final adjudication in several jurisdictions as well as the United States Supreme Court. Congress has also proposed a number of legislative initiatives, including possible repeal of the Affordable Care Act. At this time, it remains unclear whether there will be any changes made to the Affordable Care Act, whether to certain provisions or its entirety. We cannot assure you that the Affordable Care Act, as currently enacted or as amended in the future, will not adversely affect our business and financial results and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. In the event that the Joint Select Committee is unable to achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, or Congress does not act on the committee’s recommendation, without amendment, by December 23, 2011, an automatic reduction is triggered. These automatic cuts would be made to several government programs and, with respect to Medicare, would include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. More recently, on September 19, 2011, President Obama presented his Plan for Economic Growth and Deficit Reduction to the Joint Select Committee, which includes $248 billion in Medicare savings ($240 billion of which comes from reducing and collecting Medicare payments incorrectly paid) and $72 billion in Medicaid savings. Beginning in 2017, the President’s proposal also shifts more of the Medicare costs to newly enrolled beneficiaries, including an increase in patient deductibles under Medicare Part B for certain beneficiaries, and increases Part B and Part D premiums for higher-income beneficiaries.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of health care may adversely affect:

 

   

our ability to set a price we believe is fair for our products;

 

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our ability to generate revenues and achieve or maintain profitability; and

 

   

the availability of capital.

A number of states have challenged the constitutionality of certain provisions of the Affordable Care Act, and many of these challenges are still pending final adjudication in several jurisdictions. Congress has also proposed a number of legislative initiatives, including possible repeal of the Affordable Care Act. At this time, it remains unclear whether there will be any changes made to the Affordable Care Act, whether to certain provisions or its entirety. We cannot assure you that the Affordable Care Act, as currently enacted or as amended in the future, will not adversely affect our business and financial results.

Further, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. In light of widely publicized events concerning the safety risk of certain drug products, regulatory authorities, members of Congress, the Governmental Accounting Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products, revisions to drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products. The increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and the drug approval process. Data from clinical trials may receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure in obtaining approval or approval for a more limited indication than originally sought.

Heightened Congressional scrutiny on the adequacy of the FDA’s drug approval process and the agency’s efforts to assure the safety of marketed drugs resulted in the enactment of legislation addressing drug safety issues, the FDA Amendments Act of 2007. This legislation provided the FDA with expanded authority over drug products after approval, and the FDA’s exercise of this authority has resulted in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, and increased costs to assure compliance with new post-approval regulatory requirements. Given the serious public health risks of high profile adverse safety events with certain drug products, the FDA may require, as a condition of approval, costly risk management programs which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, preapproval of promotional materials and restrictions on direct-to-consumer advertising.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include, without limitation:

 

   

the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

   

the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government, and which may apply to entities like us which provide coding and billing advice to customers;

 

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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

The recently enacted Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

Risks Related To This Offering

The price of our common stock may be volatile, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the shares of our common stock sold in this offering has been determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. Prior to this offering, there has been no public market for our common stock. An active and liquid trading market for our common stock may not develop or be sustained after this offering. You may be unable to sell your shares of common stock at or above the initial public offering price due to fluctuations in the market price of our common stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

 

   

results from, and any delays in, clinical trial programs relating to our drug candidates, including the ongoing and planned clinical trials for Traficet-EN, CCX140, CCX354, CCX168, CCX832 and other drug candidates;

 

   

announcements of regulatory approvals or disapprovals of our drug candidates, including Traficet-EN and CCX140, or delays in any regulatory agency review or approval processes;

 

   

failure or discontinuation of any of our research programs;

 

   

announcements relating to future collaborations or our existing collaboration with GSK;

 

   

general economic conditions in the United States and abroad;

 

   

acquisitions and sales of new products, technologies or business;

 

   

delays in the commercialization of any of our drug candidates;

 

   

market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors;

 

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the issuance of new or changed securities analysts’ reports or recommendations regarding us, our competitors or our industry in general;

 

   

actual and anticipated fluctuations in our quarterly operating results;

 

   

disputes concerning our intellectual property or other proprietary rights;

 

   

introduction of technological innovations or new products by us or our competitors;

 

   

manufacturing issues related to our drug candidates for clinical trials or future products for commercialization;

 

   

market acceptance of our future products;

 

   

deviations in our operating results from the estimates of analysts, or other analyst comments;

 

   

third party payor coverage and reimbursement policies;

 

   

new legislation in the United States relating to the sale or pricing of pharmaceuticals;

 

   

FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

   

product liability claims or other litigation or public concern about the safety of our drug candidates or future drugs;

 

   

our ability to obtain necessary intellectual property licenses including, if necessary, those relating to Traficet-EN and other CCR9 drug candidates;

 

   

the outcome of any future legal actions to which we are party;

 

   

sales of our common stock by our officers, directors or significant stockholders;

 

   

additions or departures of key personnel; and

 

   

external factors, including natural disasters and other crises.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that have been often unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

The ownership of our common stock will continue to be highly concentrated, and these stockholders could delay or prevent a change of control.

After this offering and the concurrent private placements to GSK and Techne, our officers and directors, together with holders of 5% or more of our outstanding common stock and their respective affiliates, will beneficially own approximately     % of our common stock (assuming no exercise of the underwriters’ over-allotment option). Accordingly, these stockholders, acting as a group, will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

 

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Future sales of our common stock or securities convertible or exchangeable for our common stock may depress our stock price.

If our existing stockholders or holders of our convertible notes, options or warrants sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. The perception in the market that these sales may occur could also cause the trading price of our common stock to decline. Based on shares of common stock outstanding as of June 30, 2011, upon (1) the completion of this offering, (2) the conversion of all of our preferred stock into 48,664,392 shares of common stock prior to the completion of this offering, (3) the concurrent private placements to GSK and Techne of $7.0 million and $5.0 million of our common stock, respectively, and (4) the automatic conversion of the convertible note held by Techne at a conversion price equal to the initial public offering price, in each case at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, we will have outstanding a total of              shares of common stock, assuming no exercise of the underwriters’ overallotment option. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ overallotment option will be freely tradable, without restriction, in the public market immediately following this offering. Our underwriters may, however, in their sole discretion, permit our officers, directors and other stockholders and the holders of our outstanding options and warrants who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

We expect that the lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus (subject to extension upon the occurrence of specified events). After the lock-up agreements expire, up to an additional shares of common stock, and up to approximately 619,000 shares of common stock issuable upon exercise of our outstanding warrants, including warrants to purchase up to 300,000 shares of our common stock that will be issued to Techne upon completion of this offering, will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, with respect to shares held by directors, executive officers and other affiliates. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act and, in any event, we plan to file a registration statement permitting shares of common stock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Certain holders of shares of our common stock, warrants to purchase our capital stock and the shares of common stock issuable upon exercise of those warrants will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. In addition, after the lock-up agreements described above expire, our directors may and we expect that our executive officers will establish programmed selling plans under Rule 10b5-1 of the Exchange Act, for the purpose of effecting sales of our common stock. Any sales of securities by these stockholders, or the perception that those sales may occur, including the entry into such programmed selling plans, could have a material adverse effect on the trading price of our common stock.

If there is no viable public market for our common stock, you may not be able to sell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a regular trading market will develop and continue after this offering or that the market price of our common stock will not decline below the initial public offering price. The initial public offering price was determined through negotiations between us and the underwriters and may not be indicative of the market price of our common stock following this offering. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the

 

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underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. See “Underwriting” for additional information.

Investors in this offering will suffer immediate and substantial dilution of their investment.

If you purchase common stock in this offering, you will pay more for your shares than our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, you will incur immediate and substantial dilution of $             per share, representing the difference between our assumed initial public offering price and our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $             per share, the midpoint of the range on the cover page of this prospectus, purchasers of common stock in this offering will have contributed approximately     % of the aggregate purchase price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. In addition, if you choose to invest in our common stock, you will pay a price per share that substantially exceeds the value of our assets after subtracting our liabilities. As of June 30, 2011, we had options outstanding under our equity compensation plans to purchase an aggregate of 7,752,112 shares of common stock at a weighted-average exercise price of $2.24 per share and had warrants outstanding to purchase an aggregate of 319,000 shares of our preferred stock at an exercise price of $2.60 per share. To the extent these outstanding options or warrants are exercised, you will incur further dilution.

If we sell shares of our common stock in future financings, common stockholders may experience immediate dilution and, as a result, our stock price may decline.

We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result, our common stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. For example, upon completion of this offering, we will issue Techne a warrant with a ten-year term to purchase up to 300,000 shares of our common stock at an exercise per share equal to 200% of the initial public offering price of a share of our common stock and such warrant, if exercised, would likely be exercised at a time when the exercise price of such warrant represented a discount to the trading price of our common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.

Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

 

   

variations in the level of expenses related to our drug candidates or future development programs;

 

   

if any of our drug candidates receives regulatory approval, the level of underlying demand for these drug candidates and wholesalers’ buying patterns.

 

   

addition or termination of clinical trials or funding support;

 

   

our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements;

 

   

any intellectual property infringement lawsuit in which we may become involved;

 

   

regulatory developments affecting our drug candidates or those of our competitors;

 

   

ability to secure new government contracts and allocation of our resources to or away from performing work under government contracts; and

 

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If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We will have broad discretion in the use of the net proceeds of this offering and the concurrent private placements to GSK and Techne and may not use them effectively.

Our management will have broad discretion over the use of the net proceeds from this offering and the concurrent private placements to GSK and Techne. Because of the number and variability of factors that will determine our use of such proceeds, you may not agree with how we allocate or spend the proceeds from this offering and the concurrent private placements. We may pursue collaborations or clinical trials that do not result in an increase in the market value of our common shares and that may increase our losses. Our failure to allocate and spend the net proceeds from this offering and the concurrent private placements effectively would have a material adverse effect on our financial condition and business. Until the net proceeds are used, they may be placed in investments that do not produce significant investment returns or that may lose value.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

 

   

a classified board of directors so that not all directors are elected at one time;

 

   

a prohibition on stockholder action through written consent;

 

   

a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors;

 

   

limitation of our stockholders entitled to call special meetings of stockholders;

 

   

an advance notice requirement for stockholder proposals and nominations;

 

   

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

 

   

a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

Provisions in our charter and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

 

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Our employment agreements with our named executive officers may require us to pay severance benefits to any of those persons who are terminated in connection with a change of control of us, which could harm our financial condition or results.

Our named executive officers are parties to employment agreements providing for aggregate cash payments of up to approximately $3.7 million for severance and other benefits and acceleration of vesting of stock options with a value of approximately $0.5 million (as of December 31, 2010) in the event of a termination of employment in connection with a change of control of us. The accelerated vesting of options could result in dilution to our existing stockholders and harm the market price of our common stock. The payment of these severance benefits could harm our financial condition and results. In addition, these potential severance payments may discourage or prevent third parties from seeking a business combination with us.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, therefore capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, our ability to pay cash dividends is currently prohibited by our loan and security agreement with Silicon Valley Bank, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

   

the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

 

   

our ability to advance drug candidates into, and successfully complete, clinical trials;

 

   

our collaborator’s exercise of its license options;

 

   

the commercialization of our drug candidates;

 

   

the implementation of our business model, strategic plans for our business, drug candidates and technology;

 

   

the scope of protection we are able to establish and maintain for intellectual property rights covering our drug candidates and technology;

 

   

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

   

the timing or likelihood of regulatory filings and approvals;

 

   

our ability to maintain and establish collaborations or obtain additional government grant funding;

 

   

our use of proceeds from this offering and the concurrent private placements to GSK and Techne;

 

   

our financial performance; and

 

   

developments relating to our competitors and our industry.

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus.

Any forward-looking statement in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This prospectus also contains estimates, projections and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates, the incidence of certain medical conditions, statements that certain drugs, classes of drugs or dosages are the most widely prescribed in the United States or other markets, the perceptions and preferences of patients and physicians regarding certain therapies and other prescription, prescriber and patient data, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In particular, unless otherwise specified, all prescription, prescriber and patient data in this prospectus is from Datamonitor. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of              shares of common stock in this offering will be approximately $             million at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will also receive $7.0 million from the sale of shares of common stock in the concurrent private placement to GSK and $5.0 million from the sale of shares of common stock in the concurrent private placement to Techne, each at a price per share equal to the initial public offering price. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds will be approximately $             million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, our net proceeds by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from this offering, together with the proceeds from the sale of our common stock in the concurrent private placements to GSK and Techne to further develop our lead independent drug candidate CCX140, to advance CCX168, CCX832 and CCX662 further in clinical development, for the research and development of additional drug candidates and for working capital and general corporate purposes.

However, due to the uncertainties inherent in the product development process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering and the concurrent private placements to GSK and Techne that may be used for the above purposes. Our management will have broad discretion over the use of the net proceeds from this offering and the concurrent private placements. The amounts and timing of our expenditures will depend upon numerous factors including the results of our research and development efforts, the timing and success of preclinical studies and any ongoing clinical trials or clinical trials we may commence in the future, the timing of regulatory submissions and the amount of cash, if any, generated by our collaboration agreement.

Pending the use of the proceeds from this offering and the concurrent private placement, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or government securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. In addition, unless waived, the terms of our credit facility with Silicon Valley Bank prohibit us from paying cash dividends. Any future determination related to dividend policy will be made at the discretion of our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and investments and capitalization as of June 30, 2011:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to reflect (1) conversion of all outstanding shares of our preferred stock into an aggregate of 48,664,392 shares of common stock prior to the completion of this offering, (2) the issuance and sale by us of              shares of our common stock in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (3) the concurrent private placements to GSK and Techne of $7.0 million and $5.0 million of our common stock, respectively, and (4) the automatic conversion of the convertible note held by Techne at a conversion price equal to the initial public offering price, in each case at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

You should read this information together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the heading “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2011  
     Actual     Pro Forma
As Adjusted (1)
 
     (unaudited)  
     (in thousands, except share
and per share data)
 

Cash, cash equivalents and investments

   $ 79,936      $                
  

 

 

   

 

 

 

Equipment financing obligations

   $ 1,757      $     

Convertible preferred stock, $0.001 par value; 48,989,914 shares authorized, 48,664,392 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma as adjusted

     49     

Common stock, $0.001 par value; 68,000,000 shares authorized, 8,346,192 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma as adjusted

     8     

Preferred stock, $0.001 par value; no shares issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma as adjusted

         

Additional paid-in capital

     168,680     

Employee note receivable

     (16  

Accumulated other comprehensive income

     42     

Accumulated deficit

     (103,872  
  

 

 

   

 

 

 

Total stockholders’ equity

     64,891     
  

 

 

   

 

 

 

Total capitalization

   $ 66,648     
  

 

 

   

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, the amount of cash, cash equivalents and investments, additional paid-in capital and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The actual and pro forma as adjusted outstanding shares information in the table above excludes the following:

 

   

7,752,112 shares of common stock issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $2.24 per share;

 

   

319,000 shares of common stock issuable upon the exercise of outstanding warrants having an exercise price of $2.60 per share;

 

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803,780 shares of common stock reserved for issuance pursuant to future option grants under our 1997 Plan or our 2002 Equity Incentive Plan;

 

   

300,000 shares of common stock issuable upon the exercise of warrants, with an exercise price per share equal to 200% of the initial public offering price of our common stock, which warrants will be issued to Techne upon the completion of this offering.

 

   

             shares of common stock reserved for issuance pursuant to future option grants under our 2012 Equity Incentive Award Plan; and

 

   

             shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. As of June 30, 2011, we had a historical net tangible book value of $64.9 million, or $1.14 per share of common stock, taking into account the expected conversion of our outstanding preferred stock into common stock prior to the completion of this offering. Without giving effect to the conversion of our outstanding preferred stock into common stock, we had a historical net tangible book value of $64.9 million, or $7.78 per share of common stock, as of June 30, 2011. Historical net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding shares of our common stock. Investors participating in this offering will incur immediate and substantial dilution. After giving effect to (1) the conversion of all of our preferred stock into 48,664,392 shares of common stock prior to the completion of this offering, (2) the sale of             shares of common stock in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (3) the concurrent private placements to GSK and Techne of $7.0 million and $5.0 million of our common stock, respectively, and (4) the automatic conversion of the convertible note held by Techne at a conversion price equal to the initial public offering price, in each case at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of June 30, 2011 was approximately $             million, or approximately $             per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to investors participating in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Historical net tangible book value per share as of June 30, 2011

   $                   

Pro forma decrease in net tangible book value per share attributable to conversion of preferred stock

     

Pro forma net tangible book value per share as of June 30, 2011

   $        

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors participating in this offering

      $     
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease, respectively, our pro forma as adjusted net tangible book value by approximately $             million, the pro forma as adjusted net tangible book value per share by approximately $             per share and the dilution to investors purchasing shares in this offering by approximately $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2011, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, at an assumed initial public offering price of $             per share.

 

     Shares Purchased      Total Consideration      Average Price
Per Share
 
     Number      Percent      Amount      Percent     

Existing stockholders

     57,010,584             %       $ 166,392,382             %       $                

Investors participating in this offering

              
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

        100.0%       $           100.0%      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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The number of shares of common stock to be outstanding after this offering and the concurrent private placements to GSK and Techne is based on the number of shares outstanding as of June 30, 2011 and excludes the following:

 

   

7,752,112 shares of common stock issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $2.24 per share;

 

   

319,000 shares of common stock issuable upon the exercise of outstanding warrants having an exercise price of $2.60 per share;

 

   

803,780 shares of common stock reserved for issuance pursuant to future option grants under our 1997 Plan or our 2002 Equity Incentive Plan;

 

   

300,000 shares of common stock issuable upon the exercise of warrants, with an exercise price per share equal to 200% of the initial public offering price of our common stock, which warrants will be issued to Techne upon the completion of this offering.

 

   

            shares of common stock reserved for issuance pursuant to future option grants under our 2012 Equity Incentive Award Plan; and

 

   

            shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan.

If the underwriters exercise their over-allotment option in full, pro forma as adjusted net tangible book value as of June 30, 2011 will increase to $             million, or $             per share, representing an increase to existing stockholders of $             per share, and there will be an immediate dilution of an additional $             per share to new investors.

Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. New investors will experience further dilution if any of our outstanding options or warrants are exercised, new options are issued and exercised under our equity incentive plans or we issue additional shares of common stock, other equity securities or convertible debt securities in the future.

 

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SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are derived from our audited financial statements not included in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus.

The consolidated statement of operations data for the six months ended June 30, 2010 and 2011 and the selected consolidated balance sheet data as of June 30, 2011, have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited interim consolidated financial information has been prepared on the same basis as the annual consolidated financial information and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our consolidated financial position as of June 30, 2011 and the consolidated results of operations for the six months ended June 30, 2010 and 2011. Interim results are not necessarily indicative of results to be expected for the full year. You should read this data together with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We have presented pro forma net loss per share information for the year ended December 31, 2010 and the six months ended June 30, 2011 to reflect (1) the conversion of all outstanding shares of our preferred stock into an aggregate of 48,664,392 shares of common stock prior to the completion of this offering, (2) the issuance and sale by us of              shares of (3) the concurrent private placements to GSK and Techne of $7.0 million and $5.0 million of our common stock, respectively, and (4) the automatic conversion of the convertible note held by Techne at a conversion price equal to the initial public offering price, in each case at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

 

    Years Ended December 31,     Six Months Ended
June 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  
                                  (unaudited)  

Consolidated Statement of Operations Data:

             

Revenues:

             

Collaborative research and development revenue from related party

  $ 4,950      $ 18,149      $ 23,551      $ 49,744      $ 34,861      $ 19,774      $ 4,180   

Grant revenue

    3,158        2,588        536                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues:

    8,108        20,737        24,087        49,744        34,861        19,774        4,180   

Operating expenses:

             

Research and development

    21,946        33,193        35,056        27,474        33,527        16,190        14,593   

General and administrative

    5,300        6,680        9,157        6,575        7,292        3,711        3,949   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,246        39,873        44,213        34,049        40,819        19,901        18,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (19,138     (19,136     (20,126     15,695        (5,958     (127     (14,362

Interest income

    1,932        3,930        1,762        297        436        206        224   

Interest expense

    (138     (93     (129     (76     (81     (36     (53

Other income

                                2,434        500          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (17,344     (15,299     (18,493     15,916        (3,169     543        (14,191

Income tax benefit (expense)

           (395     23        (293     73                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (17,344   $ (15,694   $ (18,470   $ 15,623      $ (3,096   $ 543      $ (14,191
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share (1)

  $ (2.41   $ (2.02   $ (2.26   $ 0.28      $ (0.38   $ 0.01      $ (1.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share (1)

  $ (2.41   $ (2.02   $ (2.26   $ 0.27      $ (0.38   $ 0.01      $ (1.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute basic net income (loss) per share

    7,184,527        7,785,783        8,174,380        7,923,302        8,163,318        8,137,787        8,286,143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute diluted net income (loss) per share

    7,184,527        7,785,783        8,174,380        58,512,902        8,163,318        58,665,714        8,286,143   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted net income (loss) per share (unaudited) (1)

          $          $     
         

 

 

     

 

 

 

Shares used to compute pro forma basic and diluted net income (loss) per share

             
         

 

 

     

 

 

 

 

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    As of December 31,     As of June 30,
2011
 
    2006     2007     2008     2009     2010    
    (in thousands)  
                                  (unaudited)  

Consolidated Balance Sheet Data:

           

Cash, cash equivalents and investments

  $ 82,227      $ 65,435      $ 90,158      $ 65,316      $ 82,836      $ 79,936   

Working capital

    70,730        49,029        76,598        79,125        82,712        63,333   

Total assets

    87,780        74,631        97,924        103,469        98,133        83,399   

Non-current portion of deferred revenue

    28,875        21,656        16,932        11,288        8,163        6,349   

Non-current equipment financing obligations

           1,163        455        7        945        1,223   

Accumulated deficit

    (68,044     (83,738     (102,208     (86,585     (89,681     (103,872

Total stockholders’ equity

    44,426        30,024        60,960        77,302        76,773        64,891   

 

(1)

See Note 2 within the notes to our consolidated financial statements which are included elsewhere in this prospectus for a description of the method used to compute basic and diluted loss per share.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of financial condition and results of operations together with the section entitled “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section.

Overview

ChemoCentryx is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. We currently have five drug candidates in clinical development, and expect to advance one additional drug candidate into clinical development in 2012. Our drug candidates include: Traficet-EN (CCX282 or GSK’786), our most advanced drug candidate, currently in three pivotal Phase III clinical trials being conducted by our partner Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline, for the treatment of patients with moderate-to-severe Crohn’s disease; CCX140, our lead independent drug candidate, which successfully completed a Phase II clinical trial in type 2 diabetics and is currently in two Phase II clinical trials in patients with diabetic nephropathy, a form of kidney disease; CCX354, which successfully completed a Phase II proof-of-concept clinical trial for the treatment of rheumatoid arthritis, or RA; CCX168, currently in a Phase II proof-of-concept clinical trial for the treatment of anti-neutrophil cytoplasmic antibody, or ANCA-associated vasculitis, or AAV; CCX832, which completed a Phase I clinical trial and, subject to further discussion with GSK, is expected to enter a Phase II proof-of-concept clinical trial for the treatment of skin inflammation; and CCX662, our independent drug candidate for the treatment of glioblastoma multiforme, or GBM, which is expected to enter a Phase I clinical trial in the second half of 2012. CCX140 and CCX662 are wholly owned and are being developed independently by us, while Traficet-EN, CCX354, CCX168 and CCX832 are subject to our collaboration agreement with GSK. We are also advancing several additional independent drug candidates through preclinical development. In addition, our strategy has been to identify next generation compounds related to our drug candidates. All of our drug candidates, including those under our collaboration agreement with GSK, have been internally discovered.

In August 2006, we entered into our strategic alliance with GSK. We have received approximately $220.0 million from GSK, consisting of up-front and milestone payments, equity investments, research funding and an option exercise fee. Under the terms of our agreement with GSK, we are responsible for the discovery and development of small molecule antagonists targeting four defined chemokine and chemo-attractant receptor targets (CCR9, CCR1, C5aR and ChemR23) and for advancing them through clinical proof-of-concept. After we demonstrate successful clinical proof-of-concept, GSK is entitled to options to exclusively license drug candidates that are subject to the collaboration and two defined back-up compounds for each drug candidate for further development and commercialization on a worldwide basis. Upon exercising any of its options to drug candidates under the collaboration, GSK is solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that drug candidate. In exchange for the rights granted to GSK upon the exercise of its options, we are also entitled to receive regulatory and commercial milestone payments, as earned under the terms of our agreement, and royalties on the net sales of licensed drugs. The agreement contemplated up to six drug options, each of which covers a drug candidate against the four defined targets, including Traficet-EN (CCR9), CCX354 (CCR1), CCX168 (C5aR) and CCX832 (ChemR23), and their associated back-up compounds. The other two drug options were for second generation drug candidates and their associated back-up compounds. However, we and GSK chose not to nominate second generation drug candidates against any of the four defined targets during the agreement’s research term, which has expired. GSK has already exercised its option to Traficet-EN and its two defined back-up compounds. Thus, GSK’s only remaining options are to CCX354, CCX168 and CCX832 and their

 

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associated back-up compounds. If GSK does not exercise its options to CCX354, CCX168 or CCX832, we will evaluate our alternatives for further development of these drug candidates, which may entail internally developing these drug candidates or identifying other collaboration partners for their development.

Since commencing our operations in 1997, our efforts have focused on research, development and the advancement of our drug candidates into and through clinical trials. As a result, we have incurred significant losses. We have funded our operations primarily through the sale of convertible preferred and common stock, contract revenue under our collaborations, government contracts and grants and borrowings under equipment financing arrangements. As of June 30, 2011, we had an accumulated deficit of $103.9 million. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand our research and development activities, expand our systems and facilities, seek regulatory approvals and engage in commercialization preparation activities in anticipation of Food and Drug Administration, or FDA, approval of our drug candidates. In addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenues are received. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

Financial Operations Overview

Revenues

We have not generated any revenue from product sales. Since our inception, our revenue has been derived from two primary sources: (1) contract revenue, up-front payments and development milestone payments from GSK and (2) government contracts and grants. The following table summarizes our revenue for each of the years ended December 31, 2008, 2009 and 2010 and the six months ended June 30, 2010 and 2011.

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2008      2009      2010      2010      2011  
     (in thousands)  

GSK

              

Contract revenue

   $ 7,251       $ 4,100       $ 4,721       $ 1,952       $ 2,366   

Recognition of up-front payments

     6,300         5,644         5,140         2,822         1,814   

Milestones

     10,000         40,000         25,000         15,000           

Government contracts and grants

     536                                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 24,087       $ 49,744       $ 34,861       $ 19,774       $ 4,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Research and development expenses represent costs incurred to conduct basic research, such as the discovery and development of our understanding of the chemokine system; the discovery and development of novel small molecule therapeutics, such as Traficet-EN and CCX140; the development of our suite of proprietary drug discovery technologies, known collectively as EnabaLink, which includes our proprietary Reverse Activation of Migration, or RAM, screening technology and preclinical studies and clinical trials of our drug candidates. We expense all research and development expenses as they are incurred. These expenses consist primarily of salaries and related benefits, including stock-based compensation, third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities, laboratory consumables, and allocated facility costs.

The following table summarizes our research and development expenses for each of the years ended December 31, 2008, 2009 and 2010 and the six months ended June 30, 2010 and 2011. The project specific expenses summarized in the following table reflect costs directly attributable to our clinical development

 

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candidates and preclinical candidates nominated and selected for further development. Such project specific expenses include third-party contract costs relating to formulation, manufacturing, preclinical studies and clinical trial activities. Unlike with respect to our early stage research and drug discovery programs, we allocate research and development salaries, benefits or indirect costs to our development candidates and we have included such costs in the project specific expenses. All remaining research and development expenses are reflected in “Research and drug discovery” which represents early stage drug discovery programs. Such expenses include allocated employee salaries and related benefits, stock-based compensation, consulting and contracted services to supplement our in-house laboratory activities, laboratory consumables and allocated facility costs associated with these earlier stage programs.

At any given time, we typically have several active early stage research and drug discovery projects. Our internal resources, employees and infrastructure are not directly tied to any individual research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for our early stage research and drug discovery programs on a project specific basis.

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2008      2009      2010      2010      2011  
     (in thousands)  

Development Candidate (Target)

              

Traficet-EN (CCR9)

   $ 16,804       $ 3,487       $       $       $   

CCX140 (CCR2)

     820         2,257         5,214         2,318         1,123   

CCX354 (CCR1)

     735         3,538         6,106         2,088         2,191   

CCX168 (C5aR)

             1,527         2,870         1,662         1,956   

CCX832 (ChemR23)

                     1,398         1,084         846   

Research and drug discovery

     16,697         16,665         17,939         9,038         8,477   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development

   $ 35,056       $ 27,474       $ 33,527       $ 16,190       $ 14,593   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We expect our research and development expenses to increase as we advance our development programs further and increase the number and size of our clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We or our partners may never succeed in achieving marketing approval for any of our drug candidates. The probability of success for each drug candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. For the product options covered under our strategic alliance with GSK, for which we receive milestone payments, we are responsible for development of drug candidates through clinical proof-of-concept, after which time GSK has an option to an exclusive license on a compound by compound basis. Our strategy includes entering into additional partnerships with third parties for the development and commercialization of some of our independent drug candidates that are not subject to our alliance with GSK.

Most of our product development programs are at an early-to-mid-stage; therefore the successful development of our drug candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each drug candidate and are difficult to predict for each product. Given the uncertainty associated with clinical trial enrollments and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical trials of our drug candidates or if, or to what extent, we will generate revenues from the commercialization and sale of any of our drug candidates. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each drug candidate, as well as ongoing assessment as to each drug candidate’s commercial potential. We will need to raise additional capital or may seek additional strategic alliances in the future in order to complete the development and commercialization of our drug candidates, including CCX140, our lead independent drug candidate.

 

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General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation and travel expenses, in executive, finance, business and corporate development and other administrative functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses, legal costs of pursuing patent protection of our intellectual property, and professional fees for auditing, tax, and legal services. We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a public company. These public company related increases will likely include legal fees, accounting fees, directors’ and officers’ liability insurance premiums and investor relations related fees.

Other Income

Other income, net, consists primarily of income or expenses which are non-recurring in nature. For instance, in 2010, we were awarded $1.9 million from the United States Department of Treasury for eight projects under the Qualitative Therapeutic Discovery Project Program under the Patient Protection and Affordable Care Act of 2010 to support research with the potential to produce new therapies and reported such amount in other income.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements as well as the reported revenues and expenses during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the Notes to our consolidated financial statements appearing at the end of this prospectus, we believe that the following critical accounting policies relating to revenue recognition, clinical trial expenses and stock-based compensation are most important to understanding and evaluating our reported financial results.

Revenue Recognition

We generate revenue from two principal sources: (1) collaborative research and development agreements with pharmaceutical companies and (2) government contracts and grants. We recognize revenue in accordance with the criteria outlined in the Securities and Exchange Commission’s Topic 13 and Accounting Standards Codification, or ASC, 605-25 and by the Financial Accounting Standards Board, or FASB. Following these accounting pronouncements, revenue is recognized when the following criteria have been met:

 

   

persuasive evidence of an arrangement exists;

 

   

delivery has occurred and risk of loss has passed;

 

   

the seller’s price to the buyer is fixed or determinable; and

 

   

collectibility is reasonably assured.

As a result, we recognize revenue under the government grants when the work is performed or the expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Under collaboration agreements, we may receive payments for non-refundable up-front fees, reimbursement for research and development services, milestone payments and royalties. In assessing the appropriate revenue recognition related to a collaboration agreement, we first determine whether an arrangement includes multiple elements, such as the delivery of intellectual property rights and research and development services. Intellectual

 

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property rights generally are not separable from the activity of providing research and development services because the intellectual property right does not have stand-alone value separate from the research and development services provided or evidence of fair value does not exist for the undelivered research and development services. Accordingly, we account for our collaboration agreements as a combined unit of accounting. The revenue from up-front payments is recognized on a straight-line basis over the estimated term of the research and development obligations covered under the research and development collaboration agreement. We periodically review the basis for our estimates, and we may change the estimates if circumstances change. These changes can significantly increase or decrease the amount of revenue recognized. As we applied our policy to our collaboration arrangements we made judgments which affected the pattern of revenue recognition. For instance, in our arrangement with GSK, we are obligated to provide research and development services. We are recognizing revenue over the estimated period of our performance of the research and development services, which we currently estimate will end in March 2014, the expected completion date of the proof-of-concept trial for the last of the drug candidates to be developed under the GSK alliance. In 2010 we increased our estimate for the remaining estimated research and development period under our arrangement with GSK by approximately 1.25 years. This change in estimate is accounted for prospectively and reduced the annualized revenue recognition by approximately $2.0 million per year.

In addition to up-front payments and research and development funding, we may also be entitled to milestone payments that are contingent upon our achieving a predefined objective. Milestone payments are recorded as revenue upon achievement if there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and the achievement of the milestone is based on our performance.

Clinical Trial Accruals and Related Expenses

We accrue and expense costs for clinical trial activities performed by third parties, including clinical research organizations, or CROs, and clinical investigators, based upon estimates made as of the reporting date of the work completed over the life of the individual study in accordance with agreements established with CROs and clinical trial sites. Some CROs invoice us on a monthly basis, while others invoice upon milestones achieved and the expense is recorded as services are rendered. We determine the estimates of clinical activities incurred at the end of each reporting period through discussion with internal personnel and outside service providers as to the progress or stage of completion of trials or services, as of the end of each reporting period, pursuant to contracts with numerous clinical trial centers and CROs and the agreed upon fee to be paid for such services. The significant factors considered in estimating accruals include the number of patients enrolled and the percentage of work completed to date. Costs of setting up clinical trial sites for participation in the trials that are paid for in advance are expensed over the estimated set-up period. While the set-up periods vary from one arrangement to another, such set-up periods generally take from two to six months. Such set-up activities include clinical site identification, local ethics committee submissions, regulatory submissions, clinical investigator kick-off meetings and pre-study site visits. Clinical trial site costs related to patient enrollments are accrued as patients are entered into the trial.

To date, we have not experienced significant changes in our estimates of clinical trial accruals after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period on a straightline basis. We recorded non-cash stock-based compensation expense of $0.7 million, $1.8 million and $2.3 million for the years ended December 31, 2008, 2009 and 2010 and $1.0 million and $1.2 million during the six months ended June 30, 2010 and 2011, respectively. At December 31, 2010 and June 30, 2011, we had $5.2 million and $4.2 million, respectively, of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over a weighted-average period of 2.76 years and 2.42 years,

 

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respectively. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

Our board of directors, with the assistance of management and independent consultants, performed fair value analyses for the valuation of our common stock as of December 2009, December 2010 and June 2011. For grants made on dates for which there was no contemporaneous valuation to utilize in setting the exercise price of our common stock, and given the absence of an active market for our common stock, our board of directors determined the fair value of our common stock on the date of grant based on several factors, including:

 

   

important developments in our operations, most significantly related to the clinical development of our lead drug candidates, Traficet-EN and CCX140;

 

   

equity market conditions affecting comparable public companies;

 

   

the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering or an acquisition of us, given prevailing market conditions; and

 

   

that the grants involved illiquid securities in a private company.

In determining the fair value of our common stock, we used a combination of the market multiple approach and the initial public offering, or IPO, value approach to estimate the enterprise value of our company. The per share common stock value was estimated by allocating the enterprise value using the probability-weighted expected return method, or PWERM, at each valuation date.

The market multiple approach estimates the value of a business by comparing a company to similar publicly-traded companies. When selecting the comparable companies to be used for the market multiple approaches, we focused on companies within the biopharmaceutical industry. Some of the specific criteria used to select the comparable companies included those discovering and developing small molecule drugs in the therapeutic areas of autoimmune or inflammatory disorders and cancer and whose product pipeline was comprised of lead candidates in a pre-commercial stage and/or pre-Phase III clinical development. The mix of comparable companies was reviewed at each valuation date to assess whether to add or delete companies; however, following each review, the comparable companies remained largely unchanged from those used in prior valuation analysis.

A group of comparable publicly-traded companies is selected and market multiples are calculated using each company’s stock price and other financial data. An estimate of value for our company is completed by applying selected market multiples based on forecasted financial results for both the comparable companies and the subject company. Given that we are several years away from generating product revenue and we were unable to develop reliable long-term forecasts, our analysis applied the market approach based on our research and development spending results, which was deemed to be the most relevant financial measure.

The IPO value approach estimates the value of a business by estimating a future IPO value based on pre-money valuations of biopharmaceutical IPOs of similar stage over approximately the preceding two to three year period, discounted to the present value (as further discussed below in each valuation discussion). As we moved closer to an anticipated IPO, we continued to lower the discount rate as the perceived risk of an IPO was reduced. Given that both the market multiple approach and the IPO value approach provide relevant estimates of fair value, which did not differ significantly, we applied equal weighting to each of these approaches to determine an initial estimated enterprise value. The initial estimated enterprise value was then allocated to the common stock using the PWERM for the periods described below.

The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. The PWERM estimates the common stock value to our stockholders under each of four possible future scenarios—IPO, sale, stay private and liquidation. The value per

 

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share under each scenario was then probability weighted and the resulting weighted values per share were summed to determine the fair value per share of our common stock. In the liquidation, sale and stay private scenarios, the value per share was allocated taking into account the liquidation preferences and participation rights of our convertible preferred stock consistent with the method outlined in the AICPA Practice Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation . In the IPO scenario, it was assumed that all outstanding shares of our convertible preferred stock would convert into common stock. Over time, as we achieved certain company related milestones, the probability of each scenario was evaluated and adjusted accordingly, with the probability of a liquidity event such as an IPO or sale remaining in the range of 55-60% and 15-20%, respectively. The probability of remaining a private company or liquidating remained in the range from 20-25% and 0-5%, respectively. In addition, our previously filed registration statement which was withdrawn in 2008 influenced the probability weighting.

We also considered the fact that our stockholders cannot freely trade our common stock in the public markets. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

In the contemporaneous valuations used to establish the fair value of our common stock, the non-marketability discount decreased over time from December 2009 to June 2011. However, as the IPO scenario did not include a non-marketability discount, the effect of the non-marketability discount on the valuation declined over time when weighted over the four possible scenarios.

There is inherent uncertainty in these forecasts and projections and if we had made different assumptions and estimates than those described above, the amount of our stock-based compensation expense, net loss and net loss per share amounts could have been materially different.

In connection with the preparation of our consolidated financial statements, we reassessed the fair value of our common stock for financial reporting purposes at interim dates between the contemporaneous valuations where there were stock option grants. For these interim periods we adjusted the fair value based on market conditions, progress made in our development programs and whether we achieved company milestones, when we deemed appropriate. Since December 2009, we had a number of developments in our business that we believe contributed to increase in the fair value of our common stock as discussed below.

Common stock valuations

Information regarding our stock option grants to our employees and non-employees along with the exercise price, which equals the estimated fair value of the underlying common stock for stock options issued since January 1, 2010 is summarized as follows:

 

Grant Date

   Shares Subject to Options
Granted
     Exercise Price per
Common Share
     Fair Value per
Common Share
     Intrinsic Value per
Common Share
 

March 3, 2010

     92,900       $ 3.15       $ 3.15           

May 27, 2010

     12,500         3.15         3.15           

August 10, 2010

     847,259         3.15         3.15           

August 11, 2010

     558,333         3.15         3.15           

November 17, 2010

     18,000         3.15         3.15           

February 9, 2011 (unaudited)

     64,125         3.30         3.30           

May 5, 2011 (unaudited)

     3,000         3.30         3.30           

August 4, 2011 (unaudited)

     693,237         3.45         3.45           

December 2009:     As of December 2009, the results of our Phase II clinical trial of Traficet-EN demonstrated clinical efficacy in patients with moderate-to-severe Crohn’s disease with a favorable safety and tolerability profile in both induction and maintenance periods of the study. Based on a confluence of data, GSK exercised its option to obtain an exclusive license for further development and worldwide commercialization of Traficet-EN. The option exercised by GSK constituted a material change in our business and financial position; we therefore conducted a contemporaneous valuation as of December 31, 2009. The valuation used a risk-adjusted discount of 18%, a

 

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non-marketability discount of 24% and an estimated time to a liquidity event of 12-18 months. Given that a potential liquidity event was estimated to be in the 12-18 month time horizon, we utilized the PWERM allocation model. The expected outcomes were weighted more toward an IPO (55-60%), with a lower weight for remaining private (20-25%), and a lower weight for a sale (15-20%) and with the lowest weights given to liquidation (0-5%). The valuation indicated a fair value of $3.15 per share for our common stock.

March 2010, May 2010, August 2010, and November 2010:     During these periods, there were no material changes to our business, and therefore we did not adjust the fair value of our common stock as of March 2010, May 2010, August 2010 and November 2010.

December 2010:     As of December 2010, we continued to make progress in our preclinical and clinical product portfolio. In December 2010, we completed a Phase II clinical trial for CCX140 for the treatment of type 2 diabetes which demonstrated that the compound was safe and well tolerated. In addition, in December 2010, we initiated a Phase I clinical trial of CCX832 and as a result, earned a milestone payment from GSK. The advancement of our clinical trials and the earned milestone payment constituted a significant change in our business and financial position, and we therefore conducted a contemporaneous valuation as of December 31, 2010. The valuation used a risk-adjusted discount of 18%, a non-marketability discount of 24% and an estimated time to a liquidity event of 12 months. The expected outcomes were weighted more toward an IPO (55-60%), with a lower weight for remaining private (20-25%), and a lower weight for a sale (15-20%), with the lowest weights given to liquidation (0-5%). The valuation indicated a fair value of $3.30 per share for our common stock.

February 2011 and May 2011 :    During these periods, we continued to advance our clinical pipeline consisting of several drug candidates including our lead compound under the GSK alliance, Traficet-EN, which entered pivotal Phase III clinical trials in January 2011 for the treatment of patients with moderate-to-severe Crohn’s disease. We advanced our other clinical trial programs further into the clinic, however we did not expect data from these trials to be available at this time. As a result, there were no material changes to our business, and therefore we did not adjust the fair value of our common stock as of February 2011 or May 2011.

June 2011 :    As of June 2011, we completed enrollment of our Phase II study of CCX354 for the treatment of rheumatoid arthritis with data expected in the second half of 2011. We also initiated pre-study activities for our Phase II proof-of-concept clinical trial for CCX168 in patients with AAV. We conducted a contemporaneous valuation as of June 30, 2011. At that time, our board of directors had not approved moving forward with an IPO. The valuation used a risk-adjusted discount of 18%, a non-marketability discount of 24% and an estimated time to a liquidity event of 12-18 months. The expected outcomes were weighted more toward an IPO (55-60%), with a lower weight for remaining private (20-25%), and a lower weight for a sale (15-20%), with the lowest weights given to liquidation (0-5%). The valuation indicated a fair value of $3.45 per share for our common stock.

August 2011:     As of August 2011, we continued to advance our clinical pipeline further in development and completed our Phase II study of CCX354 for the treatment of rheumatoid arthritis. We expect GSK’s decision whether to exercise its option to license the compound to be determined by the end of 2011. As a result, there were no material changes to our business, and therefore we did not adjust the fair value of our common stock as of August 2011.

Net Operating Loss Carryforwards

As of December 31, 2010, we had net operating loss and research and development tax credit carryforwards for federal income tax purposes of approximately $68.2 million and $4.5 million, respectively. The federal net operating loss and tax credit carryforwards will expire at various dates beginning in 2019 if not utilized. We also had net operating loss and research and development tax credit carryforwards for state income tax purposes of approximately $67.8 million and $2.5 million respectively. The state net operating loss carryforwards will expire at various dates beginning in 2014 if not utilized. The state research and development tax credits can be carried forward indefinitely.

Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 as amended. The annual limitation

 

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may result in the expiration of our net operating losses and credits before they can be used. We have recorded a valuation allowance for the full amount of the portion of the deferred tax asset related to our net operating loss and research and development tax credit carryforwards.

Results of Operations

Comparison of Six Months Ended June 30, 2010 and 2011

 

     Six Months Ended June 30,     Change  
         2010             2011         2011 vs. 2010     %  
     (in thousands)  

Revenue

   $ 19,774      $ 4,180      $ (15,594     (79%

Research and development expenses

     16,190        14,593        (1,597     (10%

General and administrative expenses

     3,711        3,949        238        6%   

Interest income

     206        224        18        9%   

Interest expense

     (36     (53     (17     (47%

Other income

     500               (500     (100%

Revenue.     We recognized revenue of $4.2 million in the six months ended June 30, 2011 and $19.8 million in the same period in 2010. This decrease was primarily due to milestone payments received in connection with our GSK alliance during the six months ended June 30, 2010 for the development candidate nomination of CCX832 and Phase I clinical trial initiation of CCX168. Total milestone payments recognized in the six months ended June 30, 2010 were $15.0 million. No milestone payments were recognized in the same period in 2011.

Research and development expenses.     Research and development expenses were $14.6 million in the six months ended June 30, 2011 and $16.2 million in the same period in 2010. This decrease was primarily due to the completion of our Phase II clinical trial of CCX140 in type 2 diabetes in December 2010.

General and administrative expenses.     General and administrative expenses were $3.9 million in the six months ended June 30, 2011 and $3.7 million for the same period in 2010. This increase was primarily related to higher professional fees for legal and financial consulting services in connection with intellectual property and business development related activities, respectively.

Interest income, net.     Interest income, net of interest expense, was $0.2 million in the six months ended June 30, 2011 and in the same period in 2010.

Other income .    Other income was $0.5 million for the six months ended June 30, 2010. No other income was recognized in 2011. This decrease was due to the receipt of an insurance claim in the six months ended June 30, 2010.

Comparison of Years Ended December 31, 2009 and 2010

 

     Year Ended December 31,     Change  
         2009             2010         2010 vs. 2009     %  
     (in thousands)        

Revenue

   $ 49,744      $ 34,861      $ (14,883     (30%

Research and development expenses

     27,474        33,527        6,053        22%   

General and administrative expenses

     6,575        7,292        717        11%   

Interest income

     297        436        139        47%   

Interest expense

     (76     (81     (5     (7%

Other income

            2,434        2,434        N/A   

Income tax benefit (expense)

     (293     73        366        125%   

Revenue.     We recognized revenue of $34.9 million for the year ended December 31, 2010 and $49.7 million for the same period in 2009. This decrease was primarily due to higher milestone payments in 2009. In December 2009, GSK exercised its option to obtain an exclusive license for further development and worldwide

 

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commercialization of Traficet-EN. The associated option exercise fee of $35.0 million was recognized as revenue in full in the year ended December 31, 2009. Total milestones payments recognized in 2010 and 2009 were $25.0 million and $40.0 million, respectively.

Research and development expenses.     Research and development expenses were $33.5 million in 2010 and $27.5 million in 2009. This increase was primarily due to higher clinical expenses for CCX140, CCX354 and CCX168, reflecting further patient enrollment in the associated clinical trials for these drug candidates and for CCX832 for which Phase I clinical trials were initiated in 2010.

General and administrative expenses.     General and administrative expenses were $7.3 million in 2010 and $6.6 million in 2009. This increase was primarily due to higher stock based compensation resulting from additional stock option grants and an increase in the fair value per share of our common stock during 2010.

Interest income, net.     Interest income, net of interest expense, was $0.4 million in 2010 and $0.2 million in 2009. This increase was a result of higher cash and investment balances in 2010 primarily due to the receipt of milestone payments from GSK in 2010.

Other income .    Other income was $2.4 million for the year ended December 31, 2010. No other income was recognized in 2009. This increase was due to the $1.9 million in government grants awarded from the United States Department of Treasury for eight projects under the Qualitative Therapeutic Discovery Project Program under the Patient Protection and Affordable Care Act of 2010 to support research with the potential to produce new therapies and $0.5 million for the receipt of an insurance claim in 2010.

Income tax benefit (expense) .    Income tax expense was $0.3 million in 2009. State income tax expense resulting from the state of California’s temporary suspension of the use of net operating loss carrybacks in 2009 was partially offset by a federal income tax credit in the same period.

Comparison of Years Ended December 31, 2008 and 2009

 

     Year Ended December 31,     Change        
         2008             2009         2009 vs. 2008     %  
     (in thousands)        

Revenue

   $ 24,087      $ 49,744      $ 25,657        107%   

Research and development expenses

     35,056        27,474        (7,582     (22%

General and administrative expenses

     9,157        6,575        (2,582     (28%

Interest income

     1,762        297        (1,465     (83%

Interest expense

     (129     (76     53        41%   

Income tax benefit (expense)

     23        (293     (316     (1,374%

Revenue.     We recognized revenue of $49.7 million in 2009 and $24.1 million in 2008. This increase was primarily due to higher milestone payments in 2009. In December 2009, GSK exercised its option to obtain an exclusive license for further development and worldwide commercialization of Traficet-EN. The associated option exercise fee of $35.0 million was recognized as revenue in full in the year ended December 31, 2009. Total milestones payments recognized in 2009 and 2008 were $40.0 million and $10.0 million, respectively.

Grant revenue was $0.5 million in 2008, reflecting the completion of efforts related to a grant from the National Institute of Allergy and Infectious Diseases. No grant revenue was recognized in 2009.

Research and development expenses.     Research and development expenses were $27.5 million in 2009 and $35.1 million in 2008. This decrease was primarily due to lower medical and regulatory expenses of $7.6 million as a result of the completion of our Phase II trial for Traficet-EN, partially offset by higher clinical expenses for CCX140, CCX354 and CCX168, reflecting further patient enrollment in associated clinical trials for these drug candidates and for CCX832 for which Phase I clinical trials were initiated in 2010.

General and administrative expenses.     General and administrative expenses were $6.6 million in 2009 and $9.2 million in 2008, representing a decrease of $2.6 million. This decrease was primarily a result of higher legal and financial professional fees associated with our previously filed registration statement which was withdrawn.

 

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Interest income, net.     Interest income, net of interest expense, was $0.2 million in 2009 and $1.6 million in 2008. This decrease was primarily due to a significantly lower interest rate environment in 2009.

Income tax benefit (expense) .    Income tax expense was $0.3 million in 2009. State income tax expense resulting from the state of California’s temporary suspension of the use of net operating loss carrybacks in 2009 was partially offset by a federal income tax credit in the same period.

Liquidity and Capital Resources

Since our inception, we have raised approximately $350 million to fund our operations primarily through the private placement of equity, contract revenue under our collaborations, government contracts and grants and borrowings under equipment financing arrangements. As of June 30, 2011, we had approximately $79.9 million in cash, cash equivalents and investments. The following table shows a summary of our cash flows for each of the three years ended December 31, 2008, 2009 and 2010 and six months ended June 30, 2010 and 2011.

 

     Years Ended December 31,     Six Months Ended June 30,  
     2008     2009     2010          2010               2011       
     (in thousands)  
                       (unaudited)  

Cash provided by (used in)

          

Operating activities

   $ (22,758   $ (22,961   $ 17,664      $ 31,492      $ (4,412

Investing activities

     23,777        (29,915     (27,629     (37,030     1,098   

Financing activities

     47,890        (1,639     945        813        1,592   

Net cash used in operating activities.     Net cash used in operating activities was $4.4 million for the six months ended June 30, 2011, compared to net cash provided by operating activities of $31.5 million for the same period in 2010. This decrease was primarily due to the receipt by us in the six months ended June 30, 2010 of a $35.0 million milestone payment from GSK in connection with the exercise of its option to obtain an exclusive license for further development and worldwide commercialization of Traficet-EN.

Net cash provided by operations was $17.7 million for the year ended December 31, 2010, compared to net cashed used in operations of $23.0 million in 2009. This increase was primarily due to the receipt of the $35.0 million milestone payment from GSK in 2010.

Net cash used in operations was $23.0 million for the year ended December 31, 2009, compared to $22.8 million for the year ended December 31, 2008. The use of cash in these periods was primarily due to the funding of our drug discovery and development efforts adjusted for non-cash charges and changes in components of working capital.

Net cash used in investing activities.     Net cash used in or provided by investing activities for periods presented primarily relate to the purchase, sale and maturity of investments used to fund the day-to-day needs of our business.

Net cash used in financing activities.     Net cash provided by financing activities was $1.6 million for the six months ended June 30, 2011, compared to $0.8 million for the same period in 2010. The increase was primarily due to $1.1 million in proceeds from issuance of Series B convertible preferred stock in connection with the exercise of an associated warrant.

Net cash provided by financing activities was $0.9 million for the year ended December 31, 2010 compared to cash used in financing activities of $1.6 million for the same period in 2009. This increase was due to $1.5 million in proceeds received from the drawdown of our equipment line of financing in 2010. In addition, we repurchased $1.1 million in common stock from our Chief Executive Officer in 2009.

Net cash used in financing activities was $1.6 million for the year ended December 31, 2009, compared to net cash provided by financing activities of $47.9 million in 2008. The decrease in cash provided by financing activities was due to $48.7 million in net proceeds from the 2008 private placement of our Series E convertible preferred stock.

 

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As of June 30, 2011, we had approximately $79.9 million in cash, cash equivalents and investments. We believe that our existing cash, cash equivalents and investments as of June 30, 2011, along with the estimated net proceeds from this offering, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

 

   

the achievement of milestones under our agreement with GSK;

 

   

the terms and timing of any other collaborative, licensing and other arrangements that we may establish;

 

   

the initiation, progress, timing and completion of preclinical studies and clinical trials for our drug candidates and potential drug candidates;

 

   

the number and characteristics of drug candidates that we pursue;

 

   

the progress, costs and results of our clinical trials;

 

   

the outcome, timing and cost of regulatory approvals;

 

   

delays that may be caused by changing regulatory requirements;

 

   

the cost and timing of hiring new employees to support our continued growth;

 

   

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

 

   

the costs and timing of procuring clinical and commercial supplies of our drug candidates;

 

   

the costs and timing of establishing sales, marketing and distribution capabilities; and

 

   

the extent to which we acquire or invest in businesses, products or technologies.

Contractual Obligations and Commitments

The following is a summary of our long-term contractual cash obligations as of December 31, 2010.

 

     Payments Due by Period  
     Total      Less than
One Year
     1-3
Years
     3-5
Years
     More than 5
Years
 
     (in thousands)  

Operating lease (1)

   $ 2,975       $ 844       $ 1,816       $ 315       $   

Equipment financing obligations (including interest) (2)

     1,493         407         815         271           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 4,468       $ 1,251       $ 2,631       $ 586       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

We lease our facility in Mountain View, California. The lease expires in 2014.

 

(2)

In February 2007, we entered into a $2.5 million credit facility with Silicon Valley Bank to finance equipment purchases and other related expenses. In April 2010, we modified this credit facility to increase its limit to $4.0 million until March 31, 2011. As of June 30, 2011 we had drawn $2.2 million under this modified credit facility. The loans under this credit facility are secured by certain of our assets and are being repaid over 48 months. Interest rates are fixed at the time of drawdown, with effective rates ranging from 6.3%-7.0%.

In September 2011, we entered into a convertible note loan agreement with Techne pursuant to which we issued a convertible note with a principal amount of $10.0 million, bearing interest at a rate of 5.0% per annum and maturing in September 2021. Upon completion of this offering, all outstanding principal and interest under this note will automatically convert into shares of our common stock at a conversion price equal to the initial public offering price of our common stock. See “Certain Relationships and Related Party Transactions.”

 

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We enter into contracts in the normal course of business with CROs for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable SEC regulations) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, except warrants and stock options.

Quantitative and Qualitative Disclosure About Market Risk

The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive from our marketable securities without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the marketable securities to fluctuate. To minimize the risk in the future, we intend to maintain our portfolio of cash equivalents and short term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate obligations. Because of the short-term maturities of our cash equivalents and marketable securities, we do not believe that an increase in market rates would have any significant impact on the realized value of our marketable securities.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standard Update No. 2009-13, Revenue Recognition—Multiple Deliverable Revenue Arrangement , or ASU 2009-13. ASU 2009-13 provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We adopted this guidance prospectively beginning on January 1, 2011 and there was no cumulative effect upon adoption. Under ASU 2009-13, we may be required to exercise considerable judgment in determining the estimated selling price of delivered items under new agreements and our revenue under new agreements may be more accelerated as compared to the prior accounting standard. As such, the adoption of ASU 2009-13 could have a material impact on our financial statements going forward.

In April 2010, the FASB issued Accounting Standard Update No. 2010-17, Revenue Recognition—Milestone Method , or ASU 2010-17. ASU 2010-17 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance, companies may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. ASU 2010-17 is effective on a prospective basis for research and development milestones achieved in fiscal years beginning on or after June 15, 2010. We adopted this standard on a prospective basis on January 1, 2011 with no impact.

 

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BUSINESS

Overview

ChemoCentryx is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. Our approach has been to target the chemokine system, a network of molecules including chemokine ligands and their associated receptors, as well as related chemo-attractant receptors, all of which are known to drive inflammation. Chemokine ligands concentrate at the site of an inflammatory event, serving as signals that attract and guide inflammatory cells to the tissue, where, based on the chemokine ligand and receptor combination, a specific inflammatory response is initiated. In certain diseases, discrete chemokine receptors that play a specific role in the pathology of interest have been identified, and the therapeutic goal is to specifically inhibit that receptor to provide clinical benefit. Accordingly, each of our drug candidates is a small molecule designed to target a specific chemokine or chemo-attractant receptor, thereby blocking the inflammatory response driven by that particular chemokine while leaving the rest of the immune system unaffected. Using our pioneering insights and proprietary technologies designed to better understand the chemokine system, we believe that we have established the broadest pipeline of novel drugs targeting chemokine receptors. Our compounds are designed to be highly potent, selective to minimize the risk of off-target effects and orally-available for improved patient compliance. As small molecules, they are also easier and less costly to manufacture than protein therapeutics, or biologics.

We currently have five drug candidates in clinical development, and expect to advance one additional drug candidate into clinical development in 2012. Two of these drug candidates are wholly owned and are being developed independently by us while four are subject to our collaboration agreement with Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline. Under this agreement, GSK has exercised its option to obtain an exclusive license to further develop and commercialize Traficet-EN, is currently evaluating its option to CCX354, and will have similar option rights to CCX168 and CCX832 if we establish clinical proof-of-concept.

All of our drug candidates have been internally discovered and include:

 

   

Traficet-EN (CCX282 or GSK’786) — Our most advanced drug candidate, currently in three pivotal Phase III clinical trials being conducted by our partner GSK for the treatment of patients with moderate-to-severe Crohn’s disease;

 

   

CCX140 — Our lead independent drug candidate successfully completed a Phase II clinical trial in type 2 diabetics and is currently in two Phase II clinical trials in patients with diabetic nephropathy, a form of kidney disease;

 

   

CCX354 — Successfully completed a Phase II proof-of-concept clinical trial for the treatment of rheumatoid arthritis, or RA, and we expect GSK’s option decision by the end of 2011;

 

   

CCX168 — Currently in a Phase II proof-of-concept clinical trial for the treatment of anti-neutrophil cytoplasmic antibody, or ANCA-associated vasculitis, or AAV, and is subject to GSK’s option;

 

   

CCX832 — Recently completed a Phase I clinical trial. Subject to further discussion with GSK, expected to enter a Phase II proof-of-concept clinical trial for the treatment of skin inflammation, and is subject to GSK’s option; and

 

   

CCX662 — Our independent drug candidate for the treatment of glioblastoma multiforme, or GBM, is expected to enter a Phase I clinical trial in the second half of 2012.

We are also advancing several additional independent drug candidates through preclinical development, the most advanced of which target chemokine receptors involved in atopic dermatitis, inflammatory bowel disease, or IBD, including ulcerative colitis, liver inflammation, psoriasis, and RA.

Traficet-EN, our most advanced drug candidate, is intended to control the inflammatory response underlying IBD by targeting the chemokine receptor known as CCR9. In adults, CCR9 is found primarily on a population of T cells, a subset of the body’s inflammatory cells, that migrate selectively to the digestive tract. It is believed that

 

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when CCR9’s ligand, CCL25 (also known as TECK), is over-expressed, the migration of T cells to the small and large intestine causes persistent inflammation that may result in Crohn’s disease or ulcerative colitis, the two forms of IBD. We have completed nine clinical trials with Traficet-EN in a total of 785 subjects, including five Phase I clinical trials, one Thorough QT study (an assessment of cardiovascular safety which is required for regulatory approval), and three Phase II clinical trials. We completed our PROTECT-1 Phase II clinical trial in 436 patients with moderate-to-severe Crohn’s disease in 2009. Results from this clinical trial indicated that Traficet-EN was effective in inducing a clinical response over a 12-week treatment period. The results also indicated that Traficet-EN was effective in maintaining clinical remission over a 36-week treatment period. Traficet-EN was safe and well tolerated in all clinical trials completed to date. In December 2009, GSK exercised its option to obtain an exclusive license to further develop and commercialize Traficet-EN. To date, GSK has initiated three pivotal Phase III clinical trials with Traficet-EN in Crohn’s disease. If approved, Traficet-EN would be the first oral agent with a novel mechanism of action introduced for the treatment of Crohn’s disease since the introduction of corticosteroids and oral immunosuppressants.

CCX140, our lead independent drug candidate, targets the chemokine receptor known as CCR2. CCX140 is a potent and selective antagonist of CCR2 that is found on subsets of monocytes and macrophages, which are cells of the immune system believed to play an important role in inflammatory processes. Blocking CCR2 is intended to reduce the abnormal monocyte and macrophage driven inflammatory response implicated in renal disease. In addition, it has been shown that levels of CCL2, the main ligand for CCR2, are elevated in the kidneys of patients with diabetic nephropathy, which is characterized by a persistent and usually progressive decline in renal function. Current treatments of patients with diabetic nephropathy primarily focus on treatment of the underlying type 2 diabetes and hypertension. Given that the current standard of care does not halt or reverse the progression of diabetic patients with impaired kidney function to end-stage renal disease, we believe that an unmet medical need persists for the treatment of diabetic nephropathy. As a precursor to our clinical trials in patients with diabetic nephropathy, in January 2011, we completed a 159-patient randomized Phase II clinical trial to assess the safety and tolerability of CCX140 in patients with type 2 diabetes, the most common cause of diabetic nephropathy. CCX140 was safe and well tolerated in this trial. In addition, CCX140 demonstrated biological activity through a dose-dependent decrease in fasting plasma glucose. The highest dose of 10mg CCX140 administered once-daily also lowered hemoglobin A1c, or HbA1c, with statistical significance compared to placebo over a four-week period. CCX140 is currently in two Phase II clinical trials in patients with diabetic nephropathy and we expect to complete these clinical trials by the end of 2012.

CCX354 targets the chemokine receptor known as CCR1. Synovial fluid from the joints of RA patients contains high levels of activated CCR1 chemokine ligands. Blocking CCR1 is intended to reduce inflammation and prevent subsequent joint destruction by suppressing the infiltration of inflammatory cells into the arthritic joint. We successfully completed two Phase I clinical trials in a total of 84 healthy subjects, followed by a Phase I/II clinical trial in 24 patients with stable RA and a Phase II proof-of-concept clinical trial in 160 patients with moderate-to-severe RA. This successful Phase II proof-of-concept clinical trial triggered GSK’s option rights under our collaboration agreement, and we expect GSK’s decision whether to exercise its option to further develop and commercialize CCX354 by the end of 2011. If GSK exercises its option, it would have an exclusive right to initiate a Phase IIb clinical trial for CCX354 in RA.

CCX168 targets the chemo-attractant C5a receptor, or C5aR, which binds to a biologically activated fragment of the complement protein known as C5. Chemo-attractant receptors are related to the chemokine receptor family and similarly regulate the migration of certain types of inflammatory cells. C5aR is thought to play a role in a range of inflammatory and autoimmune diseases such as AAV, lupus and psoriasis. We completed a Phase I clinical trial for CCX168, which showed that CCX168 was well tolerated at doses up to 100mg. We initiated a Phase II proof-of-concept clinical trial in AAV in the fourth quarter of 2011 and expect to complete this clinical trial by the end of 2012. Following the successful completion of this clinical trial, GSK may exercise its option to further develop and commercialize CCX168.

CCX832 targets the chemo-attractant receptor known as ChemR23. This molecule has been designed to block the pro-inflammatory effects of chemerin, the ligand for ChemR23. Elevated chemerin levels are seen in multiple inflammatory skin diseases, including cutaneous lupus, oral lichen planus and psoriasis. In preclinical studies to

 

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date, CCX832 has demonstrated the ability to successfully block ChemR23 and to interrupt the early steps associated with the development of skin inflammation. CCX832 has completed a Phase I clinical trial in 40 healthy subjects and, subject to further discussion with GSK, we expect to advance this drug candidate into a Phase II proof-of-concept clinical trial for the treatment of skin inflammation. Following the successful completion of this clinical trial, GSK may exercise its option to further develop and commercialize CCX832 under our collaboration agreement.

For any drug candidate for which GSK exercises its option under the collaboration agreement, GSK would be solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that drug candidate. Upon the exercise of any of these options, we would receive an option exercise fee and would become eligible to receive regulatory and commercial milestone payments, as earned under the terms of our agreement, and royalties on the net sales of licensed drugs. GSK has already exercised its option to Traficet-EN. If GSK does not exercise its options to CCX354, CCX168 or CCX832, we will evaluate our alternatives for further development of these drug candidates, which may entail internally developing these drug candidates or identifying other collaboration partners for their development.

CCX662 is our independent drug candidate that is a highly potent and selective small molecule compound which targets CXCR7, a novel chemokine receptor that we believe plays a key role in the survival of certain tumor cells. Of particular interest is the role that CXCR7 appears to play in the development of GBM, the deadliest of all brain cancers. In animal studies, CCX662 demonstrated safety and efficacy against GBM. We are in preclinical development with this drug candidate and anticipate initiation of clinical trials in patients with GBM in the second half of 2012.

We have developed a suite of proprietary technologies, which we call the EnabaLink drug discovery engine, to better understand the chemokine system and to accelerate the identification of small molecule lead compounds that target and inhibit the function of specific chemokine receptors. We believe this platform provides us with an advantage in the rapid identification of highly specific drug candidates. An important element of this platform is our thorough map of the chemokine network, which allows us to better understand how a given chemokine-chemokine receptor interaction impacts the migration of cells in a given disease. With this understanding, we can apply our advanced screening methodologies, including a purpose-built high-throughput robotic screening technology, known as the Reverse Activation of Migration, or RAM, Assay, to identify small molecule antagonists for the chemokine receptor most closely associated with a specific disease. The RAM Assay is designed to markedly reduce or eliminate non-specific inhibitors and toxic inhibitors of cell migration, resulting in highly specific lead candidates. This technology allows us to screen against targets that are not accessible with traditional technologies, providing us with what we believe to be a competitive advantage in drug discovery. We have used our EnabaLink drug discovery engine in our drug candidate programs and continue to apply these powerful research tools in our early stage drug discovery efforts.

Thomas Schall, Ph.D., our founder, President and Chief Executive Officer, has more than 25 years of research experience in the field of chemokine biology and has contributed broadly to the understanding of chemokines and their receptors in human disease. Since our founding, we have raised approximately $350 million, of which approximately $185 million has been in the form of collaboration funding and government grants and contracts. As of June 30, 2011, we had $79.9 million of cash, cash equivalents and investments. We believe that our broad pipeline of oral drug candidates, our ability to advance unique, highly specific compounds into and through clinical development across diverse indications and our proprietary drug discovery technologies provide us with distinct advantages that will enable us to continue to exploit the extensive pharmacologic potential of the chemokine system.

Strategy

Our strategy includes the following key elements:

 

   

Collaborate with our partner GSK in the Phase III clinical development and commercialization of Traficet-EN.     Prior to the exercise of GSK’s option to Traficet-EN, our most advanced drug candidate, we conducted all of the preclinical and clinical trials for Traficet-EN, including a 436-patient Phase II clinical trial called PROTECT-1 in patients with moderate-to-severe Crohn’s

 

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disease. We will continue to collaborate with GSK, in the clinical development and commercialization of Traficet-EN in this and other indications.

 

   

Forward integrate into a commercial biopharmaceutical company by driving the development and commercialization of our lead independent drug candidate, CCX140.     We have initiated two Phase II clinical trials in patients with diabetic nephropathy. Upon successful completion of the Phase II program for CCX140, we plan to initiate Phase III clinical trials either alone or together with a co-development partner. We plan to retain commercial rights to CCX140 in North America and seek a partner for co-development and commercialization outside North America.

 

   

Advance our other three drug candidates under our collaboration with GSK.     We also plan to continue advancing our other three clinical programs under our collaboration with GSK, including CCX354, which successfully completed a Phase II proof-of-concept clinical trial in patients with moderate-to-severe RA; CCX168, currently in a Phase II proof-of-concept clinical trial in patients with AAV; and CCX832, which recently completed a Phase I clinical trial and, subject to further discussion with GSK, is expected to advance into a Phase II proof-of-concept clinical trial for the treatment of skin inflammation.

 

   

Expand our clinical stage portfolio of internally discovered, independent drug candidates.     We intend to advance CCX662, currently in preclinical development, into clinical trials in patients with GBM, in the second half of 2012. We will also explore new therapeutic applications for other independent programs currently in preclinical development, including those targeting the CCR4, CCR6, CXCR6 and CCR9 receptors in various inflammatory diseases and cancer.

 

   

Leverage our expertise and proprietary technologies to continue discovering and developing a broad pipeline of novel chemokine-based therapeutics.     We intend to use our RAM Assay to screen against additional chemokine receptors and chemo-attractant receptors and expect to continue to discover and validate novel chemokine receptors by using our proprietary EnabaLink suite of drug discovery technologies. We plan to use our proprietary technologies to internally discover and develop a balanced portfolio of independent and partnered compounds.

 

   

Commercialize our drug candidates in specialty markets in North America and partner outside North America and in primary care markets worldwide.     We intend to retain significant rights to our independent drug candidates which address specialty market opportunities such as renal disease and certain cancers. We plan to build capabilities to market our drugs to physician specialists in North America and seek commercialization partners for our drugs marketed to physician specialists outside of North America and to primary care physicians worldwide.

Focusing on the Chemokine System

Understanding Inflammation

The human immune system serves to protect the body against infections and injuries. It recognizes these threats and quickly mounts a defensive response. Inflammation is a key component of the immune response and serves as one line of defense to infection, irritation or injury as immune system cells attempt to suppress and control an infectious agent, such as bacteria, or to break down and carry away damaged tissue, as in the case of injury. Specialized white blood cells known as antigen presenting cells such as macrophages and lymphocytes are mobilized to the affected tissue and work in concert to recognize, neutralize and eliminate the perceived threat. Macrophages and other antigen presenting cells pick up and ingest foreign materials and present the threatening antigens to lymphocytes, also known as T cells and B cells. T cells in turn destroy infected cells or coordinate other inflammatory cells, such as B cells, which produce antibodies, or proteins with the ability to neutralize antigens, to bind with the antigen leading to the destruction of the foreign agent. Macrophages then dispose of dead cells and debris.

 

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Acute inflammation is characterized by the rapid onset of pain, heat, redness, swelling and loss of function. When inflammation is long-term, or chronic, and is directed at the body’s own tissues, this can result in various forms of autoimmune disease. Different autoimmune diseases tend to affect different tissues or organs. For example, in Crohn’s disease certain inflammatory cells attack tissues predominantly in the digestive tract, while in RA a different set of inflammatory cells is involved in attacking the tissues that make up the joints between bones. While the cause of autoimmune diseases is not known, we and others have demonstrated that the self-perpetuating, tissue-damaging inflammation associated with these conditions is in part characterized by dysregulation of the chemokine system.

IBD, RA, AAV, lupus and skin inflammatory diseases such as psoriasis and atopic dermatitis, are all examples of chronic conditions in which an inappropriate inflammatory response underlies disease. In recent years, conditions that were not previously considered to be the result of inflammation, such as type 2 diabetes, chronic kidney disease and cancer, have joined the long list of human diseases thought to be the result, at least in part, of uncontrolled and chronic inflammation. Many autoimmune diseases are highly debilitating, creating a significant social and financial burden. According to the National Institutes of Health, there are more than 80 clinically distinct autoimmune diseases which collectively affect as many as 22 million people in the United States.

Role of Chemokines in Disease

Inflammation involves a complex series of cellular events that rely on chemical messengers known as chemokines, or chemo -attractant cyto kines , which send out signals to attract inflammatory cells, or leukocytes, to the site of disease or injury. Chemokines bind to chemokine receptors found on the surface of leukocytes, and the specific combination of various chemokines and chemokine receptors serve to precisely coordinate the inflammatory response.

The chemokine system, including chemokines and chemo-attractants, directs inflammatory responses, serving to precisely coordinate immune system cell movement. The human chemokine network is made up of more than 50 known chemokine ligands and approximately 25 identified chemokine receptors. Some chemokines are known to bind to more than one chemokine receptor. Certain receptors can bind to multiple chemokines, while other chemokine receptors only bind to a single ligand. Different chemokines are made in different tissues at different times and different chemokine receptors are expressed on the surface of different types of inflammatory cells. Those cells can only respond to a chemokine in a given organ or tissue if the cell possesses a receptor that specifically recognizes the chemokine that is present in the local environment. In this way, each chemokine-chemokine receptor combination may direct a different inflammatory response and this response can be tailored by the body based on the type of injury, irritation or other threat.

Inappropriate activity of the chemokine network is at the core of numerous autoimmune and inflammatory conditions. For example, in Crohn’s disease dysregulation of either the chemokine CCL25 or the chemokine receptor to which it binds, CCR9, is thought to selectively attract inflammatory T cells to and subsequently attack tissues in the digestive tract. As drivers of the inflammatory response, chemokines and their receptors present opportunities for the development of new therapies. By selectively blocking a given chemokine-chemokine receptor combination, and largely leaving other chemokine-chemokine receptor interactions unaffected, we believe even aggressive forms of chronic inflammation and autoimmune diseases can potentially be brought under control in a safe, effective manner.

Chemokines are also involved in the causes of diseases that were not historically classified as inflammatory. For example, CCR2 is responsible for the recruitment of monocytes from blood into the adipose tissue and liver of obese, insulin-resistant individuals. The monocytes mature into inflammatory macrophages within these tissues and interfere with the biochemical signals involved in the regulation of glucose levels, often resulting in type 2 diabetes.

Research also indicates that chemokines may contribute to inflammatory damage by direct activation of non-inflammatory cells that are part of the affected tissue. For example, evidence indicates that certain cells within diabetic kidneys begin to express CCR2 on their surface and become impaired due to the resulting increased levels of the chemokine CCL2 found in such kidneys.

 

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In addition to its central role in autoimmune and inflammatory conditions, the chemokine system plays an important role in other diseases, such as cancer. It is known that tumors induce the expression of chemokines that are involved in promoting the growth of blood vessels that feed tumors, providing a link to the chemokine system’s role in the establishment and spread of cancer. In addition, certain chemokine ligands and their corresponding receptors have been implicated in the survival, growth and metastasis of human cancer. The chemokine system is likely a more recent evolutionary branch of other chemo-attractant systems in the body such as the complement system. The complement system includes the protein C5a, which under certain conditions has pro-inflammatory effects.

Our Drug Candidates and Preclinical Programs

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Traficet-EN for Inflammatory Bowel Disease

Understanding Crohn’s Disease

IBD refers to two diseases, Crohn’s disease and ulcerative colitis, both characterized by inflammation of the gastrointestinal tract. Both Crohn’s disease and ulcerative colitis are chronic and recurring autoimmune conditions. Researchers believe that these conditions occur when the body’s inflammatory cells become overreactive to microbes in the gastrointestinal tract, such as bacteria normally found in the intestines for digestion, and mount a destructive inflammatory response.

According to the Crohn’s and Colitis Foundation of America, or CCFA, Crohn’s disease is estimated to affect as many as 700,000 Americans. According to National Digestive Diseases Information Clearinghouse, men and women are affected equally by the disease. While patients may be of any age, Crohn’s disease is primarily a disease that commences in adolescents and young adults, with onset between the ages of 15 and 35.

Crohn’s disease is chronic; patients suffer periods of flare-ups or periods characterized by intense symptoms, interspersed with periods of remission where symptoms decrease or disappear. Symptoms may range from mild to severe and can include persistent diarrhea, abdominal pain, fever, and rectal bleeding, as well as loss of appetite and subsequent weight loss. Crohn’s disease patients will experience ulcerations that penetrate

 

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deeply into the mucosal tissues that line the walls of the bowel. Crohn’s disease may involve the entire length of the gastrointestinal tract from the mouth to the anus, but the most typical areas of involvement are in the small intestine and colon. Complications of Crohn’s disease include obstruction or blockage of the intestine due to scar tissue build-up and nutritional deficiencies. Ulcerative lesions associated with the disease can, on occasion, completely penetrate the bowel wall, leading to painful fistula formation, or an abnormal break or opening in the bowel wall, which can cause infectious complications that require surgical intervention.

Patients with Crohn’s disease are typically referred to and treated by gastroenterologists. Prior to referral and accurate diagnosis, the condition may go undiagnosed or misdiagnosed as a variety of gastrointestinal ailments. Crohn’s disease often mimics other conditions and symptoms may vary widely, presenting challenges for an accurate diagnosis. Crohn’s disease is diagnosed through a colonoscopy, mucosal biopsy and small bowel x-ray to rule out other conditions such as ulcerative colitis and to ascertain which parts of the digestive tract are involved and establish a baseline for monitoring treatment and management. The primary goals for drug therapy are to induce and maintain significant clinical improvement or remission, resulting in improvement of active symptoms.

We believe that Crohn’s disease represents a significant underserved clinical problem with high medical and economic costs and a large impact on quality of life. The disease is strongly linked to work disability and unemployment, as 48% of Crohn’s disease patients were employed full-time at the time of diagnosis of their disease, and 39% of patients were unemployed, according to a 2005 publication in the Journal of Clinical Gastroenterology. Healthcare costs are significant, as patients typically require daily drug therapy over many years to control symptoms and maintain remissions, and a number of patients require multiple hospitalizations and, in some cases, surgeries over the course of their illness. In addition, currently available treatments for Crohn’s disease are often associated with adverse reactions that may require frequent monitoring and impact patient compliance.

Limitations of Current Therapies

Crohn’s disease is a chronic condition, and consequently patients continue on a given therapeutic regimen over the course of a lifetime. Current treatments for Crohn’s disease are directed toward bringing a patient’s active disease, or acute flare-ups, under control or into remission. The initial induction therapy is often followed by chronic maintenance therapy to preserve the remission or to keep disease manifestations at a minimal level. If the disease continues to progress, patients continue on a given therapeutic regimen from the time of diagnosis forward, adding additional therapies as flare-ups recur or persist. Over their lifetimes, Crohn’s disease patients will typically use a broad array of drugs, often in combination, to seek improvement of their symptoms. Many patients also often require one or more surgical procedures over the course of their lifetimes to treat the disease.

In spite of the existence of a number of medications for the treatment of Crohn’s disease, according to a 2001 publication in Alimentary Pharmacology Therapeutics, a study showed that 25% of patients had active disease every year, while another 53% fluctuated between years in remission and years in relapse. Only 22% of patients experienced long-term remissions. When medications can no longer control symptoms, patients have few or no options beyond surgery. According to the CCFA, an estimated 75% of Crohn’s disease patients will eventually require one or more hospitalizations or surgeries to repair a fistula or fissure, to remove an intestinal obstruction or to treat an intestinal abscess, and approximately 50% of adult patients will have a recurrence of symptomatic Crohn’s disease within five years after having surgery. There is no known cure for Crohn’s disease.

For patients with mild-to-moderate disease, aminosalicylates, a type of oral non-steroidal anti-inflammatory drug, are considered a first-line therapeutic approach. These drugs, also called 5-ASAs, may be administered for years after a patient receives an initial diagnosis, though there is limited clinical evidence demonstrating their efficacy in inducing remission of the disease. Oral antibiotics are also used as a primary therapy, as some researchers believe that these drugs may be useful in reducing intestinal bacteria and indirectly suppressing the patient’s immune system. If patients’ symptoms progress after these treatments, they are often given a multi-week course of oral steroid therapy to treat the flare-up.

 

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For patients with moderate-to-severe disease, immunosuppressants and corticosteroids, in some cases administered intravenously, are prescribed for active disease. Corticosteroids are often used in conjunction with immunosuppressants as they may provide a more immediate impact and have shown some efficacy in treating patients with active Crohn’s disease. Immunosuppressants can take up to four months to induce remission and are associated with increased susceptibility to serious infections. Individual immunosuppressive agents have other serious toxic effects, including chronic liver, lung, and kidney damage, or acute inflammation of the pancreas. In addition, profound side effects are known to occur with long-term corticosteroids use, including weight gain, elevated blood sugar, high blood pressure, vision problems such as glaucoma and cataracts, fragile bones and increased susceptibility to infections. Once the flare-up subsides, the patient may be maintained on immunosuppressants, or in some cases with additional oral corticosteroids therapies.

For patients whose active Crohn’s disease cannot be controlled with immunosuppressants or corticosteroids, TNF- a inhibitors such as Remicade (infliximab), sold by Johnson & Johnson, are now commonly used to treat severe cases of Crohn’s disease. TNF- a inhibitors block the natural activity of tumor necrosis factor-alpha, or TNF- a , a cytokine present in large quantities as part of the downstream inflammatory response triggered by chemokines in Crohn’s disease. Other TNF- a inhibitors marketed in the United States for the treatment of Crohn’s disease include Humira (adalimumab), sold by Abbott Laboratories, and Cimzia (certolizumab pegol), sold by UCB. Tysabri (natalizumab), an anti-alpha4 integrin antibody, sold by Biogen Idec, that blocks alpha4 integrin, which is present on several inflammatory cell types, is also used. Remicade and Tysabri are administered by intravenous infusion. The other therapies are given by subcutaneous injection.

Patients who experience acute flare-ups are generally treated with three infusions of Remicade at zero, two and six weeks and the patient is generally continued indefinitely on a maintenance regimen of infusions every eight weeks. The formation of anti-infliximab antibodies to infliximab treatment is associated with a loss of clinical response, infusion reactions and discontinuation of treatment. This may occur in these patients due to the development of neutralizing antibodies against the therapy as a result of its nonhuman components. Humira is typically administered once every other week. Cimzia is given subcutaneously at zero, two and four weeks, and every four weeks thereafter, if the patient responds favorably to the drug. Tysabri is given every four weeks by intravenous infusion. Amgen’s Enbrel (etanercept) has also been studied in IBD and is sometimes prescribed off-label for its treatment.

While TNF- a inhibitors as a class and Tysabri represent clear advances in the treatment of Crohn’s disease, they act by down-regulating the body’s inflammatory response in a generalized manner and are not tissue-specific. Due at least in part to their broad activity, TNF- a inhibitors are associated with serious adverse side effects including an increased risk of life-threatening infections, such as sepsis. TNF- a inhibitors have also been associated with such serious risks as drug-induced lupus, reactivation of latent tuberculosis, and increased risk of developing lymphoma or other blood or neurological disorders. Treatment with TNF- a inhibitors is also expensive, with the combined costs of the drug and its administration often exceeding $20,000 per year per patient, according to The Pain Practitioner, Spring 2011 Pharmacologic Approaches to Rheumatoid Arthritis . Tysabri has been associated with the rapidly progressive, often fatal complication of progressive multifocal encephalopathy, which arises from an often latent virus that a compromised immune system can no longer suppress.

For Crohn’s disease patients, one or more surgeries are a radical, but unfortunately common treatment of last resort. Crohn’s disease patients often undergo repeated procedures for the removal of sections of diseased bowel to treat complications such as severe bleeding, inflammatory obstruction of the flow of bowel contents, or for removal of fistulous tracts through which bowel contents drain into the abdominal space or externally to the body surface.

The ChemoCentryx Solution: Traficet-EN — A Novel CCR9 Antagonist

Traficet-EN is being developed as a first-in-class oral anti-inflammatory agent for the treatment of IBD, including Crohn’s disease and ulcerative colitis. Traficet-EN is orally administered, which we believe would be an important improvement in patient convenience and potentially patient compliance as compared to existing intravenous and subcutaneous treatments with biologics. We believe that the combination of Traficet-EN’s specificity and the convenience of oral administration may make this a treatment of choice for IBD patients. In

 

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addition, as a synthetic small molecule, the drug may have significant cost-of-goods advantages over protein therapeutics, or biologics, such as TNF- a inhibitors.

Traficet-EN Mechanism of Action in IBD

Traficet-EN is designed to prevent the migration of inflammatory cells to the digestive tract by blocking the function of CCR9, which is found primarily on a subset of inflammatory T cells that plays a key role in the development of both forms of IBD. T cell migration into the digestive tract is guided by a chemokine called CCL25 found in the intestines. CCL25-mediated activation of CCR9 draws T cells into the intestinal tissue, where they release inflammatory mediators that can ultimately lead to tissue damage. In adults, CCL25 only signals CCR9-expressing T cells to migrate to the gastrointestinal tract, and blocking CCR9 is not thought to interfere with cell migration elsewhere. Therefore, by blocking CCR9, Traficet-EN may be able to halt the inflammatory response underlying IBD without otherwise impacting the patient’s immune system. In addition, by interrupting CCR9 signaling, we believe Traficet-EN may hasten the elimination of inflammatory T cells from the intestines, thus potentially speeding recovery by reducing the longevity of flare-ups associated with IBD. We believe this mechanism of action would allow Traficet-EN, if approved, to be a highly effective treatment with significantly fewer side effects than currently available immunosuppressive therapies, including TNF- a inhibitors.

Traficet-EN Drug Development Strategy and Clinical Trials

We have completed nine clinical trials with Traficet-EN in a total of 785 subjects, including five Phase I clinical trials in a total of 151 subjects, one Thorough QT study in 57 subjects demonstrating cardiovascular safety, two Phase II clinical trials in 510 patients with Crohn’s disease and one Phase II clinical trial in 67 patients with celiac disease. The largest of these Phase II clinical trials, PROTECT-1, was conducted in 436 patients with moderate-to-severe Crohn’s disease. Results from this clinical trial indicated that Traficet-EN was effective in inducing a clinical response over a 12-week treatment period in these patients. Furthermore, the results indicated that Traficet-EN was also effective in maintaining clinical remission over a 36-week treatment period. Traficet-EN was safe and well tolerated in all clinical trials completed to date. In December 2009, GSK exercised its option to obtain an exclusive license to Traficet-EN and is now solely responsible for all further clinical development and commercialization expenditures worldwide.

To date, three pivotal Phase III clinical trials have been initiated by GSK with Traficet-EN in Crohn’s disease. The pivotal Phase III clinical trials are designed to support the use of Traficet-EN to induce clinical response or remission of Crohn’s disease, and to provide maintenance of remission for Crohn’s disease.

PROTECT-1 Crohn’s Disease Clinical Trial

PROTECT-1 was designed to demonstrate Traficet-EN’s efficacy as an oral treatment capable of inducing and maintaining clinical response or remission among patients with moderate-to-severe Crohn’s disease. This was a double-blind, randomized, placebo-controlled clinical trial, and enrolled 436 patients with an active Crohn’s disease flare-up and Crohn’s Disease Activity Index, or CDAI, scores of 250 to 450 and C-reactive protein, or CRP, levels of at least 7.5mg/L (CRP being a more objective, but non-specific, marker of inflammation). The clinical trial was conducted in 17 countries at more than 100 study centers. The clinical trial included four separate study periods:

 

  1.

A 12-week induction period during which all patients received either placebo, 250mg once-daily (QD), 500mg once-daily or 250mg twice-daily (BID) of Traficet-EN orally. The purpose of this study period was to determine Traficet-EN’s ability to induce clinical response or remission in patients with active Crohn’s disease.

 

  2.

A 4-week active treatment period during which all patients received 250mg of Traficet-EN twice-daily orally.

 

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  3.

A 36-week maintenance period during which all patients with a 70-point-or-greater drop in CDAI scores at the end of the 4-week active treatment period relative to their baseline entry level criteria were re-randomized to either 250mg of Traficet-EN twice-daily or placebo given orally. The purpose of this study period was to determine Traficet-EN’s ability to maintain clinical response or remission in patients with Crohn’s disease.

 

  4.

A 4-week follow-up period during which all patients were followed for safety after the conclusion of dosing of Traficet-EN.

The CDAI is a research tool used for distinguishing a patient’s level of disease from inactive to severely active disease. CDAI scores can range from zero to 600, and a patient experiencing an active Crohn’s disease flare-up can be expected to have a CDAI score of 220 to 450 for moderate-to-severe disease and above 450 for severe to very severe disease. Clinical remission is considered to be a CDAI score of less than 150. For a treatment to be regarded as effective, researchers look for a drop in CDAI of at least 70 to 100 points. CDAI is currently the only measure regarded by regulatory agencies as an appropriate endpoint to assess the efficacy of a given drug in Crohn’s disease.

Overall, the clinical trial demonstrated evidence of efficacy in both the induction of treatment response as well as the maintenance of remission for patients with moderate-to-severe Crohn’s disease when treated with Traficet-EN. Furthermore, Traficet-EN was shown to be safe and well tolerated over the one-year course of this clinical trial.

More specifically, data reported from the 12-week induction period of the PROTECT-1 clinical trial showed that the 500mg once-daily oral dose of Traficet-EN in patients with small bowel and/or colonic Crohn’s disease was consistently superior to placebo across key efficacy endpoints, including CDAI, maintenance of steroid free remission, normalization of CRP, and Crohn’s Disease Endoscopic Index of Severity, or CDEIS.

500mg Once-Daily Traficet-EN Showed Statistically Significant CDAI ³ 100-Point Response at Week 12

As shown below, the difference in clinical response rate between the 500mg once-daily Traficet-EN group and placebo increased at each timepoint during the 12-week induction period: 7% at Week 4; 11% at Week 8; and 14% at Week 12. The CDAI ³ 100-point response was 55% in the 500mg once-daily group versus 40% for placebo at Week 12 (p=0.039).

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500mg Once-Daily Traficet-EN Significantly Reduced Endoscopic Lesions of Crohn’s Disease

A decrease in CRP confirmed the effect of 500mg once-daily Traficet-EN and, as shown below, colonoscopic evidence of improvement based on CDEIS was observed in the 500mg once-daily Traficet-EN group compared to placebo (p=0.049). Only a subset of the patients in the clinical trial consented to serial invasive endoscopy and that subset is presented in the chart below.

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Traficet-EN, But Not Placebo, Showed a CDAI Remission Rate of Approximately 50% Over the Course of the Maintenance Period

Maintenance of clinical remission (CDAI £ 150) showed statistically significant separation between the 250mg twice-daily Traficet-EN and placebo groups. As shown below, data from the maintenance period of PROTECT-1 showed that Traficet-EN treatment was able to maintain the clinical remission rate at 47% to 50%, whereas the remission rate dropped progressively from 50% to 31% in the placebo group over the course of the maintenance period. At week 36 of the maintenance period, which was week 52 of the clinical trial overall, 47% of the patients in the Traficet-EN group were in remission compared to 31% in placebo (p=0.011).

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We also demonstrated that Traficet-EN may reduce the need for corticosteroids. Approximately 11% of patients in the Traficet-EN group compared to 21% in the placebo group started or increased corticosteroid treatment during the maintenance period (p=0.04) and 57% of patients receiving Traficet-EN were able to stop their corticosteroid treatment compared to 43% of patients receiving placebo.

 

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Traficet-EN was safe and well tolerated with no evidence of immune system compromise when administered orally for up to 12 consecutive months to patients in the PROTECT-1 clinical trial. More specifically, in the induction period, a similar proportion of patients in the placebo and Traficet-EN overall groups, 62.5% and 59.8% of patients, respectively, reported treatment-emergent adverse events, or TEAEs, during the clinical trial. Also, a similar proportion of patients in the placebo and Traficet-EN overall groups, 10.4% and 8.6% of patients, respectively, reported treatment-emergent SAEs during the induction period of the clinical trial. In the maintenance period, a similar proportion of patients in the placebo and Traficet-EN groups reported TEAEs and SAEs leading to discontinuation of the clinical trial treatment. One patient died more than one month after discontinuing early from the clinical trial. This was considered by the clinical investigator to be related to worsening of underlying Crohn’s disease and not related to treatment with Traficet-EN. The patient received 250mg twice-daily of Traficet-EN in the induction and active treatment periods. No serious or opportunistic infections were observed in patients receiving Traficet-EN and there were no safety concerns based on the other safety evaluations including laboratory data, vital signs and ECGs.

Phase III Clinical Program

GSK has initiated three pivotal Phase III clinical trials intended to obtain the clinical results necessary to apply for marketing approval for Traficet-EN in Crohn’s disease. In general, the development approach of the Phase III program is modeled after the design of our PROTECT-1 clinical trial. The following pivotal Phase III clinical trials are currently ongoing:

 

   

SHIELD-1 is a multi-national, randomized, double-blind, placebo-controlled clinical trial to evaluate the efficacy and safety of two doses, 500mg once-daily and 500mg twice-daily, of Traficet-EN over 12 weeks of treatment in approximately 600 adult patients with moderate-to-severe Crohn’s disease. Patient recruitment was initiated in December 2010.

 

   

SHIELD-2 is a multi-national, randomized, double-blind, placebo-controlled clinical trial to evaluate the efficacy and safety of two doses, 500mg once-daily and 500mg twice-daily, of Traficet-EN in maintaining disease remission over 52 weeks in approximately 750 adult patients with Crohn’s disease. Eligible patients will have achieved disease improvement and/or remission in SHIELD-1 or SHIELD-3. Patient recruitment was initiated in April 2011.

 

   

SHIELD-3 is a multi-national, open-label clinical trial to evaluate the safety and effectiveness of 500mg twice-daily of Traficet-EN over 108 weeks in approximately 800 adult patients with Crohn’s disease. Patients completing previous clinical trials with the drug or patients who withdraw early from the SHIELD-2 maintenance clinical trial may be eligible to participate. Patient recruitment was initiated in April 2011.

Traficet-EN Commercialization Strategy

Following the exercise of its option, GSK became solely responsible for all further clinical development and commercialization of Traficet-EN worldwide. However, we have the option, which we can exercise at our sole discretion, to co-promote Traficet-EN to physician specialists in the United States, subject to our payment of 35% of GSK’s development costs. Under the terms of the agreement, our promotional efforts could be as high as 50% of all promotional efforts to physician specialists in the United States. As consideration for our promotional efforts, GSK would be required to pay us an amount similar to what it would pay a third-party contract sales force.

Additional Indications for Traficet-EN

Ulcerative colitis is an additional indication for which Traficet-EN could be developed. Preclinical studies showed that Traficet-EN can prevent the onset of and treat large bowel inflammation in mice, and may have the potential to treat ulcerative colitis in humans. We have also recently demonstrated that, contrary to the prevailing assumption regarding the absence of CCL25 from the colon, increased levels of CCL25 are present in colonic tissue from human patients with IBD, which further supports our belief that Traficet-EN has the potential for treating ulcerative colitis.

 

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CCX140 for Diabetic Nephropathy and Other Renal Diseases

Understanding Diabetic Nephropathy and Limitations of Current Therapies

Diabetic nephropathy is a common disease among patients with diabetes and hypertension. It is characterized by a persistent and usually progressive decline in renal function, as measured by glomerular filtration rate, a measure of the rate of fluid filtration in the kidney, and/or albuminuria, a condition where elevated protein levels are present in the urine, which can be an indicator of kidney damage.

Given the rise in the incidence of obesity, type 2 diabetes and hypertension, the associated incidence of diabetic nephropathy has reached epidemic proportions in industrialized nations. According to the 2008 annual report of the United States Renal Data System, an estimated 31 million Americans had some form of renal disease and patients with diabetic nephropathy form the largest segment (approximately 35%) of the renal disease patient population. Diabetic nephropathy is the leading cause of a condition known as end-stage renal disease, or ESRD, the most severe stage of chronic kidney disease. ESRD patients impose a significant economic burden on the United States, constituting approximately 0.5% of Medicare beneficiaries but accounting for approximately 5% of Medicare expenditures. Consequently, we believe that a drug which would delay or prevent the onset of ESRD would have significant pharmaco-economic benefits.

Current treatment options for patients with diabetic nephropathy mainly include drugs that treat the underlying conditions of diabetes and hypertension. Angiotensin receptor blockers, or ARBs, and angiotensin converting enzyme, or ACE, inhibitors are commonly prescribed to control hypertension and slow the progression of diabetic nephropathy. Even with these therapies, about 20% of patients with diabetic nephropathy will progress into ESRD, at which point patients must rely on regular dialysis sessions or a kidney transplant in order to survive.

A number of experimental treatments for diabetic nephropathy are currently being evaluated in clinical trials, although none of them have yet demonstrated clear and convincing benefit in large long-term clinical trials, either in terms of slowing or reversing disease progression. Several of these treatments aim to interfere with the inflammatory or fibrotic processes that are now recognized as central to the disease.

The ChemoCentryx Solution: CCX140 — A Novel CCR2 Antagonist

While historically diabetic nephropathy was not considered an inflammatory disease, there is now clear evidence of the role of macrophages in this disease. Kidney biopsies from patients with diabetic nephropathy show elevated numbers of macrophages in the glomeruli, which are the basic filtering elements in the kidney. It has also been shown that the extent of tissue damage in the interstitial areas surrounding the proximal tubules, which are the second component of the filtering apparatus in the kidney, is strongly correlated with the numbers of macrophages present. Experimental studies in preclinical diabetic models have clarified that monocyte and macrophage infiltration occurs at early stages of disease and that this infiltration correlates with renal injury.

In recent years, CCR2 has been identified as the main driver of monocyte and macrophage recruitment into diseased kidneys. Levels of CCL2, the main ligand for CCR2, are elevated in the kidneys of patients with diabetic nephropathy. CCL2 is produced by kidney cells in response to high glucose levels, and levels of CCL2 in the urine are strong indicators of renal damage and correlate well with albuminuria and interstitial macrophage numbers.

 

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We have utilized various animal models to study the relationship between CCR2 inhibition and renal function. Data generated from these models have confirmed and expanded observations made by other independent investigators in preclinical models of diabetic nephropathy indicating that CCR2 inhibition leads to pronounced reduction in albuminuria, as well as improvement in markers of renal function. We have also demonstrated that CCR2 inhibition provides benefit in several models of non-diabetic nephropathy. The following table summarizes the key findings from each of these animal models:

Summary of Findings From CCR2 Inhibition in Animal Models of Nephropathy

 

Biological Parameter    Effect of CCR2 Inhibition
Albuminuria    Reduced
Hyperglycemia    Reduced
Glomerular Filtration Rate    Decreased hyperfiltration
Serum Markers of Renal Function    Reduced serum creatinine and blood urea nitrogen levels
Histological Improvements    Increased podocyte density

Data from preclinical studies indicate that CCX140 is a potent and selective antagonist of CCR2 which is required for monocytes to infiltrate the inflamed kidney, where they differentiate into macrophages. While CCX140 is not the first CCR2 antagonist to advance into clinical trials, we believe that it is unique in a number of ways, including its high selectivity for CCR2 relative to other chemokine receptors such as CCR5. We believe that CCX140 also distinguishes itself from other CCR2 antagonists in that it has been shown preclinically to be free of the cardiovascular safety signals associated with other CCR2 antagonists. CCX140 has been shown in a number of preclinical toxicology studies to be suitable for evaluation in humans for chronic use in diabetic nephropathy.

CCX140 Drug Development Strategy and Clinical Trials

Our clinical development strategy was to first assess the safety and tolerability of CCX140 in patients with type 2 diabetes and normal renal function prior to evaluation of the drug in patients with diabetic nephropathy. As a precursor to our clinical trials in patients with diabetic nephropathy, in January 2011, we completed a 159-patient randomized Phase II clinical trial to assess the safety and tolerability of CCX140 in patients with type 2 diabetes, the most common cause of diabetic nephropathy. CCX140 is currently in two Phase II clinical trials in diabetic nephropathy and we expect to complete these clinical trials by the end of 2012.

CCX140 Phase I Clinical Trials

We conducted a randomized, double-blind, placebo-controlled, single ascending dose Phase I clinical trial in 56 healthy subjects in which single oral doses of 0.05mg, 0.1mg, 0.3mg, 0.6mg, 1mg, 3mg, and 10mg of CCX140 were compared to placebo. CCX140 was well tolerated by most clinical trial subjects and no SAEs were observed. All observed adverse events were either mild or moderate in intensity and no subjects were withdrawn from the clinical trial due to adverse events. There did not appear to be a relationship between CCX140 dose level and the overall subject incidence of adverse events in the clinical trial. The pharmacokinetic, or PK, profile of CCX140 showed dose-proportionality.

In addition, we conducted a randomized, double-blind, placebo-controlled, multiple ascending dose Phase I clinical trial in 32 healthy subjects in which once-daily oral doses of 0.6mg and 2mg of CCX140 for seven days, and 5mg and 10mg of CCX140 for ten days were compared to placebo. CCX140 was well tolerated by most clinical trial subjects and no SAEs were observed. All adverse events were either mild or moderate in intensity and no subjects were withdrawn from the clinical trial due to adverse events. The PK profile was consistent with the single-dose clinical trial.

 

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To enable us to potentially evaluate doses higher than 10mg in our ongoing Phase II clinical trial in patients with diabetic nephropathy, we are currently conducting an additional Phase I clinical trial at doses of 5mg, 10mg, 12.5mg and 15mg once-daily.

CCX140 Phase II Clinical Trial in Type 2 Diabetes

Our Phase II clinical trial was designed to demonstrate safety of CCX140 in patients with type 2 diabetes and normal renal function and the effect of CCX140 on glycemic indices. We conducted a randomized, double-blind, placebo and active controlled clinical trial in 159 patients with type 2 diabetes on a stable dose of metformin for at least eight weeks, with 32 patients receiving placebo, 32 receiving pioglitazone hydrochloride (an approved therapeutic for type 2 diabetes serving as the active control), 63 receiving 5mg of CCX140 and 32 receiving 10mg of CCX140 orally once-daily for 28 days.

The clinical trial met its primary objective by demonstrating the safety and tolerability of CCX140 in these patients. In addition, CCX140 showed encouraging signs of biological activity. For example, patients receiving CCX140 experienced a dose-dependent decrease in fasting plasma glucose, or FPG, from baseline to day 29 of the trial period, or Day 29. The least square mean change from baseline to Day 29 in FPG was -4.3mg/dL for 5mg CCX140, -16.1mg/dL for 10mg CCX140, -10.7mg/dL for placebo, and -21.4mg/dL for 30mg pioglitazone hydrochloride. The decrease in FPG observed in the active control group receiving 30mg pioglitazone hydrochloride was in line with the anticipated decrease of 25mg/dL as reported in published literature. Decreases in FPG from baseline to Day 29 for the pioglitazone hydrochloride and CCX140 groups were not statistically different when compared to placebo. However, the decrease in FPG in the 10mg CCX140 group was comparable to the 30mg pioglitazone hydrochloride response observed over four weeks of treatment.

Patients in the 10mg CCX140 group also experienced a statistically significant (p=0.045 vs. placebo) decrease from baseline in HbA1c, one of the most important glycemic indices, indicating an improvement in glycemic control which may be an added benefit when treating patients with diabetic nephropathy. The least square mean change from baseline in HbA1c was -0.09% for 5mg CCX140, -0.23% for 10mg CCX140, -0.09% for placebo, and -0.13% for 30mg pioglitazone hydrochloride, based on the Wilcoxon Rank Sum test. In addition, the fructosamine levels, another index of glycemic control, trended lower in the CCX140 and pioglitazone hydrochloride groups, but did not reach statistical significance compared to placebo. Plasma CCL2 and circulating monocyte levels were unchanged by CCX140 treatment.

No SAEs were observed in patients receiving CCX140 treatment. The incidence of TEAEs across treatment groups was similar. Two patients discontinued the clinical trial due to a TEAE. One patient, in the 5mg CCX140 group, experienced a TEAE of dyspepsia, which led to discontinuation of clinical trial medication. The TEAE was considered by the clinical investigator to be moderate in severity and possibly related to clinical trial medication. A second patient, in the 10mg CCX140 group, experienced a TEAE of gouty arthritis, which led to discontinuation of clinical trial medication. This patient had a medical history of gout and this adverse event was considered by the clinical investigator to be severe in intensity and probably not related to CCX140. The most commonly observed TEAE in patients receiving CCX140 was hypertension, which occurred in three patients in the 5mg CCX140 group. Review of the blood pressure data from the subjects with TEAEs of hypertension, as well as the overall group blood pressure data, did not reveal any significant worsening trend in blood pressure with CCX140 treatment compared to placebo. No adverse effects of hypertension were observed in patients in the 10mg CCX140 group.

CCX140 treatment did not negatively affect the patients’ serum lipid profiles (total cholesterol, HDL and LDL cholesterol, triglycerides, and non-esterified fatty acids) over the four-week treatment period. Changes in ECG were not clinically meaningful and there was no detrimental effect on renal function observed.

Current and Future CCX140 Clinical Development in Diabetic Nephropathy

CCX140 is currently in two Phase II clinical trials in patients with diabetic nephropathy. The first randomized, double-blind, placebo-controlled Phase II clinical trial will enroll at least 135 patients. The primary

 

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objective of this clinical trial will be to evaluate the safety and tolerability of CCX140 in patients with diabetic nephropathy. Secondary objectives include evaluation of the effect of CCX140 on albuminuria as well as HbA1c. The three treatment groups will consist of placebo, 5mg and 10mg of CCX140 and the treatment duration will be 12 weeks, with a four-week follow-up period. Following an interim analysis for efficacy evaluation, the sample size may be increased to up to 270 patients, and/or additional dose groups may be added. These potential modifications to the dose groups will allow us to increase the probability of obtaining statistically significant results. Patients with residual albuminuria, despite being on a stable therapeutic dose of an ACE inhibitor or ARB will be included in this clinical trial. The key efficacy endpoint is change from baseline in first morning urinary albumin:creatinine ratio, a major indicator of renal function. We expect to complete this clinical trial by the end of 2012.

The second randomized, double-blind, placebo-controlled Phase II clinical trial we are conducting is in 20 patients with diabetic nephropathy. The primary objective of this clinical trial is to evaluate the effect of CCX140 on 24-hour urinary albumin excretion. The two treatment groups consist of placebo and 10mg of CCX140. The treatment duration is 12 weeks, with a four-week follow-up period. Patients with residual albuminuria, despite being on a stable therapeutic dose of an ACE inhibitor or ARB will be included in this clinical trial. We expect to complete this clinical trial by the end of 2012.

If the Phase II clinical program indicates that CCX140 is safe and efficacious in treating patients with diabetic nephropathy, we plan to conduct end-of-Phase II meetings with the FDA and European Medicines Agency, at which time the clinical results from the CCX140 program will be reviewed and a Phase III clinical program will be discussed. It is anticipated that the Phase III program will include at least 1,500 patients. We expect that the patient population from the first Phase III clinical trial will be large enough to assess the rate of major cardiovascular events in order to exclude the possibility of a cardiovascular safety signal with CCX140.

CCX140 Commercialization Strategy

We plan to retain commercial rights to CCX140 in North America and intend to build a specialty sales force to call on nephrologists who treat diabetic nephropathy patients. There are approximately 8,300 nephrologists in the United States. We believe that a moderately sized sales force will be sufficient to call on all key prescribing nephrologists in this market. In addition, we plan to seek partners for co-development and commercialization of CCX140 outside North America.

CCX354 for Rheumatoid Arthritis

Understanding Rheumatoid Arthritis

RA, a chronic inflammatory disease, is among the most debilitating of all forms of arthritis, causing pain, stiffness, swelling and limitation in the motion and function of multiple joints which may eventually become deformed. Sometimes these symptoms make even the simplest activities, such as walking, difficult to manage. The exact cause of RA is unknown, but it is believed to result from the body’s immune system attacking the synovium, which is the tissue that lines a patient’s joints.

More than two million Americans suffer from RA. RA is two to three times more common in women than in men and generally strikes between the ages of 20 and 50, but it can also affect young children and adults older than age 50.

Limitations of Current Therapies

Although therapy for patients with RA has improved dramatically over the last 25 years, there is still no cure and no single therapy which is effective for all patients. Many patients will need to change treatment strategies during the course of their disease due to lack of efficacy and adverse side effects. People with RA, particularly those whose disease is not well controlled, may have a higher risk of other diseases such as osteoporosis, or thinning of bone resulting in fracture.

 

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Current treatment options for RA consist of corticosteroids such as prednisone, immunosuppressants such as methotrexate, TNF- a inhibitors such as Remicade, Humira and Cimzia, and other biologic agents such as Rituxan (rituximab) and Orencia (abatacept). Corticosteroids may provide relief during a disease flare-up, but often have serious side effects, including high blood pressure, osteoporosis, reduced ability to fight infections, mood swings, diabetes and gastric ulcers. Immunosuppressants have anti-inflammatory and bone-sparing effects, but the general suppression of the immune system leads to increased risk of infection. The use of these drugs may lead to mouth sores, stomach ulcers, and low white blood counts, and can cause severe toxicity of the liver and bone marrow, which require regular monitoring with blood testing.

Biologic agents have been approved by the FDA to treat moderate-to-severe RA that has not responded to an adequate trial of one or more of the traditional courses of treatment. Biologic agents must be given by subcutaneous injection or by intravenous infusion. According to The Pain Practitioner, Spring 2011 Pharmacologic Approaches to Rheumatoid Arthritis , annual treatment cost with biologic agents range from $13,000 to $30,000 per patient depending on the drug used and the dose administered. Biologic agents are effective in some patients to treat the signs and symptoms of RA and the bone erosive effects of the disease. However, their use may lead to serious side effects including serious infections, tuberculosis, an increased risk of lymphoma and serious hypersensitivity reactions.

The ChemoCentryx Solution: CCX354 — A Novel CCR1 Antagonist

Over 20 years ago, Dr. Schall and his colleagues reported the initial cloning and characterization of the chemokine receptor that came to be known as CCR1. There is strong evidence implicating CCR1 in the pathology of RA; first, CCR1-expressing monocytes and macrophages are consistently found at high levels in the synovium of RA patients, and second, the C6 superagonists of CCR1, which are activated highly potent forms of certain CCR1 ligands, are consistently detected at high levels in synovial fluids from RA patients. Blocking CCR1 is intended to reduce the inflammation and prevent subsequent joint destruction by suppressing the infiltration of inflammatory cells into the arthritic joint.

We are currently developing a new class of proprietary small molecule CCR1 inhibitors and have selected CCX354 as a drug candidate. CCX354 was designed by optimization of a chemical lead that was discovered using our EnabaLink drug discovery engine and is chemically distinct from all known inhibitors of this receptor. Our preclinical data suggest that the compound selectively inhibits CCR1-mediated migration of monocytes and does not inhibit migration of inflammatory cells mediated by other chemokine receptors, even when the compound is given at high doses. We believe that this high degree of target specificity is an important safety feature that may allow CCX354 to be effective while avoiding unwanted side effects associated with existing injectable biologics and other immunosuppressive agents currently used to treat RA.

Preclinical studies indicate that CCX354 has a favorable safety and PK profile. In animal studies, CCX354 is well absorbed when given orally and the compound is well tolerated at dose levels much higher than those required to cause inhibition of CCR1 function. In in vitro and animal studies, because of its potency and selectivity, CCX354 did not appear to have the safety concerns that have hindered others from successfully developing compounds blocking this receptor. In addition, CCX354 does not significantly inhibit the activity of a class of liver protein which is necessary for metabolizing other common drugs that patients may be taking. We believe that this lack of interference suggests that the compound may be safely administered along with other medications used concurrently by RA patients.

CCX354 Drug Development Strategy and Clinical Trials

We have completed two Phase I clinical trials with CCX354 in 84 healthy subjects, a Phase I/II clinical trial in 24 patients with RA, and a Phase II proof-of-concept clinical trial in 160 patients with moderate-to-severe RA partially responsive to methotrexate.

CCX354 Phase I Clinical Trials

We completed a randomized, double-blind, placebo-controlled, single ascending dose Phase I clinical trial in 48 healthy volunteers in which single oral doses of 1mg, 3mg, 10mg, 30mg, 100mg and 300mg of CCX354

 

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were compared to placebo. CCX354 appeared to be well tolerated by most subjects in this clinical trial. No SAEs were reported and no subjects were withdrawn from the clinical trial due to adverse events. The subject incidence of adverse events was relatively similar across treatment groups. The most common adverse events in subjects receiving CCX354 were dizziness, headache, dizziness postural, nasopharyngitis, and pharyngolaryngeal pain and there was no evidence that the incidence of adverse events was CCX354 dose-dependent. There were no safety concerns of subjects receiving CCX354 based on review of hematology, serum chemistry, urinalysis, vital signs, ECG results, or physical examination results from this clinical trial.

We also completed a multiple ascending dose Phase I clinical trial in healthy volunteers, which included oral dose regimens of 3mg, 30mg and 300mg of CCX354 once-daily and 10mg, 30mg and 100mg of CCX354 twice-daily for seven days. CCX354 was well tolerated by most clinical trial subjects, no SAEs were reported and no subjects were withdrawn from the clinical trial due to adverse events. The subject incidence of adverse events was relatively similar across treatment groups, 70% in the CCX354 group compared to 83% in the placebo group. All adverse effects were either mild or moderate in intensity. The most common adverse events in subjects receiving CCX354 were headache, flatulence, sense of hair loss, ocular hyperemia, abdominal pain, diarrhea, dizziness, and pharyngolaryngeal pain. There was no evidence that the incidence of these most common adverse events was CCX354 dose-dependent.

We evaluated the safety and tolerability of 100mg or 200mg of CCX354 daily in 24 patients with stable RA on a stable dose of methotrexate in a Phase I/II clinical trial. An important secondary objective of this clinical trial was to assess the PK profile of CCX354 and to determine if there was any interaction between CCX354 and methotrexate. Doses of 100mg of CCX354 once-daily, 100mg of CCX354 twice-daily and 200mg of CCX354 once-daily or placebo were given for 14 days. There were no SAEs, TEAEs leading to death, or TEAEs leading to discontinuation of treatment and the proportion of patients with TEAEs was the same in the placebo group and the CCX354 group overall. All adverse effects were mild or moderate in severity. The PK profile of CCX354 was not significantly affected by methotrexate co-administration and the PK profile of methotrexate was also not significantly affected by CCX354 co-administration, indicating that there is no negative drug-drug interaction between these two drugs.

CCX354 Phase II Clinical Trial in Rheumatoid Arthritis

We have successfully completed a randomized, double-blind, placebo-controlled Phase II proof-of-concept clinical trial in 160 patients with RA on a stable dose of methotrexate for at least eight weeks. Patients received either placebo, 100mg of CCX354 twice-daily or 200mg of CCX354 once-daily for 84 days, followed by 28 days without treatment. The primary objective of the clinical trial was to evaluate the safety and tolerability of CCX354 in patients with moderate-to-severe RA. Key secondary objectives included assessment of the effect of CCX354 on RA disease activity measured by the American College of Rheumatology, or ACR, response criteria, Disease Activity Score 28-CRP, the ACR components and bone resorption markers.

Future CCX354 Clinical Development in Rheumatoid Arthritis

CCX354 is subject to our collaboration agreement with GSK and it has a pending option to obtain a license to further develop and commercialize CCX354 and its two defined back-up compounds. We expect that GSK will make its option decision prior to the end of 2011. If GSK exercises its option, it would have an exclusive right to initiate a Phase IIb clinical trial for CCX354 in RA. If GSK does not exercise its option, we will evaluate our options for further development of CCX354, which may entail internally developing this drug candidate or identifying another collaboration partner for its development.

CCX168 for ANCA-Associated Vasculitis

Understanding ANCA-Associated Vasculitis

AAV is a type of autoimmune disease caused by autoantibodies, which are abnormal antibodies that attack one’s own cells and tissues. ANCAs are autoantibodies that attack a certain type of white blood cells called

 

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neutrophils. When ANCAs attack these neutrophils, they cause these cells to attack the walls of small blood vessels in different tissues and organs of the body, which causes AAV. AAV encompasses various conditions including:

 

   

Renal limited vasculitis or ANCA glomerulonephritis: the blood vessel damage occurs in the kidneys. No other organs are affected.

 

   

Microscopic polyangiitis: caused by injury to blood vessels in multiple tissues at the same time. It can be seen in the kidneys, skin, nerves, and lungs.

 

   

Granulomatosis with polyangiitis (Wegener’s granulomatosis): the blood vessel damage occurs in connection with a process called granulomatous inflammation. This often affects the lung, sinuses, nose, eyes or ears.

In AAV, activation of the complement cascade, an escalating group of inflammatory responses, leads to production of the very potent chemo-attractant factor C5a. This in turn leads to the attraction and activation of neutrophils and other white blood cells, which play a key role in the disease.

Limitations of Current Therapies

AAV currently is treated with high-dose corticosteroids and cyclophosphamide, azathioprine, mycophenolate mofetil, rituximab, and plasma exchange in severe cases. Even though these approaches may induce a treatment response in 70% to 90% of patients, corticosteroids and cyclophosphamide are associated with substantial morbidity and mortality, particularly as a result of serious infections. Cyclophosphamide is also associated with an increased risk of cancer, bladder conditions and infertility in patients. Azathioprine and mycophenolate mofetil are also general immunosuppressive therapies, associated with increased infection risk. Rituximab is a mouse-human chimeric anti-CD20 antibody, which depletes B cells and is associated with increased risk of serious infections, as well as progressive multifocal encephalopathy. Because of the serious adverse effects of these current therapies, we believe that there is an important unmet medical need for therapies that are safe, effective, and corticosteroid-sparing.

The ChemoCentryx Solution: CCX168 — A Novel C5a Receptor Antagonist

CCX168 is a potent and highly specific antagonist of the human C5a receptor. The compound displays excellent oral bioavailability in various species and has demonstrated an excellent preclinical safety profile, consistent with its intended chronic use in patients. We have evaluated the pharmacological activity of CCX168 preclinically utilizing models that are relevant to the intended therapeutic use in humans. In the most recent of these models, treatment with an oral dose of CCX168 completely blocked the neutropenia, or removal of neutrophils from blood, produced by an injection of C5a.

The efficacy of CCX168 was demonstrated in a mouse model of ANCA-associated glomerulonephritis which recapitulates many of the histological features of the human disease. In these studies, oral doses of CCX168 completely blocked the glomerulonephritic vasculitis induced by intravenous injection of anti-myeloperoxidase antibodies. Levels of CCX168 in the blood of these mice were comparable to those expected in the blood of patients participating in our ongoing Phase II proof-of-concept clinical trial with CCX168.

CCX168 Drug Development Strategy and Clinical Trials

We have completed a Phase I clinical trial with CCX168 in 40 healthy subjects and we have initiated a Phase II clinical trial.

CCX168 Phase I Clinical Trial

We completed a Phase I clinical trial in 40 healthy subjects with our C5aR-specific blocker, CCX168. This was a randomized, double-blind, placebo-controlled, two-period clinical trial in which subjects received either CCX168 or placebo, as a single dose in the first period and as multiple once-daily or twice-daily oral doses in the

 

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second period. Single oral doses of 1mg, 3mg, 10mg, 30mg, and 100mg of CCX168 were studied. In period two, CCX168 doses of 1mg, 3mg, and 10mg once-daily for seven days, and 30mg and 50mg twice-daily for seven days, were studied. CCX168 appeared to be well tolerated by clinical trial subjects in this clinical trial and no serious adverse events or withdrawals due to adverse events have been observed. The most commonly reported adverse events in subjects receiving CCX168 in the multi-dose period were headache, diarrhea, dizziness, lower abdominal pain, nausea, and oropharyngeal pain.

CCX168 Phase II Clinical Trial

We have initiated a Phase II clinical trial for CCX168. This is a randomized, double-blind, placebo-controlled clinical trial in 60 patients with AAV with mild-to-moderate renal involvement, the aim of which is to optimize the treatment to induce remission for patients with non-life-threatening AAV with mild-to-moderate renal involvement. The intent is to reduce the toxicity of induction therapy by reducing the overall exposure to or eliminating entirely the use of systemic corticosteroids during the induction period with an inhibitor of the complement C5a receptor plus cyclophosphamide. The primary objective of this clinical trial is to evaluate the safety and tolerability of CCX168 in patients with AAV on background cyclophosphamide treatment. The secondary objectives of this clinical trial include assessment of the feasibility of reducing or eliminating the use of corticosteroids in the treatment of patients with AAV without the need for rescue corticosteroid measures; evaluation of the PK profile of CCX168 in patients with AAV; and assessment of changes in renal function based on estimated glomerular filtration rate, hematuria, and proteinuria with CCX168 compared to placebo. The clinical trial will be conducted in three sequential steps with 12, 12, and 36 patients, respectively in each step. 30mg of CCX168 twice-daily given orally will be compared to placebo twice-daily for 84 days, followed by an 84-day follow-up period. We expect to complete this clinical trial by the end of 2012. Following the successful completion of this clinical trial, GSK may exercise an option to further develop CCX168. If GSK does not exercise its option, we will evaluate our options for further development of CCX168, which may entail internally developing this drug candidate or identifying another collaboration partner for its development.

CCX832 for Skin Inflammation

CCX832 — A Novel ChemR23 Antagonist

In certain skin inflammatory diseases, the movement of plasmacytoid dendritic cells, or pDC, from blood into the skin sets in motion an inflammatory response that involves the recruitment and activation of various other types of inflammatory cells. This movement appears to be largely controlled by the binding of chemerin to its recently discovered chemo-attractant receptor known as ChemR23. This receptor displays a unique expression profile among leukocytes, restricted mainly to subsets of natural killer cells and immature pDC. Chemerin is the natural ligand for ChemR23 and is synthesized as a precursor protein which under inflammatory conditions undergoes activation. Elevated chemerin levels are seen in multiple skin inflammatory diseases, including cutaneous lupus, oral lichen planus and psoriasis.

We have identified CCX832, a ChemR32 antagonist, which we intend to study further for the treatment of certain types of skin inflammatory diseases. We have extensively characterized the properties of CCX832 preclinically and have demonstrated, in preclinical studies, the benefits of CCX832 in preventing the development of skin inflammation at clinically relevant doses by blocking the pro-inflammatory effects of chemerin, thereby interrupting the early steps associated with the development of skin inflammation. The compound displays excellent potency for ChemR23 and high selectivity relative to all other chemo-attractant receptors evaluated. It also displays excellent oral bioavailability and has been successfully evaluated in multiple preclinical toxicology studies.

CCX832 Drug Development Strategy and Clinical Trials

CCX832 Phase I Clinical Trial

We have completed a randomized, placebo-controlled, single- and multiple ascending dose Phase I clinical trial in 40 healthy subjects in which single oral doses of 1mg, 3mg, 10mg, 30mg, and 100mg of CCX832 were

 

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compared to placebo in the first period of the trial. Subjects received doses of 1mg, 3mg, 10mg, 30mg, and 50mg of CCX832 twice-daily for seven days in the second period of this clinical trial. The clinical trial remains blinded at this time, but CCX832 appears to be well tolerated by most clinical trial subjects. We expect to have unblinded results of the study in 2012, and subject to further discussion with GSK we expect to advance this drug candidate into a Phase II proof-of-concept clinical trial for the treatment of skin inflammation.

CCX662 — CXCR7 Antagonist for Glioblastoma Multiforme

Understanding Glioblastoma Multiforme

According to Datamonitor, the incidence of primary brain cancer in 2007 across seven major markets (United States, Japan, France, Germany, Italy, Spain and the United Kingdom) was estimated to be 47,000. GBM is the most common and most aggressive of the primary brain tumors, accounting for 50%-60% of primary brain tumors in adults and it is slightly more common in men than in women. While GBM occurs in all age groups, its incidence is increasing in elderly patients. GBM is the most severe grade of brain tumors and is highly malignant, infiltrates the brain extensively and at times may become enormous before turning symptomatic. GBM, like other brain tumors, produces symptoms such as seizures, cognitive disorders and/or personality changes, among others. Symptoms depend on the location, size, and rate of growth of the tumor. Median life expectancy of GBM patients receiving radiation post-surgery is only 12 months.

Limitations of Current Therapies

Although the prognosis of GBM is uniformly poor, treating patients in an attempt to improve the quality of life is worthwhile. The current standard of care includes maximal safe surgical resection, followed by a combination of radiation and chemotherapy with temozolomide, or Temodar, the most widely used form of chemotherapy in GBM.

Temodar induces DNA damage resulting in cell death. The current optimized dosing regimen includes six weeks of daily Temodar followed by monthly maintenance doses. This regimen has resulted in a median survival of 14.6 months, and 2-year overall survival of 27% and remains the current standard of care. Temodar was approved on the basis of only a 2.5 month improvement in overall survival. At present, no therapy has been identified which prevents relapse for the majority of patients and the tumor invariably recurs with often debilitating neurological and psychological symptoms, and salvage therapy has thus far met with very limited clinical success. At this stage, probably the most important part of the management of patients with GBM is compassionate and effective supportive care.

The overall prognosis for GBM has changed little in the past two decades, despite major improvements in neuroimaging, neurosurgery, radiation treatment techniques, adjuvant chemotherapy, and supportive care. There are considerable unmet needs in GBM, most notably the relatively low survival benefit offered by the existing standard of care and the lack of effective alternatives to Temodar.

The ChemoCentryx Solution: CCX662 — A Novel CXCR7 Antagonist

We are developing drugs that target CXCR7 and combine an anti-angiogenic approach to stopping the blood supply to cancerous cells with anti-tumor activity via direct attack of tumor cells. Our most recent data support the notion that CXCR7 could be causally connected to tumor growth regulation. This is coupled with clear evidence from immunohistochemistry staining of primary human tumor tissues which revealed clear evidence of CXCR7 expression. In contrast to standard chemotherapies which can be highly toxic, our compounds are designed to selectively target CXCR7 in an effort to halt cancer progression while minimizing detrimental effects, such as generalized immunosuppression or cytotoxicity.

We believe we were the first to provide clear evidence that CXCR7 expression can directly control tumor growth in vivo . We and others have shown that CXCR7 regulates several important biological processes

 

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including cell survival, cell adhesion, trans-endothelial migration, tumor development and metastatic growth in secondary organs, in a variety of in vivo and in vitro models. CXCR7 is expressed on many human tumor cells but not on most healthy cells. In our tumor model systems we found that reduction or inhibition of CXCR7 by genetic and pharmacological means reduces or abolishes tumor formation in vivo , and that the introduction of CXCR7 into a “naïve” background is both necessary and sufficient for that tumor to grow aggressively in vivo . CXCR7 is highly expressed in human GBM and in GBM-associated blood vessels.

We and others have demonstrated, using various aggressive rodent GBM models, that CXCR7 inhibition is effective at preventing tumor growth, particularly when utilized in combination with radiation. Recent discoveries support a role for CXCR7 in preventing apoptosis, or programmed cell death, of human GBM cells. Separate observations indicate that recruitment of bone-marrow derived cells from blood into irradiated mouse GBM/brain is critical for tumor re-vascularization after irradiation and is dependent on CXCL12, the main chemokine ligand for CXCR7.

We have discovered several highly potent and selective small molecule compounds for CXCR7. We have selected one of these molecules, CCX662, as a clinical candidate and it is currently in preclinical development. Due to scientific and medical need reasons, our current efforts are primarily focused on the development of CCX662 for the treatment of GBM. CCX662 may qualify for orphan drug status, which may provide a faster path to regulatory approval.

We believe that CCX662 represents a promising novel therapeutic for the treatment of GBM and other types of cancer. Preclinical studies support not only the anti-tumor efficacy of this drug but also an excellent safety profile, a reflection of its highly targeted and specific activity profile, which is fundamentally different from many other cytotoxic drugs in development or on the market.

Other Preclinical Programs

CCR4 Antagonist for Atopic Dermatitis

CCR4 is expressed primarily on T helper-2, or Th2, cells, which are key drivers of allergic conditions, such as atopic dermatitis, asthma, and allergic rhinitis. Multiple investigators have demonstrated increased levels of CCR4-activating chemokines in skin and lung tissues in connection with atopic dermatitis and asthma, respectively. During the past few years, a number of pharmaceutical companies have tried to develop small molecule CCR4 antagonists but have consistently failed to advance a molecule into clinical trials, primarily due to the inability to identify molecules with sufficient potency and PK properties and with an adequate safety profile, particularly in regards to cardiovascular safety.

Atopic dermatitis is an inflammatory, chronically recurring condition of the skin, which is often first diagnosed in children. Symptoms may vary from person to person but generally include red, inflamed, and itchy areas of rash, which can quickly develop into raised and painful bumps. Atopic dermatitis affects as many as 3% of adults in the United States. In its most severe form, it can be an absolutely debilitating disease.

CCX6239 is a novel, orally administered CCR4 antagonist we are developing for the treatment of atopic dermatitis. We have shown that CCX6239 effectively blocks the mobilization of white blood cells mediated by CCR4 in preclinical models. Potential additional areas of interest for this drug include asthma, allergic rhinitis and other allergic conditions. Based on preclinical data, we expect that CCX6239 will have excellent efficacy and safety, as it interferes selectively with the recruitment to skin of the key population of inflammatory cells that drive dermal allergic reactions, leaving most of the immune system unaltered. Given the young age of many atopic dermatitis patients, safety is a major consideration for drugs for the treatment of this disease and there are safety concerns with several of the currently available treatment options, which can increase the risk of opportunistic infection by broadly suppressing the immune system.

CCR9 Antagonist for IBD

Building on our extensive expertise in the area of CCR9 antagonists and IBD and following the expiration of our target exclusivity obligations with respect to CCR9 under our collaboration agreement with GSK, we

 

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started a de novo discovery program under which we have designed a series of novel molecules that we believe will represent the next generation of CCR9 antagonists. The lead compound from this series, CCX7034, demonstrates excellent selectivity for CCR9 relative to all other chemokine receptors, excellent oral bioavailability, and a very promising preclinical safety profile. However, molecules such as CCX7034 have been designed to interact with the CCR9 receptor in a unique way which produces molecules with much greater potency towards CCR9 than first-generation molecules. CCX7034 and several related molecules from this program are currently in preclinical development. The first clinical indication that might be pursued for this molecule is in the treatment of ulcerative colitis.

CXCR6 Antagonist for Chronic Hepatitis

Clearance of viral infections is associated with a vigorous T cell response. However, the immune system is often unable to clear hepatic infections. In fact, inflammation, chronic hepatitis and liver damage often result from persistent attempts by the immune system to deal with the underlying infection. Autoimmune hepatitis is a disease of unknown etiology also associated with pronounced T cell mediated liver inflammation and tissue damage. The chemokine receptor known as CXCR6 is expressed on a subset of specialized inflammatory cells, including certain types of T cells, natural killer cells, and natural killer T cells, or NKT cells, and is accepted, based on preclinical work with CXCR6-deficient mice, as a “liver homing” receptor for those cells. Under inflammatory conditions, various cell types in the liver produce the chemokine ligand that attracts CXCR6-expressing inflammatory cells, particularly NKT cells. We believe that these effects may be blocked by our CXCR6 antagonists without the adverse side effects associated with current method of treatment.

CCX5224 is a new, orally administered, internally developed CXCR6 antagonist that we are developing for the treatment of moderate-to-severe chronic hepatitis associated with viral and autoimmune hepatitis. CCX5224 has demonstrated excellent preclinical potency, selectivity and safety, and displays high oral bioavailability. CCX5224 is currently in preclinical development.

Research Programs

We are working on several additional research programs, from which additional drug candidates may be identified in the future. The most advanced of these programs centers around a chemokine receptor known as CCR6.

CCR6 Program

One of the most intriguing areas of current research in immunology involves the study of a newly discovered type of helper T cells known as Th17 cells. These highly specialized cells are efficient producers of several highly inflammatory cytokines in the IL-17 family. While Th17 cells most likely play a role in the protection against extracellular pathogens, there is a large amount of preclinical and clinical data that implicate these cells, as well as IL-17, in the development of a large number of autoimmune diseases, including RA, IBD, and psoriasis. Activated Th17 cells isolated from chronically inflamed human tissues produce high levels of TNF- a and other cytokines.

A hallmark of Th17 cells is that they express high levels of CCR6, which is not found on Th1 and Th2 cells. Th17 cells and the newly discovered Th22 cells both express CCR6 and CCL20, which is the only known chemokine ligand for CCR6. High levels of CCL20 have been documented to be present in psoriatic skin, IBD intestinal tissue, RA joint biopsies and asthmatic lungs.

Our RAM screening technique has produced several suitable CCR6 antagonist leads, which are now being optimized via medicinal chemistry approaches. We believe that there are many potential therapeutic applications for a CCR6 antagonist. In general, these areas mirror those identified as being of interest for Th17-targeted therapeutics, including RA, psoriasis, and IBD, among others. We intend to identify a lead CCR6 antagonist for this program during 2012.

 

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Our Proprietary Drug Discovery Platform, EnabaLink

Since the founding of our company, we have developed a set of proprietary drug discovery tools, known collectively as the EnabaLink technology suite, specifically designed to unlock the chemokine system’s complexity and to accelerate a productive drug discovery program. Our proprietary EnabaLink drug discovery technologies allow our scientists to accurately predict the specific chemokine receptors implicated in a given condition and to identify and optimize small molecule compounds best suited for treatment of the disease. One of the initial tools that we developed is a thorough functional genomic map of the chemokine system which assists us in our understanding of the role of a given chemokine receptor in the system as well as its likely effect on the migration of inflammatory cells in a given inflammatory disease state.

As part of this platform, we have also developed a proprietary high throughput cell migration-based assay, known as the RAM Assay, capable of identifying chemokine receptor inhibitors while eliminating non-specific inhibitors and cytotoxic inhibitors of cell migration. Our proprietary RAM Assay typically uses cells expressing a given chemokine receptor in its natural environment and enables the screening of small molecule libraries against chemokine receptor targets which are not amenable to traditional screening technologies. This produces additional novel chemical hits with structural diversity, allowing us to expand the number of chemical structures, which serve as starting points for subsequent optimization into drug candidates.

We have used our EnabaLink drug discovery engine to create a broad pipeline of promising chemokine-based drug candidates. The combination of proprietary in-house technologies and internally discovered drug candidates has resulted in an extensive intellectual property estate covering composition of matter and associated method of treatments for our compounds, novel biology-related discoveries, such as unique targets and new drug discovery technologies. We have generated more than six clinical or preclinical-stage programs, each targeting distinct chemokine receptors with different small molecule compounds. Drug candidates emerging from these programs act with high affinity and selectivity in vitro by binding to the precise chemokine receptor associated with the essential inflammatory processes underlying a given condition. Our compounds are designed to be highly potent and selective to minimize the risk of off-target effects and orally-available for improved patient compliance. As small molecules, they are also easier and less costly to manufacture than biologics.

Strategic Alliance with GSK

In August 2006, we entered into our strategic alliance with GSK. We have received approximately $220.0 million from GSK, consisting of up-front and milestone payments, equity investments, research funding and an option exercise fee. Under the terms of our agreement with GSK, we are responsible for the discovery and development of small molecule antagonists targeting four defined chemokine and chemo-attractant receptor targets (CCR9, CCR1, C5aR and ChemR23) and for advancing them through clinical proof-of-concept. After we demonstrate successful clinical proof-of-concept, GSK is entitled to options to exclusively license drug candidates that are subject to the collaboration and two defined back-up compounds for each drug candidate for further development and commercialization on a worldwide basis. Upon exercising any of its options to drug candidates under the collaboration, GSK is solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that drug candidate. In exchange for the rights granted to GSK upon the exercise of its options, we are also entitled to receive regulatory and commercial milestone payments, as earned under the terms of our agreement, and royalties on the net sales of licensed drugs. The agreement contemplated up to six drug options, each of which covers a drug candidate, including Traficet-EN (CCR9), CCX354 (CCR1), CCX168 (C5aR) and CCX832 (ChemR23), and their associated back-up compounds. The other two drug options were for second generation drug candidates and their associated back-up compounds. However, we and GSK chose not to nominate second generation drug candidates against any of the four defined targets during the agreement’s research term, which has expired. GSK has already exercised its option to Traficet-EN and its two defined back-up compounds. Thus, GSK’s only remaining options are to CCX354, CCX168 and CCX832 and their associated back-up compounds.

 

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GSK does not have exclusive rights to a given clinical indication or substitution rights with respect to a given collaboration target. Our proprietary programs around CCR2, CXCR7 or any other receptors are not part of the GSK collaboration.

In December 2009, GSK exercised its option to obtain an exclusive license to further develop and commercialize Traficet-EN following our completion of the PROTECT-1 clinical trial. We received an option exercise fee of $35.0 million in January 2010 after GSK obtained Hart-Scott-Rodino clearance. After exercising the option, GSK became solely responsible for all further clinical development and commercialization expenditures for Traficet-EN worldwide. With respect to the remaining drug candidates subject to the agreement, GSK has an option exercisable with respect to each drug candidate upon our demonstration of successful clinical proof-of-concept and, if GSK elects to exercise its option, we will be entitled to an option exercise fee of $25.0 million upon the exercise of each such option by GSK. For each of our drug candidates subject to the agreement we would be entitled to receive regulatory filing milestones of up to $47.0 million in the aggregate and regulatory approval milestones of up to $75.0 million in the aggregate.

Upon exercising any of its remaining options to drug candidates under the collaboration, GSK would be solely responsible for all further clinical development and commercialization expenditures worldwide with respect to that program. However, even if proof-of-concept clinical trials for any of our drug candidates that are subject to this collaboration result in positive outcomes, GSK may decide not to exercise its option. In the event that GSK elects not to exercise its option upon successful completion of a given proof-of-concept clinical trial, all rights to that program revert back to us, subject to a royalty obligation to GSK in the amount of 3% of annual worldwide net sales of the relevant drug candidate (capped at $50.0 million) if we go on to develop and commercialize it. In the event that GSK exercises an option with respect to a drug candidate and later determines in good faith to cease the development and commercialization of the licensed drug, either in its entirety, or on a country-by-country basis, we can elect to further develop and commercialize such licensed drug under a non-exclusive license grant from GSK. If we so elect, we will be solely responsible for satisfying all obligations to third parties with respect to the development, manufacture or commercialization of such licensed drug including any ongoing obligations of GSK under any third party manufacturing, licensing or other agreements, and we will be obligated to pay GSK 3% to 5% of annual worldwide net sales of such licensed drug depending on the licensed drug’s stage of development at the time at which we make such election.

We retain the option to co-develop Traficet-EN for certain gastrointestinal indications. If we elect to co-develop Traficet-EN we would be required to pay 35% of GSK’s development costs related to the selected gastrointestinal indications. Such co-development rights apply only to drug candidates arising out of the CCR9 program and only for such gastrointestinal indications as Crohn’s disease or ulcerative colitis. In return for having co-developed Traficet-EN, we would receive an increase over base line royalties, based on worldwide net sales of Traficet-EN. We also have the option, which we can exercise at our sole discretion, to co-promote Traficet-EN to physician specialists in the United States, subject to our payment of 35% of GSK’s development costs. Under the terms of the agreement, our promotional efforts could be as high as 50% of all promotional efforts to physician specialists in the United States. As consideration for our promotional efforts, GSK would be required to pay us an amount similar to what it would pay a third-party contract sales force.

Under the terms of the agreement, we received $63.5 million in the form of cash and equity from GSK in 2006. GSK was also obligated to provide research funding of up to $5.0 million per year during the first three years of our collaboration. The research term expired in August 2009, but was extended by six months for the ChemR23 program and we received an additional $2.5 million in research funding from GSK for the six months extension. Upon nomination of one of the defined back-up compounds in a given non-CCR9 collaboration program, we are entitled to receive a non-refundable, non-creditable milestone payment of $5.0 million for each drug candidate, for a maximum of three such payments for a given collaboration target. We received such pre-clinical milestone payments for CCX354, CCX168 and CCX832, respectively. Upon initiation of a first-in-humans study, we would be entitled to receive a non-refundable, non-creditable milestone payment of $10.0 million per drug candidate. We also received such first-in-humans milestone payments for CCX354, CCX168 and CCX832, respectively.

 

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In addition, we are entitled to receive base royalties on net sales of the licensed drugs. The base royalties for each program differ, but are set at levels commensurate with the development stage of each program at the time we entered into the agreement. We are also entitled to receive sales milestones on a per drug basis.

This agreement will expire with respect to each licensed drug and country upon the expiration of the payment obligations of GSK for that licensed drug in that country and would expire in its entirety upon the expiration of the last payment obligation of GSK for the last licensed drug in the last country. GSK may terminate the collaboration agreement for any reason upon 90 days prior written notice to us. The agreement and each program under the agreement may also be terminated under certain circumstances, including by either party for material breach or insolvency of the other party. The rights and obligations of the parties that survive termination of the agreement vary depending on the basis of the termination.

We are obligated to use diligent efforts to carry out the early development programs covered by the agreement. If we fail to do so and fail to cure such breach within the specified cure period, we will be required to pay a penalty to GSK based on certain percentages of up-front payments and research funding relating to the relevant collaboration target that we received from GSK. Alternatively, if we fail to cure such breach, at GSK’s election, we would be required to grant GSK a worldwide exclusive license to the compounds and their associated back-up compounds which are the subject of the relevant early development program, whether or not proof-of-concept has been achieved at such time and, other than certain royalty obligations, GSK would not be obligated to pay milestone payments, costs and other fees to us in connection with the exercise of such options.

Under the terms of the agreement, with respect to each collaboration target, we are obligated to not, either alone or with a third party, conduct any research or development activities or grant any license or other rights with respect to the identification or optimization of small molecule antagonists or agonists, as applicable, for such collaboration target unless and until either (i) GSK exercises its option to a drug candidate and its two back-up compounds with respect to such collaboration target or (ii) GSK terminates the collaboration program with respect to such collaboration target. Once the target exclusivity with respect to a collaboration target expires, we are free to initiate our own proprietary drug discovery effort with respect to such target free of the exclusivity restrictions of our strategic alliance with GSK.

Under the terms of the agreement, GSK has the right, but not the obligation, to defend against third party patent infringement claims for licensed drugs. If GSK elects to defend against any such claims, it has the sole right to direct the defense of such claims and settle such claims at its own cost and expense. If GSK elects not to defend against such claims, we have the right, but not the obligation, to defend against such claims. If the development or commercialization of licensed drugs requires use of third party intellectual property, we and GSK will share all license fees, provided however, that in the event that Millennium has valid patents relating to CCR9 and we are required to take a license from Millennium, we will be solely responsible for all fees required to be paid to Millennium in connection with such license. See “—Intellectual Property.”

Intellectual Property

Our commercial success depends in part on our ability to obtain and maintain proprietary protection for our drug candidates, novel biological discoveries, screening and drug development technology and other know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position.

As for the pharmaceutical products we develop and commercialize, as a normal course of business, we intend to pursue composition-of-matter patents, where possible, and dosage and formulation patents, as well as method of use patents on novel indications for known compounds. We also seek patent protection with respect to novel biological discoveries, including new targets and applications as well as adjuvant and vaccine

 

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candidates. We have also pursued patents with respect to our proprietary screening and drug development processes and technology. We have sought patent protection, either alone or jointly with our collaborators, as our collaboration agreements may dictate.

Our patent estate, on a worldwide basis, includes approximately 390 issued or allowed patents and approximately 325 pending patent applications, with claims relating to all of our current clinical stage drug candidates. With respect to our lead drug candidates in the CCR1, CCR2 and CCR9 programs, we have approximately 100 issued or allowed patents worldwide relating to their chemical composition or use thereof. There are approximately 40 patent applications pending for our other clinical stage compounds in the C5aR and ChemR23 programs. We have approximately 180 issued patents relating to other small molecule compounds and approximately 65 issued patents relating to our novel biological discoveries. We also have approximately 50 issued patents relating to our proprietary screening and drug development technologies.

Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued for applications filed in the United States are effective for twenty years from the earliest effective filing date. In addition, in certain instances, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. However, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also twenty years from the earliest effective filing date. Our issued patents will expire on dates ranging from 2020 to 2029. However, the actual protection afforded by a patent varies on a product by product basis, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the pate.

Furthermore, the patent positions of biotechnology and pharmaceutical products and processes like those we intend to develop and commercialize are generally uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in such patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries can diminish our ability to protect our inventions and enforce our intellectual property rights and more generally could affect the value of intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third party patents. The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual property rights. Our ability to maintain and solidify our proprietary position for our drugs and technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of the patent applications that we may file or license from third parties will result in the issuance of any patents. The issued patents that we own or may receive in the future, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may be able to independently develop and commercialize similar drugs or duplicate our technology, business model or strategy without infringing our patents. Because of the extensive time required for clinical development and regulatory review of a drug we may develop, it is possible that, before any of our drugs can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of any such patent.

In addition to patents, we rely upon unpatented trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners, collaborators, employees and consultants and invention assignment agreements with our employees. We also have confidentiality agreements or invention assignment agreements with our commercial partners and selected consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise

 

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become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any third party patent would require us to alter our development or commercial strategies, or our drugs or processes, obtain licenses or cease certain activities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize our future drugs may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office, or USPTO, to determine priority of invention.

Millennium Pharmaceuticals, Inc., or Millennium, has obtained certain United States patents which include claims to small molecules that modulate CCR9, compositions thereof, and methods of using them to treat conditions such as IBD. Millennium may contend that the claims of these patents cover our patented Traficet-EN drug candidate. We believe that our activities related to Traficet-EN are currently exempt from patent infringement liability because these activities are strictly limited to obtaining information for regulatory approval. However, if and when our Traficet-EN related activities extend beyond those related to seeking regulatory approval, such as, for example, if and when we commercialize Traficet-EN, Millennium might then commence an infringement action against us based on these patents and/or other related patents that it may be granted in the future. If Millennium elects to sue us, we believe that we may have viable defenses to any such infringement suit. However, we cannot assure you that the relevant court would find in our favor with respect to such defenses. Intellectual property litigation and patent litigation in particular, is expensive, complex and lengthy and its outcome is difficult to predict. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our partners from using, selling, offering to sell or importing our current or future drug candidates or could enter an order mandating that we undertake certain remedial activities. Pending or future patent litigation against us or any strategic partners by Millennium or anyone else may force us or any strategic partners to stop or delay developing, manufacturing or selling potential drug candidates that are claimed to infringe a third party’s intellectual property, unless that party grants us or any strategic partners rights to use its intellectual property. If Millennium is able to obtain an injunction and neither we nor our partners are able to obtain a license, we and our partners will be precluded from the manufacture and sale of Traficet-EN. If we or our partners are unable to show that Millennium’s patent is invalid and neither we nor our partners are able to obtain a license from Millennium for the use of their intellectual property, at all or on commercially acceptable terms, this would preclude us and our partners from the manufacture and sale of Traficet-EN or related candidate compounds found to be covered by Millennium’s patent claims.

In addition, substantial scientific and commercial research has been conducted for many years in the areas in which we have focused our development efforts, which has resulted in third parties having a number of issued patents and pending patent applications. Patent applications in the United States and elsewhere are published only after eighteen months from the priority date. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating to drugs similar to Traficet-EN and any future drugs, discoveries or technologies we might develop may have already been filed by others without our knowledge.

Competition

We compete in the segments of the pharmaceutical, biotechnology and other related markets that address IBD, chronic kidney disease and diabetic nephropathy, rheumatoid arthritis, other autoimmune diseases and inflammatory disorders, and cancer. We face significant competition from many pharmaceutical and biotechnology companies that are also researching and selling products designed to address these markets. Many of our competitors have materially greater financial, manufacturing, marketing, research and drug development resources than we do. Large pharmaceutical companies in particular have extensive expertise in preclinical and

 

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clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with our competitors.

It is possible that our competitors will develop and market drugs that are less expensive and more effective than our drug candidates, or that will render our drug candidates obsolete. It is also possible that our competitors will commercialize competing drugs before we or our partners can launch any drugs developed from our drug candidates. If approved for marketing by the FDA, Traficet-EN, our lead drug candidate for the treatment of IBD, would compete against existing IBD treatments such as Remicade, Humira, and other TNF- a inhibitors, immunomodulatory drugs and corticosteroids and potentially against other novel IBD drug candidates that are currently in development. Remicade is a humanized monoclonal antibody targeted to TNF- a , indicated for the treatment of Crohn’s disease, ulcerative colitis, rheumatoid arthritis, psoriasis, psoriatic arthritis and ankylosing spondylitis. Annual sales for Remicade totaled at least $6.0 billion in 2010. Humira, a similar drug, is also a human monoclonal antibody that acts as a TNF- a inhibitor. Marketed by Abbott Laboratories in the United States and Europe, Humira is approved for the treatment of Crohn’s disease, rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis. Annual worldwide sales for Humira totaled $6.5 billion in 2010.

We believe that Traficet-EN offers three distinct advantages as compared to currently used biologic therapies such as Remicade and Humira. First, unlike Remicade and Humira which are given by infusion or injection, Traficet-EN would be administered orally as a capsule or a tablet. We expect that oral administration of Traficet-EN will have a positive effect on patient compliance. Second, given that Traficet-EN is a small molecule which can be synthesized using standard chemistry processes, the molecule will be cheaper to manufacture than biologic agents which require complex and expensive cell based systems to produce a given biologic agent. The lower cost of goods for Traficet-EN could result in a more favorable pricing structure which, in turn, could lead to pharmaco-economic benefits for patients and healthcare providers. Third, Traficet-EN’s mode of action may not lead to the broad suppression of the patient’s immune system which is often seen with TNF- a inhibitors.

Our lead independent drug candidate, CCX140, a CCR2 antagonist, if approved for marketing by the FDA for diabetic nephropathy, would compete with treatments commonly used for type 2 diabetes and hypertension patients. ARBs and ACE inhibitors, are commonly prescribed treatments used to reduce blood pressure and increase kidney function, reducing the progression of diabetic nephropathy. Many patients eventually progress to end-stage renal disease and require hemodialysis, peritoneal dialysis, or renal transplant. There are other candidates in Phase III development for diabetic nephropathy including Abbott / Reata’s bardoxolone.

CCX354 is our lead CCR1 antagonist candidate in RA. Treatment of RA can be divided into disease-modifying antirheumatic drugs, or DMARDs, anti-inflammatory agents and analgesics. Current treatment options for RA consist of corticosteroids such as prednisone, immunosuppressants such as methotrexate (Rheumatrex and Trexall), azathioprine (such as Imuran), sulfasalazine (Azulfidine), hydroxychloroquine (Plaquenil) and 6-mercaptopurine (Purinethol), leflunomide (Arava), and biologic agents including TNF- a inhibitors (etanercept (Enbrel), infliximab (Remicade), adalimumab (Humira), certolizumab (Cimzia), and golimumab (Simponi)), anakinra (Kineret), rituximab (Rituxan), abatacept (Orencia), and tocilizumab (Actemra). There are also several novel, oral kinase inhibitors in Phase III development for RA including AstraZeneca / Rigel’s fostamatinib and Pfizer’s tasocitinib.

Many of these currently approved treatments have notable and common adverse events including liver and bone marrow toxicity, renal toxicity, pneumonitis, immunosuppression, allergic skin reactions, autoimmune diseases and infections.

We expect that competition among any of our drugs approved for sale will be based on various factors, including drug safety and efficacy, prevalence of negative side effects, reliability, ease of administration, availability, price, insurance coverage and reimbursement status and patent position. We believe that our ability to compete depends largely upon our ability to research, develop and commercialize our existing and future drug candidates. Further, we need to continue to attract and retain qualified personnel, obtain patent protection, develop proprietary technology or processes and secure sufficient capital resources for the substantial time period

 

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between technological conception and commercial sales of drugs. Our ability to compete will also be affected by the speed at which we are able to identify and develop, conduct clinical testing and obtain regulatory approvals of our drug candidates. Potential competitors may develop treatments that are more effective and/or safer than our drug candidates or that would make our technology and drug candidates obsolete or non-competitive.

Established pharmaceutical companies that currently sell or are developing drugs in our markets of interest include Abbott, Amgen, AstraZeneca, Biogen Idec, Bayer, Elan, GSK, Johnson & Johnson, Merck, Merck Serono, Takeda, Novartis, Pfizer, Reata, Sanofi-aventis and Teva. Many or all of these established competitors are also heavily involved in research and drug development regarding various chemokine receptors. Pharmaceutical and biotechnology companies which are known to be involved in chemokine research and related drug development include Pfizer, GSK, Bristol-Myers Squibb, Merck, Takeda, Sanofi-aventis, Incyte, and UCB Pharma among others. These companies and others also compete with us in recruiting and retaining qualified scientific and management personnel, and in acquiring technologies complementary to, or necessary for, our programs.

Manufacturing

Our current drug candidates are manufactured using common chemical engineering and synthetic processes from readily available raw materials. Following GSK’s exercise of its option for the further development of Traficet-EN, it assumed sole manufacturing responsibility for this drug candidate. We rely on contract manufacturing organizations to produce our other drug candidates in accordance with the FDA’s current good manufacturing practices, or cGMP, regulations for use in our clinical trials. However, we currently rely on a single source supplier for our requirements of the API of each of these other drug candidates. The manufacture of pharmaceuticals is subject to extensive cGMP regulations, which impose various procedural and documentation requirements and govern all areas of record keeping, production processes and controls, personnel and quality control. We expect to rely on contract manufacturers for the manufacture of clinical and commercial supplies of our compounds other than those drug candidates for which GSK has exercised its option.

We purchase quantities of our drug candidates from our contract manufacturers pursuant to purchase orders that we place from time to time. If we were unable to obtain sufficient quantities of drug candidates or receive raw materials in a timely manner, we could be required to delay our ongoing clinical trials and seek alternative manufacturers, which would be costly and time-consuming. We believe we have multiple potential sources for our contract manufacturing.

Government Regulation

The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, export and import of our drug candidates.

In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and the FDA’s implementing regulations. If we fail to comply with applicable FDA or other requirements at any time during the drug development process, clinical testing, the approval process or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any FDA enforcement action could have a material adverse effect on us. The process required by the FDA before our drug candidates may be marketed in the United States generally involves the following:

 

   

completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies all performed in accordance with the FDA’s current good laboratory practice, or cGLP, regulations;

 

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submission to the FDA of an investigational new drug, or IND, application which must become effective before human clinical trials in the United States may begin;

 

   

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug candidate for each proposed indication;

 

   

submission to the FDA of a new drug application, or NDA;

 

   

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current Good Manufacturing Practice, or cGMP, regulations; and

 

   

FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our drug candidates will be granted on a timely basis, if at all.

Once a pharmaceutical drug candidate is identified for development, it enters the preclinical testing stage. Preclinical studies include laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may result in the FDA not allowing the clinical trials to commence or not allowing the clinical trials to commence on the terms originally specified in the IND. A separate submission to an existing IND must also be made for each successive clinical trial conducted during drug development, and the FDA must grant permission, either explicitly or implicitly by not objecting, before each clinical trial can begin.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be used. Each protocol must be submitted to the FDA as part of the IND. An independent institutional review board, or IRB, for each medical center proposing to conduct a clinical trial must also review and approve a plan for any clinical trial before it can begin at that center and the IRB must monitor the clinical trial until it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice, or GCP, requirements, including the requirements for informed consent.

All clinical research performed in the United States in support of an NDA must be authorized in advance by the FDA under the IND regulations and procedures described above. However, a sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to FDA in support of an NDA so long as the clinical trial is conducted in compliance with an international guideline for the ethical conduct of clinical research known as the Declaration of Helsinki and/or the laws and regulations of the country or countries in which the clinical trial is performed, whichever provides the greater protection to the participants in the clinical trial. We conducted our PROTECT-1 clinical trial solely at foreign clinical research sites, and we did not have authorization from the FDA under an IND to conduct that clinical trial in the United States. We designed the clinical trial to comply with FDA regulatory requirements for the use of foreign clinical data in support of an NDA, and we intend to submit data from the PROTECT-1 clinical trial in support of our future U.S. marketing application for Traficet-EN.

 

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Clinical Trials

For purposes of NDA submission and approval, clinical trials are typically conducted in three sequential phases, which may overlap or be combined.

 

   

Phase I clinical trials are initially conducted in a limited population of subjects to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients with severe problems or life-threatening diseases to gain an early indication of its effectiveness.

 

   

Phase II clinical trials are generally conducted in a limited patient population to:

 

   

evaluate dosage tolerance and appropriate dosage;

 

   

identify possible adverse effects and safety risks; and

 

   

evaluate preliminarily the efficacy of the drug for specific targeted indications in patients with the disease or condition under study.

 

   

Phase III clinical trials, commonly referred to as pivotal studies, are typically conducted when Phase II clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety profile. Phase III clinical trials are generally undertaken with large numbers of patients, such as groups of several hundred to several thousand, to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically-dispersed clinical trial sites.

In some cases, the FDA may condition approval of an NDA on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval clinical trials are typically referred to as Phase IV clinical trials.

Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the drug in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

New Drug Applications

The results of preclinical studies and of the clinical trials, together with other detailed information, including extensive manufacturing information and information on the composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the drug for one or more specified indications. The FDA reviews an NDA to determine, among other things, whether a drug is safe and effective for its intended use.

Once an NDA has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant. However, the review process is often significantly extended by FDA requests for additional information or clarification. Under the Prescription Drug User Fee Act, the FDA has a goal of responding to NDAs within ten months of submission for standard review, but this timeframe is also often extended. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable statutory and regulatory criteria are not satisfied, or it may require additional clinical data or an additional Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret data. Once the FDA approves an NDA, or supplement thereto, the FDA may withdraw the approval if ongoing regulatory requirements are not met or if

 

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safety problems are identified after the drug reaches the market. Where a withdrawal may not be appropriate, the FDA still may seize existing inventory of such drug or require a recall of any drug already on the market. In addition, the FDA may require testing, including Phase IV clinical trials and surveillance programs to monitor the effect of approved drugs which have been commercialized. The FDA has the authority to prevent or limit further marketing of a drug based on the results of these post-marketing programs.

A sponsor may also seek approval of its drug candidates under programs designed to accelerate FDA’s review and approval of NDAs. For instance, a sponsor may seek FDA designation of a drug candidate as a “fast track product.” Fast track products are those products intended for the treatment of a serious or life-threatening condition and which demonstrate the potential to address unmet medical needs for such conditions. If fast track designation is obtained, the FDA may initiate review of sections of an NDA before the application is complete. This “rolling review” is available if the applicant provides and the FDA approves a schedule for the remaining information. In some cases, a fast track product may be approved on the basis of either a clinical endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit under the FDA’s accelerated approval regulations. Approvals of this kind typically include requirements for appropriate post-approval Phase IV clinical trials to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint. In addition, drug candidates may be eligible for “priority review,” or review within a six month timeframe from the date a complete NDA is accepted for filing, if a sponsor shows that its drug candidate provides a significant improvement compared to marketed drugs. When appropriate, we intend to seek fast track designation and/or accelerated approval for our drugs. We cannot predict whether any of our drug candidates will obtain a fast track and/or accelerated approval designation, or the ultimate impact, if any, of the fast track or the accelerated approval process on the timing or likelihood of FDA approval of any of our proposed drugs.

Drugs may be marketed only for the FDA approved indications and in accordance with the provisions of the approved labeling. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.

Before approving an application, the FDA will inspect the facility or the facilities at which the finished drug product, and sometimes the active drug ingredient, is manufactured, and will not approve the drug unless cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance, and will not approve the drug unless compliance with GCP requirements is satisfactory.

The testing and approval processes require substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all. Even if we believe a clinical trial has demonstrated safety and efficacy of one of our drug candidates for the treatment of a disease, the results may not be satisfactory to the FDA. Preclinical and clinical data may be interpreted by the FDA in different ways, which could delay, limit or prevent regulatory approval. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals which could delay or preclude us from marketing drugs. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the drugs. After approval, certain changes to the approved drug, such as adding new indications, manufacturing changes, or additional labeling claims are subject to further FDA review and approval. Depending on the nature of the change proposed, an NDA supplement must be filed and approved before the change may be implemented. For many proposed post-approval changes to an NDA, the FDA has up to 180 days to review the application. As with new NDAs, the review process is often significantly extended by the FDA requests for additional information or clarification.

Other Regulatory Requirements

Any drugs manufactured or distributed by us or our collaborators pursuant to FDA approvals would be subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by

 

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the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If we or our present or future third party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution or withdraw approval of the NDA for that drug.

The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.

Healthcare Reform

In March 2010, the President signed one of the most significant healthcare reform measures in decades. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively known as the Affordable Care Act, substantially changes the way healthcare will be financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The comprehensive $940 billion dollar overhaul is expected to extend coverage to approximately 32 million previously uninsured Americans. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. Additionally, the Affordable Care Act:

 

   

mandates a further shift in the burden of Medicaid payments to the states;

 

   

increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%;

 

   

requires collection of rebates for drugs paid by Medicaid managed care organizations;

 

   

requires manufacturers to participate in a coverage gap discount program, under which they must agree to offer 50 percent point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning January 2011; and

 

   

imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federal government programs.

The Affordable Care Act also establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. Beginning in 2014, IPAB is mandated to propose changes in Medicare payments if it is determined that the rate of growth of Medicare expenditures exceeds target growth rates. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative impact on payment rates for services, including imaging services. A proposal made by the IPAB is required to be implemented by the U.S. government’s Centers for Medicare & Medicaid Services unless Congress adopts a

 

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proposal with savings greater than those proposed by the IPAB. IPAB proposals may impact payments for physician and free-standing services beginning in 2015 and for hospital services beginning in 2020.

A number of states have challenged the constitutionality of certain provisions of the Affordable Care Act, and many of these challenges are still pending final adjudication in several jurisdictions. Congress has also proposed a number of legislative initiatives, including possible repeal of the Affordable Care Act. At this time, it remains unclear whether there will be any changes made to the Affordable Care Act, whether to certain provisions or its entirety.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. Most recently, on August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. In the event that the Joint Select Committee is unable to achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, or Congress does not act on the committee’s recommendation, without amendment, by December 23, 2011, an automatic reduction is triggered. These automatic cuts would be made to several government programs and, with respect to Medicare, would include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. Further, on September 19, 2011, President Obama presented his Plan for Economic Growth and Deficit Reduction to the Joint Select Committee, which includes $248 billion in Medicare savings ($240 billion of which comes from reducing and collecting Medicare payments incorrectly paid) and $72 billion in Medicaid savings. Beginning in 2017, the President’s proposal also shifts more of the Medicare costs to newly enrolled beneficiaries, including an increase in patient deductibles under Medicare Part B for certain beneficiaries, and increases Part B and Part D premiums for higher-income beneficiaries. The full impact on our business of the Affordable Care Act and other new laws is uncertain. Nor is it clear whether other legislative changes will be adopted, if any, or how such changes would affect the demand for our drugs once commercialized.

Third-Party Payor Coverage and Reimbursement

Although none of our drug candidates has been commercialized for any indication, if they are approved for marketing, commercial success of our drug candidates will depend, in part, upon the availability of coverage and reimbursement from third-party payors at the federal, state, and private levels. Government payor programs, including Medicare and Medicaid, private health care insurance companies, and managed-care plans have attempted to control costs by limiting coverage and the amount of reimbursement for particular procedures or drug treatments. The U.S. Congress and state legislatures from time to time propose and adopt initiatives aimed at cost-containment. Ongoing federal and state government initiatives directed at lowering the total cost of health care will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid payment systems. Examples of how limits on drug coverage and reimbursement in the United States may cause reduced payments for drugs in the future include:

 

   

changing Medicare reimbursement methodologies;

 

   

fluctuating decisions on which drugs to include in formularies;

 

   

revising drug rebate calculations under the Medicaid program; and

 

   

reforming drug importation laws.

Some third-party payors also require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse health care providers who use such therapies. While we cannot predict whether any proposed cost-containment measures will be adopted or otherwise implemented in the future, the announcement or adoption of these proposals could have a material adverse effect on our ability to obtain adequate prices for our drug candidates and operate profitably.

 

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Other Healthcare Laws and Regulations

We are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate include:

 

   

the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

   

federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

 

   

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.

If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and impact our financial results.

International Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future drugs. Whether or not we obtain FDA approval for a drug, we must obtain approval of a drug by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the drug in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marking authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marking authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.

In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our future drugs.

Employees

As of June 30, 2011, we had 64 full-time employees, 30 of whom hold Ph.D.s, M.D.s or both. Of our total workforce, 52 employees are engaged in research and development, and 12 employees are engaged in business

 

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development, finance, legal, human resources, facilities, information technology administration and general management. We have no collective bargaining agreements with our employees and we have not experienced any work stoppages. We believe that our relations with our employees are good.

Facilities

Our corporate headquarters are located in Mountain View, California, where we lease 35,755 square feet of office and laboratory space. In April 2004, we entered into a ten-year lease agreement for that facility.

We believe that our existing facilities are adequate for our current needs, as the facility has sufficient laboratory space to house additional scientists to be hired as we expand. When our leases expire, we may exercise our renewal options or look for additional or alternate space for our operations and we believe that suitable additional or alternative space will be available in the future on commercially reasonable terms.

Legal Proceedings

We are not currently a party to any material legal proceedings.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors, as of June 30, 2011:

 

Name

   Age    

Position(s)

Thomas J. Schall, Ph.D.

     52      President, Chief Executive Officer and Director

Markus J. Cappel, Ph.D.

     50      Chief Business Officer and Treasurer

Susan M. Kanaya

     48      Senior Vice President, Finance, Chief Financial Officer and Secretary

Juan C. Jaen, Ph.D.

     53      Senior Vice President, Drug Discovery and Chief Scientific Officer

Petrus (Pirow) Bekker, M.D., Ph.D.

     51      Senior Vice President of Medical and Clinical Affairs

Rishi Gupta, J.D. (1)(2)

     34      Director

Roger C. Lucas, Ph.D.

     68      Director

Geoffrey M. Parker (1)

     46      Director

Edward E. Penhoet, Ph.D. (1)(2)

     70      Director

 

(1)

Member of the audit and investment committee.

 

(2)

Member of the compensation committee.

 

(3)

Member of the nominating and corporate governance committee.

Thomas J. Schall, Ph.D. , is the founder of our company and has served as our President, Chief Executive Officer and Director since November 1996. From December 1993 to November 1996, Dr. Schall worked at the DNAX Research Institute, a division of Schering-Plough Corporation, a pharmaceutical company. Prior to his work at the DNAX Research Institute, he worked as a scientist with Genentech, Inc., a pharmaceutical company. Dr. Schall participated in some of the earliest discoveries of chemokine system function and activities. Dr. Schall cloned one of the first chemokines to be discovered, and provided some of the earliest data for the existence of the previously unknown family of molecules which later came to be called the chemokines. Dr. Schall’s laboratories have been responsible for the discovery or co-discovery of almost one-third of all known chemokine receptors. Dr. Schall received his B.S. in biology from Northern Illinois University and his Ph.D. in cancer biology from Stanford University. We believe Dr. Schall is qualified to serve on our board of directors because of his extensive executive leadership experience, many years of service as one of our directors and our President and Chief Executive Officer and extensive scientific expertise and knowledge of the chemokine system.

Markus J. Cappel, Ph.D. , has served as our Chief Business Officer since February 2007, and Treasurer since August 2004. From March 2003 to February 2007, he served as our Senior Vice President of Corporate and Business Development. From October 2001 to March 2003, Dr. Cappel served as our Vice President of Business Development. Prior to joining us, Dr. Cappel served as Vice President of Business Development at Alkermes, Inc., a biotechnology company, from 1998 to 2001. Prior to this, he served as Director of Business Development with Millennium Pharmaceuticals as well as in various business development roles at Cygnus, Inc., a biotechnology company. Dr. Cappel received his B.S. in pharmacy and his Ph.D. in pharmaceutics from J.W. Goethe University, Frankfurt, Germany, and his M.B.A. from Harvard Business School. Dr. Cappel also completed postdoctoral studies in pharmaceutics at the University of Michigan.

Susan M. Kanaya has served as our Senior Vice President, Finance, and Chief Financial Officer since January 2006, and Secretary since February 2006. Prior to joining us, Ms. Kanaya served as Senior Vice President, Finance, and Chief Financial Officer at Kosan Biosciences Inc., a biotechnology company, from 1999 to 2005. Prior to this, she served in financial management positions at SUGEN, Inc., a biotechnology company, from 1994 to 1999, most recently as Vice President, Finance, and Treasurer. Ms. Kanaya also served as Controller with high technology companies and as a public accountant with KPMG. Ms. Kanaya received her B.S. in business administration from the University of California, Berkeley.

 

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Juan C. Jaen, Ph.D., has served as our Chief Scientific Officer since February 2010. From January 2007 to February 2010, Dr. Jaen served as our Senior Vice President, Drug Discovery. From 1996 to 2006, Dr. Jaen was employed at Tularik, a biotechnology company, and then Amgen Inc., a pharmaceutical company (following Tularik’s acquisition by Amgen in 2004), most recently serving as Vice President of Chemistry. From 1983 to 1996, Dr. Jaen was employed at Parke-Davis/Warner-Lambert, a pharmaceutical company, most recently as Chemistry Director, with responsibility for the neurodegenerative disease research area. Dr. Jaen received his B.S. from the Universidad Complutense in Madrid, Spain and holds a Ph.D. in organic chemistry from the University of Michigan.

Petrus (Pirow) Bekker, M.D., Ph.D., has served as our Senior Vice President of Clinical and Medical Affairs since February 2009. From April 2005 to February 2009, Dr. Bekker served as our Vice President of Clinical and Medical Affairs. Prior to joining us, Dr. Bekker worked at Amgen Inc., where he served as Senior Director of Global Safety from July 2004 to April 2005 and as Senior Director of Clinical Development and Director of Clinical Development from December 1997 to July 2004. Prior to this, he served as a clinical researcher and scientist at Procter & Gamble Pharmaceuticals in various capacities for seven years. Dr. Bekker received his Ph.D. in molecular biology from Pennsylvania State University and his M.D. and medical training in South Africa at the University of Pretoria.

Rishi Gupta, J.D., has served as a member of our board of directors since May 2011. Since 2004, Mr. Gupta has served as Private Equity Principal of OrbiMed Advisors LLC, a healthcare asset management company. From 1999 to 2000, Mr. Gupta served as a corporate finance analyst in healthcare investment banking at Raymond James & Associates and from 2000 to 2001 served as Manager of Corporate Development at Veritas Medicine. Mr. Gupta received his A.B. degree magna cum laude in Biochemical Sciences from Harvard College and holds a J.D. from the Yale Law School. Mr. Gupta also serves on the board of directors of several private companies. We believe Mr. Gupta is qualified to serve on our board of directors because of his experience in venture capital and financial services and investing in life sciences companies.

Roger C. Lucas, Ph.D., has served as a member of our board of directors since September 1997. Since 1995, Dr. Lucas has served as Vice Chairman and a member of the board of directors of Techne Corporation, a biotechnology company. From 1985 to 1995, Dr. Lucas served as the Chief Scientific Officer, Senior Executive Vice President and Secretary of Techne Corporation and the founder of its Biotechnology Division. Prior to this, Dr. Lucas was Vice President of Research at R&D Systems, now a subsidiary of Techne, where he worked for over 10 years. Dr. Lucas received his B.S. in biology and chemistry from St. Mary’s College, Minnesota, and his Ph.D. in physiology and cell biology from the Illinois Institute of Technology. Dr. Lucas also presently serves on the board of directors of a number of privately held companies. We believe Dr. Lucas is qualified to serve on our board of directors because of his experience in the healthcare industry as an entrepreneur and a director of a range of public and private companies and his leadership and management experience from his service as an executive for a public life sciences company.

Geoffrey M. Parker, has served as a member of our board of directors since December 2009. Since September 2010, Mr. Parker has served as Senior Vice President and Chief Financial Officer of Anacor Pharmaceuticals, Inc. after serving in a consulting capacity since December 2009. From July 2009 to July 2010, Mr. Parker served in a consulting capacity as Chief Business Officer of InteKrin Therapeutics, Inc., a biotechnology company, and previously served as Managing Director and Partner in the Investment Banking Division of Goldman, Sachs & Co. From 1997 to 2009, Mr. Parker directed Goldman Sachs’ West Region Healthcare Investment Banking practice. From 1995 to 1997, Mr. Parker was Vice President at Feibusch & Co., a venture capital firm in Larkspur, California. Mr. Parker received his A.B. in Engineering Sciences and Economics from Dartmouth College and his M.B.A. from Stanford University. We believe Mr. Parker is qualified to serve on our board of directors because of his financial sophistication and his management background as an executive in the financial services industry.

Edward E. Penhoet, Ph.D. , has served as a member of our board of directors since December 2007. Since August 2000, Dr. Penhoet has served as a director of Alta Partners, a venture capital firm. Dr. Penhoet is currently a member of the President’s Council of Advisors for Science and Technology (PCAST). Dr. Penhoet

 

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was a member of the Independent Citizens Oversight Committee of the California Institute of Regenerative Medicine where he served as the Vice Chairman from 2004 to 2008. From July 1998 to July 2002, Dr. Penhoet served as the Dean of the School of Public Health and as a Professor of Public Health and of Molecular and Cellular Biology at the University of California, Berkeley. Dr. Penhoet was a co-founder of the Chiron Corporation, a biotechnology company, where he served as President, Chief Executive Officer and a director from its formation in 1981 to April 1998. From 1971 to 1981, Dr. Penhoet was a faculty member of the Biochemistry Department at the University of California, Berkeley. From 2004 to 2008, Dr. Penhoet served as President of the Gordon and Betty Moore Foundation. Dr. Penhoet is a member of the Institute of Medicine of the National Academy of Sciences and The American Academy of Arts & Sciences and currently serves, or has during the past five years served, as a director of Chiron, Corcept Therapeutics, Inc., IDM Pharma, Inc. and Renovis, Inc., together with several privately held biotechnology companies. Dr. Penhoet received a B.A. in Biology from Stanford University and a Ph.D. in Biochemistry from the University of Washington. We believe Dr. Penhoet’s qualifications to sit on our board of directors include his extensive knowledge of biochemistry and related science, together with his experience as a founder and chief executive officer of a leading biotechnology company and his corporate governance expertise. We believe Dr. Penhoet is qualified to serve on our board of directors because of his extensive leadership experience in the healthcare industry as an entrepreneur, venture capitalist and executive and his service on the boards of directors of a range of public and private life sciences companies.

Board Composition

Our board of directors currently consists of five members with one vacancy. Our amended and restated bylaws will permit the authorized number of directors to be determined by resolution of the board of directors or by the stockholders at the annual meeting of stockholders. Each director elected shall hold office until his or her successor is elected and qualified. Effective upon the closing of this offering, we will divide the terms of office of the directors into three classes:

 

   

Class I, whose term will expire at the annual meeting of stockholders to be held in 2013;

 

   

Class II, whose term will expire at the annual meeting of stockholders to be held in 2014; and

 

   

Class III, whose term will expire at the annual meeting of stockholders to be held in 2015.

Upon the closing of this offering, Class I shall consist of                      and             , Class II shall consist of                      and             , and Class III shall consist of                      and             . At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire shall serve from the time of election and qualification until the third annual meeting following election and until their successors are duly elected and qualified. A resolution of the board of directors may change the authorized number of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Board Committees

Our board of directors has established three standing committees: the audit and investment committee, the compensation committee and the nominating and corporate governance committee.

Audit and Investment Committee

The audit and investment committee is composed of Messrs. Parker and Gupta and Dr. Penhoet (our audit committee financial expert), all of whom will be independent, within the meaning of applicable SEC rules and regulations of The Nasdaq Stock Market LLC, or Nasdaq, upon completion of this offering. We believe that the

 

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composition and functioning of our audit and investment committee complies with all applicable requirements of the Sarbanes-Oxley Act of 2002, and all applicable SEC and Nasdaq rules and regulations. We intend to comply with future requirements to the extent they become applicable to us.

Our audit and investment committee is responsible for overseeing our accounting and financial reporting processes and audits of our consolidated financial statements on behalf of our board of directors. Our independent auditor reports directly to the audit and investment committee. The specific powers and responsibilities of our audit and investment committee include:

 

   

appointing, assessing the qualifications of, compensating, retaining, and overseeing the work of our independent auditor, for the purpose of preparing or issuing an auditor’s report or performing other audit, review, and attest services;

 

   

reviewing our annual audited consolidated financial statements with management and our independent auditor;

 

   

reviewing the appointment of, replacement of, and meeting with our internal auditor to discuss significant reports to management;

 

   

overseeing and monitoring the integrity of our consolidated financial statements, our compliance with legal and regulatory requirements as they relate to consolidated financial statements or accounting matters, our independent auditor’s qualifications, independence and the performance of our internal accounting and financial controls;

 

   

determining whether to recommend to our board of directors that the audited financial statements be included in our annual report for the fiscal year subject to the audit;

 

   

reviewing all related party transactions on an ongoing basis;

 

   

preparing the report that SEC rules require be included in our annual proxy statement;

 

   

providing our board of directors with the results of its monitoring and recommendations;

 

   

providing our board of directors with additional information and materials as it deems necessary to make our board of directors aware of significant financial matters that require the attention of our board of directors; and

 

   

evaluating its own performance on an annual basis.

Compensation Committee

The compensation committee is composed of Dr. Penhoet and Mr. Gupta, both of whom will be independent, within the meaning of applicable SEC and Nasdaq rules, upon completion of this offering. We believe that the composition and functioning of our compensation committee complies with all applicable requirements of the Sarbanes-Oxley Act of 2002, and all applicable SEC and Nasdaq rules and regulations. We intend to comply with future requirements to the extent they become applicable to us.

Our compensation committee is responsible for, among other things:

 

   

reviewing and approving our corporate goals and objectives relating to the compensation of our Chief Executive Officer, evaluating the performance of our Chief Executive Officer in light of those goals and objectives, and determining and approving the compensation of our Chief Executive Officer based on such evaluation;

 

   

reviewing, approving and making recommendations to our board of directors regarding compensation of our officers, directors and certain employees; reviewing and approving general compensation goals and guidelines for employees and the criteria by which bonuses, long-term incentive compensation, stock options, employee pension and welfare benefits plans are determined;

 

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determining our policy with respect to change of control or “parachute” payments;

 

   

managing and reviewing executive officer and director indemnification and insurance matters;

 

   

preparing the compensation committee report to be included as part of our annual proxy statement; and

 

   

evaluating its own performance on an annual basis.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is composed of Messrs.                     ,                      and                     , all of whom will be independent, within the meaning of applicable SEC and Nasdaq rules, upon completion of this offering. We believe that the composition and functioning of our nominating and corporate governance committee complies with all applicable requirements of the Sarbanes-Oxley Act of 2002, and all applicable SEC and Nasdaq rules and regulations. We intend to comply with future requirements to the extent they become applicable to us.

Our nominating and corporate governance committee is responsible for, among other things:

 

   

overseeing our board of director’s annual review of its performance, composition, and organization, and making recommendations on these matters to our board of directors;

 

   

reviewing, soliciting and making recommendations to our board of directors and stockholders with respect to candidates for election to our board of directors;

 

   

reviewing the performance of each current director and determining whether to recommend the nomination of such director for an additional term; and

 

   

evaluating its own performance on an annual basis.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

Compensation Discussion and Analysis

Overview

This compensation discussion and analysis provides information about the material elements of our executive compensation program for our “named executive officers,” consisting of the following persons:

 

   

Thomas J. Schall, Ph.D., our President and Chief Executive Officer;

 

   

Susan M. Kanaya, our Chief Financial Officer, Secretary and Senior Vice President, Finance;

 

   

Markus J. Cappel, Ph.D., our Chief Business Officer and Treasurer;

 

   

Juan C. Jaen, Ph.D., our Chief Scientific Officer and Senior Vice President, Drug Discovery; and

 

   

Petrus J. Bekker, M.D., Ph.D., our Senior Vice President, Medical and Clinical Affairs.

Specifically, this compensation discussion and analysis provides an overview of our executive officer compensation philosophy, the overall objectives of our executive officer compensation program, and each compensation element that we provide. In addition, we explain how and why the compensation committee and our board of directors arrived at specific compensation policies and decisions involving our named executive officers during the year ended December 31, 2010.

Objectives of Our Compensation Program

We recognize that the ability to excel depends on the integrity, knowledge, imagination, skill, diversity and teamwork of our employees. To this end, we strive to create an environment of mutual respect, encouragement and teamwork—an environment that rewards commitment and performance and that is responsive to the needs of our employees. The objectives of our compensation and benefits programs for our employees generally, and for our named executive officers specifically, are to:

 

   

attract, engage and retain the workforce that helps ensure our future success;

 

   

motivate and inspire employee behavior that fosters a high-performance culture;

 

   

support a cost-effective and flexible business model;

 

   

reinforce key business objectives; and

 

   

align employee interests with stockholder interests.

Most of our compensation elements simultaneously fulfill one or more of these objectives. These elements consist of:

 

   

base salaries;

 

   

annual performance bonuses;

 

   

long-term equity incentives;

 

   

perquisites, health, welfare and retirement benefits; and

 

   

post-termination benefits.

We believe that each element aligns the interests of our named executive officers with the interests of our stockholders in different ways, whether through focusing on short-term and long-term performance goals, promoting an ownership mentality toward one’s job, linking individual compensation opportunities to our performance or by ensuring healthy employees. This mix of compensation is intended to ensure that total compensation reflects our overall success or failure and to motivate our named executive officers to meet appropriate performance measures. In determining each element of compensation for any given year, our board of directors and our compensation committee consider and determine each element individually and then review

 

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the resulting total compensation and determine whether it is reasonable and competitive. We have no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Each of these compensation elements is described in more detail below.

Compensation Determination Process

The compensation committee of our board of directors develops, reviews and approves each of the elements of the executive officer compensation program of our company as a whole, and for our named executive officers individually, and regularly assesses the effectiveness and competitiveness of the program.

In the first quarter of each year, the compensation committee reviews the performance of each of our named executive officers during the previous year. At this time the compensation committee also reviews our performance relative to the corporate performance objectives set by the board of directors for the previous year and makes the final annual bonus payment determinations based on our performance and the compensation committee’s evaluation of each named executive officer’s performance for the prior year. In connection with this review, the compensation committee also reviews and adjusts, as appropriate, annual base salaries for our named executive officers and grants, as appropriate, additional equity awards to our named executive officers and certain other eligible employees for the coming fiscal year. During the first quarter of each year, our compensation committee also reviews and recommends to the full board of directors for approval the corporate performance objectives for purposes of our performance bonus programs for that year.

Our Chief Executive Officer, with the assistance and support of the human resources department and the other executive officers, aids the compensation committee by providing annual recommendations regarding the compensation of all of our named executive officers, other than himself. The compensation committee also, on occasion, meets with our Chief Executive Officer to obtain recommendations with respect to our compensation programs and practices generally. The compensation committee considers, but is not bound to accept, the chief executive officer’s recommendations with respect to named executive officer compensation. In the beginning of each year, our named executive officers work with our Chief Executive Officer to establish their individual performance goals for the year, based on their respective roles within the company.

Our Chief Executive Officer generally attends all of the compensation committee meetings, but the compensation committee also holds executive sessions that are not attended by any members of management or non-independent directors, as needed from time to time. Any decisions regarding our Chief Executive Officer’s compensation package are made without him present.

Role of Compensation Consultant and Comparable Company Information

The compensation committee is authorized to retain the services of third-party compensation consultants and other outside advisors from time to time, as the committee sees fit, in connection with compensation matters. Compensation consultants and other advisors retained by the compensation committee will report directly to the compensation committee which has the authority to select, retain and terminate any such consultants or advisors. During 2010, the compensation committee reviewed our compensation programs and practices in light of certain market comparison information compiled by our management team at the request of the compensation committee. Specifically, for 2010 compensation decisions, the compensation committee referred to a market comparison group, which included comparable companies within our industry, other biotechnology companies of similar size in terms of revenue and market capitalization, and companies which are otherwise relevant. For 2010, these companies included: Affymax, Inc., Array BioPharma, Inc., Cytokinetics, Incorporated, Exelixis, Inc., MAP Pharmaceuticals, Inc., Rigel Pharmaceuticals, Inc. and XenoPort, Inc. These companies were selected because all of them were at a similar stage of development, had a total value/market capitalization or size similar to ours or were otherwise companies which we believe we compete against for executive talent. During 2010, the compensation consultant also referred to the 2010 Radford Global Life Sciences Survey, which consists of public companies throughout the United States primarily from the life sciences industry with between 50 and 150 employees.

 

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With respect to Dr. Schall’s and Ms. Kanaya’s cash compensation, the data from our market comparison group was weighted more heavily by the compensation committee than the Radford survey data, as there were individuals at our peer companies who held positions with titles that were an exact match for Dr. Schall’s and Ms. Kanaya’s. For all other named executive officers, the Radford survey data was more heavily weighted by the compensation committee, as there were no exact matches for the titles of such other officers at our peer group companies. With respect to the survey data presented to the compensation committee, the identities of the individual companies included in the survey were not provided to the compensation committee, and the compensation committee did not refer to individual compensation information for such companies.

We expect that the compensation committee will continue to review comparable company survey data in connection with setting the compensation we offer our named executive officers to help ensure that our compensation programs are competitive and fair.

However, our compensation committee does not establish compensation levels based on benchmarking. Our compensation committee has relied instead upon the judgment of its members in making compensation decisions, after reviewing our performance and carefully evaluating a named executive officer’s performance during the year against established goals, leadership qualities, operational performance, business responsibilities, career with our company, current compensation arrangements and long-term potential to enhance stockholder value. While competitive market compensation paid by other companies is reviewed by the compensation committee, the compensation committee does not attempt to set compensation at a certain target percentile within a peer group or otherwise rely entirely on that data to determine named executive officer compensation. Instead, the compensation committee incorporates flexibility into our compensation programs and in the assessment process to respond to and adjust for the evolving business environment.

We strive to achieve an appropriate mix between equity incentive awards and cash payments in order to meet our objectives. Any apportionment goal is not applied rigidly and does not control our compensation decisions, and our compensation committee does not have any policies for allocating compensation between long-term and short-term compensation or cash and non-cash compensation. Our mix of compensation elements is designed to reward recent results and motivate long-term performance through a combination of cash and equity incentive awards. We believe the most important indicator of whether our compensation objectives are being met is our ability to motivate our named executive officers to deliver superior performance and retain them to continue their careers with us on a cost-effective basis.

The compensation levels of our named executive officers reflect to a significant degree the varying roles and responsibilities of such executive officers. As a result of the compensation committee’s and the board of directors’ assessment of our Chief Executive Officer’s role and responsibilities within our company, there are significant compensation differentials between him and our other named executive officers.

We do not yet have a formal policy to adjust or recover awards or payments if the relevant performance measures upon which they are based are restated or are otherwise adjusted in a manner that would otherwise reduce the size of the initial payment or award.

Executive Compensation Elements

The following describes each element of our executive compensation program, the rationale for each, and how compensation amounts are determined.

Base Salaries

In general, base salaries for our named executive officers are initially established through arm’s length negotiation at the time the executive officer is hired, taking into account such executive officer’s qualifications, experience and prior salary. We have entered into employment agreements with each of our named executive officers setting forth their initial base salaries, which employment agreements were approved by our compensation committee. Base salaries of our named executive officers are approved and reviewed annually by our compensation committee and adjustments to base salaries are based on the scope of an executive officer’s responsibilities, individual contribution, prior experience and sustained performance. Decisions regarding salary

 

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increases may take into account the executive officer’s current salary, equity ownership and the amounts paid to an executive officer’s peers inside our company by conducting an internal analysis which compares the pay of an executive officer to other members of the management team. Base salaries are also reviewed in the case of promotions or other significant changes in responsibility. Base salaries are not automatically increased if the compensation committee believes that other elements of the named executive officer’s compensation are more appropriate in light of our stated objectives. This strategy is consistent with our intent of offering compensation that is cost-effective, competitive and contingent on the achievement of performance objectives.

Our Chief Executive Officer’s base salary is based upon the same policies and criteria used for other named executive officers as described above. Each year the compensation committee reviews the chief executive officer’s compensation arrangements and his individual performance for the previous fiscal year, as well as our performance as a whole, and makes adjustments to such compensation, if appropriate.

In early 2010, the compensation committee reviewed the base salaries for our named executive officers and set the base salaries to be in effect during 2010. Given the strong performance of the executive management team during 2009, the compensation committee determined that each executive officer other than Dr. Schall and Dr. Jaen should receive a 4% increase above 2009 base salary levels. In recognition of Dr. Jaen’s promotion to chief scientific officer and his strong performance in 2009, the compensation committee increased Dr. Jaen’s base salary to $350,000 for 2010, which represented a 12.9% increase above his 2009 base salary. In recognition of Dr. Schall’s outstanding performance and our extraordinary accomplishments in 2009, the compensation committee increased Dr. Schall’s base salary to $450,000 for 2010, which represented an 8.2% increase above his 2009 base salary. The actual base salaries paid to our named executive officers for 2010 are set forth in the “Summary Compensation Table” below.

In February 2011, the compensation committee set annual base salaries for our named executive officers to be in effect until the next annual review. The 2011 base salary for each of the named executive officer represents a 3.5% increase above his or her 2010 base salary. Such increase was based on the compensation committee’s review of comparable company compensation data, as discussed above, and general budget considerations based on the company’s financial position. The compensation committee felt that this increase represented a competitive merit-based increase for our named executive officers.

Annual Performance Bonuses

Each named executive officer is also eligible for an annual performance bonus based upon the achievement of certain corporate performance goals and objectives approved by our board of directors and individual performance.

Bonuses are set based on the executive officer’s base salary as of the end of the bonus year, and are expected to be paid out in the first quarter of the following year. Pursuant to their employment agreements, each of the named executive officers is eligible to receive a target bonus of 25% of his or her base salary, with the exception of Dr. Schall, who is eligible to receive a target bonus of 40% of his base salary. Each named executive officer’s bonus is based entirely on performance relative to corporate objectives.

At the beginning of each year, the board of directors (considering the recommendations of the compensation committee and management) sets corporate goals and milestones for the year. These goals and milestones and the proportional emphasis placed on each are set by the board of directors after considering management input and our overall strategic objectives. These goals generally relate to factors such as financial targets, achievement of product development objectives and establishment of new collaborative arrangements. The board of directors, upon recommendation of the compensation committee, determines the level of achievement of the corporate goals for each year. This achievement level is then applied to each named executive officer’s target bonus to determine that year’s total bonus award.

All final bonus payments to our named executive officers are determined by our compensation committee. The actual bonuses awarded in any year, if any, may be more or less than the target, depending on individual performance and the achievement of corporate objectives and may also vary based on other factors at the discretion of the compensation committee.

 

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2010 Bonuses

For 2010, the corporate performance objectives generally fell into the following categories: objectives related to continued progress in the area of clinical trials and pipeline development (50% weighting); drug discovery efforts and pipeline support (25% weighting); and financial and corporate objectives (25% weighting), including achieving revenue and cash utilization targets for 2010, expansion and implementation of infrastructure to support a public company and general business development progress. With the exception of the financial targets described above, quantitative measures were not established for the corporate objectives during 2010. Instead these performance objectives and areas of emphasis were used as a guide by the board of directors in subjectively determining overall corporate performance as they represented those areas in which the named executive officers and our employees generally were expected to focus their efforts during the year. The three foregoing areas of emphasis were weighted based on their level of importance to our business plan.

In evaluating management’s performance relative to corporate performance for 2010, our board of directors determined to award a corporate achievement level of 90%. In coming to its final determination regarding the overall corporate achievement percentage, the board of directors awarded 90% credit for corporate performance relative to our clinical trial and pipeline development efforts, noting that we initiated, completed enrollment and obtained top line results from our Phase II study of CCX140 in type 2 diabetes, completed the first of two phases and initiated the second phase of the Phase II study of CCX354 in rheumatoid arthritis, successfully collaborated with GSK to advance Traficet-EN/GSK’786 into late-stage clinical development, initiated a Phase I study for CCX168, thereby generating a GSK milestone payment, and nominated CCX832 as the development candidate for the ChemR23 program, thereby generating another GSK milestone payment. With respect to our drug discovery efforts and pipeline support, the board of directors awarded 86% credit, noting our successful identification of lead series of development candidates in the hits-to-leads programs.

The board of directors awarded full credit with respect to financial and corporate objectives for 2010. Specifically, the board of directors noted that our 2010 revenues ($34.9 million) exceeded the targeted level of $25 million and that our cash utilization level for 2010 ($32.5 million) was less than the targeted level of $37.5 million. The board of directors also noted our continued efforts at maintaining readiness for this offering and our continued business development discussions.

This achievement level was then used to determine each named executive officer’s bonus. The bonuses paid to our named executive officers for 2010 are set forth in the “Summary Compensation Table” below.

Long-Term Equity Incentives

The goals of our long-term, equity-based incentive awards are to align the interests of our named executive officers and other employees, non-employee directors and consultants with the interests of our stockholders. Because vesting is based on continued service, our equity-based incentives also encourage the retention of our named executive officers through the vesting period of the awards. In determining the size of the long-term equity incentives to be awarded to our named executive officers, we take into account a number of internal factors, such as the relative job scope, the value of existing long-term incentive awards, individual performance history, prior contributions to us and the size of prior grants. Our compensation committee has not historically referred to competitive market data in determining long-term equity incentive awards. Based upon these factors, the compensation committee determines the size of the long-term equity incentives at levels it considers appropriate to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value.

To reward and retain our named executive officers in a manner that best aligns employees’ interests with stockholders’ interests, we use stock options as the primary incentive vehicle for long-term compensation. We believe that stock options are an effective tool for meeting our compensation goal of increasing long-term stockholder value by tying the value of the stock options to our future performance. Because employees are able to profit from stock options only if our stock price increases relative to the stock option’s exercise price, we believe stock options provide meaningful incentives to employees to achieve increases in the value of our stock over time.

 

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We use stock options to compensate our named executive officers both in the form of initial grants in connection with the commencement of employment and annual retention grants. Annual retention grants of stock options are typically approved by the compensation committee during the summer of each year. While the majority of stock option awards to our employees have been made pursuant to our annual retention grant program, the compensation committee retains discretion to make stock option awards to employees at other times, including in connection with the hiring of an employee, the promotion of an employee, to reward an employee, for retention purposes or for other circumstances recommended by management or the compensation committee. We have not granted any equity awards other than stock options to date.

The exercise price of each stock option grant is the fair market value of our common stock on the grant date, as determined by our board of directors. Since June 2006, the fair market value of our common stock has been determined by an independent third party appraisal. Except as described below, we have never granted stock options with an exercise price that is less than the fair market value of our common stock on the grant date, as determined pursuant to our equity incentive plans. Stock option awards to our named executive officers typically vest over a four-year period as follows: 25% of the shares underlying the option vest on the first anniversary of the vesting commencement date and the remainder of the shares underlying the option vest in equal monthly installments over the remaining 36 months thereafter. From time to time, our compensation committee may, however, determine that a different vesting schedule is appropriate. For a description of certain accelerated vesting provisions applicable to such options, see “Summary Compensation—Equity Compensation and Other Benefit Plans” below. We do not have any security ownership requirements for our named executive officers.

In August 2010, the compensation committee awarded the following options to our named executive officers: Dr. Schall, options to purchase 558,333 shares; Ms. Kanaya, options to purchase 143,229 shares; Dr. Cappel, options to purchase 128,646 shares; Dr. Jaen, options to purchase 210,938 shares and Dr. Bekker, options to purchase 98,021 shares. Each of these option awards vest over four years, as described above, and has an exercise price of $3.15 per share, which the board of directors determined was the fair value per share of our common stock on the date of grant. The compensation committee’s decision regarding each named executive officer’s award amount was not based on any quantifiable factors, but instead was based on the compensation committee’s subjective analysis of the award levels the compensation committee deemed appropriate in order to incentivize our named executive officers for their strong operational performance and in light of various other factors, including internal pay equity considerations.

In August 2011, the compensation committee awarded the following options to our named executive officers: Ms. Kanaya, options to purchase 88,361 shares; Dr. Cappel, options to purchase 97,395 shares; Dr. Jaen, options to purchase 98,850 shares; and Dr. Bekker, options to purchase 78,531 shares. Each of these option awards vest over four years, as described above, and has an exercise price of $3.45 per share, which the board of directors determined was the fair value per share of our common stock on the date of grant. Because we no longer had enough shares remaining available for issuance under our equity plan to grant options commensurate in number with past practice, Dr. Schall recommended to the compensation committee that he wished to be excluded from any grants and that the remaining option shares be divided among the other members of our executive management team. The compensation committee granted options at two-thirds the level recommended by Dr. Schall, leaving approximately 110,000 options available for grant under the equity plan. The compensation committee indicated that it would revisit whether to make additional grants to the executive management team and to Dr. Schall if and when additional shares become available for grant under our equity plan.

As a privately owned company, there has been no active market for our common stock. Accordingly, we have had no program, plan or practice pertaining to the timing of stock option grants to named executive officers coinciding with the release of material non-public information.

Perquisites, Health, Welfare and Retirement Benefits

The establishment of competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel.

 

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Health and Welfare Benefits

Our named executive officers are eligible to participate in all of our employee benefit plans, including our medical, dental, vision, group life and disability insurance plans, in each case on the same basis as other employees. We believe that these health and welfare benefits help ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.

Retirement Savings

All of our full-time employees in the United States, including our named executive officers, are eligible to participate in our 401(k) plan. Pursuant to our 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit of $16,500 in 2011 (additional salary deferrals not to exceed $5,500 are available to those employees 50 years of age or older) and to have the amount of this reduction contributed to our 401(k) plan. While we may elect to make matching contributions, no such contributions have been made. The 401(k) Plan currently does not offer the ability to invest in our securities.

Perquisites

We do not provide significant perquisites or personal benefits to our named executive officers. We do, however, pay the premiums for term life insurance for our named executive officers.

Post-Termination Benefits

We have entered into employment agreements which provide for certain severance benefits in the event a named executive officer’s employment is involuntarily or constructively terminated. Such severance benefits are intended and designed to alleviate the financial impact of an involuntary termination and maintain a stable work environment through salary continuation and equity award vesting acceleration. We provide severance benefits because they are essential to help us fulfill our objective of attracting and retaining key managerial talent. While these arrangements form an integral part of the total compensation provided to these individuals and are considered by the compensation committee when determining executive officer compensation, the decision to offer these benefits did not influence the compensation committee’s determinations concerning other direct compensation or benefit levels. The compensation committee has determined that such arrangements offer protection that is competitive within our industry and for our company size and are designed to attract highly qualified individuals and encourage them to maintain their employment with us. In determining the severance benefits payable pursuant to the executive officer employment agreements, the compensation committee considered the input of our executive officers as to what they expected and what level of severance benefits would be sufficient to retain our current executive team and to recruit talented executive officers in the future. For a description of these employment agreements with our named executive officers, see “Summary Compensation—Employment Agreements” below.

As described above, we routinely grant our named executive officers stock options under our equity incentive plans. For a description of the change in control provisions in such equity incentive plans applicable to these stock options, see “Summary Compensation—Equity Compensation Plans and Other Benefit Plans” below.

Tax Deductibility of Executive Compensation

The compensation committee and our board of directors have considered the potential future effects of Section 162(m) of the Internal Revenue Code of 1986 as amended, or the Code, on the compensation paid to our executive officers. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for our Chief Executive Officer and each of the other named executive officers (other than our chief financial officer), unless compensation is performance based. As we are not currently publicly traded, our board of directors has not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation. Our compensation committee, however, has adopted a policy that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for an exemption from the deductibility limitations of Section 162(m).

 

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In approving the amount and form of compensation for our executive officers, the compensation committee will continue to consider all elements of the cost to our company of providing such compensation, including the potential impact of Section 162(m).

Accounting for Stock-Based Compensation

We follow Financial Accounting Standards Board Accounting Standards Codification Topic 718 (formerly known as SFAS No. 123(R)), or ASC Topic 718, for our stock-based compensation awards. ASC Topic 718 requires companies to calculate the grant date “fair value” of their stock-based awards using a variety of assumptions. This calculation is performed for accounting purposes and reported in the compensation tables below, even though recipients may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based awards in their income statements over the period that an employee is required to render service in exchange for the award.

Summary Compensation Table

The following table shows information regarding the compensation of our named executive officers during the fiscal year ended December 31, 2010.

 

Name and Principal Position

  Year     Salary     Bonus     Stock
Option
Awards (1)
    Non-Equity
Incentive Plan
Compensation (2)
    All Other
Compensation (3)
    Total  

Thomas J. Schall, Ph.D.

    2010      $ 450,000             $ 1,106,281      $ 162,000      $ 690      $ 1,718,971   

President and Chief Executive Officer

             

Susan M. Kanaya

    2010        347,464      $ 4,842 (4)       283,994        78,179        450        714,929   

Senior Vice President, Finance and Chief Financial Officer

             

Markus J. Cappel, Ph.D.

    2010        330,970               255,079        74,468        450        660,967   

Chief Business Officer

             

Juan C. Jaen, Ph.D.

    2010        350,000               418,248        78,750        690        847,688   

Senior Vice President, Drug Discovery and Chief Scientific Officer

             

Petrus J. Bekker, M.D., Ph.D.

    2010        344,822               194,356        77,585        690        617,453   

Senior Vice President, Medical and Clinical Affairs

             

 

(1)

Amounts shown represent the aggregate grant date fair value of the option awards granted during 2010 computed in accordance with FASB Topic ASC 718. These amounts do not correspond to the actual value that will be recognized by the named executive officer with respect to such awards. The assumptions used in the valuation of these awards are consistent with the valuation methodologies specified in the notes to our financial statements included elsewhere in this prospectus.

(2)

Amounts shown represent performance bonuses for 2010, which were each paid in a cash lump sum in the first quarter of 2011.

 

(3)

Amounts shown represent term life insurance paid by the Company on behalf of the named executive officers.

 

(4)

In order to avoid potential adverse tax consequences to Ms. Kanaya, in October 2007, our compensation committee approved an increase to the exercise price of options granted on February 9, 2006, from $0.44

 

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per share to $1.00 per share, which represents the exercise price of options that were issued immediately following receipt of our December 31, 2005 appraisal. Our compensation committee further approved periodic cash bonuses to Ms. Kanaya, commencing in January 2008, in the amount of the increased exercise price of $0.56 per share, to be paid as the amended options vest and become exercisable.

Grants of Plan-Based Awards

The following table sets forth summary information regarding grants of plan-based awards made to our named executive officers during our fiscal year ended December 31, 2010.

 

Name

  Grant
Date
    Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards (1)
    Option
Awards:
Number of
Securities
Underlying
Options (3)
    Exercise
or Base
Price of
Option
Awards (4)
    Grant Date
Fair Value
of Option
Awards (5)
 
    Threshold     Target     Maximum (2)        
Thomas J. Schall, Ph.D.     08/11/10             $ 180,000               558,333      $ 3.15      $ 1,106,281   
Susan M. Kanaya     08/10/10               86,866               143,229        3.15        283,944   
Markus J. Cappel, Ph.D.     08/10/10               82,743               128,646        3.15        255,079   
Juan C. Jaen, Ph.D.     08/10/10               87,500               210,938        3.15        418,248   
Petrus J. Bekker, M.D., Ph.D.     08/10/10               86,206               98,021        3.15        194,356   

 

(1)

Represents target awards granted under our annual bonus plan, as described above under the heading “—Bonuses.”

 

(2)

There is no maximum possible payout under our annual bonus plan.

 

(3)

The options have a 10-year term and vest at the rate of 25% of the original number of shares on the first anniversary of the vesting commencement date and 1/48 th of the original number of shares on each monthly anniversary thereafter, provided that the option holder continues to provide services to the company.

 

(4)

Reflects the fair market value per share of our common stock on the grant date as determined by our board of directors based on an appraisal prepared by an independent valuation firm.

 

(5)

Amounts shown represent the aggregate grant date fair value of the option awards computed in accordance with FASB Topic ASC 718. The assumptions used in the valuation of these awards are consistent with the valuation methodologies specified in the notes to our financial statements included elsewhere in this prospectus.

 

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Outstanding Equity Awards at December 31, 2010

The following table sets forth specified information concerning unexercised stock options for each of the named executive officers outstanding as of December 31, 2010.

 

     Option Awards (1)  
            Number of Securities
Underlying Unexercised
Options
              

Name

   Grant
Date
     Exercisable      Unexercisable      Option
Exercise Price
    Option
Expiration  Date
 

Thomas J. Schall, Ph.D.

     05/13/04         200,000               $ 0.30        05/13/14   
     05/05/05         250,000                 0.30        05/05/15   
     09/10/08         500,000                 3.00        09/10/18   
     07/29/09         620,000                 3.00        07/29/19   
     08/11/10         558,333                 3.15        08/11/20   

Susan M. Kanaya

     02/09/06         415,000                 0.44 (2)       02/09/16   
     09/10/08         150,000                 3.00        09/10/18   
     07/28/09         185,000                 3.00        07/28/19   
     08/10/10         143,229                 3.15        08/10/20   

Markus J. Cappel, Ph.D.

     10/26/01         250,000                 0.26        10/26/11   
     05/13/04         125,000                 0.30        05/13/14   
     05/05/05         150,000                 0.30        05/05/15   
     02/06/07         100,000                 2.15        02/06/17   
     09/10/08         200,000                 3.00        09/10/18   
     07/28/09         155,000                 3.00        07/28/19   
     08/10/10         128,646                 3.15        08/10/20   

Juan C. Jaen, Ph.D.

     02/06/07         395,000                 2.15        02/06/17   
     09/10/08         75,000                 3.00        09/10/18   
     07/28/09         85,000                 3.00        07/28/19   
     08/10/10         210,938                 3.15        08/10/20   

Petrus J. Bekker, M.D., Ph.D.

     05/05/05         125,000                 0.30        05/05/15   
     09/10/08         100,000                 3.00        09/10/18   
     02/17/09         200,000                 3.00        02/17/19   
     07/28/09         25,000                 3.00        07/28/19   
     08/10/10         98,021                 3.15        08/10/20   

 

(1)

The options have a 10-year term and vest at the rate of 25% of the original number of shares on the first anniversary of the vesting commencement date and 1/48 th of the original number of shares on each monthly anniversary thereafter, provided that the option holder continues to provide services to the company. All options are immediately exercisable for shares of restricted stock, to the extent such options are unvested on the date of exercise.

 

(2)

In order to avoid potential adverse tax consequences to Ms. Kanaya, in October 2007, our compensation committee approved an increase to the exercise price of such options to $1.00 per share, which represents the exercise price of options that were issued immediately following receipt of our December 31, 2005 appraisal. Our compensation committee further approved periodic cash bonuses to Ms. Kanaya, commencing in January 2008, in the amount of the increased exercise price of $0.56 per share, to be paid as the amended options vest and become exercisable.

 

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Option Exercises and Stock Vested

The following table summarizes information regarding the stock options that were exercised during 2010 for each of the named executive officers.

 

     Option Awards  

Name

   Number of
Shares
Acquired on
Exercise
     Value
Realized
on
Exercise (1)
 

Thomas J. Schall, Ph.D.

               

Susan M. Kanaya

               

Markus J. Cappel, Ph.D.

               

Juan C. Jaen, Ph.D.

               

Petrus J. Bekker, M.D., Ph.D.

     48,000       $ 129,600   

 

(1)

Represents the difference between the market value of the option shares on the exercise date and the option exercise price.

Pension Benefits and Nonqualified Deferred Compensation

We do not provide a pension plan for our employees and none of our named executive officers participated in a nonqualified deferred compensation plan during the fiscal year ended December 31, 2010.

Employment Agreements

We have entered into amended and restated employment agreements with each of our named executive officers. Each of the employment agreements has a three-year term, subject to automatic successive one-year renewals unless we provide written notice of our desire to terminate the agreement at least sixty days prior to the expiration of the then-current term. Pursuant to the employment agreements, each executive officer is eligible for a target performance bonus of up to 25% (40% with respect to Dr. Schall) of his or her base salary, based upon the achievement of financial and performance objectives established by the compensation committee. Any final bonus payment shall be determined by our board of directors or compensation committee.

The employment agreements provide for certain severance payments to our named executive officers. All cash severance payments are payable in a lump sum. If we terminate an executive officer’s employment without cause or if the executive officer resigns for good reason (unless such termination occurs within 12 months following a change in control), we are obligated to pay such executive officer a lump sum severance payment equal to his or her base salary in effect at the time of termination for a specified number of months. The applicable severance period is 18 months for Drs. Schall, Cappel and Jaen and Ms. Kanaya, and six months for Dr. Bekker. Additionally, each of Drs. Schall, Cappel and Jaen and Ms. Kanaya will receive accelerated vesting and/or exercisability of 100% of his or her outstanding stock awards.

Under each of the employment agreements, if we terminate an executive officer’s employment without cause or if the executive officer resigns for good reason, in each case within 12 months following a change in control, we are obligated to pay such executive officer a lump sum severance payment equal to the sum of: (1) 18 months of his or her base salary in effect at the time of termination, (2) one and one-half times the executive officer’s target bonus, and (3) 18 months of health benefits continuation at our cost. Furthermore, all of the executive officer’s outstanding stock awards will vest upon the date of termination. The foregoing change-in-control severance benefits shall only apply so long as the executive officer is working on a full-time basis. For a further description of the potential compensation payable to our named executive officers under their amended and restated employment agreements, please see “—Potential Benefits Upon Termination or Change in Control” below.

 

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For purposes of the amended and restated employment agreements, “cause” means an executive officer (1) has committed an act of fraud, embezzlement or dishonesty in connection with the executive officer’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the company or any successor or parent or subsidiary thereof; (2) has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the company or any successor or parent or subsidiary thereof; (3) has made any unauthorized use or disclosure of confidential information or trade secrets of the company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity; (4) has materially breached a company policy, materially breached the provisions of the executive officer’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the company or any successor or parent or subsidiary thereof, or (5) has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the board of directors or the appropriate individual to whom the executive officer reports; provided such direction is not materially inconsistent with the executive officer’s customary duties and responsibilities.

For purposes of the amended and restated employment agreements, “good reason” means (1) a material diminution in the executive officer’s authority, duties or responsibilities, (2) a material diminution in the executive officer’s base compensation unless such a reduction is imposed across-the-board to senior management of the company, (3) a material change in the geographic location at which the executive officer must perform services to us or (4) any other action or inaction that constitutes a material breach by the company or any successor or affiliate of its obligations to the executive officer under the employment agreement. With respect to Drs. Schall, Cappel and Jaen and Ms. Kanaya, “good reason” also includes a material diminution in the authority, duties or responsibilities of the supervisor to whom the executive officer is required to report.

For purposes of the amended and restated employment agreements, “change in control” has the same meaning as such term is given under the terms of our 2012 Equity Incentive Award Plan, as described below.

 

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Potential Benefits Upon Termination or Change in Control

We have agreements with each of our named executive officers which provide for certain benefits in the event of a termination of employment under certain circumstances. The two right-hand columns describe the payments that would apply in two different potential scenarios: (1) a termination of the named executive officer’s employment by the company without cause or his or her resignation for good reason; and (2) a termination of the named executive officer’s employment by the company without cause or his or her resignation for good reason within 12 months following a change in control. The table assumes that the termination and change in control occurred on December 31, 2010. For purposes of estimating the value of amounts of equity compensation to be received in the event of a termination of employment, we have assumed a price per share of our common stock of $3.30, which represents the fair market value of our common stock on such date as determined by our board of directors. For a further description of potential benefits in the event of a termination of employment or change in control, please see “—Employment Agreements” above.

 

Name and Position

 

Benefit Type

  Payment in the Case of a
Termination by the
Company  Without
Cause or by Executive
Officer for
Good Reason
    Payment in the Case of a Termination
by the Company  Without Cause or
by Executive Officer for
Good Reason Within 12 Months
Following a Change in Control
 

Thomas J. Schall, Ph.D.

  Cash Severance (1)   $ 675,000      $ 945,000   
  Benefits Continuation            21,584   
  Accelerated Vesting
of Stock Options
(2)
    263,250        263,250   
   

 

 

   

 

 

 
  Total Value:     938,250        1,229,834   
   

 

 

   

 

 

 

Susan M. Kanaya

  Cash Severance (1)     521,196        651,495   
  Benefits Continuation            21,828   
  Accelerated Vesting
of Stock Options
(2)
    75,141        75,141   
   

 

 

   

 

 

 
  Total Value:     596,337        748,464   
   

 

 

   

 

 

 

Markus J. Cappel, Ph.D.

  Cash Severance (1)     496,455        620,569   
  Benefits Continuation            11,899   
  Accelerated Vesting
of Stock Options
(2)
    75,475        75,475   
   

 

 

   

 

 

 
  Total Value:     571,930        707,943   
   

 

 

   

 

 

 

Juan C. Jaen, Ph.D.

  Cash Severance (1)     525,000        656,250   
  Benefits Continuation            36,934   
  Accelerated Vesting
of Stock Options
(2)
    66,480        66,480   
   

 

 

   

 

 

 
  Total Value:     591,480        759,664   
   

 

 

   

 

 

 

Petrus J. Bekker, M.D., Ph.D.

  Cash Severance (1)     172,411        646,541   
  Benefits Continuation            31,579   
  Accelerated Vesting
of Stock Options
(2)
           62,672   
   

 

 

   

 

 

 
  Total Value:     172,411        740,792   
   

 

 

   

 

 

 

 

(1)

Payable in a lump sum.

 

(2)

Represents the value of those options that would vest as a result of the named executive officer’s termination, which is equal to the number of shares that would vest multiplied by the difference between the fair value per share of our common stock on December 31, 2010, which was $3.30, and the exercise price per share of such option.

 

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Equity Compensation Plans and Other Benefit Plans

2012 Equity Incentive Award Plan

Concurrently with this offering, we intend to establish our 2012 Equity Incentive Award Plan, or the Equity Plan. We expect our board of directors to adopt, and our stockholders to approve, the Equity Plan prior to the completion of this offering. The Equity Plan will become effective on the day prior to the public trading date of our common stock. The material terms of the Equity Plan are summarized below. The Equity Plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

Authorized Shares .    A total of              shares of our common stock will initially be reserved for issuance under the Equity Plan. In addition, the number of shares initially reserved under the Equity Plan will be increased by (1) the number of shares that as of the closing of this offering, have been reserved but not issued pursuant to any awards granted under our 2002 Plan and are not subject to any awards granted thereunder, and (2) the number of shares subject to stock options or similar awards granted under the 2002 Plan that expire or otherwise terminate without having been exercised in full and unvested shares issued pursuant to awards granted under the 2002 Plan that are forfeited to or repurchased by us, with the maximum number of shares to be added to the Equity Plan pursuant to clauses (1) and (2) above equal to             shares as of June 30, 2011. In addition, the number of shares available for issuance under the Equity Plan will be annually increased on the first day of each of our fiscal years during the term of the Equity Plan, beginning with the 2012 fiscal year, by an amount equal to the least of:

 

   

            shares;

 

   

    % of the outstanding shares of our common stock as of the last day of our immediately preceding fiscal year; or

 

   

such other amount as our board of directors may determine.

The Equity Plan will also provide for an aggregate limit of             shares of common stock that may be issued under the Equity Plan over the course of its ten-year term.

Shares issued pursuant to awards under the Equity Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise price of an award or to satisfy the tax withholding obligations related to an award, will become available for future grant under the Equity Plan. In addition, to the extent that an award is paid out in cash rather than shares, such cash payment will not reduce the number of shares available for issuance under the Equity Plan.

Plan Administration .    The compensation committee of our board of directors will administer the Equity Plan (except with respect to any award granted to “independent directors” (as defined in the Equity Plan), which must be administered by our full board of directors). Following the completion of this offering, to administer the Equity Plan, our compensation committee must consist solely of at least two members of our board of directors, each of whom is a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act and, with respect to awards that are intended to constitute performance-based compensation under Section 162(m) of the Code, an “outside director” for purposes of Section 162(m). Subject to the terms and conditions of the Equity Plan, our compensation committee has the authority to select the persons to whom awards are to be made, to determine the type or types of awards to be granted to each person, the number of awards to grant, the number of shares to be subject to such awards, and the terms and conditions of such awards, and to make all other determinations and decisions and to take all other actions necessary or advisable for the administration of the Equity Plan. Our compensation committee is also authorized to establish, adopt, amend or revise rules relating to administration of the Equity Plan. Our board of directors may at any time revest in itself the authority to administer the Equity Plan.

Eligibility.     Options, stock appreciation rights, or SARs, restricted stock and other awards under the Equity Plan may be granted to individuals who are then our officers or employees or are the officers or employees of any of our subsidiaries. Such awards may also be granted to our non-employee directors and consultants but only employees may be granted incentive stock options, or ISOs. As of June 30, 2011, there were four non-employee

 

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directors and approximately 64 employees who would have been eligible for awards under the Equity Plan had it been in effect on such date. At such time after the completion of this offering when we are subject to the requirements of Section 162(m) of the Code, the maximum number of shares that may be subject to awards granted under the Equity Plan to any individual in any calendar year cannot exceed              and the maximum amount that may be paid to a participant in cash during any calendar year with respect to one or more cash based awards under the Equity Plan is $            .

Awards.     The Equity Plan provides that our compensation committee (or the board of directors, in the case of awards to non-employee directors) may grant or issue stock options, SARs, restricted stock, restricted stock units, dividend equivalents, performance share awards, stock payments and performance bonus awards, or any combination thereof. Our compensation committee (or the board of directors, in the case of awards to non-employee directors) will consider each award grant subjectively, considering factors such as the individual performance of the recipient and the anticipated contribution of the recipient to the attainment of our long-term goals. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award.

 

   

Nonqualified stock options, or NQSOs, will provide for the right to purchase shares of our common stock at a specified price which may not be less than the fair market value of a share of common stock on the date of grant, and usually will become exercisable (at the discretion of our compensation committee or our board of directors, in the case of awards to non-employee directors) in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of performance targets established by our compensation committee (or our board of directors, in the case of awards to non-employee directors). NQSOs may be granted for any term specified by our compensation committee (or our board of directors, in the case of awards to non-employee directors).

 

   

ISOs will be designed to comply with the provisions of the Code and will be subject to specified restrictions contained in the Code. Among such restrictions, ISOs must have an exercise price of not less than the fair market value of a share of common stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the optionee’s termination of employment, and must be exercised within the ten years after the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of our capital stock, the Equity Plan provides that the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant and the ISO must expire upon the fifth anniversary of the date of its grant.

 

   

Restricted stock may be granted to participants and made subject to such restrictions as may be determined by our compensation committee (or our board of directors, in the case of awards to non-employee directors). Typically, restricted stock may be forfeited for no consideration if the conditions or restrictions are not met, and it may not be sold or otherwise transferred to third parties until restrictions are removed or expire. Recipients of restricted stock, unlike recipients of options, may have voting rights and may receive dividends, if any, prior to the time when the restrictions lapse.

 

   

Restricted stock units may be awarded to participants, typically without payment of consideration or for a nominal purchase price, but subject to vesting conditions including continued employment or on performance criteria established by our compensation committee (or our board of directors, in the case of awards to non-employee directors). Like restricted stock, restricted stock units may not be sold or otherwise transferred or hypothecated until vesting conditions are removed or expire. Unlike restricted stock, stock underlying restricted stock units will not be issued until the restricted stock units have vested, and recipients of restricted stock units generally will have no voting or dividend rights prior to the time when vesting conditions are satisfied.

 

   

SARs granted under the Equity Plan typically will provide for payments to the holder based upon increases in the price of our common stock over the exercise price of the SAR. Except as required by Section 162(m) of the Code with respect to SARs intended to qualify as performance-based

 

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compensation as described in Section 162(m) of the Code, there are no restrictions specified in the Equity Plan on the exercise of SARs or the amount of gain realizable therefrom. Our compensation committee (or the board of directors, in the case of awards to non-employee directors) may elect to pay SARs in cash or in common stock or in a combination of both.

 

   

Dividend equivalents represent the value of the dividends, if any, per share paid by us, calculated with reference to the number of shares covered by the stock options, SARs or other awards held by the participant.

 

   

Performance bonus awards may be granted by our compensation committee on an individual or group basis. Generally, these awards will be based upon the attainment of specific performance goals that are established by our compensation committee and relate to one or more performance criteria on a specified date or dates determined by our compensation committee. Any such cash bonus paid to a “covered employee” within the meaning of Section 162(m) of the Code may be, but need not be, qualified performance-based compensation as described below and will be paid in cash.

 

   

Stock payments may be authorized by our compensation committee (or our board of directors, in the case of awards to non-employee directors) in the form of common stock or an option or other right to purchase common stock as part of a deferred compensation arrangement, made in lieu of all or any part of compensation, including bonuses, that would otherwise be payable to employees, consultants or members of our board of directors.

Transferability of Awards .    Unless the administrator provides otherwise, our Equity Plan generally does not allow for the transfer of awards and only the recipient of an option or stock appreciation right may exercise such an award during his or her lifetime.

Qualified Performance-Based Compensation .    The compensation committee may designate employees as “covered employees” whose compensation for a given fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. The compensation committee may grant to such covered employees restricted stock, dividend equivalents, stock payments, restricted stock units, cash bonuses and other stock-based awards that are paid, vest or become exercisable upon the attainment of company performance criteria which are related to one or more of the following performance criteria as applicable to our performance or the performance of a division, business unit or an individual, measured either in absolute terms, as compared to any incremental increase or as compared to results of a peer group: operating or other costs and expenses, improvements in expense levels, cash flow (including, but not limited to, operating cash flow and free cash flow), return on net assets, stockholders’ equity, return on stockholders’ equity, return on sales, gross or net profit or operating margin, working capital, net earnings (either before or after interest, taxes, depreciation and amortization), gross or net sales or revenue, net income (either before or after taxes), adjusted net income, operating earnings, earnings per share of stock, adjusted earnings per share of stock, price per share of stock, capital raised in financing transactions or other financing milestones, market recognition (including but not limited to awards and analyst ratings), financial ratios, implementation of critical projects, comparisons with various stock market indices, and implementation, completion or attainment of objectively determinable objectives relating to research, development, regulatory, commercial or strategic milestones or development. These performance criteria may be measured in absolute terms or as compared to performance in an earlier period or as compared to any incremental increase or as compared to results of a peer group.

The compensation committee may provide that one or more objectively determinable adjustments will be made to one or more of the performance goals established for any performance period. Such adjustments may include one or more of the following: items related to a change in accounting principle, items relating to financing activities, expenses for restructuring or productivity initiatives, other non-operating items, items related to acquisitions, items attributable to the business operations of any entity acquired by us during the performance period, items related to the disposal of a business of segment of a business, items related to discontinued operations that do not qualify as a segment of a business under applicable accounting standards, items attributable to any stock dividend, stock split, combination or exchange of shares occurring during the performance period, any other items of significant income or expense which are determined to be appropriate

 

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adjustments, items relating to unusual or extraordinary corporate transactions, events or developments, items related to amortization of acquired intangible assets, items that are outside the scope of our core, on-going business activities, items relating to changes in tax laws, items relating to major licensing or partnership arrangements, items relating to asset impairment charges, items relating to gains and losses for litigation, arbitration or contractual settlements, or items relating to any other unusual or nonrecurring events or changes in applicable laws, accounting principles or business conditions.

Forfeiture, Recoupment and Clawback Provisions .    Pursuant to its general authority to determine the terms and conditions applicable to awards under the Equity Plan, the compensation committee has the right to provide, in an award agreement or otherwise, that an award shall be subject to the provisions of any recoupment or clawback policies implemented by us, including, without limitation, any recoupment or clawback policies adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder.

Adjustments .    If there is any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of our assets to stockholders, or any other change affecting the shares of our common stock or the share price of our common stock other than an equity restructuring (as defined in the Equity Plan), the plan administrator will make such equitable adjustments, if any, as the plan administrator in its discretion may deem appropriate to reflect such change with respect to (1) the aggregate number and type of shares that may be issued under the Equity Plan (including, but not limited to, adjustments of the number of shares available under the plan and the maximum number of shares which may be subject to one or more awards to a participant pursuant to the plan during any calendar year), (2) the number and kind of shares, or other securities or property, subject to outstanding awards, (3) the number and kind of shares, or other securities or property, for which automatic grants are to be subsequently made to new and continuing non-employee directors, (4) the terms and conditions of any outstanding awards (including, without limitation, any applicable performance targets or criteria with respect thereto), and (5) the grant or exercise price per share for any outstanding awards under the plan. If there is any equity restructuring, (1) the number and type of securities subject to each outstanding award and the grant or exercise price per share for each outstanding award, if applicable, will be proportionately adjusted, and (2) the plan administrator will make proportionate adjustments to reflect such equity restructuring with respect to the aggregate number and type of shares that may be issued under the Equity Plan (including, but not limited to, adjustments of the number of shares available under the plan and the maximum number of shares which may be subject to one or more awards to a participant pursuant to the plan during any calendar year). Adjustments in the event of an equity restructuring will not be discretionary. Any adjustment affecting an award intended as “qualified performance-based compensation” will be made consistent with the requirements of Section 162(m) of the Code. The plan administrator also has the authority under the Equity Plan to take certain other actions with respect to outstanding awards in the event of a corporate transaction, including provision for the cash-out, termination, assumption or substitution of such awards.

Corporate Transactions .    In the event of a change in control where the acquirer does not assume awards granted under the Equity Plan, awards issued under the Equity Plan will be subject to accelerated vesting such that 100% of the awards will become vested and exercisable or payable, as applicable. Under the Equity Plan, a change in control is generally defined as:

 

   

a transaction or series of related transactions (other than an offering of our stock to the general public through a registration statement filed with the Securities and Exchange Commission, or SEC) whereby any person or entity or related group of persons or entities (other than us, our subsidiaries, an employee benefit plan maintained by us or any of our subsidiaries or a person or entity that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, us) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of more than 50% of the total combined voting power of our securities outstanding immediately after such acquisition;

 

   

during any two-year period, individuals who, at the beginning of such period, constitute our board of directors together with any new director(s) whose election by our board of directors or nomination for

 

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election by our stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of our board of directors; or

 

   

our consummation (whether we are directly or indirectly involved through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) the sale, exchange or transfer of all or substantially all of our assets in any single transaction or series of transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

 

   

which results in our voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into our voting securities or the voting securities of the person that, as a result of the transaction, controls us, directly or indirectly, or owns, directly or indirectly, all or substantially all of our assets or otherwise succeeds to our business (we or such person being referred to as a successor entity)) directly or indirectly, at least a majority of the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction; and

 

   

after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the successor entity; provided, however, that no person or group is treated as beneficially owning 50% or more of combined voting power of the successor entity solely as a result of the voting power held in us prior to the consummation of the transaction.

Amendment, Termination .    Our board of directors has the authority to amend, suspend or terminate the Equity Plan at any time. However, stockholder approval of any amendment to the Equity Plan will be obtained to the extent necessary to comply with any applicable law, regulation or stock exchange rule. If not terminated earlier by our board of directors, the Equity Plan will terminate on the tenth anniversary of the date of its initial approval by our board of directors.

Repricing Permitted.     Our compensation committee (or the board of directors, in the case of awards to non-employee directors) shall have the authority, without the approval of our stockholders, to authorize the amendment of any outstanding award to reduce its price per share and to provide that an award will be canceled and replaced with the grant of an award having a lesser price per share. Our compensation committee (or the board of directors, in the case of awards to non-employee directors) will also have the authority, without the approval of our stockholders, to amend any outstanding award to increase the price per share or to cancel and replace an award with the grant of an award having a price per share that is greater than or equal to the price per share of the original award.

Securities Laws and Federal Income Taxes.     The Equity Plan is designed to comply with various securities and federal tax laws as follows:

Securities Laws.     The Equity Plan is intended to conform to all provisions of the Securities Act of 1933, as amended, and the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including, without limitation, Rule 16b-3. The Equity Plan will be administered, and awards will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.

Federal Income Tax Consequences.     The material federal income tax consequences of the Equity Plan under current federal income tax law are summarized in the following discussion, which deals with the general tax principles applicable to the Equity Plan. The following discussion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed due to the fact that they may vary depending on individual circumstances and from locality to locality.

Stock Options and Stock Appreciation Rights.     An Equity Plan participant generally will not recognize taxable income and we generally will not be entitled to a tax deduction upon the grant of a stock option or stock appreciation right. The tax consequences of exercising a stock option and the subsequent disposition of the shares

 

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received upon exercise will depend upon whether the option qualifies as an ISO as defined in Section 422 of the Code. The Equity Plan permits the grant of options that are intended to qualify as ISOs as well as options that are not intended to so qualify; however, ISOs generally may be granted only to our employees and employees of our parent or subsidiary corporations, if any. Upon exercising an option that does not qualify as an ISO when the fair market value of our stock is higher than the exercise price of the option, an Equity Plan participant generally will recognize taxable income at ordinary income tax rates equal to the excess of the fair market value of the stock on the date of exercise over the purchase price, and we (or our subsidiaries, if any) generally will be entitled to a corresponding tax deduction for compensation expense, in the amount equal to the amount by which the fair market value of the shares purchased exceeds the purchase price for the shares. Upon a subsequent sale or other disposition of the option shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

Upon exercising an ISO, an Equity Plan participant generally will not recognize taxable income, and we will not be entitled to a tax deduction for compensation expense. However, upon exercise, the amount by which the fair market value of the shares purchased exceeds the purchase price will be an item of adjustment for alternative minimum tax purposes. The participant will recognize taxable income upon a sale or other taxable disposition of the option shares. For federal income tax purposes, dispositions are divided into two categories: qualifying and disqualifying. A qualifying disposition generally occurs if the sale or other disposition is made more than two years after the date the option was granted and more than one year after the date the shares are transferred upon exercise. If the sale or disposition occurs before these two periods are satisfied, then a disqualifying disposition generally will result.

Upon a qualifying disposition of ISO shares, the participant will recognize long-term capital gain in an amount equal to the excess of the amount realized upon the sale or other disposition of the shares over their purchase price. If there is a disqualifying disposition of the shares, then the excess of the fair market value of the shares on the exercise date (or, if less, the price at which the shares are sold) over their purchase price will be taxable as ordinary income to the participant. If there is a disqualifying disposition in the same year of exercise, it eliminates the item of adjustment for alternative minimum tax purposes. Any additional gain or loss recognized upon the disposition will be recognized as a capital gain or loss by the participant.

We will not be entitled to any tax deduction if the participant makes a qualifying disposition of ISO shares. If the participant makes a disqualifying disposition of the shares, we should be entitled to a tax deduction for compensation expense in the amount of the ordinary income recognized by the participant.

Upon exercising or settling a SAR, an Equity Plan participant will recognize taxable income at ordinary income tax rates, and we should be entitled to a corresponding tax deduction for compensation expense, in the amount paid or value of the shares issued upon exercise or settlement. Payments in shares will be valued at the fair market value of the shares at the time of the payment, and upon the subsequent disposition of the shares the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

 

   

Restricted Stock and Restricted Stock Units.     An Equity Plan participant generally will not recognize taxable income at ordinary income tax rates and we generally will not be entitled to a tax deduction upon the grant of restricted stock or restricted stock units. Upon the termination of restrictions on restricted stock or the payment of restricted stock units, the participant will recognize taxable income at ordinary income tax rates, and we should be entitled to a corresponding tax deduction for compensation expense, in the amount paid to the participant or the amount by which the then fair market value of the shares received by the participant exceeds the amount, if any, paid for them. Upon the subsequent disposition of any shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares. However, an Equity Plan participant granted restricted stock that is subject to forfeiture or repurchase through a vesting schedule such that it is subject to a “risk of forfeiture” (as defined in Section 83 of the Code) may make an election under Section 83(b) of the Code to recognize taxable income at ordinary income tax rates, at the time of the grant, in an amount equal to the fair market

 

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value of the shares of common stock on the date of grant, less the amount paid, if any, for such shares. We will be entitled to a corresponding tax deduction for compensation, in the amount recognized as taxable income by the participant. If a timely Section 83(b) election is made, the participant will not recognize any additional ordinary income on the termination of restrictions on restricted stock, and we will not be entitled to any additional tax deduction.

 

   

Dividend Equivalents, Stock Payment Awards and Cash-Based Awards.     An Equity Plan participant will not recognize taxable income and we will not be entitled to a tax deduction upon the grant of dividend equivalents, stock payment awards or cash-based awards until cash or shares are paid or distributed to the participant. At that time, any cash payments or the fair market value of shares that the participant receives will be taxable to the participant at ordinary income tax rates and we should be entitled to a corresponding tax deduction for compensation expense. Payments in shares will be valued at the fair market value of the shares at the time of the payment, and upon the subsequent disposition of the shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

 

   

Section 409A of the Code .    Certain types of awards under the Equity Plan may constitute, or provide for, a deferral of compensation under Section 409A. Unless certain requirements set forth in Section 409A are complied with, holders of such awards may be taxed earlier than would otherwise be the case ( e.g. , at the time of vesting instead of the time of payment) and may be subject to an additional 20% federal income tax (and, potentially, certain interest penalties). To the extent applicable, the Equity Plan and awards granted under the Equity Plan will be structured and interpreted to comply with Section 409A and the Department of Treasury regulations and other interpretive guidance that may be issued pursuant to Section 409A.

 

   

Section 162(m) Limitation .      In general, under Section 162(m) of the Code, income tax deductions of publicly held corporations may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and non-qualified benefits paid) for certain executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Code) in any one year. However, under Section 162(m), the deduction limit does not apply to certain “performance-based compensation” if an independent compensation committee determines performance goals and if the material terms of the performance-based compensation are disclosed to and approved by our stockholders. In particular, stock options and SARs will satisfy the “performance-based compensation” exception if the awards are made by a qualifying compensation committee, the plan sets the maximum number of shares that can be granted to any person within a specified period and the compensation is based solely on an increase in the stock price after the grant date. Specifically, the option exercise price must be equal to or greater than the fair market value of the stock subject to the award on the grant date. Under a Section 162(m) transition rule for compensation plans of corporations which are privately held and which become publicly held in an initial public offering, certain awards under the Equity Plan will not be subject to Section 162(m) until a specified transition date, which is the earlier of (1) the material modification of the Equity Plan, (2) the issuance of all employer stock and other compensation that has been allocated under the Equity Plan, or (3) the first annual meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs. After the transition date, rights or awards granted under the Equity Plan, other than options and SARs, will not qualify as “performance-based compensation” for purposes of Section 162(m) unless such rights or awards are granted or vest upon pre-established objective performance goals, the material terms of which are disclosed to and approved by our stockholders.

We have attempted to structure the Equity Plan in such a manner that, after the transition date, the compensation attributable to stock options and SARs which meet the other requirements of Section 162(m) will not be subject to the $1 million limitation. We have not, however, requested a ruling from the Internal Revenue Service or an opinion of counsel regarding this issue.

 

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Amended and Restated 2002 Equity Incentive Plan

Our Amended and Restated 2002 Equity Incentive Plan, or the 2002 Plan, was initially adopted by our board of directors in May 2002 and approved by our stockholders in September 2002. As amended to date, we have reserved a total of 9,300,000 shares of common stock for issuance under the 2002 Plan. As of June 30, 2011, options to purchase 1,458,227 shares of common stock had been exercised (net of repurchases), options to purchase 7,235,912 shares of common stock were outstanding and 631,948 shares of common stock remained available for grant. As of June 30, 2011, the outstanding options were exercisable at a weighted average exercise price of approximately $2.38 per share. The material terms of the 2002 Plan are summarized below. The 2002 Plan is filed as an exhibit to the registration statement of which this prospectus is a part.

No Further Grants.     After the effective date of the Equity Plan, no additional awards will be granted under the 2002 Plan, and all awards granted under the 2002 Plan that are repurchased, forfeited, expire or are cancelled will become available for grant under the Equity Plan.

Administration.     The compensation committee of our board of directors administers the 2002 Plan. Subject to the terms and conditions of the 2002 Plan, our compensation committee has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject thereto and the terms and conditions thereof, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2002 Plan. Our compensation committee is also authorized to adopt, amend or rescind rules relating to administration of the 2002 Plan. Our board of directors may at any time abolish the compensation committee and revest in itself the authority to administer the 2002 Plan. The full board of directors administers the 2002 Plan with respect to awards to non-employee directors.

Eligibility.     Options and restricted stock under the 2002 Plan may be granted to individuals who are then our officers or employees or are the officers or employees of any of our subsidiaries. Such awards may also be granted to our non-employee directors or consultants, but only employees may be granted ISOs.

Awards.     The 2002 Plan provides that our compensation committee may grant or issue stock options and restricted stock or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award.

 

   

NQSOs provide for the right to purchase shares of our common stock at a specified price and usually will become exercisable at the discretion of our compensation committee or, in the case of awards to non-employee directors, the board of directors, in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of performance targets established by our compensation committee or, in the case of awards to non-employee directors, the board of directors.

 

   

ISOs are designed to comply with the provisions of the Internal Revenue Code and will be subject to specified restrictions contained in the Internal Revenue Code and as further described above in connection with our 2002 Plan.

 

   

Restricted stock may be granted to participants and made subject to such restrictions as may be determined by our compensation committee or, in the case of awards to non-employee directors, the board of directors. Typically, restricted stock and stock bonus awards may be forfeited for no consideration or repurchased by us at the original purchase price if the conditions or restrictions are not met and they may not be sold, or otherwise transferred to third parties until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will receive dividends, if any, prior to the time when the restrictions lapse.

Corporate Transactions.     In the event of an acquisition where the acquirer does not assume awards granted under the 2002 Plan or substitute similar awards, awards issued under the 2002 Plan and held by participants in the plan whose status as a service provider has not terminated prior to such acquisition will be subject to accelerated vesting such that 100% of such award will become vested and exercisable or payable, as applicable,

 

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and all other outstanding options under the 2002 Plan will be terminated if not exercised prior to the closing of the acquisition. Under the 2002 Plan, an acquisition is generally defined as:

 

   

the sale, transfer or other disposition of all or substantially all of our assets or our complete liquidation or dissolution; or

 

   

a merger or consolidation in which securities possessing more than 50% of the total combined voting power of our outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction.

Amendment and Termination of the 2002 Plan.     Our board of directors may terminate, amend or modify the 2002 Plan. However, stockholder approval of any amendment to the 2002 Plan will be obtained in order to increase the maximum number of shares issuable under the 2002 Plan, to extend the term of the 2002 Plan and, to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule. If not terminated earlier by the board of directors, the 2002 Plan will terminate on the tenth anniversary of the date of its initial adoption by our board of directors.

Securities Laws and Federal Income Taxes.     The 2002 Plan is also designed to comply with various securities and federal tax laws as described above in connection with the Equity Plan.

Amended and Restated 1997 Stock Option/Stock Issuance Plan

Our amended and restated 1997 Stock Option/Stock Issuance Plan, or the 1997 Plan, was initially adopted by our board of directors in October 1997 and approved by our stockholders in October 1997. We have reserved a total of 2,700,000 shares of common stock for issuance under the 1997 Plan. As of June 30, 2011, options to purchase 2,011,968 shares of common stock had been exercised, options to purchase 516,200 shares of common stock were outstanding and 171,832 shares of common stock remained available for grant. As of June 30, 2011, the outstanding options were exercisable at a weighted average exercise price of approximately $0.27 per share. The material terms of the 1997 Plan are summarized below. The 1997 Plan is filed as an exhibit to the registration statement of which this prospectus is a part.

No Further Grants.     No additional awards will be granted under the 1997 Plan after the expiration of the 1997 Plan in May 2012.

Administration.     The compensation committee of our board of directors administers the 1997 Plan. Subject to the terms and conditions of the 1997 Plan, our compensation committee has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject thereto and the terms and conditions thereof, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 1997 Plan. Our compensation committee is also authorized to adopt, amend or rescind rules relating to administration of the 1997 Plan. Our board of directors may at any time abolish the compensation committee and revest in itself the authority to administer the 1997 Plan. The full board of directors administers the 1997 Plan with respect to awards to non-employee directors.

Eligibility.     Options under the 1997 Plan may be granted to individuals who are then our officers or employees or are the officers or employees of any of our parent or subsidiary corporations. Options may also be granted to our non-employee directors or consultants, but only employees may be granted ISOs.

Awards.     The 1997 Plan provides that our compensation committee may grant or issue stock options and restricted stock or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award.

 

   

NQSOs provide for the right to purchase shares of our common stock at a specified price, which for purposes of the 1997 Plan may be no less than 85 percent of the fair market value on the date of grant, and usually will become exercisable, at the discretion of our compensation committee or the board of directors, in the case of awards to non-employee directors, in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of performance targets established by our compensation committee, or the board of

 

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directors, in the case of awards to non-employee directors. Under the 1997 Plan, in the case of an NQSO granted to an individual who owns or is deemed to own at least 10% of the total combined voting power of all classes of our capital stock, the 1997 Plan provides that the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant. NQSOs may be granted for a maximum ten-year term.

 

   

ISOs are designed to comply with the provisions of the Internal Revenue Code and are subject to specified restrictions contained in the Internal Revenue Code and as further described above in connection with our Equity Plan.

 

   

Restricted stock may be granted to participants and made subject to such restrictions as may be determined by our compensation committee, or the board of directors, in the case of awards to non-employee directors. Typically, restricted stock and stock bonus awards may be forfeited for no consideration or repurchased by us at the original purchase price if the conditions or restrictions are not met and they may not be sold, or otherwise transferred to third parties until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will receive dividends, if any, prior to the time when the restrictions lapse.

Corporate Transactions.     In the event of a corporate transaction where the acquirer does not assume or replace awards granted under the 1997 Plan, awards issued under the 1997 Plan will be subject to accelerated vesting such that 100% of such award will become vested and exercisable or payable, as applicable. Under the 1997 Plan, a corporate transaction is generally defined as:

 

   

the sale, transfer or other disposition of all or substantially all of our assets or a complete liquidation or dissolution; or

 

   

a merger or consolidation in which securities possessing more than 50% of the total combined voting power of our outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction.

Amendment and Termination of the 1997 Plan.     Our board of directors may terminate, amend or modify the 1997 Plan. However, stockholder approval of any amendment to the 1997 Plan will be obtained to the extent necessary and desirable to comply with any applicable law, regulation, or stock exchange rule. If not terminated earlier by the board of directors, the 1997 Plan will terminate in May 2012 on the tenth anniversary of the date of its adoption by our board of directors.

Securities Laws and Federal Income Taxes.     The 1997 Plan is also designed to comply with various securities and federal tax laws as described above in connection with the Equity Plan.

2012 Employee Stock Purchase Plan

Concurrently with this offering, we intend to establish our 2012 Employee Stock Purchase Plan, or the ESPP. We expect our board of directors to adopt, and our stockholders to approve, the ESPP prior to the completion of this offering. The ESPP will become effective on the business day prior to the public trading date of our common stock. Our executive officers and all of our other employees will be allowed to participate in our ESPP, subject to the eligibility requirements described below. The material terms of the ESPP are summarized below. The ESPP is filed as an exhibit to the registration statement of which this prospectus forms a part.

A total of             shares of our common stock will initially be reserved for issuance under our ESPP. In addition, the number of shares available for issuance under the ESPP will be annually increased on the first day of each fiscal year during the term of the ESPP, beginning with the 2012 fiscal year, by an amount equal to the least of:

 

   

            shares;

 

   

    % of the outstanding shares of our common stock as of the last day of our immediately preceding fiscal year; or

 

   

such other amount as may be determined by our board of directors.

 

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The ESPP will also provide for an aggregate limit of             shares of common stock that may be issued under the ESPP during the term of the ESPP.

Our board of directors or its committee has full and exclusive authority to interpret the terms of the ESPP and determine eligibility. We expect that our compensation committee will be the initial administrator of the ESPP.

Our employees are eligible to participate in the ESPP if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted rights to purchase stock under our ESPP if such employee, immediately after the grant, would own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of our common or other class of stock.

Our ESPP is intended to qualify under Code Section 423 and stock will be offered under the ESPP during offering periods. The length of the offering periods under the ESPP will be determined by our compensation committee and may be up to 27 months long. Employee payroll deductions will be used to purchase shares on each purchase date during an offering period. The purchase dates will be determined by the compensation committee for each offering period, but will generally be the last day in each offering period. Offering periods under the ESPP will commence when determined by our compensation committee. The compensation committee may, in its discretion, modify the terms of future offering periods.

Our ESPP permits participants to purchase common stock through payroll deductions of up to     % of their eligible compensation, which includes a participant’s gross base compensation for services to the company, excluding overtime payments, sales commissions, incentive compensation, bonuses, expense reimbursements, fringe benefits and other special payments. A participant may purchase a maximum of              shares of common stock during each offering period. In addition, no employee will be permitted to accrue the right to purchase stock under the ESPP at a rate in excess of $25,000 worth of shares during any calendar year during which such a purchase right is outstanding (based on the fair market value per share of our common stock as of the first day of the offering period).

On the first trading day of each offering period, each participant automatically is granted an option to purchase shares of our common stock. The option expires at the end of the offering period or upon termination of employment, whichever is earlier, but is exercised at the end of each purchase period to the extent of the payroll deductions accumulated during such purchase period. The purchase price of the shares will be 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the applicable purchase date. Participants may end their participation at any time during an offering period, and will be paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination of employment with us.

A participant may not transfer rights granted under the ESPP other than by will, the laws of descent and distribution or as otherwise provided under the ESPP.

In the event of certain significant transactions or a change in control (as defined in the ESPP), the compensation committee may provide for (1) either the replacement or termination of outstanding rights in exchange for cash, (2) the assumption or substitution of outstanding rights by the successor or survivor corporation or parent or subsidiary thereof, if any, (3) the adjustment in the number and type of shares of stock subject to outstanding rights, (4) the use of participants’ accumulated payroll deductions to purchase stock on a new purchase date prior to the next purchase date and termination of any rights under ongoing offering periods or (5) the termination of all outstanding rights. Under the ESPP, a change in control has the same definition as given to such term in the Equity Plan.

The compensation committee may amend, suspend or terminate the ESPP. However, stockholder approval of any amendment to the ESPP will be obtained for any amendment which changes the aggregate number of shares that may be sold pursuant to rights under the ESPP changes the corporations or classes of corporations whose employees are eligible to participate in the ESPP or changes the ESPP in any manner that would cause the ESPP to no longer be an employee stock purchase plan within the meaning of Section 423(b) of the Code. The ESPP will terminate no later than the tenth anniversary of the ESPP’s initial adoption by our board of directors.

 

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Securities Laws.     The ESPP has been designed to comply with various securities laws in the same manner as described above in the description of the Equity Plan.

Federal Income Taxes.     The material federal income tax consequences of the ESPP under current federal income tax law are summarized in the following discussion, which deals with the general tax principles applicable to the ESPP. The following discussion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed due to the fact that they may vary depending on individual circumstances and from locality to locality.

The ESPP, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Section 423 of the Code. Under the applicable Code provisions, no income will be taxable to a participant until the sale or other disposition of the shares purchased under the ESPP. This means that an eligible employee will not recognize taxable income on the date the employee is granted an option under the ESPP ( i.e. , the first day of the offering period). In addition, the employee will not recognize taxable income upon the purchase of shares. Upon such sale or disposition, the participant will generally be subject to tax in an amount that depends upon the length of time such shares are held by the participant prior to disposing of them. If the shares are sold or disposed of more than two years from the first day of the offering period during which the shares were purchased and more than one year from the date of purchase, or if the participant dies while holding the shares, the participant (or his or her estate) will recognize ordinary income measured as the lesser of (1) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price or (2) an amount equal to 15% of the fair market value of the shares as of the first day of the offering period. Any additional gain will be treated as long-term capital gain. If the shares are held for the holding periods described above but are sold for a price that is less than the purchase price, there is no ordinary income and the participating employee has a long-term capital loss for the difference between the sale price and the purchase price.

If the shares are sold or otherwise disposed of before the expiration of the holding periods described above, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price and we will be entitled to a tax deduction for compensation expense in the amount of ordinary income recognized by the employee. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on how long the shares were held following the date they were purchased by the participant prior to disposing of them. If the shares are sold or otherwise disposed of before the expiration of the holding periods described above but are sold for a price that is less than the purchase price, the participant will recognize ordinary income equal to the excess of the fair market value of the shares on the date of purchase over the purchase price (and we will be entitled to a corresponding deduction), but the participant generally will be able to report a capital loss equal to the difference between the sales price of the shares and the fair market value of the shares on the date of purchase.

Incentive Plan

Concurrently with this offering, we intend to establish a cash incentive plan, which we refer to as the Incentive Plan, under which we will provide cash incentives to our executive officers and other key employees following the consummation of this offering. The purpose of the Incentive Plan is to enable the Company and its subsidiaries to attract, retain, motivate and reward the best qualified executive officers and key employees by providing them with the opportunity to earn competitive compensation directly linked to the Company’s performance. We expect our board of directors to adopt, and our stockholders to approve, the Incentive Plan, prior to the completion of this offering. The Incentive Plan will become effective on the business day prior to the public trading date of our common stock. The material terms of the Incentive Plan are summarized below. The Incentive Plan is filed as an exhibit to the registration statement of which this prospectus forms a part.

Administration.     The Incentive Plan will be administered by our compensation committee, which may delegate its authority under the Incentive Plan to any of its duly constituted subcommittees.

 

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Performance Criteria.     The compensation committee may establish the performance objective or objectives that must be satisfied in order for a participant to receive an award under the Incentive Plan or may make discretionary payments from the plan. Performance objectives under the Incentive Plan may be based upon the relative or comparative achievement of performance criteria, whether in absolute terms or relative to the performance of one or more similarly situated companies or a published index covering the performance of a number of companies, as determined by the compensation committee for the applicable performance period, which performance criteria may include: operating or other costs and expenses, improvements in expense levels, cash flow (including, but not limited to, operating cash flow and free cash flow), return on net assets, stockholders’ equity, return on stockholders’ equity, return on sales, gross or net profit or operating margin, working capital, net earnings (either before or after interest, taxes, depreciation and amortization), gross or net sales or revenue, net income (either before or after taxes), adjusted net income, operating earnings, earnings per share of stock, adjusted earnings per share of stock, price per share of stock, capital raised in financing transactions or other financing milestones, market recognition (including but not limited to awards and analyst ratings), financial ratios, implementation of critical projects, comparisons with various stock market indices, and implementation, completion or attainment of objectively determinable objectives relating to research, development, regulatory, commercial or strategic milestones or development. These performance criteria may be measured in absolute terms or as compared to performance in an earlier period or as compared to any incremental increase or as compared to results of a peer group. The compensation committee may exclude any or all extraordinary, unusual or non-recurring items and the cumulative effects of accounting changes from performance objectives for a performance period and may also adjust performance objectives in its discretion.

Payment.     Payment of awards will be made as soon as practicable after the compensation committee certifies that one or more of the applicable performance criteria have been attained or determines the payable amount of an award. The compensation committee will determine whether an award will be paid in cash, stock (including restricted stock or restricted stock units) or other awards under the Equity Plan, or in a combination of cash, stock and other awards, and may impose whatever additional conditions on such shares or other awards as it deems appropriate, including conditioning the vesting of such shares or other awards on the performance of additional service.

Maximum Award; Discretion.     The maximum award amount payable to a participant in cash per fiscal year under the Incentive Plan is $            . The compensation committee may, in its discretion, increase, reduce or eliminate awards otherwise payable under the Incentive Plan for any reason.

Termination of Employment.     Unless otherwise determined by the compensation committee in its discretion, any participant whose employment terminates will forfeit all rights to any and all unpaid awards under the Incentive Plan.

Forfeiture; Disgorgement.     If we are required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws, and a participant knowingly or grossly negligently engaged in the misconduct or knowingly or grossly negligently failed to prevent the misconduct, or if the participant is one of the individuals subject to automatic forfeiture under section 304 of the Sarbanes-Oxley Act of 2002, then the participant must forfeit and disgorge any awards received during the twelve months following the filing of the financial document embodying such financial reporting requirement and any other awards earned based on the materially non-complying financial reporting. In addition, any award paid to a current or former executive officer during the three-year period preceding the date on which the restatement is required, based on erroneous data, must be forfeited and disgorged to us to the extent the award is in excess of what would have been paid to the officer under the restated data. Participants must also forfeit and disgorge any awards to the extent required by applicable law or regulations in effect on or after the effective date of the Incentive Plan.

Director Compensation

We compensate certain non-employee members of the board of directors for their service. Directors who are also employees do not receive cash or equity compensation for service on the board of directors in addition to

 

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compensation payable for their service as our employees. The non-employee members of our board of directors are also reimbursed for travel, lodging and other reasonable expenses incurred in attending board of directors or committee meetings.

We do not currently provide any cash compensation to our non-employee directors. Our board of directors has historically granted to certain of our non-employee directors options to purchase shares of our common stock under our 1997 Plan and our 2002 Plan. None of our non-employee directors received an equity award during 2010.

Following the completion of this offering, we intend to provide cash compensation in the form of an annual retainer of $             for each non-employee director. We will also pay an additional annual retainer of $             to the chairman of our audit and investment committee, $             to the chairs of our compensation committee and our nominating and corporate governance committees and $             to other non-employee directors for their service on each such committee. We will pay an additional annual retainer to the chairman of our board of directors of $             per year. Directors will receive $             per board of directors meeting attended in person. We have reimbursed and will continue to reimburse our non-employee directors for their reasonable expenses incurred in attending meetings of our board of directors and committees of the board of directors.

Following the completion of this offering, any non-employee director who is first elected to the board of directors will be granted an option to purchase              shares of our common stock on the date of his or her initial election to the board of directors. Such options will have an exercise price per share equal to the fair market value of our common stock on the date of grant. In addition, on the date of each annual meeting of our stockholders following this offering, each non-employee director will be eligible to receive an option to purchase              shares of common stock.

The initial options granted to non-employee directors described above will vest             , subject to the director’s continuing service on our board of directors on those dates. The annual options granted to non-employee directors described above will vest             , subject to the director’s continuing service on our board of directors (and, with respect to grants to a chairman of the board of directors or board committee, service as chairman of the board of directors or a committee) on those dates. The term of each option granted to a non-employee director shall be ten years. The terms of these options are described in more detail under “—Equity Compensation Plans and Other Benefit Plans—2012 Equity Incentive Award Plan.”

During 2010, we did not pay any director for service as a member of the board of directors or any board committee, either in cash compensation or with equity awards. Outstanding vested and nonvested options held by members of our board of directors at December 31, 2010, were:

 

     Shares Underlying
Options Outstanding

At December 31, 2010
 
     Vested      Unvested  

Geoffrey M. Parker

     25,000         75,000   

Thomas J. Schall, Ph.D.

     971,667         1,156,666   

Roger C. Lucas, Ph.D.

               

Edward E. Penhoet, Ph.D.

               

Samuel P. Wertheimer, Ph.D. (1)

               

 

(1)

Dr. Wertheimer resigned from the board of directors on May 11, 2011.

Risk Assessment of Compensation Program

In September and October 2011, management assessed our compensation program for the purpose of reviewing and considering any risks presented by our compensation policies and practices that are reasonably likely to have a material adverse effect on us. As part of that assessment, management reviewed the primary elements of our compensation program, including base salary, short-term incentive compensation and long-term incentive compensation. Management’s risk assessment included a review of the overall design of each primary

 

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element of our compensation program, and an analysis of the various design features, controls and approval rights in place with respect to compensation paid to management and other employees that mitigate potential risks to us that could arise from our compensation program. Following the assessment, management determined that our compensation policies and practices did not create risks that were reasonably likely to have a material adverse effect on us and reported the results of the assessment to our compensation committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a description of transactions since January 1, 2008 to which we have been a party, in which the amount involved exceeds $120,000, and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, from unaffiliated third parties.

Sales and Purchases of Securities

In August 2008, Glaxo Group Limited, one of our principal stockholders, purchased 6,793,478 shares of our Series E Preferred Stock at a price of $7.36 per share for an aggregate purchase price of $50.0 million.

In January 2009, we repurchased 366,666 shares of our common stock from Dr. Thomas J. Schall, our President and Chief Executive Officer, for a total purchase price of $1.1 million.

Relationships with GSK

In August 2006, we entered into a collaboration agreement with Glaxo Group Limited, or GSK, an affiliate of GlaxoSmithKline. See “Business—Strategic Alliance with GSK.” Pursuant to the terms of this agreement we received research funding, upfront payments and milestone payments aggregating $23.6 million, $49.7, million and $34.9 million, in the years ended December 31, 2008, 2009 and 2010, respectively. In addition, GSK has agreed to purchase $7.0 million of our common stock in a private placement concurrent with this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered.

Relationships with Techne

In September 2011, we entered into a convertible note loan agreement with Techne, one of our principal stockholders, pursuant to which we issued a convertible note to Techne with a principal amount of $10.0 million, bearing interest at a rate of 5.0% per annum and maturing in September 2021. Upon completion of this offering, all outstanding principal and interest under this note will automatically convert into shares of our common stock at a conversion price equal to the initial public offering price of our common stock. Upon the conversion of this note in connection with this offering, we will issue Techne warrants with a ten-year term to purchase 300,000 shares of our common stock at an exercise price per share equal to 200% of the initial public offering price of our common stock. In addition, Techne has also agreed, pursuant to the terms of the convertible note loan agreement, to purchase $5.0 million of our common stock in a private placement concurrent with this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered.

During the years ended December 31, 2010, 2009 and 2008, we paid Techne Corporation, $0.1 million, $0.1 million and $0.2 million, respectively, for research materials. During the six months ended June 30, 2011, we paid Techne Corporation $28,000 for research materials.

Director and Executive Officer Compensation

Please see “Executive and Director Compensation—Director Compensation” for a discussion of options granted to our non-employee directors. Please see “Executive and Director Compensation,” “Management—Outstanding Equity Awards at Fiscal Year End,” and “Management—Summary Compensation” for additional information regarding compensation of executive officers.

Employment Agreements

We have entered into employment agreements with our executive officers. For more information regarding these agreements, see “Executive and Director Compensation—Employment Agreements.”

 

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Indemnification Agreements and Directors’ and Officers’ Liability Insurance

We intend to enter into indemnification agreements with each of our executive officers and directors.

Registration Rights Agreements

We and the holders of our Series A-1, Series A-2, Series A-3, Series B, Series C, Series D and Series E Preferred Stock, and Dr. Schall, as well as holders of certain warrants, have entered into agreements pursuant to which these stockholders will have, among other things, registration rights under the Securities Act with respect to their common shares following this offering. Prior to the completion of this offering, all outstanding shares of our preferred stock will be converted into common stock. GSK and Techne will also be entitled to registration rights with respect to shares of our common stock purchased by GSK and Techne in the concurrent private placements. See “Description of Capital Stock—Registration Rights” for a further description of the terms of these agreements.

Procedures for Related Party Transactions

Our board of directors reviews and approves transactions with directors, officers and holders of 5% or more of our voting securities and their affiliates, each, a related party. Prior to this offering, the material facts as to the related party’s relationship or interest in the transaction were disclosed to our board of directors and the transaction was not considered approved by our board of directors unless a majority of the directors who were not interested in the transaction approved the transaction. Our current policy with respect to approval of related party transactions is not in writing.

Following this offering, any request for us to enter into a related party transaction with an officer, director, principal stockholder or any of their immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to our audit committee for review, consideration and approval. In approving or rejecting any such proposal, our audit committee is to consider the relevant facts and circumstances available and deemed relevant to the audit committee, including, but not limited to, the risks, costs and benefits to us, the extent of the related party’s interest in the transaction, the terms of the transaction, the availability of other sources for comparable services or products and the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally. The audit committee will then document its findings and conclusions in written minutes. In the event a transaction relates to a member of our audit committee, that member will not participate in the audit committee’s deliberations. Further, when stockholders are entitled to vote on a transaction with a related party, the material facts of the related party’s relationship or interest in the transaction will be disclosed to the stockholders, who must approve the transaction in good faith. Following the closing of this offering, our related party policy will be written and subject to periodic review.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth information relating to the beneficial ownership of our common stock as of June 30, 2011, by:

 

   

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares of common stock;

 

   

each of our directors;

 

   

each of our named executive officers; and

 

   

all directors and executive officers as a group.

The number of shares beneficially owned by each entity, person, director or executive officer is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days of June 30, 2011 through the exercise of any stock option, warrants or other rights. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by that person.

The percentage of shares beneficially owned is computed on the basis of 57,010,584 shares of our common stock outstanding as of June 30, 2011, which reflects the assumed conversion of all of our outstanding shares of preferred stock into an aggregate of 48,664,392 shares of common stock. Shares of our common stock that a person has the right to acquire within 60 days of June 30, 2011 are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. Unless otherwise indicated below, the address for each beneficial owner listed is c/o ChemoCentryx, Inc., 850 Maude Avenue, Mountain View, California 94043.

 

            Percentage of Shares
Beneficially Owned
 

Name and Address of

Beneficial Owner

   Number of Shares
Beneficially Owned
     Before
Offering
    After
Offering
 

5% and Greater Stockholders

       

Glaxo Group Limited (1)

                     

980 Great West Road

Brentford, Middlesex TW8 9GS

United Kingdom

       

Techne Corporation (2)

              

614 McKinley Place, N.E.

Minneapolis, MN 55413

       

Entities Affiliated with OrbiMed Advisors LLC (3)

     6,309,430         11.1  

767 3rd Avenue, 30th Floor

New York, NY 10017

       

HBM BioVentures (Cayman) Ltd. (4)

     4,900,984         8.6  

Centennial Towers, 3rd Floor

2454 West Bay Road

Grand Cayman, Cayman Islands

       

Entities Affiliated with Alta Partners (5)

     3,736,177         6.6  

One Embarcadero Center, Suite 4050

San Francisco, CA 94111

       

Entities Affiliated with HealthCap (6)

     3,653,846         6.4  

Strandvãgen 5B SE-114

51 Stockholm, Sweden

       

 

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            Percentage of Shares
Beneficially Owned
 

Name and Address of

Beneficial Owner

   Number of Shares
Beneficially Owned
     Before
Offering
    After
Offering
 

Named Executive Officers and Directors

       

Thomas J. Schall, Ph.D. (7)

     6,761,667         11.4         

Markus J. Cappel, Ph.D. (8)

     1,108,646         1.9  

Susan M. Kanaya (9)

     893,229         1.5  

Juan C. Jaen, Ph.D. (10)

     915,938         1.6  

Petrus (Pirow) Bekker, M.D., Ph.D. (11)

     673,021         1.2  

Rishi Gupta, J.D. (12)

     6,309,430         11.1  

Roger C. Lucas, Ph.D. (13)

              

Geoffrey M. Parker (14)

     100,000         *     

Edward E. Penhoet, Ph.D. (15)

     3,736,177         6.6  

All directors and executive officers as a group (9 persons) (16)

              

 

*

Indicates beneficial ownership of less than 1% of the total outstanding common stock.

 

(1)

Includes:              shares acquired in connection with a concurrent private placement, based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

 

(2)

Includes: (i)              shares acquired in connection with a concurrent private placement, (ii)              shares to be issued upon the conversion of all unpaid principal and interest outstanding under the convertible note we have issued to Techne Corporation and (iii) the cashless exercise of the warrants to acquire 300,000 shares of our common stock at a price per share equal to 200% of the initial public offering price of our common stock, which warrants we shall issue to Techne Corporation upon the completion of this offering, in each case based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

 

(3)

Includes: (1) 4,402,777 shares beneficially owned by OrbiMed Private Investments, LP (“OPI”); (2) 89,634 shares beneficially owned by OrbiMed Associates LLC (“Associates”); and (3) 1,817,019 shares beneficially owned by UBS Juniper Crossover Fund, L.L.C. (“Juniper”). OrbiMed Capital GP I LLC (“GPI”) is the general partner of OPI and OrbiMed Advisors LLC (“Advisors”) is the managing member of GPI. Advisors also manages the portfolio of Juniper. OrbiMed Capital LLC (“Capital”) is the manager of Associates. Samuel D. Isaly is the managing member of and owner of a controlling interest in each of Advisors and Capital and may be deemed to have voting and investment power over the shares held by OPI, Associates and Juniper. Mr. Isaly disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein, if any.

 

(4)

The board of directors of HBM BioVentures (Cayman) Ltd. has sole voting and investment power with respect to the shares held by such entity and acts by majority vote. The board of directors of HBM BioVentures (Cayman) Ltd. is comprised of John Arnold, Sophia Harris, Richard Coles, Dr. Andreas Wicki and John Urquhart, none of whom has individual voting or investment power with respect to these shares.

 

(5)

Includes: (1) 3,422,024 shares beneficially owned by Alta BioPharma Partners III, L.P., (2) 229,820 shares beneficially owned by Alta BioPharma Partners III GMBH & Co. Beteiligungs KG, and (3) 84,333 shares beneficially owned by Alta Embarcadero BioPharma Partners III, LLC. Farah Champsi, Edward Penhoet and Edward Hurwitz are directors of Alta BioPharma Management III, LLC (which is the general partner of Alta BioPharma Partners III, L.P. and managing limited partner of Alta BioPharma Partners III GmbH & Co. Beteiligungs KG), and managers of Alta Embarcadero BioPharma Partners III, LLC. The directors of Alta BioPharma Management III, LLC and the managers of Alta Embarcadero BioPharma Partners III, LLC may be deemed to share voting and investment power with respect to the shares owned by such funds.

 

(6)

Includes (1) 2,532,368 shares beneficially owned by HealthCap 1999 KB, (2) 133,283 shares beneficially owned by HealthCap 1999 GMBH (on behalf of HealthCap 1999 GbR with limitation of liability), (3) 947,115 shares beneficially owned by HealthCap III SideFund KB, (4) 14,423 shares beneficially owned

 

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by OFCO Club III Sidefund, and (5) 26,657 shares beneficially owned by OFCO Club. HealthCap 1999 GP AB is the general partner of HealthCap 1999 KB and possesses, through its board of directors, the power to vote and direct the disposition of all securities held by HealthCap 1999 KB. The board of directors of HealthCap 1999 GP AB consists of Björn Odlander, Johan Christensson, Ann Christine Forsberg, Staffan Lindstrand and Per Samuelsson. HealthCap 1999 GMBH is the general partner of HealthCap 1999 GbR. HealthCap 1999 GMBH is a wholly owned subsidiary of HealthCap 1999 GP AB. HealthCap 1999 GMBH has no board of directors, and acts in parallel with decisions taken by HealthCap 1999 GP AB as required under the terms of a parallel investment agreement. HealthCap III Sidefund GP AB is the general partner of HealthCap III SideFund KB and possesses, through its board of directors, the power to vote and direct the disposition of all securities held by HealthCap III SideFund KB. The board of directors of HealthCap III Sidefund GP AB consists of Björn Odlander, Johan Christensson, Ann Christine Forsberg, Staffan Lindstrand and Per Samuelsson. Odlander Fredrikson & Co. AB, as a member of OFCO Club and OFCO Club III Sidefund, and acting on behalf of the other members of OFCO Club and OFCO Club III Sidefund has the power to vote and direct the disposition of all securities held by OFCO Club and OFCO Club III Sidefund. The OFCO Club is obligated to invest and divest in parallel with HealthCap 1999 KB and HealthCap 1999 GMBH and OFCO Club III Sidefund is obligated to invest and divest in parallel with HealthCap III SideFund KB. Odlander Fredrikson & Co. AB is in turn ultimately controlled jointly by Mr. Peder Fredrikson and Mr. Odlander. The Odlander, Fredrikson Group acts as investment advisor to each of HealthCap 1999 KB, HealthCap 1999 GMBH and HealthCap III SideFund KB.

 

(7)

Includes 2,128,333 shares issuable upon the exercise of stock options granted to Dr. Schall that are exercisable within 60 days of June 30, 2011, 818,786 shares of which would be subject to our unvested share repurchase right.

 

(8)

Includes 1,108,646 shares issuable upon the exercise of stock options granted to Dr. Cappel that are exercisable within 60 days of June 30, 2011, 213,910 shares of which would be subject to our unvested share repurchase right.

 

(9)

Includes 893,229 shares issuable upon the exercise of stock options granted to Ms. Kanaya that are exercisable within 60 days of June 30, 2011, 227,460 shares of which would be subject to our unvested share repurchase right.

 

(10)

Includes 765,938 shares issuable upon the exercise of stock options granted to Dr. Jaen that are exercisable within 60 days of June 30, 2011, 211,726 shares of which would be subject to our unvested share repurchase right.

 

(11)

Includes 548,021 shares issuable upon the exercise of stock options granted to Dr. Bekker that are exercisable within 60 days of June 30, 2011, 177,205 shares of which would be subject to our unvested share repurchase right.

 

(12)

Includes shares held by the entities affiliated with OrbiMed Advisors LLC. Mr. Gupta disclaims beneficial ownership of shares held by the entities affiliated with OrbiMed Advisors LLC except to the extent of his pecuniary interest in these entities, if any.

 

(13)

Includes                  shares beneficially owned by Techne Corporation, of which Dr. Lucas is Vice Chairman. Dr. Lucas disclaims beneficial ownership of shares held by Techne Corporation except to the extent of his pecuniary interest in the corporation, if any.

 

(14)

Includes 100,000 shares issuable upon the exercise of stock options granted to Mr. Parker that are exercisable within 60 days of June 30, 2011, 62,500 shares of which would be subject to our unvested share repurchase right.

 

(15)

Includes (1) 3,422,024 shares beneficially owned by Alta BioPharma Partners III, L.P. (2) 229,820 shares beneficially owned by Alta BioPharma Partners III GMBH & Co. Beteiligungs KG, and (3) 84,333 shares beneficially owned by Alta Embarcadero BioPharma Partners III, LLC. Dr. Penhoet disclaims beneficial ownership of shares held by entities affiliated with Alta Partners except to the extent of his pecuniary interest in the corporation, if any.

 

(16)

Includes options to purchase                  shares of common stock exercisable within 60 days of June 30, 2011 held by all of our executive officers and directors,                  of which would be subject to our unvested share repurchase right. As to disclaimers of beneficial ownership, see footnotes 12, 13 and 14 above.

 

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DESCRIPTION OF CAPITAL STOCK

The following summary describes our capital stock and the material provisions of our amended and restated certificate of incorporation and our amended and restated bylaws, which will become effective upon the closing of this offering, the registration rights agreement to which we and certain of our stockholders are parties and of the Delaware General Corporation Law. Because the following is only a summary, it does not contain all of the information that may be important to you. For a complete description, you should refer to our amended and restated certificate of incorporation, amended and restated bylaws and registration rights agreement, copies of which have been filed as exhibits to the registration statement of which this prospectus is part.

General

Our amended and restated certificate of incorporation that will be in effect upon the closing of this offering authorizes us to issue up to              shares of common stock, par value $0.001 per share, and              shares of preferred stock, par value $0.001 per share. No shares of preferred stock will be issued or outstanding immediately after this offering.

Common Stock

Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive dividends, if any, as and when declared by our board of directors. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.

Based on 8,346,192 shares of common stock outstanding as of June 30, 2011, assuming the conversion of preferred stock into 48,664,392 shares of common stock prior to the completion of this offering, the issuance of              shares of common stock in this offering and the issuance of              shares of common stock pursuant to the concurrent private placements to GSK and Techne at a price per share equal to the initial public offering price and the automatic conversion of the convertible note held by Techne (which assumes an initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus), and assuming no exercise of options or warrants, there will be              shares of common stock outstanding upon completion of this offering. As of June 30, 2011, there were outstanding options to purchase 7,752,112 shares of common stock and outstanding warrants to purchase 319,000 shares of common stock, assuming completion of this offering.

As of June 30, 2011, we had approximately 117 record holders of our common stock, assuming the conversion of all of our outstanding shares of preferred stock into an aggregate of 48,664,392 shares of common stock prior to the completion of this offering.

Preferred Stock

Upon the closing of this offering, our board of directors will have the authority, without further action by the stockholders, to issue up to              shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.

 

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Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

As of June 30, 2011, we had outstanding warrants to purchase a total of 319,000 shares of our Series B Preferred Stock, at an exercise price of $2.60 per share. Of these warrants, warrants to purchase 15,656 shares of Series B Preferred Stock expire in 2012, warrants to purchase 3,344 shares of Series B Preferred Stock expire on December 23, 2013 and the remaining warrants to purchase 300,000 shares of Series B Preferred Stock expire on May 4, 2014. The expiration date of any of these warrants may not be extended without our consent. Upon completion of the offering, these warrants will become exercisable for an aggregate of 319,000 shares of our common stock. Concurrent with the completion of this offering, we shall also issue warrants with a ten-year term to Techne Corporation to purchase up to 300,000 shares of our common stock at an exercise price per share equal to 200% of the initial public offering price of our common stock. The warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the warrants upon the occurrence of events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The warrants are not callable by us.

Registration Rights

The holders of 53,297,726 shares of common stock, assuming the conversion of our preferred stock, are entitled, pursuant to our amended and restated investors rights agreement, to certain registration rights with respect to these securities. In addition, GSK and Techne will also have registration rights pursuant to such agreement with respect to shares acquired in the concurrent private placements and Techne will have registration rights with the respect to the shares issuable upon the exercise of the warrants to acquire up to 300,000 shares of our common stock that it will receive concurrently with the completion of this offering. These registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in any such registration under certain circumstances. We are generally required to pay all expenses incurred in connection with registrations effected in connection with the following rights, excluding underwriting discounts and commissions.

Demand Rights.     Beginning upon the expiration of the lock-up agreements entered into by the holders of these registrable securities in connection with this offering, as described below in the section entitled “Shares Eligible for Future Sale—Lock-up Agreements,” subject to specified limitations, the holders of at least a majority of (1) the Series A Preferred Stock, (2) the Series B Preferred Stock, (3) the Series C Preferred Stock, or (4) the Series D Preferred Stock and Series E Preferred Stock, may require that we register all or a portion of these securities for sale under the Securities Act, as long as at least 30% of the registrable securities are sought to be registered, or a lesser percentage if the anticipated aggregate offering price of such securities, net of underwriting discounts and commissions, is at least $10,000,000. We may be required to effect one such registration for each series of our preferred stock (other than with respect to the Series D Preferred Stock and Series E Preferred Stock, which collectively may demand only one registration. Stockholders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their shares of common stock in the registration. Under certain circumstances, the underwriters, if any, may limit the number of shares included in any such registration.

Incidental Rights.     If at any time after the expiration of the lock-up agreements entered into by the holders of these registrable securities in connection with this offering, we propose to register any of our securities under the Securities Act, for sale to the public, either for our own account or for the account of other security holders, or both, other than in connection with:

 

   

a registration relating solely to our stock option plans or other employee benefit plans;

 

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a registration relating solely to a business combination or merger involving us;

 

   

a registration relating solely to stock issuable upon conversion of debt securities which are also being registered; or

 

   

any registration which does not contain substantially the same information as would be required in a registration statement covering the shares which have registration rights pursuant to our amended and restated investors rights agreement,

the holders of these registrable securities are entitled to notice of such registration and are entitled to include their common stock in the registration. Under certain circumstances, the underwriters, if any, may limit the number of shares included in any such registration.

Form S-3 Rights.     In addition, the holders of these registrable securities will have the right to cause us to register all or a portion of these shares on a Form S-3, provided that we are eligible to use this form. We will not be required to effect such a registration unless the aggregate offering price of the shares to be registered, net of underwriting discounts and commissions, is expected to exceed $2,000,000, and we will only be required to effect one such registration in any twelve-month period. Stockholders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their shares of common stock in the registration.

The holders of 319,000 shares of common stock issuable pursuant to the exercise of warrants issued in connection with the issuance of our Series B Preferred Stock or their transferees are entitled to certain registration rights with respect to these securities in the event we propose to register any of our securities under the Securities Act for sale to the public, as set forth in warrant agreements between us and the holders of these securities. These registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in any such registration under certain circumstances.

Anti-Takeover Effects of Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws and Delaware Law

Some provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market price for our shares.

These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

Undesignated Preferred Stock

The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of our company.

Stockholder Meetings

Our charter documents provide that a special meeting of stockholders may be called only by our chairman of the board of directors, Chief Executive Officer or President, or by a resolution adopted by a majority of our board of directors.

 

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Requirements for Advance Notification of Stockholder Nominations and Proposals

Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.

Elimination of Stockholder Action by Written Consent

Our amended and restated certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting.

Election and Removal of Directors

Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. For more information on the classified board, see “Management—Board Composition.” This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors.

Delaware Anti-Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits persons deemed “interested stockholders” from engaging in a “business combination” with a publicly-held Delaware corporation for three years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in a premium over the market price of our common stock.

Amendment of Charter Provisions

The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred stock, would require approval by holders of at least 66 2/3% of our then outstanding common stock.

The provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

Nasdaq Global Market Listing

We expect to apply to have our common stock approved for listing on the Nasdaq Global Market under the symbol “CCXI.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is             . The transfer agent and registrar’s address is                                         .

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. Future sales of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market after this offering, or the perception that those sales may occur, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future. As described below, only a limited number of shares of our common stock will be available for sale in the public market for a period of several months after completion of this offering due to contractual and legal restrictions on resale described below. Future sales of our common stock in the public market either before (to the extent permitted) or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common stock at such time and our ability to raise equity capital at a time and price we deem appropriate.

Sale of Restricted Shares

Based on the number of shares of our common stock outstanding as of June 30, 2011, upon the closing of this offering and the concurrent private placements to GSK and Techne and assuming (1) the conversion of our outstanding preferred stock into common stock, (2) the automatic conversion of the convertible note issued to Techne into common stock as described elsewhere in this prospectus, assuming an initial public offering price of              per share (the mid-point of the price range set forth on the cover page of this prospectus), (3) no exercise of the underwriters’ option to purchase additional shares of common stock to cover over-allotments and (5) no exercise of outstanding options or warrants, we will have outstanding an aggregate of approximately              shares of common stock. Of these shares, all of the              shares of common stock to be sold in this offering, and any shares sold upon exercise of the underwriters’ option to purchase additional shares to cover over-allotments, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our “affiliates” as such term is defined in Rule 144 of the Securities Act. All remaining shares of common stock held by existing stockholders immediately prior to the completion of this offering, and all shares issued on exercise of the warrant to be issued to Techne upon completion of this warrant, will be “restricted securities” as such term is defined in Rule 144. These restricted securities were issued and sold by us, or will be issued and sold by us, in private transactions and are eligible for public sale only if registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701, which rules are summarized below.

As a result of the lock-up agreements referred to below and the provisions of Rule 144 and Rule 701 under the Securities Act, the shares of our common stock (excluding the shares sold in this offering) that will be available for sale in the public market are as follows:

 

Approximate Number of Shares

  

First Date Available for Sale into Public Market

             shares

   180 days after the date of this prospectus, or longer if the lock-up period is extended, upon expiration of the lock-up agreements referred to below, subject in some cases to applicable volume limitations under Rule 144

Lock-Up Agreements

In connection with this offering, we, our directors, our executive officers and substantially all of our other stockholders and option holders have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of the lock-up agreement continuing through the date 180 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC and Citigroup Global Markets Inc. J.P. Morgan Securities LLC and Citigroup Global Markets Inc. have advised us that they have no current intent or arrangement to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period.

 

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The 180-day restricted period described in the preceding paragraph will be automatically extended if:

 

   

during the last 17 days of the 180-day restricted period, we issue an earnings release or announce material news or a material event; or

 

   

prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the issuance of the earnings release or the announcement of the material news or material event.

Following the lock-up periods set forth in the agreements described above, and assuming that the representatives of the underwriters do not release any parties from these agreements and that there is no extension of the lock-up period, all of the shares of our common stock that are restricted securities or are held by our affiliates as of the date of this prospectus will be eligible for sale in the public market in compliance with Rule 144 under the Securities Act.

Rule 144

In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for at least 90 days, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our “affiliates” for purposes of Rule 144 at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our “affiliates,” is entitled to sell those shares in the public market (subject to the lock-up agreement referred to above, if applicable) without complying with the manner of sale, volume limitations or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the sales proposed to be sold for at least one year, including the holding period of any prior owner other than “affiliates,” then such person is entitled to sell such shares in the public market without complying with any of the requirements of Rule 144 (subject to the lock-up agreement referred to above, if applicable). In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, our “affiliates,” as defined in Rule 144, who have beneficially owned the shares proposed to be sold for at least six months are entitled to sell in the public market, upon expiration of any applicable lock-up agreements and within any three-month period, a number of those shares of our common stock that does not exceed the greater of:

 

   

1% of the number of common shares then outstanding, which will equal approximately              shares of common stock immediately after this offering (calculated on the basis of the assumptions described above and assuming no exercise of the underwriter’s option to purchase additional shares and no exercise of outstanding options or warrants); or

 

   

the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Such sales under Rule 144 by our “affiliates” or persons selling shares on behalf of our “affiliates” are also subject to certain manner of sale provisions, notice requirements and to the availability of current public information about us. Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted securities have entered into lock-up agreements as referenced above and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.

Rule 701

In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who acquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 under the Securities Act before the effective date of the

 

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registration statement of which this prospectus is a part (to the extent such common stock is not subject to a lock-up agreement) is entitled to rely on Rule 701 to resell such shares beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act in reliance on Rule 144, but without compliance with the holding period requirements contained in Rule 144. Accordingly, subject to any applicable lock-up agreements, beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act, under Rule 701 persons who are not our “affiliates,” as defined in Rule 144, may resell those shares without complying with the minimum holding period or public information requirements of Rule 144, and persons who are our “affiliates” may resell those shares without compliance with Rule 144’s minimum holding period requirements (subject to the terms of the lock-up agreement referred to below, if applicable).

Equity Incentive Plans

We intend to file with the SEC a registration statement under the Securities Act covering the shares of common stock that we may issue upon exercise of outstanding options reserved for issuance under our 1997 Stock Option/Stock Issuance Plan, 2002 Equity Incentive Plan, 2012 Equity Incentive Award Plan and 2012 Employee Stock Purchase Plan. Such registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under such registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations and the lock-up agreements described above, if applicable.

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX

CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

The following is a summary of the material United States federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete analysis of all of the potential United States federal income tax consequences relating thereto, nor does it address any estate and gift tax consequences or any tax consequences arising under any state, local or foreign tax laws, or any other United States federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), United States Treasury regulations promulgated thereunder (“Treasury Regulations”), judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service (“IRS”), all as in effect as of the date of this prospectus. These authorities may change, possibly retroactively, resulting in United States federal income tax consequences different from those discussed below. No ruling has been or will be sought from the IRS with respect to the matters discussed below, and there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock, or that any such contrary position would not be sustained by a court.

This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all of the United States federal income tax consequences that may be relevant to a particular holder in light of such holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the United States federal income tax laws, including, without limitation:

 

   

banks, thrifts, insurance companies and other financial institutions;

 

   

tax-exempt organizations;

 

   

partnerships, S corporations or other pass-through entities;

 

   

traders in securities;

 

   

broker-dealers or dealers in securities or currencies;

 

   

United States expatriates and certain former citizens or long-term residents of the United States;

 

   

“controlled foreign corporations,” “passive foreign investment companies” or corporations that accumulate earnings to avoid U.S. federal income tax;

 

   

persons that own, or are deemed to own, more than 5% of our outstanding common stock (except to the extent specifically set forth below);

 

   

persons deemed to sell our common stock under the constructive sale provisions of the Code;

 

   

persons subject to the alternative minimum tax; or

 

   

persons that hold our common stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction.

PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER UNITED STATES FEDERAL TAX LAWS.

 

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Definition of Non-U.S. Holder

For purposes of this discussion, a non-U.S. holder is any beneficial owner of our common stock that is not a “U.S. person” or a partnership for United States federal income tax purposes. A U.S. person is any of the following:

 

   

an individual citizen or resident of the United States;

 

   

a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate the income of which is subject to United States federal income tax regardless of its source; or

 

   

a trust (1) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust, or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Distributions on Our Common Stock

If we make cash or other property distributions on our common stock, such distributions generally will constitute dividends for United States federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. Amounts not treated as dividends for United States federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s tax basis in the common stock, but not below zero. Distributions in excess of our current and accumulated earnings and profits and in excess of a non-U.S. holder’s tax basis in its shares will be taxable as capital gain realized on the sale or other disposition of the common stock and will be treated as described under “—Dispositions of Our Common Stock” below.

Dividends paid to a non-U.S. holder of our common stock generally will be subject to United States federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN (or applicable successor form) certifying such holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under an applicable income tax treaty.

Dividends paid on our common stock that are effectively connected with a non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States) will be exempt from United States federal withholding tax. To claim the exemption, the non-U.S. holder must generally furnish to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form).

Any dividends paid on our common stock that are effectively connected with a non-U.S. holder’s United States trade or business (and if required by an applicable income tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States) generally will be subject to United States federal income tax on a net income basis at the regular graduated United States federal income tax rates in much the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.

 

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Dispositions of Our Common Stock

Subject to the discussion below regarding backup withholding, a non-U.S. holder generally will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of our common stock, unless:

 

   

the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, and if required by an applicable income tax treaty, attributable to a permanent establishment maintained by the non-U.S. holder in the United States;

 

   

the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition, and certain other requirements are met; or

 

   

our common stock constitutes a “United States real property interest” by reason of our status as a United States real property holding corporation (“USRPHC”) for United States federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder’s holding period for our common stock.

Gain described in the first bullet point above will be subject to United States federal income tax on a net income basis at the regular graduated United States federal income tax rates in much the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.

Gain described in the second bullet point above will be subject to United States federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by United States source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, we believe we are not currently and do not anticipate becoming a USRPHC for United States federal income tax purposes. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property interests relative to the fair market value of our other trade or business assets and our non-U.S. real property interests, there can be no assurance that we are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a non-U.S. holder of our common stock will not be subject to tax if such class of stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such non-U.S. holder owned, actually or constructively, 5% or less of such class of our stock throughout the shorter of the five-year period ending on the date of the sale or exchange or the non-U.S. holder’s holding period for such stock. We expect our common stock to be “regularly traded” on an established securities market, although we cannot guarantee that it will be so traded. If gain on the sale or other taxable disposition of our stock were subject to taxation under the third bullet point above, the non-U.S. holder would be subject to regular United States federal income tax with respect to such gain in generally the same manner as a U.S. person.

Information Reporting and Backup Withholding

We must report annually to the IRS and to each non-U.S. holder the amount of distributions on our common stock paid to such holder and the amount of any tax withheld with respect to those distributions. These information reporting requirements apply even if no withholding was required because the distributions were effectively connected with the holder’s conduct of a United States trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, however, generally will not apply to distributions to a non-U.S. holder of our common stock provided the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, such as by providing a valid IRS Form W-8BEN or IRS Form W-8ECI, or certain other

 

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requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient.

Unless a non-U.S. holder complies with certification procedures to establish that it is not a U.S. person, information returns may be filed with the IRS in connection with, and the non-U.S. holder may be subject to backup withholding on the proceeds from, a sale or other disposition of our common stock. The certification procedures described in the above paragraph will satisfy these certification requirements as well.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s United States federal income tax liability, provided the required information is timely furnished to the IRS.

Foreign Accounts

Withholding taxes may apply to certain types of payments made to “foreign financial institutions” (as specially defined under those rules) and certain other non-U.S. entities. The failure to comply with additional certification, information reporting and other specified requirements could result in a withholding tax being imposed on payments of dividends and sales proceeds to foreign intermediaries and certain non-U.S. holders. A 30% withholding tax is imposed on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a foreign financial institution or to a foreign non-financial entity, unless (1) the foreign financial institution undertakes certain diligence and reporting obligations or (2) the foreign non-financial entity either certifies it does not have any substantial United States owners or furnishes identifying information regarding each substantial United States owner. If the payee is a foreign financial institution, it must enter into an agreement with the United States Treasury requiring, among other things, that it undertake to identify accounts held by certain United States persons or United States-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements.

Although this legislation currently applies to applicable payments made after December 31, 2012, in recent guidance, the IRS has indicated that Treasury Regulations will be issued providing that the withholding provisions described above will apply to payments of dividends on our common stock made on or after January 1, 2014 and to payments of gross proceeds from a sale or other disposition of such stock on or after January 1, 2015. Prospective investors should consult their tax advisors regarding this legislation.

 

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UNDERWRITING

We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC and Citigroup Global Markets Inc. are acting as joint book-running managers of the offering and as representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name

   Number of
Shares

J.P. Morgan Securities LLC

  

Citigroup Global Markets Inc.

  

Cowen and Company, LLC

  
  

 

Total

  
  

 

The underwriters are committed to purchase all shares of common stock offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.

The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $             per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $             per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. The representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the common stock offered in this offering.

The underwriters have an option to buy up to              additional shares of common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this over-allotment option. If any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $             per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

     Without
over-allotment
exercise
     With full
over-allotment
exercise
 

Per Share

   $                    $                

Total

   $         $     

We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $            .

A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

 

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We have agreed that we will not, with limited exceptions, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or any such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of stock or such other securities, in cash or otherwise, in each case without the prior written consent of J.P. Morgan Securities LLC and Citigroup Global Markets Inc. for a period of 180 days after the date of this prospectus. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

Our directors and executive officers, and substantially all of our stockholders and option holders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which we and each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC and Citigroup Global Markets Inc., (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock (including without limitation, common stock or such other securities which may be deemed to be beneficially owned by the undersigned in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended), or publicly disclose the intention to make any such offer, sale, pledge or disposition, (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise or (3) make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. Each of the lock-up agreements contains certain exceptions, including the transfer or disposition of shares of common stock (i) as a bona fide gift or gifts or for estate planning purposes; (ii) to wholly-owned subsidiaries; (iii) as a distribution to limited partners, limited liability company members or stockholders; (iv) to us in connection with the cashless exercise of options; and (v) to a spouse, former spouse, child or other dependent pursuant to a domestic relations order or an order of a court of competent jurisdiction; provided that in each case, each transferee or distributee shall execute a similar lock-up agreement and no filing under Section 16 of the Exchange Act, or other public announcement shall be required or shall be made voluntarily in connection with such transfer or distribution.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

We expect to apply to have our common stock approved for listing on The Nasdaq Global Market under the symbol “CCXI”.

In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing

 

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transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on The Nasdaq Global Market, in the over-the-counter market or otherwise.

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:

 

   

the information set forth in this prospectus and otherwise available to the representatives;

 

   

our prospects and the history and prospects for the industry in which we compete;

 

   

an assessment of our management;

 

   

our prospects for future earnings;

 

   

the general condition of the securities markets at the time of this offering;

 

   

the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

   

other factors deemed relevant by the underwriters and us.

Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market at or above the initial public offering price.

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering

 

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and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), from and including the date on which the European Union Prospectus Directive (the “EU Prospectus Directive”) is implemented in that Relevant Member State (the “Relevant Implementation Date”) an offer of securities described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

 

   

to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

   

to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

 

   

to fewer than 100 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive) subject to obtaining the prior consent of the book-running managers for any such offer; or

 

   

in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of securities to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State and the expression EU Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

 

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LEGAL MATTERS

The validity of the issuance of our common stock offered in this prospectus will be passed upon for us by Latham & Watkins LLP, San Diego, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell LLP, Menlo Park, California. Latham & Watkins LLP and certain attorneys and investment funds affiliated with the firm collectively own an aggregate of 77,527 shares of our preferred stock which will be converted into an aggregate of shares of our common stock prior to the completion of this offering.

EXPERTS

Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements at December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010, as set forth in their report. We have included our consolidated financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to ChemoCentryx, Inc. and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address is www.sec.gov.

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.chemocentryx.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on our website, and you should not consider the contents of our website in making an investment decision with respect to our common stock.

 

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CHEMOCENTRYX, INC.

Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Contents

 

Report of Independent Registered Public Accounting Firm

     F-2   

Audited Consolidated Financial Statements

  

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations

     F-4   

Consolidated Statements of Stockholders’ Equity

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of ChemoCentryx, Inc.

We have audited the accompanying consolidated balance sheets of ChemoCentryx, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ChemoCentryx, Inc. at December 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Redwood City, California

October 14, 2011

 

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CHEMOCENTRYX, INC.

Consolidated Balance Sheets

 

     December 31  
     2009     2010  
     (In Thousands
Except Share Data)
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 21,076      $ 12,056   

Short-term investments

     36,055        69,519   

Accounts receivable from related party

     35,441        12,452   

Prepaid expenses and other current assets

     953        558   
  

 

 

   

 

 

 

Total current assets

     93,525        94,585   

Property and equipment at cost

     6,249        7,218   

Accumulated depreciation

     (4,667     (5,091
  

 

 

   

 

 

 

Property and equipment, net

     1,582        2,127   

Long-term investments

     8,185        1,261   

Other assets

     177        160   
  

 

 

   

 

 

 

Total assets

   $ 103,469      $ 98,133   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 994      $ 891   

Accrued liabilities

     6,167        7,017   

Deferred revenue from related party

     6,792        3,628   

Current portion of equipment financing obligations

     447        337   
  

 

 

   

 

 

 

Total current liabilities

     14,400        11,873   

Noncurrent equipment financing obligations

     7        945   

Deferred revenue from related party

     11,288        8,163   

Other non-current liabilities

     472        379   
  

 

 

   

 

 

 

Total liabilities

     26,167        21,360   

Commitments

    

Stockholders’ equity:

    

Preferred stock:

    

Convertible preferred stock $0.001 par value; 48,989,914 shares authorized and issuable in series A to E; 48,257,315 shares issued and oustanding; aggregate liquidation preference of $164,038

  

 

49

  

 

 

49

  

Common stock, $0.001 par value, 68,000,000 shares authorized at December 31, 2010 and 2009; 8,331,100 shares and 8,216,263 shares issued and outstanding at December 31, 2010 and 2009, respectively, net of shares subject to repurchase

  

 

8

  

 

 

8

  

Additional paid-in capital

     163,867        166,330   

Employee note receivable

     (16     (16

Accumulated other comprehensive income (loss)

     (21     83   

Accumulated deficit

     (86,585     (89,681
  

 

 

   

 

 

 

Total stockholders’ equity

     77,302        76,773   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 103,469      $ 98,133   
  

 

 

   

 

 

 

See accompanying notes.

 

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CHEMOCENTRYX, INC.

Consolidated Statements of Operations

 

     Year Ended December 31  
     2008     2009     2010  
     (In Thousands, Except Share and Per Share Data)  

Revenues:

      

Collaborative research and development revenue from related party

   $ 23,551      $ 49,744      $ 34,861   

Grant revenue

     536                 
  

 

 

   

 

 

   

 

 

 

Total revenues

     24,087        49,744        34,861   

Operating expenses:

      

Research and development

     35,056        27,474        33,527   

General and administrative

     9,157        6,575        7,292   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     44,213        34,049        40,819   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (20,126     15,695        (5,958

Interest income

     1,762        297        436   

Interest expense

     (129     (76     (81

Other income

                   2,434   
  

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (18,493     15,916        (3,169

Income tax benefit (expense)

     23        (293     73   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (18,470   $ 15,623      $ (3,096
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

      

Basic

   $ (2.26   $ 0.28      $ (0.38
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (2.26   $ 0.27      $ (0.38
  

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per common share:

      

Basic

     8,174,380        7,923,302        8,163,318   
  

 

 

   

 

 

   

 

 

 

Diluted

     8,174,380        58,512,902        8,163,318   
  

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted loss per common share (unaudited)

       $ (0.05
      

 

 

 

Shares used to compute pro forma basic and diluted loss per common share

         56,420,633   
      

 

 

 

See accompanying notes.

 

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CHEMOCENTRYX, INC.

Consolidated Statements of Stockholders’ Equity

 

    Convertible Preferred
Stock
    Common Stock     Additional
Paid-In

Capital
    Employee
Note

Receivable
    Accumulated
Other
Comprehensive

Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’

Equity
 
    Shares      Amount     Shares     Amount            
                             (In Thousands, Except Share and Per Share Data)  

Balances as of December 31, 2007

    41,463,837       $ 42        8,034,717      $ 8      $ 113,707      $ (15   $ 20      $ (83,738   $ 30,024   

Comprehensive loss:

                  

Net loss

                                                      (18,470     (18,470

Unrealized loss on short-term investments

                                               (20            (20
                  

 

 

 

Total comprehensive loss

                     (18,490

Issuance of Series E convertible preferred stock, net of issuance costs of $1,325

    6,793,478         7                      48,668                             48,675   

Employee stock-based compensation

                                 622                             622   

Issuance of common stock to option holders, upon exercise of stock options including vested options early exercised

                   181,546               67                             67   

Compensation expense related to options granted to consultants

                                 62                             62   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2008

    48,257,315         49        8,216,263        8        163,126        (15            (102,208     60,960   

Comprehensive income:

                  

Net income

                                                      15,623        15,623   

Unrealized loss on investments

                                               (21            (21
                  

 

 

 

Total comprehensive income

                     15,602   

Interest receivable on nonrecourse note

                                        (1                   (1

Employee stock-based compensation

                                 1,698                             1,698   

Issuance of common stock to option holders, upon exercise of stock options including vested options early exercised

                   114,837               63                             63   

Repurchase of common stock

                   (366,666            (1,100                          (1,100

Compensation expense related to options granted to consultants

                                 80                             80   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2009

    48,257,315         49        7,964,434        8        163,867        (16     (21     (86,585     77,302   

Comprehensive loss:

                  

Net loss

                                                      (3,096     (3,096

Unrealized gain on investments

                                               104               104   
                  

 

 

 

Total comprehensive loss

                     (2,992

Employee stock-based compensation

                                 2,309                             2,309   

Issuance of common stock to option holders, upon exercise of stock options including vested options early exercised

                   226,491               117                             117   

Compensation expense related to options granted to consultants

                                 37                             37   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2010

    48,257,315       $ 49        8,190,925      $ 8      $ 166,330      $ (16   $ 83      $ (89,681   $ 76,773   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

F-5


Table of Contents

CHEMOCENTRYX, INC.

Consolidated Statements of Cash Flows

 

     Year Ended December 31  
     2008     2009     2010  
     (In Thousands)  

Operating activities

      

Net (loss) income

   $ (18,470   $ 15,623      $ (3,096

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

      

Depreciation of property and equipment

     707        713        660   

Stock-based compensation

     684        1,778        2,346   

Noncash interest expense, net (included in other liabilities)

     49        27        (34

Changes in assets and liabilities:

      

Accounts receivable due from related party

     (701     (30,397     22,989   

Prepaids and other current assets

     52        (503     395   

Other assets

     1,761        57        17   

Accounts payable

     (1,420     (898     (103

Other liabilities

     879        (4,865     779   

Deferred revenue

     (6,299     (4,496     (6,289
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (22,758     (22,961     17,664   

Investing activities

      

Purchases of property and equipment, net

     (389     (221     (1,193

Purchase of investments

     (26,625     (78,515     (90,258

Maturities of investments

     50,791        48,821        63,822   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     23,777        (29,915     (27,629

Financing activities

      

Proceeds from equipment financing

                   1,500   

Payments on equipment financing obligations

     (583     (596     (672

Payments on line of credit

     (250              

Proceeds from issuance of preferred stock, net of issuance costs

     48,675                 

Proceeds from issuance of common stock

     48        57        117   

Payments for repurchase of common stock

            (1,100       
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     47,890        (1,639     945   
  

 

 

   

 

 

   

 

 

 

Net increase(decrease) in cash and cash equivalents

     48,909        (54,515     (9,020

Cash and cash equivalents at beginning of year

     26,682        75,591        21,076   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 75,591      $ 21,076      $ 12,056   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid for interest

   $ 94      $ 48      $ 130   
  

 

 

   

 

 

   

 

 

 

Cash paid (refund) for income taxes

   $ 420      $ (27   $ 247   
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

F-6


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements

December 31, 2010

 

1.

Description of Business

ChemoCentryx, Inc. (the Company) commenced operations in 1997. The Company is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing orally administered chemokine-based therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. The Company’s principal operations are in the United States and it operates in one segment.

 

2.

Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the Company’s accounts and those of its wholly owned subsidiary, ChemoCentryx Limited. All intercompany amounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Cash Equivalents and Investments

The Company considers all highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. All investment securities are classified as available for sale and are recorded at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss).

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in fair value that are deemed to be other than temporary are reflected in the statement of operations. The cost of securities sold is based on the specific-identification method.

Concentration of Credit Risk

The Company invests in a variety of financial instruments and, by its policy, limits the amount of credit exposure with any one issuer, industry or geographic area.

Accounts receivable are typically unsecured and are concentrated in the pharmaceutical industry. Accordingly, the Company may be exposed to credit risk generally associated with pharmaceutical companies or specific to the collaboration agreement with Glaxo Group Limited (GSK).

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from five to seven years. Tenant improvements are depreciated over the lesser of the estimated useful life or the remaining life of the lease at the time the asset is placed into service.

 

F-7


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

2.

Summary of Significant Accounting Policies (continued)

 

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its respective fair value. To date, the Company has not recorded any impairment losses.

Revenue Recognition

The Company generates revenue from two sources: (1) collaborative research and development agreements with pharmaceutical companies and (2) government contracts and grants. The Company recognizes revenue in accordance with the criteria outlined in the Securities and Exchange Commission’s (the SEC) Topic 13 and Accounting Standards Codification (ASC) 605-25.

Collaboration Agreements

Collaboration agreements may include nonrefundable up-front fees, research and development funding, milestone payments for the achievement of defined collaboration objectives, license fees and royalties on potential sales of commercialized products.

The Company recognizes revenue from nonrefundable up-front fees ratably over the term of its expected performance obligations under the agreements. These payments received are recorded as deferred revenue and are classified as a short-term or long-term liability on the consolidated balance sheet to be recognized over the period of deferral. When the period of deferral cannot be specifically identified from the agreement, management estimates the period based upon the terms of the agreement and other relevant facts. The Company periodically reviews the estimated performance periods of its contracts based on the progress of the related programs.

Research and development funding related to collaborative research and development efforts is recognized as revenue as the related services are performed or delivered, in accordance with contract terms. Such payments generally are made based on the number of full-time equivalent researchers assigned to the collaboration project and the related research and development expenses incurred, or as other deliverables under the contracts are fulfilled.

In addition to up-front payments and research and development funding, the Company may also be entitled to milestone or option payments that are contingent upon achieving a predefined objective. The Company follows the substantive milestone method of recognizing revenue from milestones and applies it accordingly to milestone and option payments. Milestone payments are recorded as revenue in full upon achievement of the milestone if there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, the event is based on the vendor’s performance, and the amount of the payment was negotiated as part of the collaboration agreement.

Research Grant

Revenues related to government contracts and grants are recognized as the related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until they are earned.

 

F-8


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

2.

Summary of Significant Accounting Policies (continued)

 

Research and Development Expenses

Research and development expenses consist of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, lab consumables and services performed by clinical research organizations, research institutions and other outside service providers.

Research and development expenses under government contracts and grants and collaborative agreements approximated the revenue recognized, excluding milestone, up-front and option fees.

Clinical Trial Accruals

Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are deferred and recognized as expense in the period that the related goods are delivered or services are performed.

Income Taxes

The Company uses the liability method for income taxes, whereby deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are provided when the expected realization for the tax assets does not meet the more-likely-than-not criteria.

Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income (loss) and other comprehensive income (loss). Unrealized gains and losses on the Company’s available-for-sale securities are included in other comprehensive income (loss). Total comprehensive income (loss) for all periods presented has been disclosed in the consolidated statements of stockholders’ equity. Losses on the Company’s available-for-sale securities that are deemed to be other than temporary, if any, are recognized in the statements of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation using a fair-value-based method for all costs related to share-based payments. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the employee’s requisite service periods (generally the vesting periods), which the Company has elected to amortize on a straight-line basis. Because stock compensation expense is based on awards ultimately expected to vest, it has been reduced by an estimate for future forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

F-9


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

2.

Summary of Significant Accounting Policies (continued)

 

The Company accounts for stock-based compensation arrangements with nonemployees using a fair-value approach. For stock options granted to nonemployees, the fair value of the stock options is estimated using the Black-Scholes valuation model. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, assumptions are made with respect to the remaining contractual term of the option, the volatility of the fair value of its common stock, the risk-free interest rates and the expected dividend yields of its common stock. The measurement of nonemployee stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest.

Net Income (Loss) Per Share and Pro Forma Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of vested common shares outstanding during the period. The convertible preferred stock contains certain participation rights. Participating securities are included in the computation of basic income per share using the two-class method. Diluted net income per share is computed by dividing net income by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income per share includes any dilutive effect from outstanding stock options and warrants using the treasury stock method. Diluted net income per share also includes the assumed conversion of the convertible preferred stock and the weighted-average shares of common stock which are subject to repurchase.

Historical outstanding dilutive securities not included in diluted net income (loss) per share calculation:

 

     Years Ended December 31,  
     2008      2009      2010  

Convertible preferred stock

     48,257,315                 48,257,315   

Options to purchase common stock

     5,240,952         3,274,866         7,890,313   

Warrants to purchase convertible preferred stock

     726,077                 726,077   

Common stock subject to repurchase

     19,260                   
  

 

 

    

 

 

    

 

 

 
     54,243,604         3,274,866         56,873,705   
  

 

 

    

 

 

    

 

 

 

 

F-10


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

2.

Summary of Significant Accounting Policies (continued)

 

The unaudited pro forma basic and diluted income (loss) per share calculation assumes the conversion of all outstanding shares of convertible preferred stock into common stock using the as-if converted method, as-if such conversion has occurred as of January 1, 2010 or the original issuance date, if later.

 

     Year Ended December 31,  
     2008     2009     2010  
    

(In Thousands, Except Share and

Per Share Data)

 

Historical

      

Numerator:

      

Net income (loss)

   $ (18,470   $ 15,623      $ (3,096

Percent of participating securities allocable to common stockholders

       14.1  

Rights to undistributed income, used for basic income per share

     $ 2,203     

Denominator:

      

Weighted-average number of common shares outstanding used in computing basic net income (loss) per common share

     8,174,380        7,923,302        8,163,318   

Dilutive effect of:

      

Convertible preferred stock

            48,257,315          

Stock options

            2,229,701          

Warrants

            96,810          

Shares subject to repurchase

            5,774          
  

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares outstanding used in computing diluted net income (loss) per common share

     8,174,380        58,512,902        8,163,318   
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share

   $ (2.26   $ 0.28      $ (0.38
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per common share

   $ (2.26   $ 0.27      $ (0.38
  

 

 

   

 

 

   

 

 

 

Pro Forma

      

Weighted-average shares used in the computation of basic net loss per common share above

         8,163,318   

Pro forma adjustment to reflect the assumed conversion of convertible preferred stock (unaudited)

         48,257,315   
      

 

 

 

Shares used to compute pro forma basic and diulted net loss per common share (unaudited)

         56,420,633   
      

 

 

 

Pro forma basic and diluted net loss per common share (unaudited)

       $ (0.05
      

 

 

 

Recently Issued Accounting Standards

In September 2009, the FASB ratified ASU 2009-13 which modifies the criteria for separating the consideration in multiple-element arrangements. Companies will be required to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. The Company will adopt this guidance prospectively for revenue arrangements entered into or materially modified after December 31, 2010. The adoption of this guidance did not have a material effect on the financial position or results of operations.

 

F-11


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

3.

Cash Equivalents and Investments

The amortized cost and fair value of securities not including cash, with gross unrealized gains and losses at December 31, 2009, were as follows (in thousands):

 

     2009  
     Amortized
Cost
     Gross Unrealized     Fair
Value
 
        Gains      Losses    

Money market funds

   $ 16,154       $       $      $ 16,154   

U.S. Treasury securities

     13,828         13         (12     13,829   

Government-sponsored agencies

     9,254                 (34     9,220   

Corporate debt securities

     21,179         18         (6     21,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 60,415       $ 31       $ (52   $ 60,394   
  

 

 

    

 

 

    

 

 

   

 

 

 

Classified as:

          

Cash equivalents

           $ 16,154   

Short-term investments

             36,055   

Long-term investments

             8,185   
          

 

 

 

Total available-for-sale securities

           $ 60,394   
          

 

 

 

The amortized cost and fair value of securities not including cash, with gross unrealized gains and losses, at December 31, 2010 were as follows (in thousands):

 

     2010  
     Amortized
Cost
     Gross Unrealized     Fair
Value
 
        Gains      Losses    

Money market funds

   $ 5,214       $       $      $ 5,214   

U.S. Treasury securities

     5,023         10                5,033   

Government-sponsored agencies

     24,994         52         (2     25,044   

Corporate debt securities

     45,678         28         (5     45,701   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 80,909       $ 90       $ (7   $ 80,992   
  

 

 

    

 

 

    

 

 

   

 

 

 

Classified as:

          

Cash equivalents

           $ 10,212   

Short-term investments

             69,519   

Long-term investments

             1,261   
          

 

 

 

Total available-for-sale securities

           $ 80,992   
          

 

 

 

All available-for-sale securities held as of December 31, 2010, had contractual maturities of less than two years. There have been no significant realized gains or losses on available-for-sale securities for the periods presented. No available-for-sale securities held as of December 31, 2010, have been in a continuous unrealized loss position for more than 12 months.

 

F-12


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

4.

Fair Value Measurements

The Company determines the fair value of financial assets and liabilities using three levels of inputs as follows:

Level 1—Inputs which include quoted prices in active markets for identical assets and liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows as of December 31, 2009 and 2010 (in thousands):

 

     2009  
Description    Level 1      Level 2      Level 3      Total  

Money market fund

   $ 16,154       $       $       $ 16,154   

U.S. treasury securities

             13,829                 13,829   

Government-sponsored agencies

             9,220                 9,220   

Corporate debt securities

             21,191                 21,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,154       $ 44,240       $       $ 60,394   
  

 

 

    

 

 

    

 

 

    

 

 

 
     2010  
Description    Level 1      Level 2      Level 3      Total  

Money market fund

   $ 5,214       $       $       $ 5,214   

U.S. treasury securities

             5,033                 5,033   

Government-sponsored agencies

             25,044                 25,044   

Corporate debt securities

             45,701                 45,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,214       $ 75,778       $       $ 80,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

When we use observable market prices for identical securities that are traded in less active markets, we classify our marketable debt instruments as Level 2. When observable market prices for identical securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. We corroborate non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.

 

F-13


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

5.

Property and Equipment

Property and equipment consist of the following (in thousands):

 

     December 31,  
     2009     2010  

Lab equipment

   $ 4,104      $ 4,831   

Computer equipment and software

     1,101        1,280   

Furniture and fixtures

     448        457   

Tenant improvements

     596        650   
  

 

 

   

 

 

 
     6,249        7,218   

Less: accumulated depreciation

     (4,667     (5,091
  

 

 

   

 

 

 
   $ 1,582      $ 2,127   
  

 

 

   

 

 

 

 

6.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

     December 31,  
     2009      2010  

Research and development related

   $ 3,268       $ 4,861   

Compensation related

     1,494         1,722   

Other

     1,405         434   
  

 

 

    

 

 

 
   $ 6,167       $ 7,017   
  

 

 

    

 

 

 

 

7.

Debt

Equipment Financing Obligations

In February 2007, the Company entered into a credit facility for up to $2.5 million to finance equipment purchases and other related expenses, which is secured by certain fixed assets of the Company and is repayable over 42–48 months. The interest rate is fixed at the time of drawdown and is based on U.S. Treasuries of comparable maturities. Fixed asset purchases under the credit facility are recorded on the Company’s consolidated balance sheet. The credit facility draw period expired on December 31, 2007. The Company utilized approximately $1.9 million of the credit facility, bearing interest of 6.1%.

In April 2010, the Company amended the credit facility for up to $4.0 million to finance equipment purchases and other related expenses, which is secured by certain fixed assets of the Company and is repayable over 48 months. As of December 31, 2010, the Company utilized $1.5 million of the credit facility, bearing interest of 6.7%. Such credit facility expires March 31, 2011.

In aggregate, $1.3 million and $454,000 of remaining principal was outstanding at December 31, 2010 and 2009, respectively, and was secured by certain fixed assets which have a remaining net book value of $1.2 million and $478,000 as of December 31, 2010 and 2009, respectively.

In January 2011, the Company utilized $700,000 of a credit facility to finance equipment purchases and other related expenses which is secured by certain fixed assets of the Company and is repayable over 48 months bearing interest of 6.5%.

 

F-14


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

7.

Debt (continued)

 

At December 31, 2010, future minimum principal payments related to long-term debt were as follows (in thousands):

 

Year ending December 31:

  

2011

   $ 337   

2012

     375   

2013

     391   

2014

     179   
  

 

 

 

Total minimum payments

     1,282   

Less current portion

     337   
  

 

 

 

Noncurrent equipment financing obligations

   $ 945   
  

 

 

 

 

8.

Commitments

Operating Leases

In May 2004, the Company entered into a noncancelable operating lease for its current office and primary research facility located in Mountain View, California, which expires in April 2014. The Company received a discounted lease rate during the first year of the agreement. The total rent obligation is being expensed ratably over the term of the agreement. Rental expense for the years ended December 31, 2008, 2009 and 2010, was $854,000, $829,000 and $830,000, respectively.

Future minimum lease payments under all noncancelable operating leases as of December 31, 2010, are as follows (in thousands):

 

Year ending December 31:

  

2011

   $ 853   

2012

     891   

2013

     930   

2014

     315   
  

 

 

 

Total minimum lease payments

   $ 2,989   
  

 

 

 

 

9.

Convertible Preferred Stock

In August 2008, the Company completed a private placement of 6,793,478 shares of Series E convertible preferred stock at $7.36 per share for gross proceeds of $50.0 million.

The authorized, issued, and outstanding shares of convertible preferred stock at December 31, 2009 and 2010, are as follows:

 

Series

   Authorized
Shares
     Shares
Issued and
Outstanding
     Aggregate
Liquidation
Preference
 
                   (in thousands)  

Series A convertible preferred stock

     5,000,000         5,000,000       $ 5,000   

Series B convertible preferred stock

     24,390,790         23,664,713         61,528   

Series C convertible preferred stock

     5,048,469         5,048,469         17,670   

Series D convertible preferred stock

     7,750,655         7,750,655         29,840   

Series E convertible preferred stock

     6,800,000         6,793,478         50,000   
  

 

 

    

 

 

    

 

 

 
     48,989,914         48,257,315       $ 164,038   
  

 

 

    

 

 

    

 

 

 

 

F-15


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

9.

Convertible Preferred Stock (continued)

 

Conversion

Each share of convertible preferred stock is convertible into one share of common stock at the stockholders’ option. The convertible preferred stock shall be automatically converted into common stock immediately upon the earlier of: (i) the date when the holders of a majority of the outstanding shares of convertible preferred stock shall so elect, or (ii) upon the closing of an underwritten public offering with aggregate offering proceeds of not less than $40.0 million and an offering price of not less than $6.00 per share.

Dividends

Holders of convertible preferred stock are entitled to noncumulative dividends, if and when, declared by the Board of Directors. These dividends are to be paid in advance of any distributions to common stockholders. No dividends have been declared and/or paid through December 31, 2010.

Voting

Each share of convertible preferred stock is entitled to the number of votes equal to the number of common shares into which a share of convertible preferred stock could be converted. The Series A convertible preferred stockholders, as a class, are entitled to elect one of the six members of the Board of Directors, and the Series B convertible preferred stockholders, as a class, are entitled to elect two of the six members of the Board of Directors. The common stockholders are entitled to elect the remaining three members of the Board of Directors.

Liquidation Preference

In the event of a liquidation or winding up of the Company, holders of Series A, B, C, D and E convertible preferred stock shall have a liquidation preference of $1.00, $2.60, $3.50, $3.85 and $7.36 per share, respectively, together with any declared but unpaid dividends, over holders of common shares. After the payment to the holders of convertible preferred stock, the entire remaining assets of the Company shall be distributed pro rata to the holders of common stock. If, upon liquidation, the funds available are not sufficient to permit payment of the full liquidation preference to the Series A, B, C, D and E convertible preferred stockholders, then the assets, proceeds, and funds that are available upon liquidation will be distributed ratably among the holders of the convertible preferred stock based on each holder’s pro rata percentage.

A consolidation or merger of the Company resulting in a change of voting control (i.e., a greater than 50% change) is deemed to be a liquidation or winding up of the Company unless holders of at least 66 2/3% of the convertible preferred stock consent otherwise to the transaction. Under the Company’s amended and restated Certificate of Incorporation, and other related agreements, a change of control or other liquidation event is within the control of the Company and, therefore, the preferred stock is classified as permanent equity.

Warrants to Purchase Convertible Preferred Stock

Series B Convertible Preferred Stock

In February 2001, in conjunction with the private placement of the Company’s Series B convertible preferred stock, the Company issued warrants to purchase 407,077 shares of Series B convertible preferred stock to the placement agency, in connection with the private placement of the Company’s Series B convertible preferred stock. The warrants were immediately exercisable at $2.60 per share and were exercised prior to the expiration date of February 1, 2011.

 

F-16


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

9.

Convertible Preferred Stock (continued)

 

In December 2002, the Company issued warrants to purchase 15,656 shares of Series B convertible preferred stock in conjunction with obtaining equipment financing. The warrants were immediately exercisable at $2.60 per share and expire on December 31, 2012.

In December 2003, the Company issued warrants to purchase 3,344 shares of Series B convertible preferred stock, also in conjunction with obtaining additional equipment financing. The warrants were immediately exercisable at $2.60 per share. The warrants expire on December 23, 2013.

In May 2004, in conjunction with the private placement of the Company’s Series B convertible preferred stock in 2004, the Company issued warrants to purchase 300,000 shares of Series B convertible preferred stock to a placement agency. The warrants were immediately exercisable at $2.60 per share. The warrants expire on May 4, 2014.

As of December 31, 2010, all 726,077 warrants to purchase Series B convertible preferred stock were outstanding. In February 2011, warrants to purchase 407,077 shares of Series B convertible preferred stock at $2.60 per share were exercised, resulting in gross proceeds of approximately $1.1 million.

 

10.

Related-Party Transactions

Glaxo Group Limited

In August 2006, the Company entered into a product development and commercialization agreement with Glaxo Group Limited (GSK). Concurrent with the collaboration agreement (the GSK Agreement), the Company issued 6,493,506 shares of Series D convertible preferred stock at $3.85 per share, for gross proceeds of $25.0 million. Under the terms of the agreement, the Company received an initial nonrefundable up-front fee of $38.5 million. Under the agreement, the Company delivered intellectual property rights and has an obligation to perform research and development services. Because there was not both stand-alone value of the delivered intellectual property and evidence of fair value of the undelivered research and development services, the arrangement was accounted for as a combined unit of accounting. As a combined unit of accounting, the consideration is generally recognized in the same manner as the final deliverable. The up-front payment is being recognized as revenue over the estimated research and development term during which GSK may exercise its right to license certain product candidates under the agreement.

The GSK Agreement provides GSK with an option to license certain product candidates on an exclusive, worldwide basis. Upon exercise of a product option by GSK, the Company will grant GSK an exclusive license to the specific product compounds, and GSK will bear all future costs and responsibility associated with furthering the development of the drug candidate. If these programs are successfully advanced through development by GSK, the Company is entitled to receive regulatory and commercial milestone payments based on performance and royalties of future product sales, if any. In addition, for certain licensed product compounds, the Company may receive greater royalty payments on future product sales, if it elects to co-develop and co-promote such potential drug candidates for certain indications by paying a certain portion of the costs to further develop the product compound.

The GSK Agreement would expire with respect to each licensed product and country upon the expiration of the payment obligations of GSK for that licensed product in that country, and would expire in its entirety upon the expiration of the last payment obligation of GSK for the last licensed product in the last country. GSK may terminate the GSK Agreement for any reason upon 90 days written notice to the Company, subject to certain requirements, including obtaining a license to third-party intellectual property necessary to commercialize Traficet EN. The GSK Agreement and each program under the GSK Agreement may also be terminated for cause under certain circumstances, including breach, insolvency, or by GSK for convenience.

 

F-17


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

10.

Related-Party Transactions (continued)

 

The Company recognized following revenues from GSK during the years ended December 31, 2008, 2009 and 2010 (in thousands):

 

     2008      2009      2010  

Contract revenue

   $ 7,251       $ 4,100       $ 4,721   

Recognition of upfront payments

     6,300         5,644         5,140   

Milestones

     10,000         40,000         25,000   

In October 2010, the Company changed its estimate of the research and development term from six years and four months to seven years and seven months and is recognizing the remaining unamortized portion of the up-front payment over the revised expected remaining research term which is now estimated to end in March 2014. The Company achieved certain milestones in 2009 and 2010 that were determined to be substantive and at risk at the inception of the arrangement and, as such, were recognized in the period when the milestones were achieved. In addition, the GSK Agreement provides for research funding for the initial three-year term as reimbursement for collaborative research efforts of the Company as well as development milestones for advancing selected drug candidates toward and into the clinic.

In October 2008, the GSK Agreement was amended to provide for funding up to $5.0 million to conduct a QTc Phase 1 clinical study for Traficet-EN. Such funding is included in 2008 and 2009 collaborative research and development revenue from related party. In July 2009, the GSK Agreement was further amended to provide for funding of up to $2.5 million for additional research and drug discovery relating to the fourth target under the GSK Agreement, of which $1.1 million was recorded as deferred revenue at December 31, 2009, and subsequently recognized as revenue in 2010. In February 2010, the GSK Agreement was further amended to provide for funding of up to $1.6 million to conduct certain non-clinical activities for CCX168. Research funding from the GSK Agreement and the October 2008, July 2009 and February 2010 amendments were $7.3 million, $4.1 million and $4.7 million for the years ended December 31, 2008, 2009 and 2010, respectively.

In December 2009, GSK exercised its option under the GSK Agreement to obtain an exclusive license for the further development and commercialization of Traficet-EN and two identified back-up compounds. In connection with the exercise of the option, GSK paid the Company a non-refundable option exercise fee of $35.0 million in January 2010 and assumed responsibility for the development and commercialization of Traficet-EN and related compounds, at GSK’s expense, subject to the Company’s specified development and commercial participation rights. The Company has no further performance obligations related to research and development under the program. Accordingly, the Company recognized the $35.0 million option exercise fee as revenue in the year ended December 31, 2009.

For the years ended December 31, 2008, 2009 and 2010, the Company recognized $6.3 million, $5.6 million and $5.1 million, respectively, of the up-front payment as revenue and $10.0 million, $40.0 million and $25.0 million in milestones and option fees, for the same periods then ended. For the years ended December 31, 2008, 2009 and 2010, the research and development costs under the GSK Agreement were partially offset by contract revenue. At December 31, 2009 and 2010, the Company had an accounts receivable balance due from GSK of $35.4 million and $12.5 million, respectively.

Techne Corporation (Techne)

As of December 31, 2010 Techne Corporation held 9,427,133 shares of our convertible preferred stock. For the years ended December 31, 2008, 2009, and 2010, the Company paid Techne $231,000, $106,000 and $68,000, respectively, for research materials. As of December 31, 2009 and 2010, the Company had an accounts payable balance due to Techne for the purchase of research materials of $6,700 and $8,000, respectively.

 

F-18


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

10.

Related-Party Transactions (continued)

 

Repurchased Shares

In January 2009, the Company repurchased 366,666 shares of common stock at $3.00 per share from its chief executive officer for a total of $1.1 million and recorded the repurchased shares as an offset to additional paid-in-capital.

 

11.

Equity Incentive Plans

In May 2002, the stockholders approved the Amended and Restated 1997 Stock Option/Stock Issuance Plan (the 1997 Plan) and in September 2002, the stockholders approved the 2002 Equity Incentive Plan (the 2002 Plan).

Collectively, the 1997 Plan and the 2002 Plan are known as the Stock Plans. Under the Stock Plans, incentive stock options may be granted by the Board of Directors to employees at exercise prices of not less than 100% of the fair value at the date of grant. Nonstatutory options may be granted by the Board of Directors to employees, officers, and directors of the Company or consultants at exercise prices of not less than 85% of the fair value of the common stock on the date of grant. The fair value at the date of grant is determined by the Board of Directors. Under the Stock Plans, options may be granted with different vesting terms from time to time, but not to exceed 10 years from the date of grant. Outstanding options generally vest over four years, with 25% of the total grant vesting on the first anniversary of the option grant date and 1/36th of the remaining grant vesting each month thereafter. Options are immediately exercisable, subject to the Company’s rights to repurchase.

In May 2009, the Company’s stockholders approved an amendment to the 2002 Plan to increase the authorized number of shares under the plan from 9,000,000 shares to 12,000,000 shares of common stock.

As of December 31, 2010, a total of 12,000,000 shares of common stock have been authorized for issuance under the Stock Plans.

 

           Outstanding Options  
     Shares Available
for Grant
    Number of
Shares
    Weighted-
Average
Exercise Price
 

Balances as of December 31, 2007

     1,911,765        4,236,511      $ 0.92   

Options granted

     (1,483,725     1,483,725        3.00   

Options exercised

            (119,737     0.40   

Shares repurchased

     4,688               0.30   

Options forfeited

     359,547        (359,547     1.22   
  

 

 

   

 

 

   

Balances as of December 31, 2008

     792,275        5,240,952        1.56   

Increase in authorized shares

     3,000,000                 

Options granted

     (1,648,875     1,648,875        3.00   

Options exercised

            (95,849     0.59   

Options forfeited

     127,697        (127,697     1.19   
  

 

 

   

 

 

   

Balances as of December 31, 2009

     2,271,097        6,666,281        1.93   

Options granted

     (1,528,992     1,528,992        3.15   

Options exercised

            (226,219     0.52   

Options forfeited

     78,741        (78,741     2.94   
  

 

 

   

 

 

   

Balances as of December 31, 2010

     820,846        7,890,313      $ 2.20   
  

 

 

   

 

 

   

 

F-19


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

11.

Equity Incentive Plans (continued)

 

As of December 31, 2010, stock options outstanding were as follows:

 

     Options Outstanding and Exercisable  

Exercise Prices

           Shares              Weighted-Average
Contractual Life
 

$0.26

     467,000         0.72   

  0.30

     1,262,362         3.81   

  0.44

     27,292         5.09   

  1.00

     432,000         5.11   

  2.15

     971,000         6.12   

  2.45

     156,300         6.78   

  3.00

     3,062,667         8.10   

  3.15

     1,511,692         9.59   
  

 

 

    
     7,890,313      
  

 

 

    

At December 31, 2010, 4,732,010 of the 7,890,313 options were vested. At December 31, 2010, all options outstanding were exercisable and had a weighted-average remaining contractual life of 6.75 years, a weighted-average exercise price per share of $2.20, and an aggregate intrinsic value of $7.5 million. The aggregate intrinsic value was calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock of $3.15 per share as of December 31, 2010.

Early Exercise of Stock Options

The Stock Plans allow for the granting of options that may be exercised before the options have vested. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment or services, at the price paid by the purchaser. The shares subject to repurchase are not included in the shares outstanding in these consolidated financial statements. Amounts received in exchange for these shares have been recorded as a liability on the accompanying consolidated balance sheets under the heading “accrued liabilities” and will be reclassified into common stock and additional paid-in capital as the shares vest.

As of December 31, 2009 and 2010, there were 272 shares and no shares of common stock, respectively, issued related to the early exercise of stock options subject to repurchase by the Company.

Stock-based Compensation

As of December 31, 2010, options exercisable had an aggregate intrinsic value of $7.5 million with a weighted average exercise price per share of $2.20 and a weighted average remaining contractual life of 6.75 years.

The fair values of the employee stock options granted under the Company’s Stock Plans during 2008, 2009 and 2010 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

     Year Ended December 31  
         2008             2009             2010      

Dividend yield

     0     0     0

Volatility

     71     71     70

Weighted-average expected life (in years)

     6        6        6   

Risk-free interest rate

     3.49     2.68     1.84

 

F-20


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

11.

Equity Incentive Plans (continued)

 

Employee stock-based compensation expense recognized was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Employee stock-based compensation expense (which includes the October 2007 exercise price modification of certain options) recognized was as follows (in thousands):

 

     Year Ended December 31  
       2008          2009          2010    

Research and development

   $ 447       $ 828       $ 1,018   

General and administrative

     175         870         1,291   
  

 

 

    

 

 

    

 

 

 

Total

   $ 622       $ 1,698       $ 2,309   
  

 

 

    

 

 

    

 

 

 

At December 31, 2010, the Company had $5.2 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over a weighted-average period of 2.76 years.

The weighted-average grant date fair value of options issued was $1.97, $1.94, and $1.99 in 2008, 2009, and 2010, respectively. The total intrinsic value of the options exercised was $311,000, $231,000, and $564,000 for the years ended December 31, 2008, 2009, and 2010, respectively.

Stock Option Modification

In October 2007, the Company’s Board of Directors approved an offer to certain stock option holders for the increase in the exercise price of February 2006 and May 2006 stock option grants from $0.44 per share to $1.00 per share. The stock option holders who accepted the increase in the exercise price received cash bonuses for the amount of the increase in exercise price of $0.56 per share, to be paid as the amended stock options vest.

The modification resulted in additional compensation expense of $101,000 and $7,000 in the years ended December 31, 2009 and 2010, respectively. Those electing to amend their stock option agreements to reflect an increased exercise price held a total of 496,000 options, resulting in option modification accounting. The cash bonuses are recorded as additional stock-based compensation as of December 31, 2009 and 2010, $69,000 and $5,000, respectively, has been recognized in the consolidated statement of operations.

Stock Options Granted to Nonemployees

During 2007 and 2008, the Company granted to consultants options to purchase 25,000 and 51,500 shares of common stock, respectively. The stock-based compensation expense related to nonemployees will fluctuate as the fair value of the Company’s common stock fluctuates. In connection with grants of stock options to nonemployees, the Company recorded stock-based compensation expense as follows (in thousands):

 

     Year Ended December 31  
         2008              2009              2010      

Research and development

   $ 51       $ 59       $ 17   

General and administrative

     11         21         20   
  

 

 

    

 

 

    

 

 

 
   $ 62       $ 80       $ 37   
  

 

 

    

 

 

    

 

 

 

 

F-21


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

11.

Equity Incentive Plans (continued)

 

Stock-based compensation expense related to stock options granted to nonemployees is recognized as the stock options vest. The Company believes that the fair values of the stock options are a more reliable measurement than the fair values of the services received. The estimated fair values of the stock options granted are calculated at each reporting date using the Black-Scholes option-pricing model, with the following assumptions:

 

     Year Ended December 31
     2008    2009    2010

Dividend yield

   0%    0%    0%

Volatility

   72%    71%    70%

Expected life (in years)

   5.4-9.6    5.6-8.6    6.3-8.5

Risk-free interest rate

   1.5-2.4%    2.3-3.4%    2.3-2.9%

 

12.

401(k) Plan

In October 1997, the Company established the ChemoCentryx 401(k) Plan and Trust (the 401(k) Plan). Employees may contribute, up to the percentage limit imposed by the Internal Revenue Code, an amount of their salary each calendar year until termination of their employment with the Company. The Company may elect to make matching contributions, as per the Plan; however, no contributions have been made in the years ended December 31, 2008, 2009 and 2010.

 

13.

Government Research Contract and Grant

In September 2003, the Company was awarded a grant from the National Institute of Allergies and Infectious Diseases (NIAID). The term of the grant was initially four years and four months, which was subsequently extended to July 2008. The Company recognized $536,000 for the year ended December 31, 2008 and no revenue related to the NIAID grant for each of the years ended December 31, 2009 and 2010. As of December 31, 2008, the grant was fully funded and no additional revenue associated with the grant will be recognized after December 31, 2008.

In October 2010, the Company was awarded $1.9 million from the United States Department of the Treasury for eight projects under the Qualitative Therapeutic Discovery Project Program under the Patient Protection and Affordable Care Act of 2010 to support research with the potential to produce new therapies. The first $1.8 million was received in November 2010 and the remaining $119,000 was received in the first quarter of 2011. The grants were recorded as other income in the financial statements.

 

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Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

14.

Income Taxes

The components of the income tax (benefit) expense are as follows (in thousands):

 

     Year Ended December 31,  
         2008             2009             2010      

Current (benefit from) provision for income taxes:

      

Federal

   $ (23   $ (300   $ (19

State

            593        (54
  

 

 

   

 

 

   

 

 

 

Total current (benefit from) provision for income taxes

     (23     293        (73

Deferred (benefit from) provision for income taxes:

      

Federal

                     

State

                     
  

 

 

   

 

 

   

 

 

 

Total deferred tax (benefit from) provision for income taxes

                     
  

 

 

   

 

 

   

 

 

 

(Benefit from) provision for income taxes

   $ (23   $ 293      $ (73
  

 

 

   

 

 

   

 

 

 

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

     Year Ended December 31,  
         2008             2009             2010      

Federal statutory income tax rate

     (34.00 )%      34.00     (34.00 )% 

State income taxes, net of federal benefit

     (5.83     5.83        (5.83

Permanent items

     1.01        4.64        (8.47

Research and development credits

     (1.51     (2.62     (16.36

Deferred tax assets (utilized) not benefitted

     40.20        (40.01     43.39   

Section 48D grant income

                   20.66   

Other

                   (1.68
  

 

 

   

 

 

   

 

 

 

(Benefit from) provision for income taxes

     (0.13 )%      1.84     (2.29 )% 
  

 

 

   

 

 

   

 

 

 

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets consist of the following:

 

     December 31,  
     2008     2009     2010  
     (In thousands)  

Net operating loss carryforwards

   $ 28,823      $ 24,152      $ 27,040   

Deferred revenue

     8,993        7,203        4,698   

Research and development credit

     3,221        2,942        3,534   

Reserves and accruals

     547        854        1,209   

Depreciation and amortization

     210        275        322   
  

 

 

   

 

 

   

 

 

 

Total deferred tax assets

     41,794        35,426        36,803   

Deferred tax liability

                     
  

 

 

   

 

 

   

 

 

 

Net deferred tax asset

     41,794        35,426        36,803   

Less: valuation allowance

     (41,794     (35,426     (36,803
  

 

 

   

 

 

   

 

 

 

Net deferred tax assets

   $      $      $   
  

 

 

   

 

 

   

 

 

 

 

F-23


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

14.

Income Taxes (continued)

 

The Company has concluded that it was more likely than not that its deferred tax assets will not be realized. Accordingly, the total deferred tax assets have been fully offset by a valuation allowance. The Company’s valuation allowance increased by approximately $7.5 million, decreased by $6.4 million, and increased by $1.4 million during 2008, 2009, and 2010 respectively.

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $68.2 million and $67.8 million, respectively. The federal net operating loss carryforwards begin to expire in 2025 and the state net operating loss carryforwards begin to expire in 2014, if not utilized.

The Company has federal and state research and development credit carryforwards of $4.5 million and $2.5 million, respectively. The federal research and development credits will begin to expire in 2019, if not utilized. California research and development credits can be carried forward indefinitely.

Utilization of the net operating loss and credit carryforwards may be subject to annual limitation due to historical or future ownership percentage change rules provided by the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of certain net operating loss and credit carryforwards before their utilization.

As a result of the Patient Protections and Affordable Care Act’s creation of a therapeutic discovery project tax credit, the Company received a Section 48D grant in the year ended December 31, 2010, for qualifying investments in qualifying therapeutic discovery projects made during 2009. Pursuant to Section 48D, the grant received is not subject to federal taxation, but will reduce the amount of the Company’s NOL carryforward to eliminate the potential double benefit. The 48D grant is includible in taxable income for California tax purposes.

The Company adopted FIN 48 effective January 1, 2007. Now known as Accounting Standards Codification 740-10, FIN 48 establishes standards for the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. As permitted under the provisions of FIN 48, the Company will classify interest and penalties related to unrecognized tax benefits as part of its income tax provision, although there have been no such interest or penalties recognized to date.

A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2009 and 2010, is as follows:

 

     Unrecognized
Income Tax
Benefits
 
     (in thousands)  

Balance as of January 1, 2008

   $ 1,598   

Additions for current year tax positions

     535   
  

 

 

 

Balance as of December 31, 2008

     2,133   

Additions for current year tax positions

     296   
  

 

 

 

Balance as of December 31, 2009

     2,429   

Additions for current year tax positions

     677   
  

 

 

 

Balance as of December 31, 2010

   $ 3,106   
  

 

 

 

For U.S. federal and California income tax purposes, the statute of limitations remains open for the years beginning 2007 and 2006, respectively, except for the carryforward of net operating losses and research and development credits generated in prior years. The Company is not aware of any items that will significantly increase or decrease its unrecognized tax benefits in the next 12 months.

 

F-24


Table of Contents

CHEMOCENTRYX, INC.

Notes to Consolidated Financial Statements (continued)

 

14.

Income Taxes (continued)

 

The IRS has completed its audit for the years ended December 31, 2007 and 2008, and there have been no adjustments to the Company’s attributes carryforwards; however, the R&D credit may be subject to re-examination.

 

15.

Subsequent Events

The Company evaluated subsequent events through October 14, 2011, the date at which the financial statements were available for issuance.

In September 2011, the Company entered into a convertible note loan agreement with Techne, one of its principal stockholders, pursuant to which the Company issued a convertible note to Techne with a principal amount of $10 million and bearing interest at a rate of 5.0% per annum and a maturity date in September 2021. Upon completion of this offering, all outstanding principal and accrued and unpaid interest shall automatically convert into shares of common stock at a conversion price equal to the initial public offering price. Upon the conversion of this note in connection with this offering, Techne will receive a warrant with a ten-year term to purchase 300,000 shares of the Company’s common stock at an exercise price per share equal to 200% of the initial public offering price of its common stock. In addition, Techne has also agreed, pursuant to the terms of the convertible note loan agreement, to purchase $5.0 million of the Company’s common stock in a private placement concurrent with this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered.

 

F-25


Table of Contents

CHEMOCENTRYX, INC.

Condensed Consolidated Financial Statements

Six Months Ended June 30, 2010 and 2011

Contents

Unaudited Interim Condensed Consolidated Financial Statements

 

Condensed Consolidated Balance Sheets

     F-27   

Condensed Consolidated Statements of Operations

     F-28   

Condensed Consolidated Statements of Cash Flows

     F-29   

Notes to Condensed Consolidated Financial Statements

     F-30   

 

F-26


Table of Contents

CHEMOCENTRYX, INC.

Condensed Consolidated Balance Sheets

 

     December 31
2010
    June 30,
2011
    Pro Forma
Stockholders’
Equity at
June 30,
2011
 
     (Note 1)     (unaudited)  
     (In Thousands Except Share and
Per Share Data)
 

Assets

    

Current assets:

      

Cash and cash equivalents

   $ 12,056      $ 10,334     

Short-term investments

     69,519        62,100     

Accounts receivable from related party

     12,452        640     

Prepaid expenses and other current assets

     558        877     
  

 

 

   

 

 

   

Total current assets

     94,585        73,951     

Property and equipment at cost

     7,218        7,218     

Accumulated depreciation

     (5,091     (5,432  
  

 

 

   

 

 

   

Property and equipment, net

     2,127        1,786     

Long-term investments

     1,261        7,502     

Other assets

     160        160     
  

 

 

   

 

 

   

Total assets

   $ 98,133      $ 83,399     
  

 

 

   

 

 

   

Liabilities and stockholders’ equity

      

Current liabilities:

      

Accounts payable

   $ 891      $ 523     

Accrued liabilities

     7,017        5,933     

Deferred revenue from related party

     3,628        3,628     

Current portion of equipment financing obligations

     337        534     
  

 

 

   

 

 

   

Total current liabilities

     11,873        10,618     

Noncurrent equipment financing obligations

     945        1,223     

Deferred revenue from related party

     8,163        6,349     

Other non-current liabilities

     379        318     
  

 

 

   

 

 

   

Total liabilities

     21,360        18,508     

Commitments

      

Stockholders’ equity:

      

Convertible preferred stock

     49        49      $   

Common stock

     8        8        57   

Additional paid-in capital

     166,330        168,680        168,680   

Employee note receivable

     (16     (16     (16

Accumulated other comprehensive income

     83        42        42   

Accumulated deficit

     (89,681     (103,872     (103,872
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     76,773        64,891        64,891   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 98,133      $ 83,399      $ 83,399   
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

F-27


Table of Contents

CHEMOCENTRYX, INC.

Condensed Consolidated Statements of Operations

 

     Six Months Ended June 30,  
     2010     2011  
     (unaudited)  
     (In Thousands, Except Share
and Per Share Data)
 

Revenues:

    

Collaborative research and development revenue from related party

   $ 19,774      $ 4,180   

Operating expenses:

    

Research and development

     16,190        14,593   

General and administrative

     3,711        3,949   
  

 

 

   

 

 

 

Total operating expenses

     19,901        18,542   
  

 

 

   

 

 

 

Loss from operations

     (127     (14,362

Interest income

     206        224   

Interest expense

     (36     (53

Other income

     500          
  

 

 

   

 

 

 

Net income (loss)

   $ 543      $ (14,191
  

 

 

   

 

 

 

Net income (loss) per common share:

    

Basic

   $ 0.01      $ (1.71
  

 

 

   

 

 

 

Diluted

   $ 0.01      $ (1.71
  

 

 

   

 

 

 

Shares used to compute net income (loss) per common share:

    

Basic

     8,137,787        8,286,143   
  

 

 

   

 

 

 

Diluted

     58,665,714        8,286,143   
  

 

 

   

 

 

 

Pro forma basic and diluted loss per common share (unaudited)

     $ (0.25
    

 

 

 

Shares used to compute pro forma basic and diluted loss per common share (unaudited)

       56,880,427   
    

 

 

 

See accompanying notes.

 

F-28


Table of Contents

CHEMOCENTRYX, INC.

Condensed Consolidated Statements of Cash Flows

 

     Six Months Ended June 30,  
             2010                     2011          
     (unaudited)  
     (In Thousands)  

OPERATING ACTIVITIES:

    

Net income (loss)

   $ 543      $ (14,191

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Depreciation of property and equipment

     318        380   

Stock-based compensation

     1,029        1,233   

Non-cash interest income

     (22     (22

Changes in assets and liabilities:

    

Accounts receivable from related party

     34,531        11,812   

Prepaids and other current assets

     22        (319

Other assets

     2          

Accounts payable

     110        (368

Other liabilities

     (1,070     (1,123

Deferred revenue from related party

     (3,971     (1,814
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     31,492        (4,412
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Purchases of property and equipment, net

     (468     (39

Purchases of short-term investments

     (62,219     (66,456

Sales of short-term investments

     25,657        67,593   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (37,030     1,098   
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Proceeds from equipment financing

     1,000        700   

Payments on equipment financing obligations

     (299     (225

Proceeds from issuance of common stock

     112        59   

Proceeds from the issuance of preferred stock, net of issuance costs

            1,058   
  

 

 

   

 

 

 

Net cash provided by financing activities

     813        1,592   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,725     (1,722

Cash and cash equivalents at beginning of period

     21,076        12,056   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 16,351      $ 10,334   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

   $ 14      $ 45   
  

 

 

   

 

 

 

Cash paid for income tax

   $ 590      $   
  

 

 

   

 

 

 

 

F-29


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2011

 

1.

Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of June 30, 2011, the consolidated statements of operations and cash flows for the six months ended June 30, 2010 and 2011 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2011, and the results of operations and cash flows for the six months ended June 30, 2011 and 2011. The financial data and other information disclosed in these notes to the consolidated financial statements related to the six-month periods are unaudited. The results for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2011 or for any other interim period or for any other future year. These financial statements should be read in conjunction with the Company’s audited financial statements included elsewhere in this prospectus.

Unaudited Pro Forma Stockholders’ Equity

Prior to the completion of the offering contemplated by this prospectus, the Company expects all of the convertible preferred stock outstanding to convert into shares of common stock at the then applicable conversion rate, based on the shares of convertible preferred stock outstanding at June 30, 2011.

Revenue Recognition

In the first quarter of 2011, the Company adopted Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition—Multiple Deliverable Revenue Arrangements (ASU 2009-13) for multiple deliverable revenue arrangements, on a prospective basis, for applicable transactions originating or materially modified on or subsequent to January 1, 2011. ASU 2009-13 provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update changes the requirements for establishing separate units of accounting in a multiple element arrangement and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable is based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. Implementation of ASU 2009-13 has had no impact on reported revenue as compared to revenue under previous guidance.

Comprehensive Income (Loss)

Components of other comprehensive income (loss) are comprised entirely of unrealized gains and losses on the Company’s available-for-sale securities for all periods presented and are included in total comprehensive loss as follows (in thousands):

 

     Six-Months Ended June 30,  
             2010                      2011          

Net income (loss)

   $ 543       $ (14,191

Change in unrealized gain (loss) on available-for-sale securities

     38         (41
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 581       $ (14,232
  

 

 

    

 

 

 

Accumulated other comprehensive income as of December 31, 2010 and June 30, 2011 comprises net unrealized gains on available-for-sale securities.

 

F-30


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements (continued)

 

1.

Summary of Significant Accounting Policies (continued)

 

Net Income (Loss) and Pro Forma Net Income (Loss) per Share of Common Stock

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of vested common shares outstanding during the period. Potentially dilutive securities consisting of stock options and the warrants and convertible preferred stock were not included in the diluted net loss per common share calculations for all periods, presented, because the inclusion of such shares would have had an antidilutive effect. The convertible preferred stock contains certain participation rights. Participating securities are included in the computation of basic earnings per share using the two-class method. Diluted net income per share is computed by dividing net income by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income per share includes any dilutive effect from outstanding stock options and warrants using the treasury stock method. Diluted net income per share also includes the assumed conversion of the preferred stock.

For the six months ended June 30, 2010 and 2011, the following securities were excluded from the calculation of diluted net income (loss) per share as the effect would have been antidilutive:

 

     Six-Months Ended June 30,  
             2010                      2011          

Convertible preferred stock

             48,664,392   

Options to purchase common stock

     3,195,090         7,752,112   

Warrants to purchase convertible preferred stock

             319,000   
  

 

 

    

 

 

 
     3,195,090         56,735,504   
  

 

 

    

 

 

 

The unaudited pro forma basic and diluted income (loss) per share calculations assumes the conversion of all outstanding shares of convertible preferred stock into common stock using the as is converted method, as-if such conversion had occurred at the issuance date, or later.

 

     Six Months Ended June 30  
     2010     2011  
     (In Thousands, Except Share
and Per Share Data)
 

Historical

    

Numerator:

    

Net income (loss)

   $ 543      $ (14,191

Percent of participating securities allocable to common stockholders

     14.4  

Rights to undistributed income, used for basic income per share

   $ 78     

Denominator:

    

Weighted-average number of common shares outstanding used in computing basic net income (loss) per common share

     8,137,787        8,286,143   

Dilutive effect of:

    

Convertible preferred stock

     48,257,315          

Stock options

     2,153,435          

Warrants

     117,109          

Shares subject to repurchase

     68          
  

 

 

   

 

 

 

Weighted-average number of common shares outstanding used in computing basic net income (loss) per common share

     58,665,714        8,286,143   
  

 

 

   

 

 

 

Basic net income (loss) per common share

   $ 0.01      $ (1.71
  

 

 

   

 

 

 

Diluted net income (loss) per common share

   $ 0.01      $ (1.71
  

 

 

   

 

 

 

 

F-31


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements (continued)

 

1.

Summary of Significant Accounting Policies (continued)

 

     Six Months
Ended
June 30
 
     2011  
     (In Thousands, Except Share
and Per Share Data)
 

Pro Forma

  

Weighted-average shares used in the computation of basic net loss per common share above

     8,286,143   

Pro forma adjustment to reflect the assumed conversion of preferred stock

     48,594,284   
  

 

 

 

Shares used to compute pro forma basic and diluted net loss per common share

     56,880,427   
  

 

 

 

Pro forma basic and diluted net loss per common share

   $ (0.25
  

 

 

 

 

2.

Cash Equivalents and Short-Term Investments

The amortized cost and fair value of securities not including cash, with gross unrealized gains and losses, at December 31, 2010, were as follows (in thousands):

 

     2010  
     Amortized
Cost
     Gross Unrealized     Fair
Value
 
        Gains      Losses    

Money market funds

   $ 5,214       $       $      $ 5,214   

U.S. Treasury securities

     5,023         10                5,033   

Government-sponsored agencies

     24,994         52         (2     25,044   

Corporate debt securities

     45,678         28         (5     45,701   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 80,909       $ 90       $ (7   $ 80,992   
  

 

 

    

 

 

    

 

 

   

 

 

 

Classified as:

          

Cash equivalents

           $ 10,212   

Short-term investments

             69,519   

Long-term investments

             1,261   
          

 

 

 

Total available-for-sale securities

           $ 80,992   
          

 

 

 

The amortized cost and fair value of securities, with gross unrealized gains and losses, at June 30, 2011 were as follows (unaudited) (in thousands):

 

     2011  
     Amortized
Cost
     Gross Unrealized     Fair
Value
 
      Gains      Losses    

Money market funds

   $ 6,222       $       $      $ 6,222   

U.S. Treasury securities

     5,012         8                5,020   

Government-sponsored agencies

     11,570         33                11,603   

Corporate debt securities

     55,582         18         (17     55,583   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 78,386       $ 59       $ (17   $ 78,428   
  

 

 

    

 

 

    

 

 

   

 

 

 

Classified as:

          

Cash equivalents

           $ 8,826   

Short-term investments

             62,100   

Long-term investments

             7,502   
          

 

 

 

Total available-for-sale securities

           $ 78,428   
          

 

 

 

 

F-32


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements (continued)

 

2.

Cash Equivalents and Short-Term Investments (continued)

 

All available-for-sale securities held as of June 30, 2011 have contractual maturities of less than two years. There have been no significant realized gains or losses on available-for-sale-securities. No available-for-sale-securities held as of June 30, 2011 have been in a continuous unrealized loss position for more than 12 months.

 

3.

Fair Value Measurements

The Company determines the fair value of financial assets and liabilities using three levels of inputs as follows:

Level 1—Inputs which include quoted prices in active markets for identical assets and liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows as of December 31, 2010 (in thousands):

 

     2010  
Description    Level 1      Level 2      Level 3      Total  

Money market fund

   $ 5,214       $       $       $ 5,214   

U.S. treasury securities

             5,033                 5,033   

Government-sponsored agencies

             25,044                 25,044   

Corporate debt securities

             45,701                 45,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,214       $ 75,778       $       $ 80,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows as of June 30, 2011 (unaudited) (in thousands):

 

     2011  
Description    Level 1      Level 2      Level 3      Total  

Money market fund

   $ 6,222       $       $       $ 6,222   

U.S. treasury securities

             5,020                 5,020   

Government-sponsored agencies

             11,603                 11,603   

Corporate debt securities

             55,583                 55,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,222       $ 72,206       $       $ 78,428   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-33


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements (continued)

 

4.

Related Party Transactions

Glaxo Group Limited

The Company recognized following revenues from GSK during the six months ended June 30, 2011 (unaudited) (in thousands):

 

     Six Months Ended June 30,  
         2010              2011      

Contract revenue

   $ 1,952       $ 2,366   

Recognition of upfront payments

     2,822         1,814   

Milestones

     15,000           

GSK has option rights with respect to CCX354, CCX168 and CCX832 upon demonstration by the Company of a successful clinical proof-of-concept for each respective drug candidate. If exercised, the Company would be entitled to an option exercise fee of $25.0 million upon the exercise of each option. Following an option exercise for each of these drug candidates, the Company would be entitled to receive regulatory filing milestones of up to $47.0 million in the aggregate and regulatory approval milestones of up to $75.0 million in the aggregate. During the six months ended June 30, 2010 and 2011, research and development costs related to the GSK Agreement are partially offset by contract revenue.

Techne Corporation (Techne)

For the six months ended June 30, 2010 and 2011, the Company paid Techne $46,000, and $28,000, respectively, for research materials. As of June 30, 2010 and 2011, the Company had an accounts payable balance due to Techne for the purchase of research materials of $4,000 and $5,000, respectively.

 

5.

Stock-based Compensation

The fair value of employee stock options granted under the Company’s stock option plan during the six months ended June 30, 2010 and 2011 were estimated at the date of grant using the Black-Scholes model with the following assumptions:

 

     Six Months Ended June 30,  
           2010                 2011        

Dividend yield

     0     0

Volatility

     71     77

Weighted-average expected life (in years)

     6        6   

Risk-free interest rate

     2.64     2.67

Employee stock-based compensation expense recognized was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Employee stock-based compensation expense recognized was as follows:

 

     Six Months Ended June 30,  
         2010              2011      

Research and development

   $ 465       $ 483   

General and administrative

     546         735   
  

 

 

    

 

 

 

Total

     1,011         1,218   
  

 

 

    

 

 

 

 

F-34


Table of Contents

CHEMOCENTRYX, INC.

Notes to Condensed Consolidated Financial Statements (continued)

 

5.

Stock-based Compensation (continued)

 

At June 30, 2011, the Company had $4.2 million, of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over a weighted-average period of 2.42 years.

 

6.

Subsequent Events

In September 2011, the Company entered into a convertible note loan agreement with Techne, one of its principal stockholders, pursuant to which the Company issued a convertible note to Techne with a principal amount of $10 million and bearing interest at a rate of 5.0% per annum and a maturity date in September 2021. Upon completion of this offering, all outstanding principal and accrued and unpaid interest shall automatically convert into shares of common stock at a conversion price equal to the initial public offering price. Upon the conversion of this note in connection with this offering, Techne will receive a warrant with a ten-year term to purchase 300,000 shares of the Company’s common stock at an exercise price per share equal to 200% of the initial public offering price of its common stock. In addition, Techne has also agreed, pursuant to the terms of the convertible note loan agreement, to purchase $5.0 million of the Company’s common stock in a private placement concurrent with this offering at a price per share equal to the initial public offering price. The sale of such shares of common stock will not be registered.

 

F-35


Table of Contents

 

            Shares

LOGO

 

Common Stock

 

Prospectus

 

J.P. Morgan    Citigroup

 

Cowen and Company

                    , 2012

 

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the FINRA filing fee and The Nasdaq Global Market listing fee.

 

Item

   Amount
to be paid
 

SEC Registration Fee

   $ 7,907.40   

FINRA Filing Fee

     7,400.00   

Nasdaq Global Market Listing Fee

     *   

Printing and Engraving Expenses

     *   

Legal Fees and Expenses

     *   

Premium Paid on Director and Officer Insurance Policy

     *   

Accounting Fees and Expenses

     *   

Blue Sky, Qualification Fees and Expenses

     *   

Transfer Agent Fees and Expenses

     *   

Miscellaneous Expenses

     *   
  

 

 

 

Total

   $ *   
  

 

 

 

 

*

To be completed by amendment.

 

Item 14. Indemnification of Directors and Officers

As permitted by Section 102 of the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:

 

   

any breach of the director’s duty of loyalty to us or our stockholders;

 

   

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

   

any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

 

   

any transaction from which the director derived an improper personal benefit.

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.

As permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws provide that:

 

   

we may indemnify our directors, officers, and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;

 

   

we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

 

   

the rights provided in our amended and restated bylaws are not exclusive.

 

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Our amended and restated certificate of incorporation, attached as Exhibit 3.2 hereto, and our amended and restated bylaws, attached as Exhibit 3.4 hereto, provide for the indemnification provisions described above and elsewhere herein. We intend to enter into separate indemnification agreements with our directors and officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements generally require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also generally require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified. In addition, we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.

The form of Underwriting Agreement, attached as Exhibit 1.1 hereto, provides for indemnification by the underwriters of us and our officers who sign this Registration Statement and directors for specified liabilities, including matters arising under the Securities Act.

 

Item 15. Recent Sales of Unregistered Securities

The following list sets forth information as to all securities we have sold since October 2008, which were not registered under the Securities Act. The following share numbers and per share amounts have not been adjusted for the reverse stock split of our common stock to be effected before the completion of this offering.

 

  1.

We sold an aggregate of 478,012 shares of common stock to employees, directors and consultants for cash consideration in the aggregate amount of $233,021 upon the exercise of stock options and stock awards.

 

  2.

We granted stock options and stock awards to employees, directors and consultants under our 2002 Equity Incentive Plan and our 1997 Stock Option/Stock Incentive Plan covering an aggregate of 3,287,492 shares of common stock, at an average exercise price of $3.08 per share. Of these, options covering an aggregate of 98,087 shares were cancelled without being exercised.

 

  3.

In February 2011, upon the exercise of a Warrant for the Purchase of Shares of Series B Preferred Stock, we issued 407,077 shares of our Series B convertible preferred stock to an investor at an exercise price of $2.60 per share.

 

  4.

In September 2011, pursuant to a Convertible Note Loan Agreement, we issued a promissory note for a principal amount of $10,000,000.

We claimed exemption from registration under the Securities Act for the sales and issuances of securities in the transactions described in paragraphs (1) and (2) above under Section 4(2) of the Securities Act in that such sales and issuances did not involve a public offering or under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701.

We claimed exemption from registration under the Securities Act for the sale and issuance of securities in the transactions described in paragraphs (3) and (4) by virtue of Section 4(2) and/or Regulation D promulgated thereunder as transactions not involving any public offering. All of the purchasers of unregistered securities for which we relied on Section 4(2) and/or Regulation D represented that they were accredited investors as defined under the Securities Act. We claimed such exemption on the basis that (a) the purchasers in each case represented that they intended to acquire the securities for investment only and not with a view to the distribution thereof and that they either received adequate information about the registrant or had access, through employment or other relationships, to such information and (b) appropriate legends were affixed to the stock certificates issued in such transactions.

 

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Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

See the Exhibit Index attached to this Registration Statement, which is incorporated by reference herein.

(b) Financial Statement Schedules

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

 

Item 17. Undertakings

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities 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 SEC 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 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 of 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.

The undersigned Registrant hereby undertakes that:

 

1.

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

 

2.

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be 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.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Mountain View, California, on October 14, 2011.

 

CHEMOCENTRYX, INC.
By:   / S /    T HOMAS J. S CHALL , P H .D.
 

Thomas J. Schall, Ph.D.

 

President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Thomas J. Schall and Susan M. Kanaya, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/ S /     T HOMAS J. S CHALL , P H .D.        

Thomas J. Schall, Ph.D.

  

President, Chief Executive Officer and Director

( Principal Executive Officer )

  October 14, 2011

/ S /    S USAN M. K ANAYA        

Susan M. Kanaya

  

Senior Vice President, Finance and Chief Financial Officer ( Principal Financial and Accounting Officer )

  October 14, 2011

/ S /    R ISHI G UPTA , J.D.      

Rishi Gupta, J.D.

  

Director

  October 14, 2011

/ S /    R OGER C. L UCAS , P H .D.        

Roger C. Lucas, Ph.D.

  

Director

  October 14, 2011

/ S /    G EOFFREY M. P ARKER        

Geoffrey M. Parker

  

Director

  October 14, 2011

/ S /    E DWARD E. P ENHOET , P H .D.        

Edward E. Penhoet, Ph.D.

  

Director

  October 14, 2011

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description

  1.1*    Form of Underwriting Agreement.
  3.1    Amended and Restated Certificate of Incorporation.
  3.2*    Form of Amended and Restated Certificate of Incorporation, to be in effect upon completion of this offering.
  3.3    Amended and Restated Bylaws.
  3.4*    Form of Amended and Restated Bylaws, to be in effect upon completion of the offering
  4.1*    Form of Common Stock Certificate
  4.2    Amended and Restated Investor Rights Agreement among the Registrant and certain investors set forth therein, dated September 8, 2011.
  4.3    Form of Common Stock Warrant
  4.4    Form of Series B Preferred Stock Warrant
  4.5    Convertible Note Loan Agreement, dated September 9, 2011, by and between the Registrant and Techne Corporation.
  5.1*    Opinion of Latham & Watkins LLP
10.1#    Amended and Restated 1997 Stock Option/Stock Issuance Plan.
10.2#    Amended and Restated 2002 Equity Incentive Plan.
10.3#*    2012 Equity Incentive Award Plan and forms of agreement thereunder.
10.4#*    2012 Employee Stock Purchase Plan.
10.5#*    2012 Cash Incentive Plan.
10.6#    Amended and Restated Employment Agreement, effective as of January 1, 2008, by and between the Registrant and Thomas J. Schall, P.h.D.
10.7#    Amended and Restated Employment Agreement, effective as of January 1, 2008, by and between the Registrant and Markus J. Cappel, P.h.D.
10.8#    Amended and Restated Employment Agreement, effective as of January 1, 2008, by and between the Registrant and Susan M. Kanaya.
10.9#    Amended and Restated Employment Agreement, effective as of January 1, 2008, by and between the Registrant and Juan C. Jaen, P.h.D.
10.10#    Amended and Restated Employment Agreement, effective as of January 1, 2008, by and between the Registrant and Petrus Bekker M.D., P.h.D.
10.11    Standard Industrial/Commercial Multi-Tenant Lease, dated April 20, 2004, by and between Portola Land Company and the Registrant.
10.12†    Product Development and Commercialization Agreement, effective as of August 22, 2006, by and between the Registrant and Glaxo Group Limited.
10.13†    Amendment No. 1 to Product Development and Commercialization Agreement, effective as of September 30, 2007, by and between the Registrant and Glaxo Group Limited.
10.14†    Amendment No. 2 to Product Development and Commercialization Agreement, effective as of October 6, 2008, by and between the Registrant and Glaxo Group Limited.
10.15†    Amendment No. 3 to Product Development and Commercialization Agreement, effective as of August 22, 2009, by and between the Registrant and Glaxo Group Limited.
10.16†    Amendment No. 4 to Product Development and Commercialization Agreement, effective as of February 26, 2010, by and between the Registrant and Glaxo Group Limited.


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Exhibit
Number

  

Description

10.17†    Amendment No. 5 to Product Development and Commercialization Agreement, effective as of November 15, 2010, by and between the Registrant and Glaxo Group Limited.
10.18#*    Form of Indemnification Agreement.
10.19    Amendment to Series D Preferred Stock Subscription Agreement, dated as of November 8, 2007, by and between the Registrant and Glaxo Group Limited.
10.20    Series E Preferred Stock Subscription Agreement, dated as of August 26, 2008, by and between the Registrant and Glaxo Group Limited.
10.21    Loan and Security Agreement, dated as of February 20, 2007, by and between the Registrant and Silicon Valley Bank.
10.22    Amendment No. 2 to Loan and Security Agreement, dated as of April 19, 2010, by and between the Registrant and Silicon Valley Bank.
21.1    Subsidiaries of Registrant.
23.1    Consent of independent registered public accounting firm.
23.2*    Consent of Latham & Watkins LLP (included in Exhibit 5.1).
24.1    Power of Attorney. Reference is made to page II-4.

 

*

To be filed by amendment.

 

Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and this exhibit has been submitted separately to the SEC.

 

#

Indicates management contract or compensatory plan.

Exhibit 3.1

 

 

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

CHEMOCENTRYX, INC.

ChemoCentryx, Inc. (the “ Corporation ”), formerly known as ChemogenX, Inc., originally filed with the Secretary of State of Delaware on November 8, 1996, organized and existing under the General Corporation Law of the State of Delaware (the “ General Corporation Law ”), hereby certifies as follows:

1.        Pursuant to Sections 242 and 245 of the General Corporation Law, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Amended and Restated Certificate of Incorporation of the Corporation.

2.        The Certificate of Incorporation is hereby amended and restated in its entirety as follows:

ARTICLE I.

  The name of the corporation (hereinafter called the “ Corporation ”) is ChemoCentryx, Inc.

ARTICLE II.

  The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the Corporation in the State of Delaware at such address is The Corporation Trust Company.

ARTICLE III.

  The purpose of the Corporation is to engaged in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV.

  A.         Classes of Stock . This Corporation is authorized to issue two classes of shares to be designated, respectively, Preferred Stock (“ Preferred Stock ”) and Common Stock (“ Common Stock ”). The total number of shares of capital stock that the corporation is authorized to issue is 119,989,914 shares. 71,000,000 shares shall be Common Stock, par value $0.001 per share. 48,989,914 shares shall be Preferred Stock, par value $0.001 per share, of which 3,000,000 shares shall be designated Series A-1 Preferred stock, 1,000,000 shares shall be designated Series A-2 Preferred Stock, 1,000,000 shares shall be designated Series A-3 Preferred Stock, with all three series together being referred to as the “ Series A Preferred Stock ,” 24,390,790 shares shall be designated Series B Preferred Stock (the “ Series B Preferred Stock ”), 5,048,469 shares shall be designated Series C Preferred Stock (the “ Series C Preferred Stock ”), 7,750,655 shares shall be designated as Series D Preferred Stock (the “ Series D Preferred Stock ”) and 6,800,000 shares shall be designated as Series E Preferred Stock (the “ Series E Preferred Stock ” and, together with the


Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, and the Series D Preferred Stock, the “ Existing Preferred Stock ”).

B.     Rights, Preferences and Restrictions of Preferred Stock .  The Preferred Stock authorized by this Amended and Restated Certificate of Incorporation may be issued from time to time in one or more classes or series. The rights, preferences, privileges, and restrictions granted to and imposed on the Preferred Stock are set forth below in this Article IV(B). The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed under additional series or classes of Preferred Stock, and the number of shares constituting any such series or class and the designation thereof, or of any of them. Subject to compliance with applicable law, the protective voting rights which have been granted in Section 6 of this Article IV(B) or may hereafter be granted to the Preferred Stock or series or class thereof in the Corporation’s Amended and Restated Certificate of Incorporation (“ Protective Provisions ”), the rights, privileges, preferences and restrictions of any such additional series or class may be subordinated to, pari passu with (including without limitation, with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent) or senior to any present or future class or series of Preferred Stock or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series or class, prior to the issue of that series or class, but not below the number of shares of such series or class then outstanding. In case the number of shares of any series or class shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series or class.

1.         Dividend Provisions .    Subject to the rights of series or classes of Preferred Stock which may from time to time come into existence pursuant to the then applicable Protective Provisions, the holders of shares of Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock or other securities of the Corporation pursuant to an event causing the Conversion Price of the Preferred Stock to be adjusted pursuant to Section 4(d)(iii) hereof) on the Common Stock of the Corporation, when, as and if declared by the Board of Directors.

As to any additional declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock or other securities of the Corporation pursuant to an event causing the Conversion Price of the Preferred Stock to be adjusted pursuant to Section 4(d)(iii) hereof), outstanding shares of Preferred Stock shall participate with shares of Common Stock, participating as though such shares of Preferred Stock had all been converted into Common Stock.

2.         Liquidation Preference .

a.        In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series or classes of Preferred Stock which may from time to time come into existence in compliance with the then

 

2


applicable Protective Provisions, the holders of Existing Preferred Stock shall be entitled to receive, prior to and in preference to any distribution of any of the assets of the Corporation to the holders of any other class of capital stock by reason of their ownership thereof, an amount per share equal to the Liquidation Preference (as hereinafter defined) specified for each share of Preferred Stock then held by them, plus any declared but unpaid dividends. The Liquidation Preference with respect to each share of Series A-1 Preferred Stock shall mean $1.00 per share (the “ Series A-1 Original Issue Price ”), with respect to each share of Series A-2 Preferred Stock shall mean $1.00 per share (the “ Series A-2 Original Issue Price ”), with respect to each share of Series A-3 Preferred Stock shall mean $1.00 per share (the “ Series A-3 Original Issue Price ”), with respect to each share of Series B Preferred Stock shall mean $2.60 per share (the “ Series B Original Issue Price ”), with respect to each share of Series C Preferred Stock shall mean $3.50 per share (the “ Series C Original Issue Price ”), with respect to each share of Series D Preferred Stock shall mean $3.85 per share (the “ Series D Original Issue Price ”), or with respect to each share of Series E Preferred Stock, shall mean $7.36 per share (the “ Series E Preferred Original Issue Price ”), in each case as adjusted for stock splits, combinations, reorganizations and the like. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Existing Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then, subject to the rights of series or classes of Preferred Stock which may from time to time come into existence in accordance with the then applicable Protective Provisions, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Existing Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive.

b.        Upon the completion of the distributions required by subparagraphs (a) of this Section 2 and any other distribution which may be required with respect to series or classes of Preferred Stock which may from time to time come into existence in accordance with the then applicable Protective Provisions, any remaining assets shall be distributed ratably among the holders of Common Stock.

c.        A consolidation or merger of the Corporation with or into any other corporation or corporations that results in a change of greater than 50% of the voting control of the Corporation, or a sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of (a “ Change of Control Transaction ”), shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2 unless holders of at least 66 2/3% of the then outstanding Existing Preferred Stock shall otherwise consent.

d.        In any of the events specified in (c) above, if the consideration received by the corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows:

(i)       Securities not subject to investment letter or other similar restrictions on free marketability:

 

3


  (A)      If traded on a securities exchange or the Nasdaq National Market System, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing;

  (B)      If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing; and

  (C)      If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

(ii)      The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i) (A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

(iii)      In the event the requirements of Section 2 are not complied with, this corporation shall forthwith either:

  (A)      cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or

  (B)      cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 2(d)(iv) hereof.

(iv)      The corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the stockholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the corporation has given the first notice provided for herein or sooner than ten (10) days after the corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Existing Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock.

3.         Redemption .  The Preferred Stock is not redeemable.

4.         Conversion .      The holders of the Preferred Stock shall have conversion rights as follows (the “ Conversion Rights ”):

 

4


a.         Right to Convert .    Subject to Section 4(c), each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A-1 Original Issue Price, the Series A-2 Original Issue Price, the Series A-3 Original Issue Price, the Series B Original Issue Price, the Series C Original Issue Price, the Series D Original Issue Price, or the Series E Original Issue Price, as applicable, by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Series A-1 Conversion Price per share shall be the Series A-1 Original Issue Price; the initial Series A-2 Conversion Price per share shall be the Series A-2 Original Issue Price; the initial Series A-3 Conversion Price per share shall be the Series A-3 Original Issue Price; the initial Series B Conversion Price per share shall be the Series B Original Issue Price; the initial Series C Conversion Price per share shall be the Series C Original Issue Price; the initial Series D Conversion Price shall be the Series D Original Issue Price; and the initial Series E Conversion Price shall be the Series E Original Issue Price; provided, however, that each such Conversion Price shall be subject to adjustment as set forth in subsection 4(d).

b.         Automatic Conversion .   Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then-effective Conversion Price (whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent as provided below), upon the earlier, as to each class of Preferred Stock, of (i) the date specified by written consent or agreement of holders of at least a majority of the shares of such class then outstanding, or (ii) immediately upon the closing of the sale of the Corporation’s Common Stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933, as amended (the “ Securities Act ”) other than a registration relating solely to a transaction under Rule 145 under the Securities Act (or any successor thereto) or to an employee benefit plan of the Corporation, that is either (x) at a public offering price equal to or exceeding $7.36 per share of Common Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares) and which results in aggregate cash proceeds to the Corporation of $40,000,000 (net of underwriting discounts and commissions) or (y) upon terms approved by the majority of the outstanding shares of Preferred Stock.

c.         Mechanics of Conversion .    Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of this Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be

 

5


conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. If the conversion is in connection with a Change of Control Transaction, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing of the Change of Control Transaction, in which event (i) the holder shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such Change of Control Transaction and (ii) the holder shall be entitled to rescind such notice of conversion for five days after the giving of any notice of a material change in terms pursuant to Section 2(d)(iv).

d.         Conversion Price Adjustments .  For purposes of this Section 4(d), changes to the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price, respectively, shall affect the conversion of the Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, respectively, into Common Stock. The Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price and Series E Conversion Price shall be subject to adjustment from time to time as follows:

(i)        (A)    In the event the Corporation at any time after the Original Issue Date (as hereinafter defined) shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(i)(F)) without consideration or for a consideration per share less than the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price, respectively, in effect on the date of and immediately prior to such issue, then and in such event, the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction (x) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price in effect immediately prior to such issuance, and (y) the denominator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of such Additional Shares of Common Stock so issued, provided that for the purposes of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, i.e., all shares of Common Stock issuable upon the exercise, conversion or exchange of outstanding options, warrants, convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the case may be, shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 4(d)(i)(F) below, such Additional Shares of Common Stock shall be deemed to be outstanding.

 

6


(B)      “ Original Issue Date ” shall mean, if for the Series A-1 Preferred Stock the date upon which the first share of Series A-1 Preferred Stock is first issued, if for the Series A-2 Preferred Stock the date upon which the first share of Series A-2 Preferred Stock is first issued, if for the Series A-3 Preferred Stock the date upon which the first share of Series A-3 Preferred Stock is first issued, if for the Series B Preferred Stock the date upon which the first share of Series B Preferred Stock is first issued, if for the Series C Preferred Stock the date upon which the first share of Series C Preferred Stock is first issued, if for the Series D Preferred Stock the date upon which the first share of Series D Preferred Stock is first issued and if for the Series E Preferred Stock the date upon which the first share of Series E Preferred Stock is first issued.

(C)      No adjustment of the Conversion Price for the Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward.

(D)      In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this Corporation for any underwriting or otherwise in connection with the issuance and sale thereof.

(E)      In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment.

(F)      In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any options or convertible securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such options or convertible securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such options or, in the case of convertible securities and options for convertible securities or for Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, the conversion or exchange of such convertible securities or Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in the case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued for purposes of an adjustment of the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price unless the consideration per share (determined pursuant to Sections 4(d)(i)(D) and (E) hereof) of such Additional Shares of Common Stock would be less than the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D

 

7


Conversion Price or Series E Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and; provided further, that in any such case in which Additional Shares of Common Stock are deemed to be issued:

(1)      no further adjustment in the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price shall be made upon the subsequent issue of convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or shares of Common Stock upon the exercise of such options or conversion or exchange of such convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock;

(2)      if such options or convertible securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or decrease or increase in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such options or the rights of conversion or exchange under such convertible securities (provided, however, that no such adjustment of the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price shall affect Common Stock previously issued upon conversion of the Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock);

(3)      upon the expiration of any such options or any rights of conversion or exchange under such convertible securities which shall not have been exercised, the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon such expiration, be recomputed as if:

  a)      in the case of convertible securities or options for Common Stock the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such options or the conversion or exchange of such convertible securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of such options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise or for the issue of all such convertible securities which were actually converted or exchanged, plus the

 

8


additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and

  b)      in the case of options for convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, only the convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, if any, actually issued upon the exercise thereof were issued at the time of issue of such options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of such options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Sections 4(d)(i)(D) and (E) hereof) upon the issue of the convertible securities, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock with respect to which such options were actually exercised;

(4)      no readjustment pursuant to clause (2) or (3) above shall have the effect of increasing the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price to an amount which exceeds the lower of (i) the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price, respectively, on the original adjustment date, or (ii) the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price, respectively, that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date;

(5)      in the case of any options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price shall be made until the expiration or exercise of all such options issued on the same date, whereupon such adjustment shall be made in the same manner provided in clause (3) above; and

(6)      if such record date shall have been fixed and such options or convertible securities are not issued on the date fixed therefor, the adjustment previously made in the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price which became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Series A-1 Conversion Price, Series A-2 Conversion Price, Series A-3 Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price shall be adjusted pursuant to this Section 4(d)(i)(F) as of the actual date of their issuance.

 

9


(ii)      “ Additional Shares ” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(F)) by this Corporation since the inception of the Corporation other than:

  (A)      up to 15,150,000 shares of Common Stock (or options therefor) issued or issuable to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors for the primary purpose of soliciting or retaining their services;

  (B)      shares of Common Stock issued or issuable in connection with bona fide acquisitions, mergers, technology licenses or purchases, corporate partnering agreements or similar transactions, the terms of which are approved by the Board of Directors of the Corporation;

  (C)      shares of Common Stock issued or issuable (i) in a public offering before or in connection with which all outstanding shares of Preferred Stock will be converted to Common Stock or (ii) upon exercise of warrants or rights granted to underwriters in connection with such a public offering;

  (D)      shares of Common Stock issued or issuable to financial institutions or lessors in connection with commercial credit agreements, equipment financings or similar transactions;

  (E)      upon exercise of warrants to purchase up to 726,077 shares of Series B Preferred Stock; and

  (F)      upon conversion of shares of Preferred Stock.

(iii)     If the number of shares of Common Stock outstanding at any time after the Original Issue Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price of the Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series or class shall be decreased in proportion to such decrease in outstanding shares.

e.         Other Distributions .    In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(d)(i), then, in each such case for the purpose of this Section 4(d), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution.

f.         Recapitalizations .  If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or in Section 2, but including any Change of Control Transaction which the holders of 66 2/3% of the Existing Preferred Stock

 

10


determine shall not be treated as a liquidation) provision shall be made so that the holders of Preferred Stock shall thereafter be entitled to receive upon conversion thereof the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of each series or class of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

g.       No Impairment .  This Corporation will not, by amendment of its Amended and Restated Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such actions as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment.

h.       No Fractional Shares and Certificate as to Adjustments .

(i)        No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

(ii)       Upon the occurrence of each adjustment or readjustment of the Conversion Price of the Preferred Stock pursuant to this Section 4, this Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (a) such adjustment and readjustment, (b) the Conversion Price for such Preferred Stock at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of the Preferred Stock.

i.       Reservation of Stock Issuable Upon Conversion .  This Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this Corporation will take such corporate action as

 

11


may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate.

j.         Notices .    Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this Corporation; provided, however that overnight delivery shall be used to effectuate the delivery of all such notices to addresses outside the United States.

5.         Voting Rights .   Each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted and shall have voting rights and powers equal to the voting rights and powers of the Common Stock (except as otherwise expressly provided herein or as required by law, voting together with the Common Stock as a single class) and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward).

The holders of the Preferred Stock shall vote together with the holders of the Common Stock on all matters, except that (i) the holders of the Series A Preferred Stock, so long as at least 2,000,000 shares of Series A Preferred Stock remain outstanding (as adjusted for stock splits, stock dividends or recapitalizations), shall be entitled, as a class, to elect one (1) director of the Corporation’s Board of Directors and shall not otherwise be permitted to vote with the Common Stock as to the election of directors, and (ii) the holders of Series B Preferred Stock and shares of Common Stock issued upon conversion of shares of Series B Preferred Stock, so long as at least 2,400,000 shares of Series B Preferred Stock or such shares of Common Stock remain outstanding (as adjusted for stock splits, stock dividends or recapitalizations), shall be entitled to elect, as a class, two (2) directors of the Corporation’s Board of Directors (each a “ Series B Director ” and together the “ Series B Directors ”) as described in the next sentence and shall not otherwise be permitted to vote with the Common Stock as to the election of directors. For so long as OrbiMed Advisors, L.L.C. (“ OrbiMed ”) and/or any investment funds managed or advised by OrbiMed or any affiliate of OrbiMed hold at least 384,615 shares of Series B Preferred Stock or shares of Common Stock issued upon conversion of shares of Series B Preferred Stock (as adjusted for stock splits, stock dividends or recapitalizations), OrbiMed shall be entitled to designate one Series B Director, and for so long as HBM BioVentures (Cayman) Ltd. (“ HBM ”) and/or any investment funds managed or advised by HBM or any affiliate of HBM hold at least 365,385 shares of Series B Preferred Stock or shares of Common Stock issued upon conversion of shares of Series B Preferred Stock (as adjusted for stock splits, stock dividends or recapitalizations), HBM shall be entitled to designate one Series B Director; provided, that in the event OrbiMed and/or HBM are not entitled to designate the Series B Director(s), such Series B Director(s) shall be designated by vote or consent of the holders (including OrbiMed and HBM) of a majority of the shares of Series B Preferred Stock and Common Stock issued upon conversion of shares of Series B Preferred Stock. All remaining directors shall be elected by the Common Stock.

 

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6.         Protective Provisions .   Subject to the rights of series or classes of Preferred Stock which may from time to time come into existence in accordance with the following Protective Provisions, this Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock (for so long as 2,000,000 shares of Series A Preferred Stock are outstanding), Series B Preferred Stock (for so long as 2,400,000 shares of Series B Preferred Stock are outstanding) and Series C Preferred Stock (for so long as 1,800,000 shares of Series C Preferred Stock are outstanding), each voting as a separate class:

a.        sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of, provided that this Section 6(a) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the corporation;

b.        alter or change (by merger, reclassification or otherwise) the rights, preferences or privileges of the shares of a series or class of Preferred Stock so as to affect adversely the shares of such series or class;

c.        authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Existing Preferred Stock with respect to voting, dividends or upon liquidation;

d.        redeem, purchase or otherwise acquire (or pay into or set funds aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares at cost or at cost upon the occurrence of certain events, such as the termination of employment;

e.        increase or decrease the authorized Preferred Stock;

f.         reclassify or recapitalize the capital stock of the Corporation;

g.        effect the liquidation of the Corporation;

h.        change the size of the Board of Directors;

i.         issue (directly or pursuant to the exercise of any option) or authorize or reserve for issuance to employees, consultants and directors as equity incentive compensation in excess of 15,150,000 shares of Common Stock, whether or not pursuant to a benefit plan, and taking into account all such shares that have been so issued, authorized or reserved as of the date of filing of this Amended and Restated Certificate of Incorporation; or

 

13


j.        amend or alter the number of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock required in connection with the foregoing actions.

In addition, the consent of a majority of the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as applicable, shall be required for any action that (i) adversely effects the rights, preferences or privileges of such series of Preferred Stock in a manner different from that of other classes of Preferred Stock, (ii) creates or is likely to create a conflict of interest between such series of Preferred Stock and any other class of Preferred Stock, or (iii) creates a class or series of stock or any other securities convertible into equity securities of the Corporation having a preference over the Preferred Stock. In addition, the consent of the majority of the Series D Preferred Stock or Series E Preferred Stock, as applicable, shall be required for any action that (i) adversely affects the rights, preferences or privileges of such series of Preferred Stock in a manner different from that of other classes of Preferred Stock, (ii) creates or is likely to create a conflict of interest between such series of Preferred Stock and any other class of Preferred Stock or (iii)(a) creates a class or series of stock or any other securities convertible into equity securities of the Corporation having a preference over the Preferred Stock and (b) does not otherwise provide the holders of such series of Preferred Stock participation rights permitting them to maintain their approximate fully-diluted percentage of voting securities by purchasing their pro rata share of such newly issued securities having preferences over the Preferred Stock.

 7.         Status of Converted Stock .   In the event any shares of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation. The Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation’s authorized capital stock.

C.       Common Stock .

1.         Dividend Rights .  Subject to the prior rights of holder of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

2.         Liquidation Rights .  Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed to the holders of the Common Stock as provided in Section 2 of subsection (B) of this Article IV hereof.

3.         Redemption .  The Common Stock is not redeemable.

4.         Voting Rights .    The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law.

ARTICLE V.

 

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Except as otherwise provided in this Amended and Restated Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.

ARTICLE VI.

The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders.

ARTICLE VII.

Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

ARTICLE VIII.

Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

ARTICLE IX.

The Corporation is to have perpetual existence.

ARTICLE X.

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that any provision requiring the vote or consent of more than a majority of a class or series of shares shall not be amended unless such amendment shall have received the vote or consent of the requisite percentage of such class or series of shares originally required to give such vote or consent.

ARTICLE XI.

(A)      Limitation of Directors’ and Officers’ Liability; Indemnification .

(1)      To the fullest extent permitted by the General Corporation Law as the same exists or may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article, nor the adoption of any provisions of this Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this

 

15


Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

  (2)      To the fullest extent permitted by applicable law, this Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and other agents of this Corporation (and any other persons to which Delaware law permits this Corporation to provide indemnification), through Bylaw provisions, agreements with any such director, officer, employee or other agent or other person, vote of stockholders or disinterested directors, or otherwise, in excess of the indemnification and advancement otherwise permitted by the General Corporation Law, subject only to limits created by applicable Delaware law (statutory or nonstatutory), with respect to actions for breach of duty to a corporation, its stockholders and others.

(B)        Repeal or Modification .  Neither any amendment, repeal or modification of the foregoing provisions of this Article XI by the stockholders of this Corporation, nor the adoption of any provision of this Corporation’s Certificate of Incorporation inconsistent with this Article XI, shall adversely affect any right or protection of an agent of the Corporation existing at the time of such amendment, repeal or modification.

(C)      The foregoing amendment and restatement of the Certificate of Incorporation has been duly approved and adopted by the Board of Directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the General Corporation Law.

 

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IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by Susan Kanaya, its Chief Financial Officer, this 29 th day of May, 2011.

 

ChemoCentryx, Inc.

/s/ Susan Kanaya

Name:  Susan Kanaya

Title:  Chief Financial Officer

 

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Exhibit 3.3

AMENDED AND RESTATED BYLAWS OF

CHEMOCENTRYX, INC.

(a Delaware corporation)


TABLE OF CONTENTS

 

               Page  

ARTICLE I - CORPORATE OFFICES

     1   
   1.1    REGISTERED OFFICE      1   
   1.2    OTHER OFFICES      1   

ARTICLE II - MEETINGS OF STOCKHOLDERS

     1   
   2.1    PLACE OF MEETINGS      1   
   2.2    ANNUAL MEETING      1   
   2.3    SPECIAL MEETING      1   
   2.4    ADVANCE NOTICE PROCEDURES; NOTICE OF STOCKHOLDERS’ MEETINGS      2   
   2.5    MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE      3   
   2.6    QUORUM      3   
   2.7    ADJOURNED MEETING; NOTICE      4   
   2.8    CONDUCT OF BUSINESS      4   
   2.9    VOTING      4   
   2.10    STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING      4   
   2.11    RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS      4   
   2.12    PROXIES      5   
   2.13    LIST OF STOCKHOLDERS ENTITLED TO VOTE      5   
   2.14    INSPECTORS OF ELECTION.      5   

ARTICLE III - DIRECTORS

     6   
   3.1    POWERS      6   
   3.2    NUMBER OF DIRECTORS      6   
   3.3    ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS      6   
   3.4    RESIGNATION AND VACANCIES      7   
   3.5    PLACE OF MEETINGS; MEETINGS BY TELEPHONE      7   
   3.6    REGULAR MEETINGS      8   
   3.7    SPECIAL MEETINGS; NOTICE      8   
   3.8    QUORUM      8   
   3.9    BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING      8   
   3.10    FEES AND COMPENSATION OF DIRECTORS      9   
   3.11    REMOVAL OF DIRECTORS      9   

ARTICLE IV - COMMITTEES

     9   
   4.1    COMMITTEES OF DIRECTORS      9   
   4.2    COMMITTEE MINUTES      9   
   4.3    MEETINGS AND ACTION OF COMMITTEES      9   

ARTICLE V - OFFICERS

     10   
   5.1    OFFICERS      10   
   5.2    APPOINTMENT OF OFFICERS      10   
   5.3    SUBORDINATE OFFICERS      10   

 

-i-


TABLE OF CONTENTS

(continued)

 

               Page  
   5.4    REMOVAL AND RESIGNATION OF OFFICERS      11   
   5.5    VACANCIES IN OFFICES      11   
   5.6    REPRESENTATION OF SHARES OF OTHER CORPORATIONS      11   
   5.7    AUTHORITY AND DUTIES OF OFFICERS      11   

ARTICLE VI - RECORDS AND REPORTS

     11   
   6.1    MAINTENANCE AND INSPECTION OF RECORDS      11   
   6.2    INSPECTION BY DIRECTORS      12   

ARTICLE VII - GENERAL MATTERS

     12   
   7.1    EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS      12   
   7.2    STOCK CERTIFICATES; PARTLY PAID SHARES      12   
   7.3    SPECIAL DESIGNATION ON CERTIFICATES      13   
   7.4    LOST CERTIFICATES      13   
   7.5    CONSTRUCTION; DEFINITIONS      13   
   7.6    DIVIDENDS      13   
   7.7    FISCAL YEAR      14   
   7.8    SEAL      14   
   7.9    TRANSFER OF STOCK      14   
   7.10    STOCK TRANSFER AGREEMENTS      14   
   7.11    REGISTERED STOCKHOLDERS      14   
   7.12    WAIVER OF NOTICE      14   

ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION

     15   
   8.1    NOTICE BY ELECTRONIC TRANSMISSION      15   
   8.2    DEFINITION OF ELECTRONIC TRANSMISSION      16   
   8.3    INAPPLICABILITY      16   

ARTICLE IX - INDEMNIFICATION

     16   
   9.1    INDEMNIFICATION OF DIRECTORS AND OFFICERS.      16   
   9.2    INDEMNIFICATION OF OTHERS.      16   
   9.3    PREPAYMENT OF EXPENSES.      16   
   9.4    DETERMINATION; CLAIM.      17   
   9.5    NON-EXCLUSIVITY OF RIGHTS.      17   
   9.6    INSURANCE.      17   
   9.7    OTHER INDEMNIFICATION.      17   
   9.8    AMENDMENT OR REPEAL.      17   

ARTICLE X - AMENDMENTS

     17   


AMENDED AND RESTATED

BYLAWS OF CHEMOCENTRYX, INC.

 

 

ARTICLE I—CORPORATE OFFICES

1.1 REGISTERED OFFICE.

The registered office of ChemoCentryx, Inc. shall be fixed in the corporation’s certificate of incorporation, as the same may be amended from time to time.

1.2 OTHER OFFICES.

The corporation’s board of directors (the “ Board ”) may at any time establish other offices at any place or places where the corporation is qualified to do business.

ARTICLE II—MEETINGS OF STOCKHOLDERS

2.1 PLACE OF MEETINGS.

Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law (the “ DGCL ”). In the absence of any such designation or determination, stockholders’ meetings shall be held at the corporation’s principal executive office.

2.2 ANNUAL MEETING.

The annual meeting of stockholders shall be held each year. The Board shall designate the date and time of the annual meeting. At the annual meeting, directors shall be elected and any other proper business may be transacted.

2.3 SPECIAL MEETING.

A special meeting of the stockholders may be called at any time by the Board, chairperson of the Board, chief executive officer or president (in the absence of a chief executive officer), but such special meetings may not be called by any other person or persons.

No business may be transacted at such special meeting other than the business specified in such notice to stockholders. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board may be held.


2.4 ADVANCE NOTICE PROCEDURES; NOTICE OF STOCKHOLDERS’ MEETINGS.

(i) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (B) otherwise properly brought before the meeting by or at the direction of the Board, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than ninety (90) calendar days before nor more than one hundred twenty (120) calendar days before the one (1) year anniversary of the date on which the corporation first mailed its proxy statement to stockholders in connection with the previous year’s annual meeting of stockholders; provided , however , that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date of the prior year’s meeting, notice by the stockholder to be timely must be so received not later than the close of business on the later of one hundred twenty (120) calendar days in advance of such annual meeting or ten (10) calendar days following the date on which public announcement of the date of the meeting is first made. A stockholder’s notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business, (c) the class and number of shares of the corporation that are beneficially owned by the stockholder, (d) any material interest of the stockholder in such business, and (e) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder’s meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (i). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (i), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted.

(ii) Only persons who are nominated in accordance with the procedures set forth in this paragraph (ii) shall be eligible for election as directors. Nominations of persons for election to the Board of the corporation may be made at a meeting of stockholders by or at the direction of the Board or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (ii). Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the secretary of the corporation in accordance with the provisions of paragraph (i) of this Section 2.4. Such stockholder’s notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise

 

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required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (b) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (i) of this Section 2.4. At the request of the Board, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that information required to be set forth in the stockholder’s notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (ii). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded.

These provisions shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the Board, but in connection therewith no new business shall be acted upon at any such meeting unless stated, filed and received as herein provided. Notwithstanding anything in these bylaws to the contrary, no business brought before a meeting by a stockholder shall be conducted at an annual meeting except in accordance with procedures set forth in this Section 2.4.

All notices of meetings of stockholders shall be sent or otherwise given in accordance with either Section 2.5 or Section 8.1 of these bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.

Notice of any meeting of stockholders shall be given:

(i) if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the corporation’s records; or

(ii) if electronically transmitted as provided in Section 8.1 of these bylaws.

An affidavit of the secretary or an assistant secretary of the corporation or of the transfer agent or any other agent of the corporation that the notice has been given by mail or by a form of electronic transmission, as applicable, shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

2.6 QUORUM.

The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairperson of the meeting, or (ii) the stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

 

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2.7 ADJOURNED MEETING; NOTICE.

When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

2.8 CONDUCT OF BUSINESS.

The chairperson of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business.

2.9 VOTING.

The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the DGCL.

Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.

2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

Subject to the rights of the holders of the shares of any series of Preferred Stock or any other class of stock or series thereof having a preference over the Common Stock as dividend or upon liquidation, any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of stockholders of the corporation and may not be effected by any consent in writing by such stockholders.

2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.

In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other such action.

If the Board does not so fix a record date:

(i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

 

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(ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however , that the Board may fix a new record date for the adjourned meeting.

2.12 PROXIES.

Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL.

2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.

The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least ten (10) days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the corporation’s principal executive office. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.

2.14 INSPECTORS OF ELECTION.

A written proxy may be in the form of a telegram, cablegram, or other means of electronic transmission which sets forth or is submitted with information from which it can be determined that the telegram, cablegram, or other means of electronic transmission was authorized by the person.

Before any meeting of stockholders, the Board shall appoint an inspector or inspectors of election to act at the meeting or its adjournment. The number of inspectors shall be either one (1) or three (3). If any person appointed as inspector fails to appear or fails or refuses to act, then the chairperson of the meeting may, and upon the request of any stockholder or a stockholder’s proxy shall, appoint a person to fill that vacancy.

 

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Such inspectors shall:

(i) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies;

(ii) receive votes, ballots or consents;

(iii) hear and determine all challenges and questions in any way arising in connection with the right to vote;

(iv) count and tabulate all votes or consents;

(v) determine when the polls shall close;

(vi) determine the result; and

(vii) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.

The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein.

ARTICLE III—DIRECTORS

3.1 POWERS.

Subject to the provisions of the DGCL and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.

3.2 NUMBER OF DIRECTORS.

The authorized number of directors shall be determined from time to time by resolution of the Board, provided the Board shall consist of at least one member. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.

3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.

Except as provided in Section 3.4 of these bylaws, each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until such director’s successor

 

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is elected and qualified or until such director’s earlier death, resignation or removal. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws. The certificate of incorporation or these bylaws may prescribe other qualifications for directors.

If so provided in the certificate of incorporation, the directors of the corporation shall be divided into three classes.

3.4 RESIGNATION AND VACANCIES.

Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

Unless otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. If the directors are divided into classes, a person so elected by the directors then in office to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor shall have been duly elected and qualified.

If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the DGCL.

If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the DGCL as far as applicable.

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.

The Board may hold meetings, both regular and special, either within or outside the State of Delaware.

Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

 

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3.6 REGULAR MEETINGS.

Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board.

3.7 SPECIAL MEETINGS; NOTICE.

Special meetings of the Board for any purpose or purposes may be called at any time by the chairperson of the Board, the chief executive officer, the president, the secretary or a majority of the authorized number of directors.

Notice of the time and place of special meetings shall be:

(i) delivered personally by hand, by courier or by telephone;

(ii) sent by United States first-class mail, postage prepaid;

(iii) sent by facsimile; or

(iv) sent by electronic mail,

directed to each director at that director’s address, telephone number, facsimile number or electronic mail address, as the case may be, as shown on the corporation’s records.

If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or (iii) sent by electronic mail, it shall be delivered or sent at least twenty-four (24) hours before the time of the holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. Any oral notice may be communicated to the director. The notice need not specify the place of the meeting (if the meeting is to be held at the corporation’s principal executive office) nor the purpose of the meeting.

3.8 QUORUM.

At all meetings of the Board, a majority of the authorized number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the certificate of incorporation or these bylaws. If a quorum is not present at any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.

3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a

 

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meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

3.10 FEES AND COMPENSATION OF DIRECTORS.

Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board shall have the authority to fix the compensation of directors.

3.11 REMOVAL OF DIRECTORS.

Any director may be removed from office by the stockholders of the corporation only for cause.

No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director’s term of office.

ARTICLE IV—COMMITTEES

4.1 COMMITTEES OF DIRECTORS.

The Board may, by resolution passed by a majority of the authorized number of directors, designate one (1) or more committees, each committee to consist of one (1) or more of the directors of the corporation. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board or in these bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any bylaw of the corporation.

4.2 COMMITTEE MINUTES.

Each committee shall keep regular minutes of its meetings and report the same to the Board when required.

4.3 MEETINGS AND ACTION OF COMMITTEES.

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of:

(i) Section 3.5 (place of meetings and meetings by telephone);

 

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(ii) Section 3.6 (regular meetings);

(iii) Section 3.7 (special meetings and notice);

(iv) Section 3.8 (quorum);

(v) Section 7.12 (waiver of notice); and

(vi) Section 3.9 (action without a meeting)

with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members. However :

(i) the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee;

(ii) special meetings of committees may also be called by resolution of the Board; and

(iii) notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.

ARTICLE V—OFFICERS

5.1 OFFICERS.

The officers of the corporation shall be a president and a secretary. The corporation may also have, at the discretion of the Board, a chairperson of the Board, a vice chairperson of the Board, a chief executive officer, a chief financial officer or treasurer, one or more vice presidents, one or more assistant vice presidents, one or more assistant treasurers, one or more assistant secretaries, and any such other officers as may be appointed in accordance with the provisions of these bylaws. Any number of offices may be held by the same person.

5.2 APPOINTMENT OF OFFICERS.

The Board shall appoint the officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 and 5.5 of these bylaws, subject to the rights, if any, of an officer under any contract of employment.

5.3 SUBORDINATE OFFICERS.

The Board may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, the president, to appoint, such other officers and agents as the business of the corporation may require. Each of such officers and agents shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board may from time to time determine.

 

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5.4 REMOVAL AND RESIGNATION OF OFFICERS.

Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board at any regular or special meeting of the Board or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board.

Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

5.5 VACANCIES IN OFFICES.

Any vacancy occurring in any office of the corporation shall be filled by the Board or as provided in Section 5.2.

5.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.

The chairperson of the Board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

5.7 AUTHORITY AND DUTIES OF OFFICERS.

All officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board or the stockholders and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board.

ARTICLE VI—RECORDS AND REPORTS

6.1 MAINTENANCE AND INSPECTION OF RECORDS.

The corporation shall, either at its principal executive office or at such place or places as designated by the Board, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records.

Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper

 

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purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal executive office.

6.2 INSPECTION BY DIRECTORS.

Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.

ARTICLE VII—GENERAL MATTERS

7.1 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.

The Board, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

7.2 STOCK CERTIFICATES; PARTLY PAID SHARES.

The shares of the corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of, the corporation by the chairperson or vice chairperson of the Board, or the president or vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, and upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid

 

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thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.

7.3 SPECIAL DESIGNATION ON CERTIFICATES.

If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however , that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Section 151, 156, 202(a) or 218(a) of the DGCL or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

7.4 LOST CERTIFICATES.

Except as provided in this Section 7.4, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

7.5 CONSTRUCTION; DEFINITIONS.

Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the DGCL shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

7.6 DIVIDENDS.

The Board, subject to any restrictions contained in either (i) the DGCL, or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation’s capital stock.

The Board may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies.

 

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7.7 FISCAL YEAR.

The fiscal year of the corporation shall be fixed by resolution of the Board and may be changed by the Board.

7.8 SEAL.

The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

7.9 TRANSFER OF STOCK.

Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.

7.10 STOCK TRANSFER AGREEMENTS.

The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.

7.11 REGISTERED STOCKHOLDERS.

The corporation:

(i) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner;

(ii) shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares; and

(iii) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

7.12 WAIVER OF NOTICE.

Whenever notice is required to be given under any provision of the DGCL, the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall

 

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constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.

ARTICLE VIII—NOTICE BY ELECTRONIC TRANSMISSION

8.1 NOTICE BY ELECTRONIC TRANSMISSION.

Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the certificate of incorporation or these bylaws, any notice to stockholders given by the corporation under any provision of the DGCL, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:

(i) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and

(ii) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.

However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

Any notice given pursuant to the preceding paragraph shall be deemed given:

 

  (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice;

 

  (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice;

 

  (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and

 

  (iv) if by any other form of electronic transmission, when directed to the stockholder.

An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

 

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8.2 DEFINITION OF ELECTRONIC TRANSMISSION.

An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

8.3 INAPPLICABILITY.

Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the DGCL.

ARTICLE IX—INDEMNIFICATION

9.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The corporation shall indemnify and hold harmless, to the fullest extent permitted by the DGCL as it presently exists or may hereafter be amended, any director or officer of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “ Proceeding ”) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such Proceeding. The corporation shall be required to indemnify a person in connection with a Proceeding initiated by such person only if the Proceeding was authorized by the Board.

9.2 INDEMNIFICATION OF OTHERS.

The corporation shall have the power to indemnify and hold harmless, to the extent permitted by applicable law as it presently exists or may hereafter be amended, any employee or agent of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any Proceeding by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such Proceeding.

9.3 PREPAYMENT OF EXPENSES.

The corporation shall pay the expenses incurred by any officer or director of the corporation, and may pay the expenses incurred by any employee or agent of the corporation, in defending any Proceeding in advance of its final disposition; provided, however , that the payment of expenses incurred by a person in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person is not entitled to be indemnified under this Article IX or otherwise.

 

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9.4 DETERMINATION; CLAIM.

If a claim for indemnification or payment of expenses under this Article IX is not paid in full within sixty (60) days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.

9.5 NON-EXCLUSIVITY OF RIGHTS.

The rights conferred on any person by this Article IX shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

9.6 INSURANCE.

The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the DGCL.

9.7 OTHER INDEMNIFICATION.

The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.

9.8 AMENDMENT OR REPEAL.

Any repeal or modification of the foregoing provisions of this Article IX shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.”

ARTICLE X—AMENDMENTS

These bylaws may be adopted, amended or repealed by the stockholders entitled to vote. However, the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws.

 

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Exhibit 4.2

 

 

 

 

 

 

 

CHEMOCENTRYX, INC.

AMENDED AND RESTATED

INVESTORS RIGHTS AGREEMENT

S EPTEMBER  8, 2011


TABLE OF CONTENTS

 

                Page  

1.

 

REGISTRATION RIGHTS

     1   
 

1.1

     D EFINITIONS      1   
 

1.2

     R EQUEST FOR R EGISTRATION      3   
 

1.3

     C OMPANY R EGISTRATION      4   
 

1.4

     F ORM S-3 R EGISTRATION      5   
 

1.5

     O BLIGATIONS OF THE C OMPANY      6   
 

1.6

     F URNISH I NFORMATION      7   
 

1.7

     E XPENSES OF R EGISTRATION      7   
 

1.8

     U NDERWRITING R EQUIREMENTS      7   
 

1.9

     D ELAY OF R EGISTRATION      8   
 

1.10

     I NDEMNIFICATION      8   
 

1.11

     R EPORTS U NDER S ECURITIES E XCHANGE A CT OF 1934      10   
 

1.12

     A SSIGNMENT OF R EGISTRATION R IGHTS      11   
 

1.13

     L IMITATIONS ON S UBSEQUENT R EGISTRATION R IGHTS      11   
 

1.14

     M ARKET -S TANDOFF A GREEMENT      11   
 

1.15

     T ERMINATION OF R EGISTRATION R IGHTS      12   

2.

 

COVENANTS OF THE COMPANY

     12   
 

2.1

     D ELIVERY OF F INANCIAL S TATEMENTS      12   
 

2.2

     I NSPECTION AND I NFORMATION R IGHTS      13   
 

2.3

     R IGHT OF F IRST O FFER      13   
 

2.4

     B OARD OF D IRECTORS      14   
 

2.5

     O BSERVATION R IGHTS      15   
 

2.6

     T ERMINATION OF C OVENANTS      16   

3.

 

MISCELLANEOUS

     16   
 

3.1

     S UCCESSORS AND A SSIGNS      16   
 

3.2

     A MENDMENTS AND W AIVERS      16   
 

3.3

     N OTICES      17   
 

3.4

     S EVERABILITY      17   
 

3.5

     G OVERNING L AW      17   
 

3.6

     C OUNTERPARTS      17   
 

3.7

     T ITLES AND S UBTITLES      17   
 

3.8

     A GGREGATION OF S TOCK      17   
 

3.9

     A MENDMENT AND T ERMINATION OF P RIOR A GREEMENT      17   
 

3.10

     C ONSENT      18   


AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT

This Amended and Restated Investors Rights Agreement (the “ Agreement ”) is made as of the 8 th day of September, 2011, by and among ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), the individuals or entities identified on Schedule A attached hereto, each of which is herein referred to as an “ Investor ,” and Thomas J. Schall (the “ Founder ”).

This Agreement supersedes and replaces that certain Amended and Restated Investors Rights Agreement, dated August 26, 2008, by and among the Company and the other parties named therein (the “ Prior Agreement ”).

RECITALS

WHEREAS, one of the Investors, Techne Corporation, a Minnesota corporation (“ Techne ”), has agreed to enter into that certain Convertible Note Loan Agreement (the “ Convertible Note Loan Agreement ”), pursuant to which Techne will lend $10 million in principal amount to the Company and, pursuant to which agreement, (i) the outstanding principal amount of such loan, together with any accrued but unpaid interest thereon may convert, under certain circumstances, into shares of the Company’s capital stock (the “ Note Conversion Securities ”) and (ii) Techne will be entitled to receive warrants to purchase shares of the Company’s Common Stock (the “ Warrant Shares ”) in connection with the conversion of outstanding principal and accrued but unpaid interest under such agreement; and

WHEREAS, Techne’s agreement to enter into the Convertible Note Loan Agreement is conditioned upon the execution and delivery of this Agreement, and the parties to the Prior Agreement desire to amend and restate the Prior Agreement in its entirety.

AGREEMENT

The parties hereby agree as follows:

1.        Registration Rights .   The Company, the Investors and the Founder covenant and agree as follows:

1.1     Definitions .   For purposes of this Section 1:

(a)      The terms “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the “ Securities Act ”), and the declaration or ordering of effectiveness of such registration statement or document;

(b)      The term “ Registrable Securities ” means (i) the shares of Common Stock issuable or issued upon conversion of the Series A Preferred Stock, (ii) the shares of Common Stock issuable or issued upon conversion of the Series B Preferred Stock, (iii) the shares of Common Stock issuable or issued upon conversion of the Series C Preferred Stock, (iv) the shares of Common Stock issuable or issued upon conversion of the Series D Preferred Stock, (v) the shares of Common Stock issuable or issued upon conversion of the


Series E Preferred Stock, (vi) the shares of Common Stock issued to the Founder (the “ Founder’s Stock ”); provided, however, that for the purposes of Section 1.2, 1.4 or 1.13 the Founder’s Stock shall not be deemed Registrable Securities and the Founder shall not be deemed a Holder, (vii) any Common Stock issued to Glaxo Limited Group by the Company in a private placement concurrent with the Company’s initial public offering pursuant to that Amendment to Series D Preferred Stock Subscription Agreement entered into by and between the Company and Glaxo Group Limited, a limited liability company organized under the laws of England and doing business as GlaxoSmithKline, dated as of November 8, 2007 (the “ Series D Amendment ”), (viii) the Note Conversion Securities and the Warrant Shares, (ix) any Common Stock issued to Techne by the Company in a private placement concurrent with the Company’s initial public offering pursuant to the Convertible Note Loan Agreement and (x) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix) and (x); provided, however, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale;

(c)      The number of shares of “Registrable Securities then outstanding” shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities;

(d)      The term “ Holder ” means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 of this Agreement;

(e)      The term “ Form S-3 ” means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act;

(f)      The term “ SEC ” means the Securities and Exchange Commission; and

(g)      The term “ Qualified IPO ” means a firm commitment underwritten public offering by the Company of shares of its Common Stock pursuant to a registration statement on Form S-1 under the Securities Act that is either (i) at a public offering price of not less than $6.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) and which results in aggregate cash proceeds to the Company of $40,000,000 (net of underwriting discounts and commissions), or (ii) upon terms approved by a majority of the outstanding shares of the Company’s Preferred Stock.

 

2


1.2        Request for Registration .  If the Company shall receive at any time after six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction), a written request from either (A) the Holders of a majority of the Series A Preferred Stock (or the Common Stock issuable or issued upon conversion thereof) then outstanding, (B) the Holders of a majority of the Series B Preferred Stock (or the Common Stock issuable or issued upon conversion thereof) then outstanding, (C) the Holders of a majority of the Series C Preferred Stock (or the Common Stock issuable or issued upon conversion thereof) then outstanding, or (D) the Holders of a majority of the Series D Preferred Stock and Series E Preferred Stock (or the Common Stock issuable or issued upon conversion thereof) then outstanding that the Company file a registration statement under the Securities Act covering the registration of at least thirty percent (30%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $10,000,000), then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 60 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.3.

  (b)      If the Holders initiating the registration request hereunder (“ Initiating Holders ”) intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.5(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that in no event shall (i) any securities held by a Holder (other than an Initiating Holder) be included in such underwriting if any Initiating Holder’s securities are excluded from the underwriting, or (ii) the number of shares of Registrable Securities to be included in such underwriting be reduced unless all other securities are first entirely excluded from the underwriting.

 

3


(c)      Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period.

(d)      In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2:

(i)      With respect to Holders of the Series A Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), after the Company has effected one (1) registration pursuant to this Section 1.2 at the request of such Holders of Series A Preferred Stock and such registration has been declared or ordered effective;

(ii)      With respect to Holders of the Series B Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), after the Company has effected one (1) registration pursuant to this Section 1.2 at the request of such Holders of Series B Preferred Stock and such registration has been declared or ordered effective;

(iii)      With respect to Holders of the Series C Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), after the Company has effected one (1) registration pursuant to this Section 1.2 at the request of such Holders of Series C Preferred Stock and such registration has been declared or ordered effective;

(iv)      With respect to Holders of the Series D Preferred Stock and Series E Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), after the Company has effected one (1) registration pursuant to this Section 1.2 at the request of such Holders of Series D Preferred Stock and Series E Preferred Stock and such registration has been declared or ordered effective;

(v)       During the period starting with the date sixty (60) days prior to the Company’s good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or

(vi)      If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.4 below.

1.3     Company Registration .   If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by

 

4


Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered, or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.3, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered.

1.4     Form S-3 Registration .   In case the Company shall receive from any Holder or Holders of the Registrable Securities, a written request or requests that the Company file a registration on Form S-3 and the reasonably anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $2,000,000, the Company will:

(a)      promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

(b)      as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder’s or Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.4: (i) if Form S-3 is not available for such offering by the Holders, (ii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than once in any twelve month period, (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected a registration on Form S-3 for the Holders pursuant to this Section 1.4, (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance, or (v) during the period ending one hundred eighty (180) days after the effective date of a registration statement subject to Section 1.3.

(c)      Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively.

 

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1.5     Obligations of the Company .   Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a)      Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days.

(b)      Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for up to one hundred twenty (120) days.

(c)      Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

(d)      Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e)      In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

(f)      Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, such obligation to continue for one hundred twenty (120) days.

(g)      Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed.

(h)      Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

 

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(i)      Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities.

1.6     Furnish Information .   It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder’s Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement if, as a result of the application of the preceding sentence, the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company’s obligation to initiate such registration as specified in subsection 1.2(a) or Section 1.4, whichever is applicable.

1.7     Expenses of Registration .  All expenses (other than underwriting discounts and commissions incurred in connection with registrations), filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Initiating Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2.

1.8     Underwriting Requirements .   In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under Section 1.3 to include any of the Holders’ securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities,

 

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requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering unless such offering is the initial public offering of the Company’s securities, in which case the selling Holders may be excluded if the underwriters make the determination described above and no other stockholder’s securities are included or (ii) any securities held by a Founder be included if any securities held by any selling Holder are excluded. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling stockholder,” and any pro-rata reduction with respect to such “selling stockholder” shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “selling stockholder,” as defined in this sentence.

1.9        Delay of Registration .   No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.

1.10      Indemnification .   In the event any Registrable Securities are included in a registration statement under this Section 1:

  (a)      To the extent permitted by law, the Company will indemnify and hold harmless each Holder, its officers, directors, employees, partners, members and agents, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), against any losses, claims, damages, or liabilities (joint or several) and reasonable expenses to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “ Violation ”): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or

 

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controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any Holder, underwriter or controlling person for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person.

(b)      To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) and reasonable expenses to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder.

(c)      Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to

 

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deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10.

  (d)      If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; provided, that in no event shall any contribution by a Holder under this Subsection 1.10(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

  (e)      Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

  (f)      The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.

1.11     Reports Under Securities Exchange Act of 1934 .   With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

  (a)      make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act;

  (b)      take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective;

 

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  (c)      file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

  (d)      furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form.

1.12     Assignment of Registration Rights .   The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee (a) of at least 1,000,000 shares of such securities, (b) of all securities owned by a Holder or (c) that is an entity affiliated by common control with such Holder; provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1.

1.13     Limitations on Subsequent Registration Rights .  From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Series A Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), the Series B Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), and the Series C Preferred Stock (or the Common Stock issuable or issued upon conversion thereof), voting together as a single class, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the date set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2.

1.14     Market-Standoff Agreement .

 

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  (a)       Market-Standoff Period; Agreement .   In connection with the initial public offering of the Company’s securities and upon request of the Company or the underwriters managing such offering of the Company’s securities, each Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company’s initial public offering.

  (b)       Limitations .   The obligations described in Section 1.14(a) shall apply only if all officers, directors and five percent (5%) stockholders of the Company enter into similar agreements, and shall not apply to a registration relating solely to employee benefit plans, or to a registration relating solely to a transaction pursuant to Rule 145 under the Securities Act.

  (c)       Stop-Transfer Instructions .   In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of each Holder (and the securities of every other person subject to the restrictions in Section 1.14(a)).

  (d)       Transferees Bound .   Each Holder agrees that prior to the Company’s initial public offering it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 1.14.

1.15     Termination of Registration Rights .   No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) five (5) years following the consummation of a Qualified IPO, or (ii) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares during a three (3)-month period without registration and without limitation.

2.        Covenants of the Company .

2.1        Delivery of Financial Statements .   The Company shall deliver to each Holder of at least 400,000 shares of Registrable Securities:

  (a)      as soon as practicable, after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“ GAAP ”), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company;

  (b)      as soon as practicable, after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter prepared in accordance with GAAP; and

 

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  (c)      upon written request, as soon as practicable after the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, and, as soon as prepared, any other budgets or revised budgets prepared by the Company.

Notwithstanding the foregoing, the Company shall have no obligation to provide any information pursuant to subsection (c) above to any Investor whom the Company believes is developing products in competition with or potentially in competition with the Company but only to the extent that the Board of Directors of the Company determines that provision of the specific information would have a material adverse competitive effect on the Company. The Investors hereby acknowledge that the Company may elect to provide different amounts of information relating to the Company to any such Investors.

2.2       Inspection and Information Rights .

  (a)      The Company shall permit each Holder of at least 400,000 shares of Registrable Securities, at such Holder’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers and directors, all at such reasonable times as may be requested by the Investor, as applicable; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information, the disclosure of which would have a material adverse effect on the Company or which would jeopardize the trade secret’s status as such.

  (b)      So long as Glaxo Group Limited, or its affiliates, (collectively, “ Glaxo ”) shall own at least 5,000,000 shares of the Company’s Preferred Stock, Glaxo shall be entitled to (i) a quarterly informational update meeting with the Company’s Chairman of R&D or other senior management at Glaxo’s R&D facilities and (ii) receive copies of any written Company Board actions and minutes of all Company Board meetings (each of which may be appropriately redacted by the Company in its reasonable discretion with respect to matters which may be competitive with Glaxo or matters related to the Company’s relationship with Glaxo).

2.3       Right of First Offer .   Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Holder of at least 1,000,000 shares of Registrable Securities a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). A Holder who chooses to exercise the right of first offer may designate as purchasers under such right itself or its partners or affiliates in such proportions as it deems appropriate.

Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock (“ Shares ”), the Company shall first make an offering of such Shares to each Holder in accordance with the following provisions:

  (a)      The Company shall deliver a notice by certified mail (“ Notice ”) to the Holders stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares.

 

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  (b)      Within 15 calendar days after delivery of the Notice, the Holder may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Holder bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). The Company shall promptly, in writing, inform each Holder that purchases all the shares available to it (each, a “ Fully-Exercising Investor ”) of any other Holder’s failure to do likewise. During the ten (10)-day period commencing after receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Holders were entitled to subscribe but which were not subscribed for by the Holders that is equal to the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities).

  (c)      The Company may, during the 45-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Holders in accordance herewith.

  (d)      The right of first offer in this paragraph 2.3 shall not be applicable (i) to the issuance or sale of up to 12,150,000 shares of Common Stock (or options therefor) since the inception of the Company to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors for the primary purpose of soliciting or retaining their services, (ii) to or after consummation of a Qualified IPO or to the concurrent private placements of Common Stock to Glaxo and Techne pursuant to the Series D Amendment and Convertible Note Loan Agreement, respectively, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) to the issuance of securities in connection with bona fide acquisitions, mergers, technology licenses or purchases, corporate partnering agreements or similar transactions, the terms of which are approved by the Board of Directors, (v) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions, (vi) to the issuance of the Note Conversion Securities or the Warrant Shares, or (vii) to the issuance of securities that, with unanimous approval of the Board of Directors of the Company, are not offered to any existing stockholder of the Company.

2.4       Board of Directors .   As of the date of this Agreement, and notwithstanding anything to the contrary in the Bylaws of the Company, the Board of Directors of the Company shall consist of six (6) members (counting the one vacant seat as of the date of this Agreement), not more than two (2) of which shall be employees of the Company. For so long as OrbiMed Advisors, LLC and its affiliates (collectively “ OrbiMed ”) hold at least 384,615 shares of Registrable Securities, it shall have the right to designate one (1) member of the Board

 

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of Directors and the OrbiMed designee shall also be a member of each committee of the Board of Directors, including, without limitation, the Compensation Committee and the Audit Committee. For so long as HBM BioVentures (Cayman) Ltd. and its affiliates (collectively “ HBM ”) hold at least 365,385 shares of Registrable Securities, it shall have the right to designate one (1) member of the Board of Directors and the HBM designee shall also be a member of each committee of the Board of Directors, including, without limitation, the Compensation Committee and the Audit Committee. The Board of Directors shall hold a regularly scheduled meeting at least once every ninety (90) days. Each member of the Board of Directors and the members of each committee of the Board of Directors shall receive notice of each meeting at least fifteen (15) days before the meeting and such notice shall be provided to each member in the same manner. The Company will reimburse the OrbiMed and HBM directors, as applicable, for their reasonable out-of-pocket and travel expenses incurred in connection with attending such meetings.

2.5       Observation Rights.

  (a)      The Company agrees that for so long as HealthCap III Sidefund KB or its affiliates (collectively “ HealthCap ”) owns 269,231 shares of Registrable Securities, HealthCap shall be entitled to designate one individual to act as a non-voting observer of the Board of Directors of the Company (the “ HealthCap Observer ”). The HealthCap Observer shall not have any right to vote as a director of the Company but shall otherwise be entitled to notice of and to attend all meetings of the Board of Directors of the Company, and to receive any material distributed to the directors in their capacity as directors of the Company. The Company shall not have any obligation to pay any expenses incurred in connection with the HealthCap Observer’s attendance at such meetings.

  (a)      The Company agrees that for so long as Alta Partners or its affiliates (collectively “ Alta ”) owns 326,923 shares of Registrable Securities, Alta shall be entitled to designate one individual to act as a non-voting observer of the Board of Directors of the Company (the “ Alta Observer, ” and together with the HealthCap Observer, the “ Observers ”). The Alta Observer shall not have any right to vote as a director of the Company but shall otherwise be entitled to notice of and to attend all meetings of the Board of Directors of the Company, and to receive any material distributed to the directors in their capacity as directors of the Company. The Company shall not have any obligation to pay any expenses incurred in connection with the Alta Observer’s attendance at such meetings.

  (b)      The Observers shall be subject to the obligations of confidentiality set forth in Section 7.14 of the Series B Preferred Stock Subscription Agreement pursuant to which they acquired their shares of Series B Preferred Stock of the Company. Notwithstanding Section 2.5(a), the Company reserves the right not to provide information and to exclude the Observers from any meeting or portion thereof if delivery of such information or attendance at such meeting would result in a loss of trade secret protection for trade secrets of the Company, or would adversely affect the attorney-client privilege between the Company and its counsel.

 

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 2.6       Termination of Covenants .   The covenants set forth in Sections 2.1 through Section 2.5 shall terminate as to each Holder and be of no further force or effect immediately prior to the consummation of a Qualified IPO.

  (a)      The covenants set forth in Sections 2.1 and 2.2 shall terminate as to each Holder and be of no further force or effect when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the events described in Section 2.6(a) above.

3.       Miscellaneous .

3.1       Successors and Assigns .   Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties (including transferees of any of the Registrable Securities).  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

3.2       Amendments and Waivers .   Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding, not including the Founder’s Stock; provided that if (i) such amendment has the effect of affecting the Founder’s Stock (A) in a manner different than securities issued to the Investors and (B) in a manner adverse to the interests of the holders of the Founder’s Stock, then such amendment shall require the consent of the holder or holders of a majority of the Founder’s Stock, (ii) such amendment has the effect of affecting the Series A Preferred Stock (A) in a manner different than the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series E Preferred Stock and (B) in a manner adverse to the interests of the holders of the Series A Preferred Stock, then such amendment shall require the consent of the holder or holders of a majority of the Series A Preferred Stock, (iii) such amendment has the effect of affecting the Series B Preferred Stock (A) in a manner different than the Series A Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series E Preferred Stock and (B) in a manner adverse to the interests of the holders of the Series B Preferred Stock, then such amendment shall require the consent of the holder or holders of a majority of the Series B Preferred Stock, (iv) such amendment has the effect of affecting the Series C Preferred Stock (A) in a manner different than the Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock or the Series E Preferred Stock and (B) in a manner adverse to the interests of the holders of the Series C Preferred Stock, then such amendment shall require the consent of the holder or holders of a majority of the Series C Preferred Stock, (v) such amendment has the effect of affecting the Series D Preferred Stock (A) in a manner different than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock and (B) in a manner adverse to the interests of the holders of the Series D Preferred Stock, then such amendment shall require the consent of the holder or holders of a majority of the Series D Preferred Stock, (vi) such amendment has the effect of affecting the Series E Preferred Stock (A) in a manner different than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock and (B) in a manner adverse to the interests of the holders of the Series E

 

16


Preferred Stock, then such amendment shall require the consent of the holder or holders of a majority of the Series E Preferred Stock, (vii) such amendment alters Section 2.4, then such amendment shall require the consent of OrbiMed and HBM, (viii) such amendment alters Section 2.5(a), then such amendment shall require the consent of HealthCap, (ix) such amendment alters Section 2.5(b), then such amendment shall require the consent of Alta, or (x) such amendment alters Section 2.2(b), then such amendment shall require the consent of Glaxo. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company.

  3.3       Notices .   Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party’s address or fax number as set forth below hereto or as subsequently modified by written notice; provided, however, that registered or certified mail shall not be used to effectuate the delivery of any such notice to addresses outside the United States.

  3.4       Severability .   If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms.

  3.5       Governing Law .   This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws.

  3.6       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.

  3.7       Titles and Subtitles .   The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

  3.8       Aggregation of Stock .   All shares of the Preferred Stock held or acquired by affiliated entities or persons, successor entities, investment funds managed or advised by an Investor, a manager or advisor of an Investor, or an affiliate of such manager or advisor shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

  3.9       Amendment and Termination of Prior Agreement .   The Prior Agreement is hereby amended in its entirety and restated herein. Such amendment and restatement is effective upon the execution of this Agreement by the Company and Investors

 

17


constituting at least a majority of the Registrable Securities outstanding (not including the Founder’s Stock). Upon such execution, all provisions of, rights granted and covenants made in the Prior Agreement (including, without limitation, the Right of First Offer set forth in Section 2.3 of the Prior Agreement) are hereby waived, released and terminated in their entirety and shall have no further force and effect (including, without limitation, with respect to the Note Conversion Securities, Warrant Shares or shares issuable in private placements completed concurrent with the completion of the Company’s initial public offering pursuant to the Series D Amendment or the Convertible Note Loan Agreement).

  3.10       Consent .   The execution and delivery of this Agreement by Techne shall constitute: (i) a complete waiver of Techne’s rights under Sections 6.3, 6.4, 6.5, 6.13, 7.1, 7.2(a) and 8 of that certain Investment Agreement, dated November 18, 1997, by and between the Company and Techne (as amended, modified, supplemented or amended and restated from time to time), and (ii) consent to the Company’s Amended and Restated Certificate of Incorporation, in the form attached as Exhibit A to the Series E Subscription Agreement of the Company dated August 26, 2008.

 

[Remainder of page intentionally left blank]

 

18


The parties have executed this Agreement as of the date first above written.

 

COMPANY:   CHEMOCENTRYX, INC.
  By:  

      /s/ Susan M. Kanaya

  Name:   Susan M. Kanaya
  Title:   Senior Vice President, Finance,
    Chief Financial Officer and Secretary
  Address:   850 Maude Avenue
    Mountain View, CA 94043
  Fax:  (650) 632-2910

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]

 


INVESTORS:  

Techne Corporation

 

(Print or Type Name of Investor)

  By:  

 /s/ Gregory J. Melsen

  Name:  

   Gregory J. Melsen

  Title:  

    Vice President-Finance, Treasurer and Chief

   

    Financial Officer

  Address:   614 McKinley PL NE
    Minneapolis, MN 55413-2610
  Fax:   (612) 379-6580

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

OrbiMed Private Investments, LP

 

(Print or Type Name of Investor)

  By:  

 /s/ Donald R. Bennett

  Name:  

   Donald R. Bennett

  Title:  

    Controller, OrbiMed Advisors, LLC

  Address:  
  Fax:  

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

UBS Juniper Crossover Fund, L.L.C.

 

(Print or Type Name of Investor)

  By:  

 /s/ Donald R. Bennett

  Name:  

   Donald R. Bennett

  Title:  

    Controller, OrbiMed Advisors, LLC

  Address:  
  Fax:  

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

OrbiMed Associates LLC

 

(Print or Type Name of Investor)

  By:  

 /s/ Donald R. Bennett

  Name:  

   Donald R. Bennett

  Title:  

    Controller, OrbiMed Advisors, LLC

  Address:  
  Fax:  

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

HBM BioVentures (Cayman) Ltd.

 

(Print or Type Name of Investor)

  By:  

 /s/ John Arnold

  Name:  

   John Arnold

  Title:  

    Chairman and Managing Director

  Address:     Centennial Towers, 3 rd Floor
      2454 West Bay Road
      Grand Cayman, Cayman Islands
  Fax:     (345) 946-8003

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

Private Life BioMed AG

 

Represented by its Liquidator

 

M.M. Wardurg & Co

 

Schiffahrts Treuhand Gmbh

 

     (Print or Type Name of Investor)

  By:  

       /s/ Michael Clasen        /s/ Sonja Krone

  Name:  

 Michael Clasen             Sonja Krone

  Title:  

   Managing Director          Authorized

   

     Representative

  Address:    Fuhlentwiete 12
     20355 Hamburg
     Germany
  Fax:   +49.40.3282.5809

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

Pictet Private Equity Investors SA

 

     (Print or Type Name of Investor)

  By:   

/s/ Carsten Beyer             /s/ Gerald Formaz

  Name:  

 Carsten Beyer                   Gerald Formaz

  Title:  

   Director                             Director

  Address:    Route des Accacias, 60
    1211 Geneva 73
    Switzerland
  Fax:     +41 (0) 58 323 2039

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

    DEUTSCHE BANK NOMINEES

 

    (Jersey) Limited A/c HAML

 

    St. Paul’s Gate, New Street

 

     St. Helier, Jersey JE4 8ZB, Channel Islands

 

    (Print or Type Name of Investor)

  By:   

         For and on Behalf of

  Name:         DEUTSCHE BANK NOMINEES
  Title:  

        (JERSEY) LIMITED

   

        /s/ [illegible]

   

      Authorized Signatories

  Address:
  Fax:

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

    HealthCap 1999 KB

 

    (Print or Type Name of Investor)

 

    By HealthCap 1999 [illegible]

  By:   

      /s/ [illegible]             /s/ [illegible]

  Name:  

   [illegible]               [illegible]

  Title:  

   Partner                       Partner

  Address:   [illegible]
  Fax:   +46 8 44258 79

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

    HealthCap 1999 GbR

 

    (Print or Type Name of Investor)

  By:  

        /s/ Jürgen Busch

  Name:  

    Jürgen Busch

  Title:  

   Managing Director of

   

   General Partner

  Address:  [illegible]
  Fax:  

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

HealthCap III Sidefund KB

 

      (Print or Type Name of Investor)

  By   HealthCap III Sidefund [illegible]
  By:   

       /s/ [illegible]                  /s/ [illegible]

  Name:  

    [illegible]                    [illegible]

  Title:  

    Partner                           Partner

  Address:   [illegible]
  Fax:   46 8442 5879

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

      OFCO CLUB 1999

 

      (Print or Type Name of Investor)

  By [illegible]
  By:   

      /s/ [illegible]                  /s/ [illegible]

  Name:  

   [illegible]                   [illegible]

  Title:  

    Partner                           Partner

  Address:  [illegible]
  Fax:  +46 8 44258 79

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

OFCO CLUB III Sidefund

 

(Print or Type Name of Investor)

  By [illegible]
  By:   

      /s/ [illegible]                  /s/ [illegible]

  Name:  

   [illegible]                    [illegible]

  Title:  

    Partner                           Partner

  Address:  [illegible]
  Fax:  +46 8 44258 79

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


INVESTORS:  

GIMV NV

 

     (Print or Type Name of Investor)

    By:  

/s/ [illegible]

    Name:  

[illegible]

    Title:  

CEO

  Address:      Karel Ooinsstraat 37
       2078 Antwerp
       Belgium
  Fax:      +32 3 290 2105
    By:  

/s/ Edmond Bastyirs

    Name:  

Edmond Bastyirs

    Title:  

GIMV Partner

     AdriesBemeer GIMV Life Sciences 2004
    By:  

/s/ Uoer Dejorchleer

    Name:  

Uoer Dejorchleer

    Title:  

President

    By:  

/s/ Edmond Bastyirs

    Name:  

Edmond Bastyirs

    Title:  

GIMV Partner

  Address:      Karel Ooinsstraat 37
       2078 Antwerp
       Belgium
  Fax:      +32 3 290 2105

[COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT]


Schedule A

Investors

 

Adam K. Simpson
Adviesbeheer GIMV Life Sciences 2004
Alta BioPharma Partners III GMBH & Co. Beteiligungs KG
Alta BioPharma Partners III, L.P.
Alta Embarcadero BioPharma Partners III, LLC
Banque Privee Edmond De Rothschild Europe
BNP Paribas Private Bank (Switzerland) SA
Deutsche Bank Nominees (Jersey) Limited - A/c HAML
Dr. Juerg F. Geigy
Forest Laboratories Ireland Limited
GIMV NV
Glaxo Group Limited
Hare & Co, as Nominee for Jennison Health Sciences Fund
HBM BioVentures (Cayman) Ltd.
HealthCap 1999 GMBH on behalf of HealthCap1999 Gbr
HealthCap 1999 KB
HealthCap III Sidefund KB
Latham & Watkins
Mirabaud & Cie
Odlander, Fredrikson & Co. AB
OFCO Club III Sidefund
OrbiMed Associates, LLC
OrbiMed Private Investments, LP
Peter Svennilson
Pictet Private Equity Investors SA
Private Life BioMed AG
Regina and George Herzlinger, Joint tenants
Roger Lucas
Techne Corporation
Thomas A. Edwards
Tularik Inc.
UBS Juniper Crossover Fund, L.L.C.
VP Company Investments 2004, LLC

Exhibit 4.3

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

C HEMO C ENTRYX , I NC .

W ARRANT FOR THE P URCHASE OF S HARES OF C OMMON S TOCK

 

Date: [                ]    Number of Shares: [              ]

For Value Received, C HEMO C ENTRYX , I NC ., a Delaware corporation (the “ Company ”), with its principal office at 850 Maude Avenue, Mountain View, California 94043, hereby certifies that T ECHNE C ORPORATION , a Minnesota corporation (“ Holder ”), or its assigns, in partial consideration for entering into that certain Convertible Note Loan Agreement, dated as of September [      ] , 2011, by and between the Company and the Holder, is entitled, subject to the provisions of this Warrant, to purchase from the Company the number of fully paid and nonassessable shares of Common Stock of the Company set forth above, subject to adjustment as hereinafter provided.

Holder may purchase such number of shares of Common Stock at a purchase price per share (as appropriately adjusted pursuant to Section 7 hereof) of $ [       ] (the “ Exercise Price ”). The term “ Common Stock ” shall mean the aforementioned Common Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein.

The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as “ Warrant Stock .”

Section 1.      E XERCISE OF W ARRANT .   This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date (as hereinafter defined) by presentation and surrender hereof to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper


payment of the Exercise Price in lawful money of the United States of America in the form of a check, subject to collection, for the number of shares of Warrant Stock specified in the Purchase Form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of Holder thereof to purchase the balance of the Warrant Stock purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase Form, together with proper payment of the Exercise Price, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Stock, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Stock shall not then be actually delivered to Holder.

Section 2.       N ET E XERCISE .   Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Form of Subscription and notice of such election in which event the Company shall issue to Holder a number of shares of Warrant Stock computed using the following formula:

 

       X = Y (A-B)
                     A

Where

       X =         the number of shares of Warrant Stock to be issued to Holder
       Y =         the number of shares of Warrant Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation)
       A =         the fair market value of one share of the Warrant Stock (at the date of such calculation)
       B =         Exercise Price (as adjusted to the date of such calculation)

For purposes of this Section 2, the fair market value of Warrant Stock on the date of calculation shall mean with respect to each share of Warrant Stock:

(a)     if the exercise is in connection with an initial public offering of the Company’s Common Stock, and if the Company’s Registration Statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value per share shall be the initial “Price to Public” specified in the final prospectus with respect to the offering;

(b)     if this Warrant is exercised after, and not in connection with, the Company’s initial public offering, and if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter:

 

2


(1)     if the Company’s Common Stock is traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices over a thirty (30) day period ending three days before the date of calculation;

(2)     if the Company’s Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid or sales price (whichever is applicable) over the thirty (30) day period ending three days before the date of calculation; or

(c)     if neither (1) nor (2) is applicable, the fair market value of Warrant Stock shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Warrant Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors, taking into consideration, without limitation, the most recent sales of the Company’s capital stock.

(d)     to the extent this Warrant is not previously exercised, it shall be automatically exercised in accordance with this Section 2 prior to any termination in accordance with Section 8.

Section 3.      R ESERVATION OF S HARES .   The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable.

Section 4.      F RACTIONAL I NTEREST .   The Company will not issue a fractional share of Common Stock upon exercise of a Warrant. Instead, the Company will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: multiply the current fair market value (as determined as set forth in Section 2) of a full share by the fraction of a share and round the result to the nearest cent.

Section 5.      T RANSFERS ; A SSIGNMENT OR L OSS OF W ARRANT .

(a)     Subject to the terms and conditions contained in Section 10 hereof, this Warrant and all rights hereunder are transferable in whole or in part by Holder and any successor transferee; provided that prior to such transfer Holder shall give thirty (30) days prior written notice of any such transfer to the Company, and the Company shall have the right to acquire the Warrant under the identical provisions contained in such notice by giving Holder written notice within fifteen (15) days of receipt of such notice. The Company’s failure to respond to said notice within said fifteen (15) days shall be deemed a waiver of this right of first refusal. The transfer shall be recorded on the books of the Company upon receipt by the Company of the Transfer Notice annexed hereto at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer.

(b)     Holder shall not, without obtaining the prior written consent of the Company, which consent shall not be unreasonably withheld, assign its interest in this Warrant in

 

3


whole or in part to any person or persons. Subject to the provisions of Section 11, upon surrender of this Warrant to the Company or at the office of its stock transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment (any such assignee will then be a “Holder” for purposes of this Warrant) and, if Holder’s entire interest is not being assigned, in the name of Holder, and this Warrant shall promptly be canceled.

(c)     Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. In the event that this Warrant is lost, stolen, destroyed or mutilated, Holder shall pay all reasonable attorneys’ fees and expenses incurred by the Company in connection with the replacement of this Warrant and the issuance of a new Warrant.

Section 6.      R IGHTS OF H OLDER .   Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms.

Section 7.      A DJUSTMENT OF E XERCISE P RICE AND N UMBER OF S HARES .   The number and kind of securities purchasable upon the exercise of the Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

(a)      Stock Splits and Dividends .    If outstanding shares of the Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. When any adjustment is required to be made in the Exercise Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

(b)      Reclassification, Etc .    In case there occurs any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of

 

4


this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, or reorganization shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment pursuant to the provisions of this Section 7.

(c)      Adjustment Certificate .    When any adjustment is required to be made in the Warrant Stock or the Exercise Price pursuant to this Section 7, the Company shall promptly mail to Holder a certificate setting forth (i) a brief statement of the facts requiring such adjustment, (ii) the Exercise Price after such adjustment and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment.

Section 8.      T ERMINATION .   This warrant (and the right to purchase securities upon exercise hereof) shall terminate upon the earliest to occur of the following (the “ Expiration Date ”): (a)  [                  ] or (b) a Sale of the Company (as defined below).

Section 9.      S ALE OF THE C OMPANY .   The Company will notify the Holder of any proposed Sale of the Company at least fifteen (15) days prior to the expected closing of the Sale of the Company. As used herein, “ Sale of the Company ” means (i) any sale, transfer or other disposition to another company of all or substantially all of the Company’s assets, (ii) the sale of shares of the Company resulting in more than 50% of the voting power of the Company or of the surviving entity being vested in persons other than the persons who own 50% or more of the voting power of the Company immediately prior to the effectiveness of such transaction, or (iii) a merger or consolidation of the Company resulting in more than 50% of the voting power of the Company or of the surviving entity being vested in persons other than the persons who own 50% or more of the voting power of the Company immediately prior to the effectiveness of such transaction.

Section 10.    T RANSFER TO C OMPLY WITH THE S ECURITIES A CT OF 1933.   This Warrant may not be exercised and neither this Warrant nor any Securities (as defined below), nor any interest in either, may be offered, sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or blue sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for the Securities issued upon exercise of this Warrant, unless at the time of exercise such Securities are acquired pursuant to a registration statement that has been declared effective under the Securities Act of 1933, as amended (the “ Securities Act ”), and applicable blue sky laws, shall bear a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED

 

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OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Any certificate for any Securities issued at any time in exchange or substitution for any certificate for any Securities bearing such legend (except a new certificate for any Securities issued after the acquisition of such Securities pursuant to a registration statement that has been declared effective under the Securities Act) shall also bear such legend unless, in the opinion of counsel for the Company, the Securities represented thereby need no longer be subject to the restriction contained herein. The provisions of this Section 10 shall be binding upon all subsequent holders of certificates for Securities bearing the above legend and all subsequent holders of this Warrant, if any.

Section 11.      R EPRESENTATIONS AND C OVENANTS OF H OLDER .   This Warrant has been entered into by the Company in reliance upon the following representations and covenants of Holder, which by its execution hereof Holder hereby confirms:

(a)       Investment Purpose. The right to acquire the Common Stock (the “ Securities ”), and any Securities issued upon exercise of Holder’s rights contained herein, will be acquired for investment and not with a view to the sale or distribution of any part thereof, and Holder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption.

(b)       Private Issue. Holder understands (i) that the Securities issuable upon exercise of Holder’s rights contained herein are not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualification requirements thereof, and (ii) that the Company’s reliance on such exemption is predicated on the representations set forth in this Section 11.

(c)       Disposition of Holder’s Rights. In no event will Holder make a disposition of any of its rights to acquire the Securities, or of any Securities issued upon exercise of such rights, unless and until (i) it shall have notified the Company of the proposed disposition and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to Holder) reasonably satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act has been taken or (B) an exemption from the registration requirements of the Securities Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire the Securities, or of any Securities issued on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to such security when (1) such security shall have been effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration, (2) such

 

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security shall have been sold without registration in compliance with Rule 144 under the Securities Act or (3) a letter shall have been issued to Holder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to Holder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or ruling, and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, Holder or a holder of the Securities then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such Securities not bearing any restrictive legend.

(d)       Financial Risk.   Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment.

(e)       Risk of No Registration.   Holder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), or file reports pursuant to Section 15(d) of the Exchange Act, or if a registration statement covering the Securities under the Securities Act is not in effect when it desires to sell (i) the rights to purchase the Securities pursuant to this Warrant or (ii) the Securities issued upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. Holder also understands that any sale of its rights of Holder to purchase the Securities, or of any of the Securities, which might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions of that Rule.

(f)       Accredited Investor.   Holder is an “accredited investor” within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect.

Section 12.      M ARKET -S TANDOFF A GREEMENT

(a)       Market-Standoff Period; Agreement .  In connection with the initial public offering of the Company’s securities and upon request of the Company or the underwriters managing such offering of the Company’s securities, Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company’s initial public offering; provided, that the Company’s officers and directors and the holders of substantially all of its outstanding shares of capital stock are subject to substantially similar restrictions.

(b)       Stop-Transfer Instructions .  In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of Holder (and the securities of every other person subject to the restrictions in Section 12(a)).

 

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(c)       Transferees Bound .  The Holder agrees that prior to the Company’s initial public offering it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 12.

Section 13.      S ATURDAYS , S UNDAYS AND H OLIDAYS .   If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of California.

Section 14.      I SSUE T AX .   The issuance of certificates for Common Stock upon the exercise of the Warrant shall be made without charge to the holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided , however , that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificates in a name other than that of the then Holder of the Warrant being exercised.

Section 15.      M ODIFICATION AND W AIVER .   Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated other than by an instrument in writing signed by the Company and by Holder.

Section 16.      N OTICES .   Unless otherwise specified herein, any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be given in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) three (3) days after deposit in the United States mail if sent by registered or certified mail, postage prepaid, or (iii) one (1) day after deposit with an overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to Holder at its address as shown on the books of the Company, or to the Company at the address indicated therefor in the first paragraph of this Warrant.

Section 17.      D ESCRIPTIVE H EADINGS AND G OVERNING L AW .   The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to its conflicts of laws principles.

Section 18.      A TTORNEYS ’ F EES .   In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys’ fees and expenses and all costs of proceedings incurred in enforcing this Warrant.

Section 19.      S URVIVAL .   The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall survive the execution and delivery of this Warrant.

Section 20.      S EVERABILITY .   In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be

 

8


replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision.

 

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I N W ITNESS W HEREOF , the Company has duly caused this Warrant to be signed by its duly authorized officer and to be dated as of the date first above written.

 

  Company:
  C HEMO C ENTRYX , I NC .
  By:  

 

    Name:   Thomas J. Schall
    Title:   Chief Executive Officer

 

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PURCHASE FORM

Dated                      ,         

The undersigned hereby irrevocably elects to exercise the within Warrant to purchase              shares of Common Stock and hereby makes payment of $                      in payment of the exercise price thereof, together with all applicable transfer taxes, if any.

In exercising its rights to purchase the Common Stock of ChemoCentryx, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 11 of the Warrant.

Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below.

 

   

 

    (Name)
   

 

    (Address)
   

 

    Holder:
   

T ECHNE C ORPORATION ,

a Minnesota corporation

    By:    
    Print Name:    

 

11


ASSIGNMENT FORM

Dated                  ,         

F OR V ALUE R ECEIVED , T ECHNE C ORPORATION , a Minnesota corporation, hereby sells, assigns and transfers unto

 

  (the “ Assignee ”),

(please type or print in block letters)

 

 

        (insert address)

its right to purchase up to              shares of Common Stock represented by this Warrant and does hereby irrevocably constitute and appoint                                          attorney, to transfer the same on the books of the Company, with full power of substitution in the premises.

 

T ECHNE C ORPORATION ,
a Minnesota corporation
By:  

 

Print Name:  

 

 

 

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TRANSFER NOTICE

(To transfer or assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

F OR V ALUE R ECEIVED , the foregoing Warrant and all rights evidenced thereby are hereby transferred and assigned to:

 

 

(Please Print)

 

whose address is  

 

  

 

 

Dated  

 

Holder’s Signature  

 

Holder’s Address  

 

 

 

 

Note:    The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

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Exhibit 4.4

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

C HEMO C ENTRYX , I NC .

W ARRANT FOR THE P URCHASE OF S HARES OF S ERIES B P REFERRED S TOCK

 

Date:                       Number of Shares:        

For Value Received, C HEMO C ENTRYX , I NC ., a Delaware corporation (the “ Company ”), with its principal office at 850 Maude Avenue, Mountain View, California 94043, hereby certifies that [                    ] (“ Holder ”), or its assigns, in partial consideration for the engagement of Holder as placement agent pursuant to that certain Letter Agreement dated May 4, 2004, is entitled, subject to the provisions of this Warrant, to purchase from the Company the number of fully paid and nonassessable shares of Series B Preferred Stock of the Company set forth above, subject to adjustment as hereinafter provided.

Holder may purchase such number of shares of Series B Preferred Stock at a purchase price per share (as appropriately adjusted pursuant to Section 7 hereof) of $2.60 (the “ Exercise Price ”). The term “ Series B Preferred Stock ” shall mean the aforementioned Series B Preferred Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein.

The number of shares of Series B Preferred Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Series B Preferred Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Series B Preferred Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as “ Warrant Stock .”

Section 1. E XERCISE OF W ARRANT . This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date (as hereinafter defined) by presentation and surrender hereof to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper payment of the


Exercise Price in lawful money of the United States of America in the form of a check, subject to collection, for the number of shares of Warrant Stock specified in the Purchase Form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of Holder thereof to purchase the balance of the Warrant Stock purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase Form, together with proper payment of the Exercise Price, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Stock, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Stock shall not then be actually delivered to Holder.

Section 2. N ET E XERCISE . Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Series B Preferred Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Form of Subscription and notice of such election in which event the Company shall issue to Holder a number of shares of Warrant Stock computed using the following formula:

 

     X = Y (A-B)

              A

Where      X =    the number of shares of Warrant Stock to be issued to Holder
     Y =    the number of shares of Warrant Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation)
     A =    the fair market value of one share of the Warrant Stock (at the date of such calculation)
     B =    Exercise Price (as adjusted to the date of such calculation)

For purposes of this Section 2, the fair market value of Warrant Stock on the date of calculation shall mean with respect to each share of Warrant Stock:

(a) if the exercise is in connection with an initial public offering of the Company’s Common Stock, and if the Company’s Registration Statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value per share shall be the product of (x) the initial “Price to Public” specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Warrant Stock is convertible at the date of calculation;

(b) if this Warrant is exercised after, and not in connection with, the Company’s initial public offering, and if the Company’s Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter:

(1) if the Company’s Common Stock is traded on a securities exchange

 

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or The Nasdaq Stock Market, the fair market value shall be deemed to be the product of (x) the average of the closing prices over a thirty (30) day period ending three days before the date of calculation and (y) the number of shares of Common Stock into which each share of Warrant Stock is convertible on such date;

(2) if the Company’s Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the product of (x) the average of the closing bid or sales price (whichever is applicable) over the thirty (30) day period ending three days before the date of calculation and (y) the number of shares of Common Stock into which each share of Warrant Stock is convertible on such date; or

(c) if neither (1) nor (2) is applicable, the fair market value of Warrant Stock shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Warrant Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors, unless the Company is at such time subject to an acquisition as described in Section 7(c) below, in which case the fair market value of Warrant Stock shall be deemed to be the value received by the holders of such stock pursuant to such acquisition.

(d) to the extent this Warrant is not previously exercised, it shall be automatically exercised in accordance with this Section 2 prior to any termination in accordance with Section 8.

Section 3. R ESERVATION OF S HARES . The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Series B Preferred Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable.

Section 4. F RACTIONAL I NTEREST . The Company will not issue a fractional share of Series B Preferred Stock upon exercise of a Warrant. Instead, the Company will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: multiply the current market price of a full share by the fraction of a share and round the result to the nearest cent.

Section 5. T RANSFERS ; A SSIGNMENT OR L OSS OF W ARRANT .

(a) Subject to the terms and conditions contained in Section 10 hereof, this Warrant and all rights hereunder are transferable in whole or in part by Holder and any successor transferee; provided that prior to such transfer Holder shall give thirty (30) days prior written notice of any such transfer to the Company, and the Company shall have the right to acquire the Warrant under the identical provisions contained in such notice by giving Holder written notice within fifteen (15) days of receipt of such notice. The Company’s failure to respond to said notice within said fifteen (15) days shall be deemed a waiver of this right of first refusal. The transfer shall be recorded on the books of the Company upon receipt by the Company of the Transfer Notice annexed hereto at its principal offices and the payment to the Company of all transfer taxes and other governmental

 

3


charges imposed on such transfer.

(b) Holder shall not, without obtaining the prior written consent of the Company, which consent shall not be unreasonably withheld, assign its interest in this Warrant in whole or in part to any person or persons. Subject to the provisions of Section 10, upon surrender of this Warrant to the Company or at the office of its stock transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment (any such assignee will then be a “Holder” for purposes of this Warrant) and, if Holder’s entire interest is not being assigned, in the name of Holder, and this Warrant shall promptly be canceled.

(c) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. In the event that this Warrant is lost, stolen, destroyed or mutilated, Holder shall pay all reasonable attorneys’ fees and expenses incurred by the Company in connection with the replacement of this Warrant and the issuance of a new Warrant.

Section 6. R IGHTS OF H OLDER . Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Stock purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms.

Section 7. A DJUSTMENT OF E XERCISE P RICE AND N UMBER OF S HARES . The number and kind of securities purchasable upon the exercise of the Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

(a) Redemption or Conversion of Series B Preferred Stock . If all of the Series B Preferred Stock is redeemed or converted into shares of Common Stock, then this Warrant shall automatically become exercisable for that number of shares of Common Stock equal to the number of shares of Common Stock that would have been received if this Warrant had been exercised in full and the shares of Series B Preferred Stock received thereupon had been simultaneously converted into shares of Common Stock immediately prior to such event, and the Exercise Price shall be automatically adjusted to equal the number obtained by dividing (i) the aggregate Exercise Price of the shares of Series B Preferred Stock for which this Warrant was exercisable immediately prior to such redemption or conversion, by (ii) the number of shares of Common Stock for which this Warrant is exercisable immediately after such redemption or conversion.

(b) Stock Splits and Dividends . If outstanding shares of the Series B Preferred Stock shall be subdivided into a greater number of shares or a dividend in Series B Preferred Stock shall be paid in respect of Series B Preferred Stock, the Exercise Price in effect immediately prior

 

4


to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Series B Preferred Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. When any adjustment is required to be made in the Exercise Price, the number of shares of Warrant Stock purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

(c) Reclassification, Etc . In case there occurs any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) or any similar corporate reorganization on or after the date hereof, then and in each such case Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, or reorganization shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment pursuant to the provisions of this Section 7.

(d) Adjustment Certificate . When any adjustment is required to be made in the Warrant Stock or the Exercise Price pursuant to this Section 7, the Company shall promptly mail to Holder a certificate setting forth (i) a brief statement of the facts requiring such adjustment, (ii) the Exercise Price after such adjustment and (iii) the kind and amount of stock or other securities or property into which this Warrant shall be exercisable after such adjustment.

Section 8. T ERMINATION . This warrant (and the right to purchase securities upon exercise hereof) shall terminate upon the earliest to occur of the following (the “ Expiration Date ”): (a) [                    ], (b) the sale, conveyance, disposal, or encumbrance of all or substantially all of the Company’s property or business or the Company’s merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of; provided that this Section 8(b) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company or (c) one (1) year after the closing of the initial public offering of the Company’s Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended (the “ Securities Act ”).

Section 9. T RANSFER TO C OMPLY WITH THE S ECURITIES A CT OF 1933. This Warrant may not be exercised and neither this Warrant nor any Securities (as defined below), nor any interest in either, may be offered, sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or blue sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for the Securities issued upon exercise of this Warrant, unless at the time of exercise such Securities are acquired pursuant to a registration statement that

 

5


has been declared effective under the Securities Act, and applicable blue sky laws, shall bear a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Any certificate for any Securities issued at any time in exchange or substitution for any certificate for any Securities bearing such legend (except a new certificate for any Securities issued after the acquisition of such Securities pursuant to a registration statement that has been declared effective under the Securities Act) shall also bear such legend unless, in the opinion of counsel for the Company, the Securities represented thereby need no longer be subject to the restriction contained herein. The provisions of this Section 9 shall be binding upon all subsequent holders of certificates for Securities bearing the above legend and all subsequent holders of this Warrant, if any.

Section 10. R EPRESENTATIONS AND C OVENANTS OF H OLDER . This Warrant has been entered into by the Company in reliance upon the following representations and covenants of Holder, which by its execution hereof Holder hereby confirms:

(a) Investment Purpose. The right to acquire the Series B Preferred Stock (and the shares of Common Stock issuable under conversion thereof) (together, the “ Securities ”), and any Securities issued upon exercise of Holder’s rights contained herein, will be acquired for investment and not with a view to the sale or distribution of any part thereof, and Holder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption.

(b) Private Issue. Holder understands (i) that the Securities issuable upon exercise of Holder’s rights contained herein are not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualification requirements thereof, and (ii) that the Company’s reliance on such exemption is predicated on the representations set forth in this Section 10.

(c) Disposition of Holder’s Rights. In no event will Holder make a disposition of any of its rights to acquire the Securities, or of any Securities issued upon exercise of such rights, unless and until (i) it shall have notified the Company of the proposed disposition and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to Holder) satisfactory to the Company and its

 

6


counsel to the effect that (A) appropriate action necessary for compliance with the Securities Act has been taken or (B) an exemption from the registration requirements of the Securities Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire the Securities, or of any Securities issued on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to such security when (1) such security shall have been effectively registered under the Securities Act and sold by the holder thereof in accordance with such registration, (2) such security shall have been sold without registration in compliance with Rule 144 under the Securities Act or (3) a letter shall have been issued to Holder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to Holder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or ruling, and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, Holder or a holder of the Securities then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such Securities not bearing any restrictive legend.

(d) Financial Risk. Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment.

(e) Risk of No Registration. Holder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the Securities Act, or file reports pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), or if a registration statement covering the Securities under the Securities Act is not in effect when it desires to sell (i) the rights to purchase the Securities pursuant to this Warrant or (ii) the Securities issued upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. Holder also understands that any sale of its rights of Holder to purchase the Securities, or of any of the Securities, which might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions of that Rule.

(f) Accredited Investor. Holder is an “accredited investor” within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect.

Section 11. R EGISTRATION R IGHTS .

(a) If (but without any obligation to do so) the Company shall file any registration statement under the Securities Act for purposes of a public offering of the securities of the Company other than registration statements relating to employee benefit plans or corporate reorganizations or other transactions covered by Rule 145 promulgated under the Securities Act, a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities (as hereinafter defined), or a registration statement

 

7


related to the initial public offering of the Company’s securities), then the Company will:

(1) promptly give to Holder a written notice thereof prior to such filing; and

(2) use its commercially reasonable efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 11(b) below, and in any underwriting involved therein, all of the shares of Registrable Securities specified in a written request or requests made by Holder and received by the Company within ten (10) days after the written notice from the Company described in clause (1) above is mailed or delivered by the Company. Such written request may specify all or a part of the shares of Registrable Securities.

(b) If the registration of which the Company gives notice to Holder is for a registered public offering involving an underwriting, the Company shall so advise Holder as a part of the written notice given pursuant to Section 11(a)(1). In such event, the right of Holder to registration pursuant to Section 11(a) shall be conditioned upon Holder’s participation in such underwriting and the inclusion of all or any part of the shares of Registrable Securities specified in Holder’s notice in the underwriting to the extent provided herein. Holder shall enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company.

Notwithstanding any other provision of Sections 11(a) or (b), if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all of the shares of Registrable Securities from, or limit the number of shares of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise Holder and other holders of securities requesting registration, and the number of shares that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account, second to stockholders of the Company who hold registration rights pursuant to the Company’s Amended and Restated Investors Rights Agreement, dated May 4, 2004, as may be amended from time to time (the “ Investors Rights Agreement ”), and third to any stockholders of the Company (including without limitation, Holder) granted incidental registration rights under this Warrant, or any other agreement between the Company and any stockholder (collectively, the “ Incidental Rights Holders ”), the securities so included to be apportioned pro rata among the selling Incidental Rights Holders according to the total amount of securities entitled to be included therein owned by each selling Incidental Rights Holder, or in such other portions as shall be mutually agreed to by such selling Incidental Rights Holders; provided , however , that the Registrable Securities requested by Holder to be included in such a registration shall be subject to complete or partial exclusion and/or cut-back pursuant to any senior registration rights of stockholders of the Company as set forth in any other agreement (whether presently in existence or as may come into existence in the future) between the Company and any stockholder thereof; provided , further , that in the event of a conflict between the priority of any registration rights, the incidental registration rights granted pursuant hereto shall be deemed junior to the registration rights granted in any other registration rights agreement between the Company and any stockholders thereof, including the Investors Rights Agreement, as may reasonably be determined by the Company in its sole and absolute discretion. If Holder or any other person does not agree to the terms of any such

 

8


underwriting, Holder and any other such person may elect to withdraw therefrom by written notice, given in accordance with Section 16 hereof, delivered at least twenty (20) days prior to the effective date of the registration statement. Any shares of Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration.

(c) As used herein, “ Registration Expenses ” shall mean all expenses incurred by the Company in complying with this Section 11, including, without limitation, all registration, qualification and filing fees; printing expenses; fees and disbursements of counsel for the Company and of the Company’s independent accounting firm; blue sky fees and expenses; and the expense of any special audits incident to or required by any such registration. All Registration Expenses in connection with any registration pursuant to Section 11(a) hereof shall be borne by the Company; provided , however , that (i) any incremental filing fees or other expenses incurred by the Company solely by reason of Holder’s exercise of registration rights pursuant to Section 11(a), (ii) any underwriting discounts and commissions payable in connection with Holder’s exercise of registration rights pursuant to Section 11(a) and (iii) fees and disbursements of counsel for Holder, shall be borne by Holder.

(d) The rights conferred upon Holder under this Section 11 may be assigned by Holder to any permitted transferee of the Securities; provided that such transfer complies with Section 9 hereof.

(e) In the event any shares of Registrable Securities are included in a registration statement under Section 11(a):

(1) To the extent permitted by law, the Company will indemnify and hold harmless Holder, the partners, officers, directors and legal counsel of Holder, any underwriter (as defined in the Securities Act) for Holder and each person, if any, who controls Holder or such underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “ Violation ”) by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse Holder and each partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided , however , that the indemnity agreement contained in this Section 11(e)(1) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which

 

9


occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by Holder or such partner, officer, director, underwriter or controlling person of Holder.

(2) To the extent permitted by law, Holder will indemnify and hold harmless the Company, each of its directors, its officers and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other person selling securities under such registration statement or any of such other person’s partners, directors or officers or any person who controls such person, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such person, or partner, director, officer or controlling person of such person may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by Holder under an instrument duly executed by Holder and stated to be specifically for use in connection with such registration; and Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other person, or partner, officer, director or controlling person of such other person in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided , however , that the indemnity agreement contained in this Section 11(e)(2) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 11(e)(2) exceed the net proceeds from the offering received by such Holder.

(3) Promptly after receipt by an indemnified party under this Section 11(e) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 11(e), deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided , however , that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 11(e), but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 11(e).

(4) If the indemnification provided for in this Section 11(e) is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses,

 

10


claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by Holder hereunder exceed the proceeds from the offering received by Holder.

(5) The obligations of the Company and Holder under this Section 11(e) shall survive completion of any offering of securities in a registration statement pursuant to Section 11. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.

(f) The foregoing indemnity agreements of the Company and Holder are subject to the condition that, insofar as they relate to any violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Securities and Exchange Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the Securities Act (the “ Final Prospectus ”), such indemnity agreement shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting such claim or loss at or prior to the time such action is required by the Securities Act.

(g) As used herein, “ Registrable Securities ” shall mean (i) the shares of Common Stock issuable or issued upon conversion of the Series B Preferred Stock issued or issuable upon exercise of this Warrant and (ii) any other shares of Common Stock of the Company issued as (or issuable upon conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange or replacement of, the shares listed in (i); provided , however , that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which rights under this Section 11 are not assigned in accordance with the terms of this Warrant.

(h) The Holder shall not be entitled to exercise any right provided for in this Section 11 after such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of Holder’s Securities during a three (3)-month period without registration.

Section 12. M ARKET -S TANDOFF A GREEMENT

 

11


(a) Market-Standoff Period; Agreement . In connection with the initial public offering of the Company’s securities and upon request of the Company or the underwriters managing such offering of the Company’s securities, Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company’s initial public offering.

(b) Stop-Transfer Instructions . In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of Holder (and the securities of every other person subject to the restrictions in Section 12(a)).

(c) Transferees Bound . The Holder agrees that prior to the Company’s initial public offering it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 12.

Section 13. S ATURDAYS , S UNDAYS AND H OLIDAYS . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of California.

Section 14. I SSUE T AX . The issuance of certificates for Series B Preferred Stock upon the exercise of the Warrant shall be made without charge to the holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided , however , that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificates in a name other than that of the then Holder of the Warrant being exercised.

Section 15. M ODIFICATION AND W AIVER . Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated other than by an instrument in writing signed by the Company and by Holder.

Section 16. N OTICES . Unless otherwise specified herein, any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be given in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) three (3) days after deposit in the United States mail if sent by registered or certified mail, postage prepaid, or (iii) one (1) day after deposit with an overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to Holder at its address as shown on the books of the Company, or to the Company at the address indicated therefor in the first paragraph of this Warrant.

Section 17. D ESCRIPTIVE H EADINGS AND G OVERNING L AW . The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in

 

12


accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to its conflicts of laws principles.

Section 18. A TTORNEYS ’ F EES . In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys’ fees and expenses and all costs of proceedings incurred in enforcing this Warrant.

Section 19. S URVIVAL . The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall survive the execution and delivery of this Warrant.

Section 20. S EVERABILITY . In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision.

 

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I N W ITNESS W HEREOF , the Company has duly caused this Warrant to be signed by its duly authorized officer and to be dated as of the date first above written.

 

Company:
C HEMO C ENTRYX , I NC .

By:

 

 

Name:

  Thomas J. Schall

Title:

  Chief Executive Officer

 

14


PURCHASE FORM

Dated              ,         

The undersigned hereby irrevocably elects to exercise the within Warrant to purchase                  shares of Series B Preferred Stock and hereby makes payment of $          in payment of the exercise price thereof, together with all applicable transfer taxes, if any.

In exercising its rights to purchase the Series B Preferred Stock of ChemoCentryx, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant.

Please issue a certificate or certificates representing said shares of Series B Preferred Stock in the name of the undersigned or in such other name as is specified below.

 

 

(Name)

 

(Address)

 

Holder:
By:  

 

Print Name:  

 

Title:  

 

 

15


ASSIGNMENT FORM

Dated              ,         

 

F OR V ALUE R ECEIVED , [                      ] hereby sells, assigns and transfers unto

 

  (the “ Assignee ”),
(please type or print in block letters)  

 

(insert address)

its right to purchase up to                  shares of Series B Preferred Stock represented by this Warrant and does hereby irrevocably constitute and appoint                                          attorney, to transfer the same on the books of the Company, with full power of substitution in the premises.

 

By:  

 

Print Name:  

 

Title:  

 

 

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TRANSFER NOTICE

(To transfer or assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

F OR V ALUE R ECEIVED , the foregoing Warrant and all rights evidenced thereby are hereby transferred and assigned to:

 

 

(Please Print)

 

whose address is  

 

 

 

 

Dated  

 

Holder’s Signature  

 

Holder’s Address  

 

 

 

Note:    The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

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Exhibit 4.5

CONVERTIBLE NOTE LOAN AGREEMENT

 

U.S. $10,000,000     Dated: September 9, 2011

FOR VALUE RECEIVED, THE SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, the undersigned, CHEMOCENTRYX, INC., a Delaware corporation (together with its permitted successors and assigns, the “ Borrower ”), hereby executes this Convertible Note Loan Agreement (the “ Note ”) and unconditionally promises to pay to the order of TECHNE CORPORATION, a Minnesota corporation (together with its permitted successors and assigns, the “ Holder ”), the principal sum of TEN MILLION U.S. DOLLARS (U.S. $10,000,000), subject to adjustment as set forth herein, on the Maturity Date (as defined below), unless earlier paid or converted in accordance with the terms hereof and Holder agrees to satisfy its obligations as set forth herein. Capitalized terms used herein and not otherwise defined shall have the meanings they were assigned to have in Section 12 hereof.

1.         Interest; Default Interest; Maturity; Events of Default .

(a)      Interest on the unpaid balance at a rate of five percent (5%) per annum shall accrue from and after the date hereof and all accrued but unpaid interest shall be payable on each anniversary of the issuance of the Note, to the extent that the Note remains outstanding as of such dates. All computations of interest shall be made on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable.

(b)      Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the amount of interest computed on the basis provided for in this Note, together with all fees, charges and other payments that are treated as interest under applicable law, as provided for herein, would exceed the amount of the highest lawful rate allowed in the State of California, Borrower shall not be obligated to pay, and the Holder shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the highest lawful rate allowed in the State of California, and during any such period the interest payable hereunder shall be computed on the basis of such highest lawful rate allowed in the State of California.

(c)      Unless the outstanding principal amount and accrued but unpaid interest has already been converted into shares of the capital stock of Borrower pursuant to Section 7, or paid in full, or earlier due and payable upon acceleration of this Note after an Event of Default, Borrower shall pay the outstanding principal amount of this Note and any accrued but unpaid interest on September 9, 2021 (the “ Maturity Date ”).

(d)      Upon the occurrence of an Event of Default, the principal amount then outstanding under this Note, together with all accrued but unpaid interest thereon, if any, will be due and payable, as set forth herein.

2.         Payment .  All payments hereunder shall be made, in lawful money of the United States of America and in same day or immediately available funds and shall be delivered


to Holder at the address specified in writing to Borrower, or at such other place or to such account as the Holder from time to time shall designate in a written notice to Borrower sent to Borrower not fewer than thirty (30) days before the date any payment is due to Holder hereunder.

3.         Prepayment .  Borrower may prepay the outstanding amount hereof in whole or in part upon thirty (30) days’ prior written notice to Holder; provided, that if such prepayment occurs prior to a Non-IPO Equity Financing or IPO Equity Financing, in connection with any such prepayment, Borrower shall pay Holder an additional amount equal to $500,000, subject to Section 1(b).

4.         Expenses .  Borrower agrees to pay on demand all the losses, costs and expenses (including, without limitation, reasonable attorneys’ fees and disbursements) which the Holder incurs in connection with enforcement or attempted enforcement of this Note, whether by judicial proceedings or otherwise. Such losses, costs and expenses include, without limitation, those incurred in connection with any workout or refinancing, or any bankruptcy, insolvency, liquidation or similar proceedings.

5.         Waiver of Presentment, etc .

(a)      Borrower hereby waives diligence, demand, presentment, protest or further notice of any kind. Borrower agrees to make all payments under this Note without setoff or deduction and regardless of any counterclaim or defense.

(b)      No single or partial exercise of any power under this Note shall preclude any other or further exercise of such power or exercise of any other power. No delay or omission on the part of the Holder in exercising any right under this Note shall operate as a waiver of such right or any other right hereunder.

6.       Assignment . Borrower may assign or transfer this Note only with the express written consent of Holder. This Note shall be binding on Borrower and its permitted successors and assigns, and shall be binding upon and inure to the benefit of the Holder and any future holder of this Note and their respective permitted successors and assigns.

7.         Conversion .

(a)      In the event Borrower, prior to the Maturity Date, completes a Non-IPO Equity Financing, the principal amount then outstanding under this Note together with all accrued but unpaid interest thereon (the “ Initial Conversion Amount ”), shall be automatically converted into that number of fully paid and nonassessable New Equity Shares as is equal to the Initial Conversion Amount divided by eighty percent (80%) of the per share purchase price of the New Equity Shares (the “ Per Share Price ”); provided , however , that only such dollar amount of the Initial Conversion Amount may be converted into New Equity Shares such that Holder will not own a percentage ownership of Borrower in excess of the Ownership Limitation and the balance shall remain outstanding. The New Equity Shares issued to Holder upon conversion of the Initial Conversion Amount in accordance with this paragraph shall have the same rights, preferences and privileges, including without limitation registration rights, as the New Equity Shares purchased by the investors in the Non-IPO Equity Financing, and Holder shall execute a


counterpart to the relevant transaction documents entered into among Borrower and the purchasers of the New Equity Shares, including any registration rights agreements, shareholders agreement and voting agreements, as applicable (collectively, the “ New Equity Shares Financing Documents ”).

(b)      In the event Borrower, prior to the Maturity Date, completes any additional Non-IPO Equity Financings subsequent to an initial Non-IPO Equity Financing in which shares of a class or series of Borrower’s capital stock are issued (a “ Subsequent Equity Financing ” and together with the initial Non-IPO Equity Financing, a “ Private Equity Financing ”), the principal amount then outstanding under this Note together with all accrued but unpaid interest thereon (the “ Subsequent Conversion Amount ” and together with the Initial Conversion Amount, the “ Conversion Amount ”), shall be automatically converted into that number of fully paid and nonassessable shares of the class or series of Borrower’s capital stock sold in the Subsequent Equity Financing (the “ Subsequent Equity Shares ”) as is equal to the Subsequent Conversion Amount divided by eighty percent (80%) of the per share purchase price of the Subsequent Equity Shares (the “ Subsequent Per Share Price ”); provided , however , that only such dollar amount of the Subsequent Conversion Amount may be converted into Subsequent Equity Shares as will not result in a percentage ownership by Holder of Borrower in excess of the Ownership Limitation and the balance shall remain outstanding. The Subsequent Equity Shares issued to Holder upon conversion of the Subsequent Conversion Amount in accordance with this paragraph shall have the same rights, preferences and privileges, including without limitation registration rights, as the Subsequent Equity Shares purchased by the investors in the Subsequent Equity Financing, and Holder shall execute a counterpart to the relevant transaction documents entered into among Borrower and the purchasers of the Subsequent Equity Shares, including any registration rights agreements, shareholders agreement and voting agreements, as applicable (collectively, the “ Subsequent Equity Shares Financing Documents ”). For the avoidance of doubt, any private placement of Borrower’s Common Shares with Holder pursuant to Section 11 hereof shall not constitute a Private Equity Financing for purposes of this Section 7.

(c)      In the event Borrower, prior to the Maturity Date, completes an IPO Equity Financing, the principal amount then outstanding under this Note together with all accrued but unpaid interest thereon (the “ IPO Conversion Amount ”) shall be automatically converted into that number of fully paid and nonassessable Common Shares of Borrower as is equal to the IPO Conversion Amount divided by the initial public offering price per share of the Company’s Common Stock in such IPO Equity Financing (the “ Per Share Price ”). The Common Shares issued to Holder upon conversion of the IPO Conversion Amount in accordance with this paragraph shall have the same rights, preferences and privileges, including without limitation registration rights, as the Common Shares purchased by the public in the IPO Equity Financing.

(d)      Written notice of a Private Equity Financing or IPO Equity Financing shall be delivered to the Holder at least five (5) business days in advance of the anticipated closing date of such equity financing (the “ Conversion Date ”), at the address for notice set forth in the manner below, notifying the Holder of the conversion to be effected, including specifying (i) the anticipated Conversion Amount or IPO Conversion Amount (as of the anticipated Conversion Date), (ii) the Per Share Price, Subsequent Per Share Price or initial public offering price, as the case may be, to the extent available and, if no such price per share is available, the


anticipated range for such price per share, (iii) a definitive term sheet setting forth the anticipated rights, preferences, privileges and terms and conditions of issuance and sale of the New Equity Shares, Subsequent Equity Shares or Common Stock, as the case may be, and (iv) the anticipated Conversion Date. As soon as feasible but in no event less than two (2) business days in advance of the Conversion Date, Borrower shall deliver to Holder, at the address for notice set forth below, definitive (or, if definitive documents do not then exist, substantially final drafts of the) New Equity Shares Financing Documents or Subsequent Equity Shares Financing Documents, as the case may be, to the extent applicable. This Note shall automatically convert on the Conversion Date into that number of New Equity Shares, Subsequent Equity Shares or Common Shares, as the case may be, permitted under Sections 7(a), 7(b) or 7(c) above without any further action by the Holder hereof. No fraction of a share will be issued and only whole shares of the New Equity Shares, Subsequent Equity Shares or Common Shares shall be issued upon conversion. In lieu of any fractional share to which Holder would otherwise be entitled, the amount of the unconverted principal and interest balance of this Note that would otherwise be converted into such fractional shares shall be paid in cash by Borrower. As promptly as practicable after any conversion of this Note, Borrower, at its sole expense, shall issue and deliver to the Holder a certificate or certificates evidencing the number of full New Equity Shares, Subsequent Equity Shares or Common Shares, as the case may be, issuable to Holder upon any such conversion and shall issue any necessary payment to Holder in the amount of any fractional shares.

(e)      Any conversion of this Note shall be deemed effective on the Conversion Date. Upon partial conversion of this Note, Borrower shall promptly provide a certificate, executed by its chief financial officer, certifying as to the principal balance of the Note that remains outstanding, which shall be an amount equal to the total Conversion Amount less the Conversion Amount fully converted. If the Holder shall disagree with the principal balance of the Note set forth in the certificate, it shall notify Borrower of such disagreement in writing, setting forth in reasonable detail the particulars of such disagreement, within fifteen (15) calendar days after its receipt of the certificate. In the event that the Holder does not provide such a notice of disagreement to Borrower within such fifteen (15)-day period, the Holder shall be deemed to have accepted the calculation of the principal balance of the Note, which shall be final, binding and conclusive for all purposes hereunder. In the event of any such disagreement, the Borrower and Holder shall negotiate, in good faith, a resolution of such disagreement. If, after thirty (30) days following Borrower’s receipt of the notice of disagreement, the Borrower and the Holder have not reached a mutually acceptable resolution, the Borrower and the Holder may pursue any available legal remedies to resolve the disagreement.

8.         Sale of the Company .

(a)      In the event of a Sale of the Company, at the Holder’s election, (i) this Note, including all interest accrued and unpaid hereunder (plus the prepayment penalty pursuant to Section 3 hereof, if the Sale of the Company occurs prior to a Non-IPO Equity Financing or IPO Equity Financing) shall become due and payable immediately prior to the consummation of the Sale of the Company or (ii) immediately prior to the consummation of the Sale of the Company, the principal amount then outstanding under this Note together with all accrued but unpaid interest thereon (the “ Sale Conversion Amount ”) shall be automatically converted into that number of fully paid and nonassessable shares of the Borrower’s Common Stock as is equal


to the Sale Conversion Amount, divided by the per share price to be received by the holders of the Borrower’s Common Stock in the Sale of the Company (the “ Sale Consideration ”).

(b)      Written notice of a Sale of the Company shall be delivered to the Holder at least fifteen (15) days in advance of the anticipated closing date of such Sale of the Company (the “ Sale Date ”), at the address for notice set forth in the manner below, notifying the Holder of the Sale of the Company, including specifying (i) the Sale Consideration to the extent available and, if the final Sale Consideration is not available, the anticipated range for such Sale Consideration, (ii) a definitive term sheet setting forth the anticipated terms of the Sale of the Company, and (iii) the anticipated Sale Date. As soon as feasible but in no event less than five (5) business days in advance of the anticipated Sale Date, Borrower shall deliver to Holder, at the address for notice set forth below, definitive (or, if definitive documents do not then exist, substantially final drafts of the) definitive documents for the Sale of the Company. At least two (2) business days prior to the anticipated Sale Date, the Holder shall provide the Borrower with notice of its election under Section 8(a).

(c)      If the Holder elects (i) in Section 8(a), then the aggregate amount payable under (i) above shall be paid to the Holder upon the consummation of the Sale of the Company. If the Holder elects (ii) in Section 8(a), then this Note shall automatically convert on the Sale Date without any further action by the Holder hereof and the Holder shall receive the Sale Consideration for the shares into which the Note has converted.

(d)      As used herein, “Sale of the Company” means (i) any sale, transfer or other disposition to another company of all or substantially all of the Borrower’s assets, (ii) the sale of shares of the Borrower resulting in more than 50% of the voting power of the Borrower or of the surviving entity being vested in persons other than the persons who own 50% or more of the voting power of the Borrower immediately prior to the effectiveness of such transaction, or (iii) a merger or consolidation of the Borrower resulting in more than 50% of the voting power of the Borrower or of the surviving entity being vested in persons other than the persons who own 50% or more of the voting power of the Borrower immediately prior to the effectiveness of such transaction.

9.         Warrants .  Upon the occurrence of the conversion of any portion of the Conversion Amount or IPO Conversion Amount pursuant to Section 7 hereof, the Holder will receive warrants with a ten-year term to purchase shares of the Borrower’s Common Stock (the “ Warrants ”) as set forth herein. In the event that such conversion occurs in connection with a Non-IPO Equity Financing, then the Warrants issuable in connection with such conversion will entitle Holder to purchase up to a number of shares of the Borrower’s Common Stock equal to the product of (i) two hundred thousand (200,000) (provided that such amount shall be equitably adjusted for stock splits, combinations, dividends and the like applicable to the Borrower’s capital stock occurring after the date hereof) and (ii) a fraction equal to (A) the principal amount of this note which is being converted at such time divided by (B) the sum of the outstanding principal amount of the Note at such time and all principal amounts of the Note previously converted pursuant to Section 7 hereof, at an exercise price per share equal to two hundred percent (200%) of the per share purchase price of the New Equity Shares sold in such Non-IPO Equity Financing. In the event that such conversion occurs in connection with an IPO Equity Financing, then such Warrants will entitle Holder to purchase up to a number of shares of the


Borrower’s Common Stock equal to the product of (i) three hundred thousand (300,000) (provided that such amount shall be equitably adjusted for stock splits, combinations, dividends and the like applicable to the Borrower’s capital stock occurring after the date hereof) and (ii) a fraction equal to (A) the principal amount of this note which is being converted at such time divided by (B) the sum of the outstanding principal amount of the Note at such time and all principal amounts of the Note previously converted pursuant to Section 7 hereof, at an exercise price per share equal to two hundred percent (200%) of the initial public offering price per share of the Company’s Common Stock in such IPO Equity Financing. The Warrants issued pursuant to this Section shall be in the form attached hereto as Exhibit A .

10.       Investment Representations .

(a)      This Note and the Warrants and any equity securities issuable upon conversion of this Note, exercise of the Warrant, or in the Common Closing (defined below), or issuable upon conversion of the equity securities issuable upon conversion of this Note or exercise of the Warrant (collectively, the “ Securities ”) will be acquired for investment for the Holder’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Note, the Holder further represents that the Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations, to such person or to any third person, with respect to any of such Securities).

(b)      Holder believes it has received all the information necessary or appropriate for deciding whether to acquire such Securities. Holder further represents that it has had an opportunity to ask questions and receive answers from the Borrower regarding the terms and conditions of the offering of such Securities.

(c)      Holder is an investor in securities of companies in the development stage and acknowledges that Holder is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of the investment in such Securities.

(d)      Holder is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as amended (the “ Securities Act ”), as now in effect.

(e)      Holder understands that the Securities are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations the Securities may be resold without registration under the Securities Act only in certain limited circumstances. In connection therewith, Holder represents that it is familiar with Rule 144 under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act.

(f)      Each certificate or other document evidencing any of the Securities may be endorsed with one or all of the legends set forth below, and Holder covenants that it will not


transfer the Securities represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate:

 

  (i) “THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.”

 

  (ii) Any legend required by the laws of any State.

(g)      THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.

11.         Private Placement Concurrent with IPO .  Holder agrees to purchase an aggregate amount of FIVE MILLION U.S. DOLLARS (U.S. $5,000,000) of the Borrower’s Common Shares at a per share price equal to the per share initial public offering price in a private placement closing (the “ Common Closing ”) to be held concurrently with the closing of the IPO Equity Financing. At the Common Closing the Borrower shall deliver to Holder one or more Common Stock certificates, in accordance with Holder’s reasonable request. Each such certificate shall be registered in the name of Holder or one of its affiliates as Holder shall instruct. The Borrower’s obligation to issue and deliver such shares at the Common Closing shall be subject to the following conditions, any of which may be waived by the Borrower: (i) receipt by the Borrower of a certified or official bank check or checks or wire transfer of funds in the full amount of the purchase price for the Common Shares; (ii) the accuracy in all material respects of the representations of Holder made herein as of the Common Closing; (iii) execution by Holder of a private placement purchase agreement containing customary purchaser representations and standstill provisions; (iv) no judgment, decree, injunction, order or ruling of any court or governmental or regulatory body would be violated by the consummation of the transaction; and (v) all authorizations, approvals, or permits, if any, of any governmental authority or regulatory body which are legally required shall have been obtained and be effective. Holder’s obligations to purchase the Common Shares at the Common Closing shall be subject to the following conditions, any of which may be waived by Holder: (i) the receipt by


Holder of one or more certificates representing the Common Shares; and (ii) execution by the Borrower of a private placement purchase agreement containing customary issuer representations. Holder acknowledges that the Common Shares will not be registered and will be appropriately legended as restricted stock. It is the intent of the Borrower and Holder that the Common Shares purchased hereunder be treated as “Registrable Securities” pursuant to the Investors Rights Agreement. Unless previously satisfied in accordance with the terms of this Section, Holder’s obligation to purchase Common Shares at the Common Closing shall expire on the earlier of (i) September 9, 2021 or (ii) a Sale of the Company.

12.       Defined Terms .

Event of Default ” shall mean any of the following events after receipt of written notice and five (5) business days for Borrower to cure any such Event of Default (other than with respect to subparagraphs (c) and (d) below, for which such cure period shall not be applicable):

(a)      Borrower’s failure to pay when due any payment of principal or interest due under this Note;

(b)      Borrower’s failure to perform or observe any of the material terms or conditions of this Note or any of the material terms or conditions of any other agreement between Borrower and Holder;

(c)      The making by Borrower of any assignment for the benefit of creditors or the voluntary appointment (at the request or with the consent of Borrower) of a receiver, custodian, liquidator or trustee in bankruptcy of any of Borrower’s property, or the filing by Borrower of a petition in bankruptcy or other similar proceeding under any law for relief of debtors;

(d)      The filing against Borrower of a petition in bankruptcy or other similar proceeding under any law for relief of debtors, or the involuntary appointment of a receiver, custodian, liquidator or trustee in bankruptcy of the property of Borrower, if such petition or appointment is not vacated or discharged within sixty (60) calendar days after the filing or making thereof; or

(e)      The entry of any decree or order by a court of competent jurisdiction adjudging the Borrower insolvent.

IPO Equity Financing ” means an underwritten public offering by the Borrower of its Common Shares registered under the Securities Exchange Act of 1933, as amended, pursuant to which the Borrower receives aggregate gross proceeds of at least $20,000,000.

New Equity Shares ” means the shares of Common Stock or Preferred Stock of Borrower issued pursuant to the Non-IPO Equity Financing.

Non-IPO Equity Financing ” means an equity financing of Borrower occurring following the date hereof other than an underwritten public offering registered under the Securities Exchange Act of 1933, as amended, pursuant to which the Borrower receives


aggregate gross proceeds of at least $5,000,000, not including any deemed proceeds as a result of the conversion of this Note or any other convertible notes or securities.

Ownership Limitation ” means that percentage ownership, which shall be set at Holder’s current ownership percentage of 16.5% (or such higher ownership percentage not to exceed 19.9% following compliance with the procedures set forth in Section 2.3 of Borrower’s existing Amended and Restated Investors Rights Agreement), above which the equity ownership of Techne Corporation in Borrower (based on the total number of voting shares of Borrower then issued and outstanding) may not exceed upon conversion (in connection with an equity financing) or repayment of any principal amount of this Note.

13.       Termination of Obligations .  Except as set forth in Sections 9 and 11 hereof, upon payment and/or conversion in full of the principal amount then outstanding, the Holder shall have no further rights under this Note, whether or not this Note is surrendered.

14.       Titles and Subtitles .  The titles and subtitles used in this Note are used for convenience only and are not to be considered in construing or interpreting this Note.

15.       Notices .      All payments, notices, requests, demands and other communications to a party hereunder shall be in writing (including facsimile or similar electronic transmissions), shall refer specifically to this Note and shall be personally delivered or sent by facsimile or other electronic transmission, overnight delivery with a nationally recognized overnight delivery service, in each case, if to the Borrower, to 850 Maude Avenue, Mountain View, CA 94043, and if to the Holder, to 614 McKinley Place, N.E., Minneapolis, MN 55413, Attention: Chief Financial Officer (or such other address as may be specified in writing to the other party hereto). Any notice or communication given in conformity with this Section shall be deemed to be effective when received by the addressee, if delivered by hand, facsimile or similar form of electronic transmission and one (1) day after deposit with a nationally recognized overnight delivery service.

16.       Entire Agreement .  This Note and the Warrants constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein.

17.       Amendment and Waiver .  No amendment or waiver of any provision of this Note, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.

18.       Severability .  If one or more provisions of this Note are held to be unenforceable under applicable law, such provision shall be excluded from this Note and the balance of the Note shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

19.       Counterparts .  This Note may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Note. Facsimile or other electronically scanned and transmitted signatures shall be deemed originals for all purposes of this Note.


20.       Governing Law .  This Note shall be construed in accordance with, and governed in all respects by, the laws of the State of California (without giving effect to principles of conflicts of laws that would require the application of any other law).


Executed as of the date first written above.

 

   

CHEMOCENTRYX, INC.,

a Delaware corporation

    By:      /s/ Susan Kanaya                                
    Name: Susan Kanaya
    Title: Chief Financial Officer
   

TECHNE CORPORATION,

a Minnesota corporation

    By:      /s/ Gregory J. Melsen                           
    Name: Gregory J. Melsen
   

Title: Vice President – Finance, Treasurer and Chief

Financial Officer


Exhibit A

Form of Warrant

Exhibit 10.1

CHEMOCENTRYX, INC.

AMENDED AND RESTATED 1997 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

 

  I. PURPOSE OF THE PLAN

This 1997 Stock Option/Stock Issuance Plan is intended to promote the interests of ChemoCentryx, Inc., a Delaware corporation, by providing eligible persons in the Corporation’s employ or service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service.

Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix.

 

  II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into two (2) separate equity programs:

(i) the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and

(ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary).

B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan.

 

  III. ADMINISTRATION OF THE PLAN

A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.

B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for


proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option thereunder.

 

  IV. ELIGIBILITY

A. The persons eligible to participate in the Plan are as follows:

(i) Employees,

(ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

B. The Plan Administrator shall have full authority to determine, (i) with respect to the grants under the Option Grant Program, which eligible persons are to receive the option grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares.

C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program.

 

  V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 2,700,000 1 shares.

B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise price or direct issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added

 

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Includes the 1,800,000 share increase authorized by the Board of Directors on June 10, 1999 and the 400,000 share increase authorized by the Board on May 17, 2002. Both of these increases were approved by the Company’s stockholders.

 

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back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan.

C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares of Common Stock.

 

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ARTICLE TWO

OPTION GRANT PROGRAM

 

  I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided , however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

A. Exercise Price .

1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions:

(i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date.

(ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows:

(i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or

(ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (A) to a Corporation—designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

 

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B. Exercise and Term of Options . Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date.

C. Effect of Termination of Service .

1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:

(i) Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

(ii) Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

(iii) If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee’s death to exercise such option.

(iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term.

(v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding with respect to any and all option shares for which the option is not otherwise at the time exercisable or in which the Optionee is not otherwise at that time vested.

(vi) Should Optionee’s Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to remain outstanding.

 

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2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

(i) extend the period of time for which the option is to remain exercisable following Optionee’s cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or

(ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service.

D. Stockholder Rights . The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become the recordholder of the purchased shares.

E. Unvested Shares . The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Common Stock subject to that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one (1) year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants.

F. First Refusal Rights . Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.

G. Limited Transferability of Options . During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee’s death.

H. Withholding . The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

 

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  II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms of this Section II.

A. Eligibility . Incentive Options may only be granted to Employees.

B. Exercise Price . The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

C. Dollar Limitation . The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

D. 10% Stockholder . If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the option term shall not exceed five (5) years measured from the option grant date.

 

  III. CORPORATE TRANSACTION

A. The shares subject to each option outstanding under the Plan at the time of a Corporate Transaction shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation’s repurchase rights with respect to the unvested option shares are concurrently assigned to such successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant.

B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

 

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C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).

D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same.

E. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration (in whole or in part) of one or more outstanding options (and the immediate termination of the Corporation’s repurchase rights with respect to the shares subject to those options) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction.

F. The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest at that time.

G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws.

H. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

 

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  IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date.

 

  V. ACCELERATION UPON DEATH OR DISABILITY

With respect to Optionees who are Employees, in the event of an Optionee’s termination of Service on account of death or Disability, that number of the Optionee’s unvested options that would have become fully vested and exercisable over the twelve (12) months following the Optionee’s termination of Service under the vesting schedules applicable to such options had the Optionee remained continuously employed by or providing Services to the Corporation during such period shall immediately become so vested and exercisable on the date of termination.

 

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ARTICLE THREE

STOCK ISSUANCE PROGRAM

 

  I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below.

A. Purchase Price .

1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value.

2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any Parent or Subsidiary).

B. Vesting Provisions .

1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, with initial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants.

2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

 

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3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares.

5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.

C. First Refusal Rights . Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.

 

  II. CORPORATE TRANSACTION

A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof).

 

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  III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

 

  IV. ACCELERATION UPON DEATH OR DISABILITY

With respect to Participants who are Employees, in the event of a Participant’s termination of Service on account of death or Disability, that number of the Participant’s unvested shares of Common Stock issued under the Stock Issuance Program that would have become fully vested over the twelve (12) months following the Participant’s termination of Service under the vesting schedules applicable to such shares had the Participant remained continuously employed by or providing Services to the Corporation during such period shall immediately become so vested on the date of termination.

 

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ARTICLE FOUR

MISCELLANEOUS

 

  I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of those shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase.

 

  II. EFFECTIVE DATE AND TERM OF PLAN

A. The Plan became effective when adopted by the Corporation’s Board of Directors on October 3, 1997 and was approved by the Corporation’s stockholders on November 14, 1997. The Plan was amended by the Board on June 10, 1999 to increase the number of shares issuable thereunder by an additional 1,800,000 shares of Common Stock (the “1999 Amendment”). The 1999 Amendment was approved by the Corporation’s stockholders on August 1, 1999. The Plan was further amended by the Board on May 17, 2002 to increase the number of shares issuable hereunder by an additional 400,000 shares of Common Stock (the “2002 Amendment”). The 2002 Amendment was approved by the Corporation’s stockholders on September 20, 2002. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan.

B. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances.

 

  III. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations.

 

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B. Options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

 

  IV. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

 

  V. WITHHOLDING

The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any options or upon the vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

 

  VI. REGULATORY APPROVALS

The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it.

 

  VII. NO EMPLOYMENT OR SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

 

  VIII. FINANCIAL REPORTS

The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information.

 

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APPENDIX

The following definitions shall be in effect under the Plan:

A. Board shall mean the Corporation’s Board of Directors.

B. Code shall mean the Internal Revenue Code of 1986, as amended.

C. Committee shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan.

D. Common Stock shall mean the Corporation’s common stock.

E. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.

F. Corporation shall mean ChemoCentryx, Inc., a Delaware corporation.

G. Disability shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances.

H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

I. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.

J. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market.

 

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If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

K. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

L. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:

(i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

(ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonuses under any corporate performance-based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.

M. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary).

N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

 

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O. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

P. Option Grant Program shall mean the option grant program in effect under the Plan.

Q. Optionee shall mean any person to whom an option is granted under the Plan.

R. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

S. Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

T. Plan shall mean the Corporation’s 1997 Stock Option/Stock Issuance Plan, as set forth in this document.

U. Plan Administrator shall mean either the Board or the Committee acting in its capacity as administrator of the Plan.

V. Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant.

W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.

X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.

Y. Stock Issuance Program shall mean the stock issuance program in effect under the Plan.

Z. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

 

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AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

 

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Exhibit 10.2

CHEMOCENTRYX, INC.

AMENDED AND RESTATED 2002 EQUITY INCENTIVE PLAN

(As Amended)

1. Purposes of the Plan . The purposes of the ChemoCentryx, Inc. Amended and Restated 2002 Equity Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options or Non-Qualified Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Acquisition ” means

(i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets or a complete liquidation or dissolution of the Company.

(b) “ Administrator ” means the Board or the Committee responsible for conducting the general administration of the Plan, as applicable, in accordance with Section 4 hereof.

(c) “ Applicable Laws ” means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan.

(d) “ Board ” means the Board of Directors of the Company.

(e) “ Code ” means the Internal Revenue Code of 1986, as amended, or any successor statute or statutes thereto. Reference to any particular Code section shall include any successor section.

(f) “ Committee ” means a committee appointed by the Board in accordance with Section 4 hereof.


(g) “ Common Stock ” means the Common Stock of the Company.

(h) “ Company ” means ChemoCentryx, Inc., a Delaware corporation.

(i) “ Consultant ” means any consultant or adviser if: (i) the consultant or adviser renders bona fide services to the Company or any Parent or Subsidiary of the Company; (ii) the services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities; and (iii) the consultant or adviser is a natural person who has contracted directly with the Company or any Parent or Subsidiary of the Company to render such services.

(j) “ Director ” means a member of the Board.

(k) “ Employee ” means any person, including an Officer or Director, who is an employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient, by itself, to constitute “employment” by the Company.

(l) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. Reference to any particular Exchange Act section shall include any successor section.

(m) “ Fair Market Value ” means, as of any date, the value of a share of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including, without limitation, The Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for a share of such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for a share of the Common Stock on the last market trading day prior to the day of determination; or


(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

(n) “ Holder ” means a person who has been granted or awarded an Option or Stock Purchase Right or who holds Shares acquired pursuant to the exercise of an Option or Stock Purchase Right.

(o) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and which is designated as an Incentive Stock Option by the Administrator.

(p) “ Independent Director ” means a Director who is not an Employee of the Company.

(q) “ Misconduct ” shall mean the commission by a Holder of any act of fraud, embezzlement or dishonesty by the Holder, any unauthorized use or disclosure by the Holder of confidential information or trade secrets of the Company (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Company (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of the Holder.

(r) “ Non-Qualified Stock Option ” means an Option (or portion thereof) that is not designated as an Incentive Stock Option by the Administrator, or which is designated as an Incentive Stock Option by the Administrator but fails to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(s) “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(t) “ Option ” means a stock option granted pursuant to the Plan.

(u) “ Option Agreement ” means a written agreement between the Company and a Holder evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(v) “ Parent ” means any corporation, whether now or hereafter existing (other than the Company), in an unbroken chain of corporations ending with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than fifty percent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(w) “ Plan ” means the ChemoCentryx, Inc. Amended and Restated 2002 Equity Incentive Plan.


(x) “ Public Trading Date ” means the first date upon which Common Stock of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system.

(y) “ Restricted Stock ” means Shares acquired pursuant to the exercise of an unvested Option in accordance with Section 10(i) below or pursuant to a Stock Purchase Right granted under Section 12 below.

(z) “ Rule 16b-3 ” means that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time.

(aa) “ Section 16(b) ” means Section 16(b) of the Exchange Act, as such Section may be amended from time to time.

(bb) “ Securities Act ” means the Securities Act of 1933, as amended, or any successor statute or statutes thereto. Reference to any particular Securities Act section shall include any successor section.

(cc) “ Service Provider ” means an Employee, Director or Consultant.

(dd) “ Share ” means a share of Common Stock, as adjusted in accordance with Section 13 below.

(ee) “ Stock Purchase Right ” means a right to purchase Common Stock pursuant to Section 12 below.

(ff) “ Subsidiary ” means any corporation, whether now or hereafter existing (other than the Company), in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than fifty percent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

3. Stock Subject to the Plan . Subject to the provisions of Section 13 of the Plan, the shares of stock subject to Options or Stock Purchase Rights shall be Common Stock, initially shares of the Company’s Common Stock. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be issued upon exercise of such Options or Stock Purchase Rights shall be 6,300,000 Shares. Shares issued upon exercise of Options or Stock Purchase Rights may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares which are delivered by the Holder or withheld by the Company upon the exercise of an Option or Stock Purchase Right under the Plan, in payment of the exercise price thereof or tax withholding thereon, may again be optioned, granted or awarded hereunder, subject to the limitations of this Section 3. If Shares of


Restricted Stock are repurchased by the Company at a price not greater than their original exercise price and pursuant to the exercise of the Company’s repurchase rights under the Plan, such Shares shall become available for future grant under the Plan. Notwithstanding the provisions of this Section 3, no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an Incentive Stock Option under Code Section 422.

4. Administration of the Plan .

(a) Administrator . Unless and until the Board delegates administration to a Committee as set forth below, the Plan shall be administered by the Board. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term “Committee” shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. Notwithstanding the foregoing, however, from and after the Public Trading Date, a Committee of the Board shall administer the Plan and the Committee shall consist solely of two or more Independent Directors each of whom is both an “outside director,” within the meaning of Section 162(m) of the Code, and a “non-employee director” within the meaning of Rule 16b-3. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Independent Directors the authority to grant awards under the Plan to eligible persons who are either (1) not then “covered employees,” within the meaning of Section 162(m) of the Code and are not expected to be “covered employees” at the time of recognition of income resulting from such award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (ii) delegate to a committee of one or more members of the Board who are not “non-employee directors,” within the meaning of Rule 16b-3, the authority to grant awards under the Plan to eligible persons who are not then subject to Section 16 of the Exchange Act. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may only be filled by the Board.

(b) Powers of the Administrator . Subject to the provisions of the Plan and the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its sole discretion:

(i) to determine the Fair Market Value;


(ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder;

(iii) to determine the number of Shares to be covered by each such award granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions of any Option or Stock Purchase Right granted hereunder (such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may vest or be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine);

(vi) to determine whether to offer to buyout a previously granted Option as provided in subsection 10(j) and to determine the terms and conditions of such offer and buyout (including whether payment is to be made in cash or Shares);

(vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

(viii) to allow Holders to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld based on the statutory withholding rates for federal and state tax purposes that apply to supplemental taxable income. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Holders to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(ix) to amend the Plan or any Option or Stock Purchase Right granted under the Plan as provided in Section 15; and

(x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan and to exercise such powers and perform such acts as the Administrator deems necessary or desirable to promote the best interests of the Company which are not in conflict with the provisions of the Plan.

(c) Effect of Administrator’s Decision . All decisions, determinations and interpretations of the Administrator shall be final and binding on all Holders.


5. Eligibility . Non-Qualified Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. If otherwise eligible, a Service Provider who has been granted an Option or Stock Purchase Right may be granted additional Options or Stock Purchase Rights.

6. Limitations .

(a) Each Option shall be designated by the Administrator in the Option Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares subject to a Holder’s Incentive Stock Options and other incentive stock options granted by the Company, any Parent or Subsidiary, which become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options or other options shall be treated as Non-Qualified Stock Options.

For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant.

(b) Neither the Plan, any Option nor any Stock Purchase Right shall confer upon a Holder any right with respect to continuing the Holder’s employment or consulting relationship with the Company, nor shall they interfere in any way with the Holder’s right or the Company’s right to terminate such employment or consulting relationship at any time, with or without cause.

(c) No Service Provider shall be granted, in any calendar year, Options or Stock Purchase Rights to purchase more than 1,100,000 Shares; provided, however, that the foregoing limitation shall not apply prior to the Public Trading Date and, following the Public Trading Date, the foregoing limitation shall not apply until the earliest of: (i) the first material modification of the Plan (including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 3); (ii) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (iii) the expiration of the Plan; (iv) the first meeting of stockholders at which Directors of the Company are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security of the Company under Section 12 of the Exchange Act; or (v) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13. For purposes of this Section 6(c), if an Option is canceled in the same calendar year it was granted (other than in connection with a transaction described in Section 13), the canceled Option will be counted against the limit set forth in this Section 6(c). For this purpose, if the exercise price of an Option is reduced, the transaction shall be treated as a cancellation of the Option and the grant of a new Option.


7. Term of Plan . The Plan shall become effective upon its initial adoption by the Board and shall continue in effect until the earlier of (a) the expiration of the ten (10) year period measured from the date the Plan is adopted by the Board or (b) termination of the Plan under Section 15. No Options or Stock Purchase Rights may be issued under the Plan after the tenth (10th) anniversary of the earlier of (i) the date upon which the Plan is adopted by the Board or (ii) the date the Plan is approved by the stockholders.

8. Term of Option . The term of each Option shall be stated in the Option Agreement; provided, however , that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to a Holder who, at the time the Option is granted, owns (or is treated as owning under Code Section 424) stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

9. Option Exercise Price and Consideration .

(a) Except as provided in Section 13, the per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of grant of such Option, owns (or is treated as owning under Code Section 424) stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.

(B) granted to any other Employee, the per Share exercise price shall be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Non-Qualified Stock Option

(A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of the grant.

(B) granted to any other Service Provider, the per Share exercise price shall be no less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant.


(b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) with the consent of the Administrator, a full recourse promissory note bearing interest (at no less than such rate as is a market rate of interest and which then precludes the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Administrator, (4) with the consent of the Administrator, from and after the Public Trading Date, other Shares which (x) in the case of Shares acquired from the Company, have been owned by the Holder for more than six (6) months, or the requisite period necessary to avoid a charge to the Company’s earnings for financial reporting purposes, on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) with the consent of the Administrator, property of any kind which constitutes good and valuable consideration, (6) with the consent of the Administrator, from and after the Public Trading Date, delivery of a notice that the Holder has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Options and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided, that payment of such proceeds is then made to the Company upon settlement of such sale, or (7) with the consent of the Administrator, any combination of the foregoing methods of payment.

10. Exercise of Option .

(a) Vesting; Fractional Exercises . Except as provided in Section 13, Options granted hereunder shall be vested and exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement; provided, however , that, except with regard to Options granted to Officers, Directors or Consultants, in no event shall an Option granted hereunder become vested and exercisable at a rate of less than twenty percent (20%) per year over five (5) years from the date the Option is granted, subject to reasonable conditions, such as continuing to be a Service Provider. An Option may not be exercised for a fraction of a Share.

(b) Deliveries upon Exercise . All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his or her office:

(i) A written or electronic notice complying with the applicable rules established by the Administrator stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Holder or other person then entitled to exercise the Option or such portion of the Option;

(ii) Such representations and documents as the Administrator, in its sole discretion, deems necessary or advisable to effect compliance with Applicable Laws. The Administrator may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance, including, without limitation, placing legends on share certificates and issuing stop transfer notices to agents and registrars;


(iii) Upon the exercise of all or a portion of an unvested Option pursuant to Section 10(i), a Restricted Stock purchase agreement in a form determined by the Administrator and signed by the Holder or other person then entitled to exercise the Option or such portion of the Option; and

(iv) In the event that the Option shall be exercised pursuant to Section 10(f) by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Option.

(c) Conditions to Delivery of Share Certificates . The Company shall not be required to issue or deliver any certificate or certificates for Shares purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions:

(i) The admission of such Shares to listing on all stock exchanges on which such class of stock is then listed;

(ii) The completion of any registration or other qualification of such Shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Administrator shall, in its sole discretion, deem necessary or advisable;

(iii) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its sole discretion, determine to be necessary or advisable;

(iv) The lapse of such reasonable period of time following the exercise of the Option as the Administrator may establish from time to time for reasons of administrative convenience; and

(v) The receipt by the Company of full payment for such Shares, including payment of any applicable withholding tax, which in the sole discretion of the Administrator may be in the form of consideration used by the Holder to pay for such Shares under Section 9(b).

(d) Termination of Relationship as a Service Provider . If a Holder ceases to be a Service Provider other than by reason of the Holder’s disability or death, or as a result of a termination of Holder’s employment or consulting relationship by the Company (or any Parent or Subsidiary) for Misconduct, such Holder may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination; provided , however , that prior to the Public Trading Date, such period of time shall not be less than thirty (30) days (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option


Agreement, the Option shall remain exercisable for three (3) months following the Holder’s termination. If, on the date of termination, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. If, after termination, the Holder does not exercise his or her Option within the time period specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(e) Disability of Holder . If a Holder ceases to be a Service Provider as a result of the Holder’s disability, the Holder may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination; provided , however , that prior to the Public Trading Date, such period of time shall not be less than six (6) months (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Holder’s termination. If such disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Non-Qualified Stock Option from and after the day which is three (3) months and one (1) day following such termination. If, on the date of termination, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. If, after termination, the Holder does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(f) Death of Holder . If a Holder dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement provided , however , that prior to the Public Trading Date, such period of time shall not be less than six (6) months (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Holder’s estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Holder’s termination. If, at the time of death, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. The Option may be exercised by the executor or administrator of the Holder’s estate or, if none, by the person(s) entitled to exercise the Option under the Holder’s will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(g) Termination for Misconduct . If a Holder ceases to be a Service Provider as a result of a termination of such Holder’s employment or consulting relationship by the


Company (or any Parent or Subsidiary) for Misconduct, the Option shall terminate immediately upon such termination and the Shares covered by the Option shall immediately cease to be issuable under the Option, and the Shares covered by such Option shall again become available for issuance under the Plan.

(h) Regulatory Extension . A Holder’s Option Agreement may provide that if the exercise of the Option following the termination of the Holder’s status as a Service Provider (other than upon the Holder’s death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in Section 8 or (ii) the expiration of a period of three (3) months after the termination of the Holder’s status as a Service Provider during which the exercise of the Option would not be in violation of such registration requirements.

(i) Early Exercisability . The Administrator may provide in the terms of a Holder’s Option Agreement that the Holder may, at any time before the Holder’s status as a Service Provider terminates, exercise the Option in whole or in part prior to the full vesting of the Option; provided, however , that subject to Section 20, Shares acquired upon exercise of an Option which has not fully vested may be subject to any forfeiture, transfer or other restrictions as the Administrator may determine in its sole discretion.

(j) Buyout Provisions . The Administrator may at any time offer to buyout for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Holder at the time that such offer is made.

11. Non-Transferability of Options and Stock Purchase Rights . Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Holder, only by the Holder.

12. Stock Purchase Rights .

(a) Rights to Purchase . Stock Purchase Rights may be issued either alone, in addition to, or in tandem with Options granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer; provided, however, that to the extent required to comply with applicable securities laws, the purchase price of such Shares shall not be less than the purchase price requirements set forth in Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.


(b) Repurchase Right . Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company the right to repurchase Shares acquired upon exercise of a Stock Purchase Right upon the termination of the purchaser’s status as a Service Provider for any reason. Subject to Section 20, the purchase price for Shares repurchased by the Company pursuant to such repurchase right and the rate at which such repurchase right shall lapse shall be determined by the Administrator in its sole discretion, and shall be set forth in the Restricted Stock purchase agreement; provided, however, that, except with regard to Options granted to Officers, Directors or Consultants, in no event shall the repurchase right lapse at a rate of less than twenty percent (20%) per year over five (5) years from the date the Stock Purchase Right is granted, subject to reasonable conditions, such as continuing to be a Service Provider.

(c) Other Provisions . The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) Rights as a Shareholder . Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.

13. Adjustments upon Changes in Capitalization, Merger or Asset Sale .

(a) In the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Administrator’s sole discretion, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Option, Stock Purchase Right or Restricted Stock, then the Administrator shall, in such manner as it may deem equitable, adjust any or all of:

(i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options or Stock Purchase Rights may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 3 on the maximum number and kind of shares which may be issued and adjustments of the maximum number of Shares that may be purchased by any Holder in any calendar year pursuant to Section 6(c));


(ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Stock Purchase Rights or Restricted Stock; and

(iii) the grant or exercise price with respect to any Option or Stock Purchase Right.

(b) In the event of any transaction or event described in Section 13(a), the Administrator, in its sole discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Option, Stock Purchase Right or Restricted Stock or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Holder’s request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Option, Stock Purchase Right or Restricted Stock granted or issued under the Plan or to facilitate such transaction or event:

(i) To provide for either the purchase of any such Option, Stock Purchase Right or Restricted Stock for an amount of cash equal to the amount that could have been obtained upon the exercise of such Option or Stock Purchase Right or realization of the Holder’s rights had such Option, Stock Purchase Right or Restricted Stock been currently exercisable or payable or fully vested or the replacement of such Option, Stock Purchase Right or Restricted Stock with other rights or property selected by the Administrator in its sole discretion;

(ii) To provide that such Option or Stock Purchase Right shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the provisions of such Option or Stock Purchase Right;

(iii) To provide that such Option, Stock Purchase Right or Restricted Stock be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

(iv) To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options and Stock Purchase Rights, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Options, Stock Purchase Rights or Restricted Stock or Options, Stock Purchase Rights or Restricted Stock which may be granted in the future; and

(v) To provide that immediately upon the consummation of such event, such Option or Stock Purchase Right shall not be exercisable and shall terminate; provided, that for a specified period of time prior to such event, such Option or Stock Purchase


Right shall be exercisable as to all Shares covered thereby, and the restrictions imposed under an Option Agreement or Restricted Stock purchase agreement upon some or all Shares may be terminated and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase, notwithstanding anything to the contrary in the Plan or the provisions of such Option, Stock Purchase Right or Restricted Stock purchase agreement.

(c) Subject to Section 3, the Administrator may, in its sole discretion, include such further provisions and limitations in any Option, Stock Purchase Right, Restricted Stock agreement or certificate, as it may deem equitable and in the best interests of the Company.

(d) If the Company undergoes an Acquisition, then any surviving corporation or entity or acquiring corporation or entity, or affiliate of such corporation or entity, may assume any Options, Stock Purchase Rights or Restricted Stock outstanding under the Plan or may substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 13(d)) for those outstanding under the Plan. In the event any surviving corporation or entity or acquiring corporation or entity in an Acquisition, or affiliate of such corporation or entity, does not assume such Options, Stock Purchase Rights or Restricted Stock or does not substitute similar stock awards for those outstanding under the Plan, then with respect to (i) Options, Stock Purchase Rights or Restricted Stock held by participants in the Plan whose status as a Service Provider has not terminated prior to such event, the vesting of such Options, Stock Purchase Rights or Restricted Stock (and, if applicable, the time during which such awards may be exercised) shall be accelerated and made fully exercisable and all restrictions thereon shall lapse at least ten (10) days prior to the closing of the Acquisition (and the Options or Stock Purchase Rights terminated if not exercised prior to the closing of such Acquisition), and (ii) any other Options or Stock Purchase Rights outstanding under the Plan, such Options or Stock Purchase rights shall be terminated if not exercised prior to the closing of the Acquisition.

(e) The existence of the Plan, any Option Agreement or Restricted Stock purchase agreement and the Options or Stock Purchase Rights granted hereunder shall not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

14. Time of Granting Options and Stock Purchase Rights . The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant.


15. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time wholly or partially amend, alter, suspend or terminate the Plan. However, without approval of the Company’s stockholders given within twelve (12) months before or after the action by the Board, no action of the Board may, except as provided in Section 13, increase the limits imposed in Section 3 on the maximum number of Shares which may be issued under the Plan or extend the term of the Plan under Section 7.

(b) Stockholder Approval . The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Holder, unless mutually agreed otherwise between the Holder and the Administrator, which agreement must be in writing and signed by the Holder and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Options, Stock Purchase Rights or Restricted Stock granted or awarded under the Plan prior to the date of such termination.

16. Stockholder Approval . The Plan will be submitted for the approval of the Company’s stockholders within twelve (12) months after the date of the Board’s initial adoption of the Plan. Options, Stock Purchase Rights or Restricted Stock may be granted or awarded prior to such stockholder approval, provided that such Options, Stock Purchase Rights and Restricted Stock shall not be exercisable, shall not vest and the restrictions thereon shall not lapse prior to the time when the Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Stock Purchase Rights and Restricted Stock previously granted or awarded under the Plan shall thereupon be canceled and become null and void.

17. Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Reservation of Shares . The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.


19. Information to Holders and Purchasers . Prior to the Public Trading Date and to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall provide to each Holder and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Holder or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. Notwithstanding the preceding sentence, the Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.

20. Repurchase Provisions . The Administrator in its sole discretion may provide that the Company may repurchase Shares acquired upon exercise of an Option or Stock Purchase Right upon the occurrence of certain specified events, including, without limitation, a Holder’s termination as a Service Provider, divorce, bankruptcy or insolvency; provided, however, that any such repurchase right shall be set forth in the applicable Option Agreement or Restricted Stock purchase agreement or in another agreement referred to in such agreement and, provided further, that to the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations, any such repurchase right set forth in an Option or Stock Purchase Right granted prior to the Public Trading Date to a person who is not an Officer, Director or Consultant shall be upon the following terms: (i) if the repurchase option gives the Company the right to repurchase the shares upon termination as a Service Provider at not less than the Fair Market Value of the shares to be purchased on the date of termination of status as a Service Provider, then (A) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of status as a Service Provider (or in the case of shares issued upon exercise of Options or Stock Purchase Rights after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Administrator and the Plan participant and (B) the right terminates when the shares become publicly traded; and (ii) if the repurchase option gives the Company the right to repurchase the Shares upon termination as a Service Provider at the original purchase price for such Shares, then (A) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares per year over five (5) years from the date the Option or Stock Purchase Right is granted (without respect to the date the Option or Stock Purchase Right was exercised or became exercisable) and (B) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of status as a Service Provider (or, in the case of shares issued upon exercise of Options or Stock Purchase Rights, after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Plan participant.

21. Investment Intent . The Company may require a Plan participant, as a condition of exercising or acquiring stock under any Option or Stock Purchase Right, (i) to give written assurances satisfactory to the Company as to the participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business


matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option or Stock Purchase Right; and (ii) to give written assurances satisfactory to the Company stating that the participant is acquiring the stock subject to the Option or Stock Purchase Right for the participant’s own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of stock under the applicable Option or Stock Purchase Right has been registered under a then currently effective registration statement under the Securities Act or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.

22. Governing Law . The validity and enforceability of this Plan shall be governed by and construed in accordance with the laws of the State of Delaware without regard to otherwise governing principles of conflicts of law.

23. Acceleration Upon Death or Disability . With respect to Holders who are Employees, in the event of a Holder’s termination of employment on account of death or disability (as such term is defined in Section 22(e)(3) of the Code), that number of the Holder’s unvested Options and/or shares of Restricted Stock that would have become fully vested, exercisable and/or payable, as applicable, over the twelve (12) months following the Holder’s termination under the vesting schedules applicable to such Options and/or shares of Restricted Stock had the Holder remained continuously employed by or providing services to the Company during such period shall immediately become so vested, exercisable and/or payable, as applicable, on the date of termination.


CHEMOCENTRYX, INC.

AMENDED AND RESTATED 2002 EQUITY INCENTIVE PLAN

APPENDIX

REGARDING PLAN AMENDMENTS

 

      

Date of Board Approval

    

Date of Shareholder Approval

Initial adoption of plan (1,100,000 shares)

     May 2002      September 20, 2002

Increase of share reserve by 1,700,000 shares (to 2,800,000 shares)

     May 2004      May 2004

Amendment to provide for accelerated vesting upon death or disability

     February 2005      Not applicable

Increase of share reserve by 2,000,000 shares (to 4,800,000 shares)

     November 2005      March 2006

Increase of share reserve by 1,500,000 shares (to 6,300,000 shares)

     February 2007      [April 2007]

Exhibit 10.6

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“ Agreement ”) is made effective as of January 1, 2008 (“ Effective Date ”), by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and Thomas J. Schall, Ph.D. (“ Executive ”).

WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of September 2, 1997 (the “ Original Agreement ”).

WHEREAS, Executive and the Company desire to amend and restate the Original Agreement on the terms and conditions set forth below.

The parties agree as follows:

1.         Definitions .  For purposes of this Agreement, the following terms shall have the following meanings:

(a)      “ Board ” shall mean the Board of Directors of the Company.

(b)      “ California WARN Act ” means California Labor Code Sections 1400 et seq .

(c)      “ Cause ” shall mean that, in the reasonable determination of the Company, Executive:

(i)          has committed an act of fraud, embezzlement or dishonesty in connection with Executive’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof;

(ii)         has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any successor or parent or subsidiary thereof;

(iii)        has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity;

(iv)        has materially breached a Company policy, materially breached the provisions of Executive’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof, or

(v)         has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board or the appropriate individual to whom Executive reports; provided such direction is not materially inconsistent with the Executive’s customary duties and responsibilities.

(d)      “ Change in Control ” shall mean and include each of the following:

(i)        the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities entitled to vote generally in the


election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

(A)      an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company,

(B)      an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company,

(C)      an acquisition of voting securities pursuant to a transaction described in subsection (ii) below that would not be a Change in Control under subsection (ii), or

(D)      an acquisition of voting securities pursuant to the Company’s initial public offering of its common stock;

Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section: an acquisition of the Company’s securities by the Company that causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; or

(ii)      The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(A)      Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(B)      After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(d)(iii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iii)      The Company’s stockholders approve a liquidation or dissolution of the Company

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes

 

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of subsection (ii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters thereto.

(e)      “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

(i)        a material diminution in Executive’s authority, duties or responsibilities;

(ii)       a material diminution in the authority, duties or responsibilities of the supervisor to whom Executive is required to report;

(iii)      a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;

(iv)      a material change in the geographic location at which Executive must perform his duties (and the Company and Executive agree that any involuntary relocation of Executive’s principal place of business to a location more than forty (40) miles in any direction from the Company’s headquarters in Mountain View, California as of the Effective Date would constitute a material change); or

(v)       any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.

(f)      “ Involuntary Termination ” means (i) the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability, or (ii) the Executive’s Separation from Service by reason of resignation of employment with the Company for Good Reason. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if such Separation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.

(g)      “ Separation from Service ”, with respect to the Executive (or another Service Provider) means the Executive’s (or such Service Provider’s) “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(h)      “ Specified Employee ” shall mean a Service Provider who, as of the date of the Service Provider’s Separation from Service is a “Key Employee” of the Service Recipient any stock of which is publicly traded on an established securities market or otherwise. For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section

 

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416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year. If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date. For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Treasury Regulation Section 1.415(c)-2(d)(4), from the Service Recipient for such Testing Year. The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Treasury Regulation Section 1.409A-1(i).

(i)      “ Specified Employee Effective Date ” means the first day of the fourth month following the Specified Employee Identification Date. The Specified Employee Effective Date may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(4).

(j)      “ Specified Employee Identification Date ”, for purposes of Treasury Regulation Section 1.409A-1(i)(3), shall mean December 31. The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Treasury Regulation Section 1.409A-1(a)) of the Service Recipient and all affected Service Providers. The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(3).

(k)      “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

(l)      “ Testing Year ” shall mean the twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

(m)      “ WARN Act ” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder.

2.         Term .   The term of this Agreement (the “ Term ”) shall commence on the Effective Date and shall continue in effect until December 31, 2010 (the “Initial Termination Date” ); provided , however , that this Agreement shall be automatically extended for one (1) additional year on the Initial Termination Date and on each subsequent anniversary of the Initial Termination Date, unless the Company elects not to so extend the term of the Agreement by notifying Executive, in writing, of such election not less than sixty (60) days prior to the last day of the Term as then in effect.

3.         Services to Be Rendered.

(a)       Duties and Responsibilities .     Executive shall serve as President and Chief Executive Officer of the Company. So long as Executive is serving as the President and Chief Executive Officer of the Company, he will be nominated to, and if elected by the stockholders of the Company, be a member of, the Board. In the performance of such duties, Executive shall report directly to the Board and shall be subject to the direction of the Board and to such limits upon Executive’s authority as the Board may from time to time impose. Any change in the Executive’s role without his consent such that he no longer reports directly to the Board shall constitute a material breach of this Agreement by the Company. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the Board. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work shall be the Company’s facility in Mountain View, California, or such other location within Santa Clara County as may be designated by the Board from time to time. Executive shall also render services at such other

 

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places within or outside the United States as the Board may direct from time to time. Executive shall be subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b)       Exclusive Services .   Executive shall at all times faithfully, industriously and to the best of his ability, experience and talent perform to the satisfaction of the Board all of the duties that may be assigned to Executive hereunder and shall devote substantially all of his productive time and efforts to the performance of such duties. Subject to the terms of the Employee Proprietary Information and Inventions Agreement referred to in Section 6(b), this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his duties to the Company, as determined in good faith by the Board. Executive agrees that he will not join any boards, other than community and civic boards (which do not interfere with his duties to the Company), without the prior approval of the Board.

4.         Compensation and Benefits .   The Company shall pay or provide, as the case may be, to Executive the compensation and other benefits and rights set forth in this Section 4.

(a)       Base Salary .   The Company shall pay to Executive a base salary of $350,000 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board.

(b)       Bonus .   Executive shall participate in such incentive compensation plan as may be approved by the Compensation Committee of the Board from time to time for senior executives of the Company. Executive’s target bonus award under such plan shall be forty percent (40%) of Executive’s base salary. Any material reduction of Executive’s target bonus shall be considered a material breach of this Agreement by the Company.

(c)       Benefits .     Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. Any reduction of Executive’s benefits such that Executive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of the Effective Date shall be considered a material breach of this Agreement by the Company.

(d)       Expenses .   The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred in connection with the performance of his duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e)       Paid Vacation .   Executive shall be entitled to such periods of paid vacation each year as provided from time to time under the Company’s vacation policy and as otherwise provided for senior executive officers; provided that Executive shall be entitled to earn at least five (5) weeks of paid vacation per year.

(f)       Equity Awards .   Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s

 

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participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

5.         Termination and Severance .     Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

(a)       At-Will Employment; Termination .     The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b)       Severance Upon Involuntary Termination Prior to a Change in Control or More than 12 Months Following a Change in Control .    If Executive’s employment is Involuntarily Terminated prior to a Change in Control or more than twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

(i)        The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

(ii)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination; plus

(iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of one hundred percent (100%) of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

(iv)      The payments and benefits provided for in this Section 5(b) shall only be payable in the event of Executive’s Involuntary Termination prior to a Change of Control or more than twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change of Control, then Executive shall receive the payments and benefits described in Section 5(c) in lieu of the payments and benefits described in this Section 5(b).

(c)       Severance Upon Involuntary Termination Within 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 )

 

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months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

(i)      The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

(ii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

(A)      Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination, plus

(B)      One and one-half (1  1 / 2 ) times the Executive’s target bonus for the fiscal year in which the date of Involuntary Termination occurs, with such bonus determined assuming that all of the performance objectives for such fiscal year have been attained;

(iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, for the period beginning on the date of Involuntary Termination and ending on the date which is eighteen (18) full months following the date of Involuntary Termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), the Company shall reimburse Executive for the costs associated with continuation coverage pursuant to COBRA for Executive and his eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Involuntary Termination such that Executive’s premiums are the same as for active employees (provided that Executive shall be solely responsible for all matters relating to his continuation of coverage pursuant to COBRA, including, without limitation, his election of such coverage and his timely payment of premiums);

(iv)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of any outstanding unvested portions of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

(v)      The payments and benefits provided for in this Section 5(c) shall only be payable in the event of Executive’s Involuntary Termination within twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated more than twelve (12) months following a Change of Control or prior to a Change of Control, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c). In addition, if an Executive is not a full-time employee at the time of his Involuntary Termination, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c) as a result of such Involuntary Termination.

(d)       Other Terminations .   If Executive’s employment is terminated by the Company for Cause, by Executive without Good Reason, or as a result of Executive’s death or disability, or in the event the Term expires, the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, (ii) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such

 

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plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law, and (iii) Executive shall be entitled to receive a prorata portion of any bonus payment to which Executive was entitled in the year in which such termination occurs, which bonus shall be paid within ten (10) days following the date of termination. In addition, all vesting of Executive’s unvested Stock Awards previously granted to him by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(e)       Delay of Payments .    Notwithstanding anything to the contrary in this Section 5, if the Executive is a Specified Employee on the date of the Executive’s Involuntary Termination, to the extent that the payments or benefits under this Section 5 are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which the executive is entitled under such Sections is required in order to avoid a prohibited distribution under Section 409A(a)(2)(b)(i) of the Code, then such portion shall be paid or distributed to the Executive during the ten (10) day period commencing on the earlier of (a) the expiration of the six (6)-month period measured from the date of the Executive’s Separation from Service or (b) the date of Executive’s death. Upon the expiration of the applicable six (6)-month period under Section 409A(a)(2)(b)(i) of the Code, all payments deferred pursuant to this Section 5(e) shall be paid in a lump sum payment to the Executive. Any remaining payments due under the agreement shall be paid as otherwise provided herein.

(f)       Release .   As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(b) or 5(c) above, Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form attached hereto as Exhibit A . In the event Executive does not sign the Release within the fifty (50) day period following the date of Executive’s termination of employment or revokes such Release in accordance with the terms thereof, Executive shall not be entitled to the aforesaid payments and benefits.

(g)       Exclusive Remedy .     Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5. Any payments made to Executive under this Section 5 shall be inclusive of any amounts or benefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.

(h)       No Mitigation .    Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company may be offset by the Company against amounts payable to Executive under this Section 5.

(i)       Return of the Company’s Property .   If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate his offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of his employment in any manner, as a condition to Executive’s receipt of any post-termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(i) prior to the receipt of any post-termination benefits described in this Agreement.

 

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6.         Certain Covenants .

(a)       Noncompetition .   Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however , that Executive may own, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own one percent (1%) or more of any class of securities of any such entity.

(b)       Confidential Information .    Executive and the Company have entered into the Company’s standard employee proprietary information and inventions agreement (the “ Employee Proprietary Information and Inventions Agreement ”). Executive agrees to perform each and every obligation of Executive therein contained.

(c)       Solicitation of Employees .    Executive shall not during the term of Executive’s employment and for one year following Executive’s termination of employment (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)       Solicitation of Consultants .    Executive shall not during the term of Executive’s employment and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)       Rights and Remedies Upon Breach .     If Executive breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have any rights and remedies available to the Company under law or in equity, including, without limitation, the right to cease all severance payments and benefits payable pursuant to Section 5 above in the event of Executive’s breach of any of the Restrictive Covenants.

(f)       Severability of Covenants/Blue Pencilling .    If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executive hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)       Enforceability in Jurisdictions .   The Company and Executive intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Executive that such determination not bar or in any way affect the right of

 

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the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)       Definitions .   For purposes of this Section 6, the term “ Company ” means not only ChemoCentryx, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with ChemoCentryx, Inc.

7.         Insurance; Indemnification .

(a)       Insurance .    The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Executive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executive shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.

(b)       Indemnification .   Executive will be provided with indemnification against third party claims related to his work for the Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other members of the Board and executive officers.

8.         Agreement to Arbitrate .   Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in Santa Clara County, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his discretion, award reasonable attorneys’ fees to the prevailing party; provided , however , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

9.         General Provisions .

9.1       Successors and Assigns .   The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or

 

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otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9.2       Severability .    In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

9.3       Interpretation; Construction .   The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

9.4       Governing Law and Venue .  This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

9.5       Notices.    Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address listed on the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.

9.6       Survival .     Sections 1 (“Definitions”), 5 (“Termination and Severance”), 6 (“Restrictive Covenants”), 7 (“Insurance and Indemnification”), 8 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.

9.7       Entire Agreement .    This Agreement and the Employee Proprietary Information and Inventions Agreement incorporated herein by reference together constitute the entire agreement

 

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between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Original Agreement. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

9.8       Code Section 409A .      Certain payments and benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Code. This Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the Code. To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (subject to the transitional relief under Internal Revenue Service Notice 2005-1 and other applicable authority issued by the Internal Revenue Service). As provided in Internal Revenue Service Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time and form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment may apply only to amounts that would not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

9.9       Counterparts .   This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

Dated:   28 Feb 2008                

Dated:   22 Feb 2008                

C HEMO C ENTRYX , I NC .  

By:

 

        /s/ Susan Kanaya

 

Name:

 

   Susan Kanaya

 

Title:

 

     SVP, Finance & C.F.O.

 
       
E XECUTIVE  

/s/ Thomas J. Schall

Thomas J. Schall, Ph.D.

 
   

    Address:

 

 

 

 
     

 

 
 

 

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Exhibit 10.7

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“ Agreement ”) is made effective as of January 1, 2008 (“ Effective Date ”), by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and Markus J. Cappel, Ph.D. (“ Executive ”).

WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of September 27, 2001 (the “ Original Agreement ”).

WHEREAS, Executive and the Company desire to amend and restate the Original Agreement on the terms and conditions set forth below.

The parties agree as follows:

1.         Definitions .  For purposes of this Agreement, the following terms shall have the following meanings:

(a)        “ Board ” shall mean the Board of Directors of the Company.

(b)        “ California WARN Act ” means California Labor Code Sections 1400 et seq .

(c)        “ Cause ” shall mean that, in the reasonable determination of the Company, Executive:

  (i)        has committed an act of fraud, embezzlement or dishonesty in connection with Executive’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof;

  (ii)        has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any successor or parent or subsidiary thereof;

  (iii)       has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity;

  (iv)       has materially breached a Company policy, materially breached the provisions of Executive’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof, or

  (v)        has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board or the appropriate individual to whom Executive reports; provided such direction is not materially inconsistent with the Executive’s customary duties and responsibilities.

(d)        “ Change in Control ” shall mean and include each of the following:

  (i)        the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities entitled to vote generally in the


election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

  (A)        an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company,

  (B)        an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company,

  (C)        an acquisition of voting securities pursuant to a transaction described in subsection (ii) below that would not be a Change in Control under subsection (ii), or

  (D)        an acquisition of voting securities pursuant to the Company’s initial public offering of its common stock;

Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section: an acquisition of the Company’s securities by the Company that causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; or

(ii)        The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

  (A)        Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

  (B)        After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(d)(iii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iii)        The Company’s stockholders approve a liquidation or dissolution of the Company

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes

 

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of subsection (ii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters thereto.

(e)        “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

  (i)        a material diminution in Executive’s authority, duties or responsibilities;

  (ii)       a material diminution in the authority, duties or responsibilities of the supervisor to whom Executive is required to report;

  (iii)      a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;

  (iv)      a material change in the geographic location at which Executive must perform his duties (and the Company and Executive agree that any involuntary relocation of Executive’s principal place of business to a location more than forty (40) miles in any direction from the Company’s headquarters in Mountain View, California as of the Effective Date would constitute a material change); or

   (v)      any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.

(f)        “ Involuntary Termination ” means (i) the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability, or (ii) the Executive’s Separation from Service by reason of resignation of employment with the Company for Good Reason. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if such Separation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.

(g)        “ Separation from Service ”, with respect to the Executive (or another Service Provider) means the Executive’s (or such Service Provider’s) “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(h)        “ Specified Employee ” shall mean a Service Provider who, as of the date of the Service Provider’s Separation from Service is a “Key Employee” of the Service Recipient any stock of which is publicly traded on an established securities market or otherwise. For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section

 

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416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year. If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date. For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Treasury Regulation Section 1.415(c)-2(d)(4), from the Service Recipient for such Testing Year. The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Treasury Regulation Section 1.409A-1(i).

(i)        “ Specified Employee Effective Date ” means the first day of the fourth month following the Specified Employee Identification Date. The Specified Employee Effective Date may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(4).

(j)        “ Specified Employee Identification Date ”, for purposes of Treasury Regulation Section 1.409A-1(i)(3), shall mean December 31. The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Treasury Regulation Section 1.409A-1(a)) of the Service Recipient and all affected Service Providers. The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(3).

(k)        “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

(l)        “ Testing Year ” shall mean the twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

(m)        “ WARN Act ” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder.

2.         Term .   The term of this Agreement (the “ Term ”) shall commence on the Effective Date and shall continue in effect until December 31, 2010 (the “Initial Termination Date” ); provided , however , that this Agreement shall be automatically extended for one (1) additional year on the Initial Termination Date and on each subsequent anniversary of the Initial Termination Date, unless the Company elects not to so extend the term of the Agreement by notifying Executive, in writing, of such election not less than sixty (60) days prior to the last day of the Term as then in effect.

3.         Services to Be Rendered.

(a)         Duties and Responsibilities .   Executive shall serve as Chief Business Officer and Treasurer of the Company. In the performance of such duties, Executive shall report directly to the President and Chief Executive Officer of the Company ( “CEO” ) and shall be subject to the direction of the Board and the CEO and to such limits upon Executive’s authority as the Board and the CEO may from time to time impose. Any change in the Executive’s role without his consent such that he no longer reports directly to the CEO shall constitute a material breach of this Agreement by the Company. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the CEO. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work shall be the Company’s facility in Mountain View, California, or such other location within Santa Clara County as may be designated by the CEO from time to time. Executive shall also render services at such other places within or outside the United States as the CEO may direct from time to time. Executive shall be

 

4


subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b)         Exclusive Services .   Executive shall at all times faithfully, industriously and to the best of his ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Executive hereunder and shall devote substantially all of his productive time and efforts to the performance of such duties. Subject to the terms of the Employee Proprietary Information and Inventions Agreement referred to in Section 6(b), this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his duties to the Company, as determined in good faith by the Board or the CEO. Executive agrees that he will not join any boards, other than community and civic boards (which do not interfere with his duties to the Company), without the prior approval of the Board or the CEO.

4.         Compensation and Benefits .   The Company shall pay or provide, as the case may be, to Executive the compensation and other benefits and rights set forth in this Section 4.

(a)         Base Salary .   The Company shall pay to Executive a base salary of $290,000 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board.

(b)         Bonus .   Executive shall participate in such incentive compensation plan as may be approved by the Compensation Committee of the Board from time to time for senior executives of the Company. Executive’s target bonus award under such plan shall be twenty-five percent (25%) of Executive’s base salary. Any material reduction of Executive’s target bonus shall be considered a material breach of this Agreement by the Company.

(c)         Benefits .    Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. Any reduction of Executive’s benefits such that Executive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of the Effective Date shall be considered a material breach of this Agreement by the Company.

(d)         Expenses .   The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred in connection with the performance of his duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e)         Paid Vacation .   Executive shall be entitled to such periods of paid vacation each year as provided from time to time under the Company’s vacation policy and as otherwise provided for senior executive officers; provided that Executive shall be entitled to earn at least four (4) weeks of paid vacation per year.

(f)         Equity Awards .   Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

 

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5.         Termination and Severance .    Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

(a)         At-Will Employment; Termination .    The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b)         Severance Upon Involuntary Termination Prior to a Change in Control or More than 12 Months Following a Change in Control .    If Executive’s employment is Involuntarily Terminated prior to a Change in Control or more than twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

  (i)        The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)        Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination; plus

  (iii)        Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of one hundred percent (100%) of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (iv)        The payments and benefits provided for in this Section 5(b) shall only be payable in the event of Executive’s Involuntary Termination prior to a Change of Control or more than twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change of Control, then Executive shall receive the payments and benefits described in Section 5(c) in lieu of the payments and benefits described in this Section 5(b).

(c)         Severance Upon Involuntary Termination Within 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

 

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  (i)        The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)        Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

    (A)        Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination, plus

    (B)        One and one-half (1  1 / 2 ) times the Executive’s target bonus for the fiscal year in which the date of Involuntary Termination occurs, with such bonus determined assuming that all of the performance objectives for such fiscal year have been attained;

  (iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, for the period beginning on the date of Involuntary Termination and ending on the date which is eighteen (18) full months following the date of Involuntary Termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), the Company shall reimburse Executive for the costs associated with continuation coverage pursuant to COBRA for Executive and his eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Involuntary Termination such that Executive’s premiums are the same as for active employees (provided that Executive shall be solely responsible for all matters relating to his continuation of coverage pursuant to COBRA, including, without limitation, his election of such coverage and his timely payment of premiums);

  (iv)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of any outstanding unvested portions of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (v)        The payments and benefits provided for in this Section 5(c) shall only be payable in the event of Executive’s Involuntary Termination within twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated more than twelve (12) months following a Change of Control or prior to a Change of Control, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c). In addition, if an Executive is not a full-time employee at the time of his Involuntary Termination, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c) as a result of such Involuntary Termination.

(d)         Other Terminations .   If Executive’s employment is terminated by the Company for Cause, by Executive without Good Reason, or as a result of Executive’s death or disability, or in the event the Term expires, the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, (ii) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law, and (iii) in the event Executive’s employment is terminated as a result of Executive’s death or disability, Executive shall be entitled to receive a prorate portion of any bonus payment to which

 

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Executive was entitled in the year in which such termination occurs, which bonus shall be paid within ten (10) days following the date of termination. In addition, all vesting of Executive’s unvested Stock Awards previously granted to him by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(e)         Delay of Payments .    Notwithstanding anything to the contrary in this Section 5, if the Executive is a Specified Employee on the date of the Executive’s Involuntary Termination, to the extent that the payments or benefits under this Section 5 are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which the executive is entitled under such Sections is required in order to avoid a prohibited distribution under Section 409A(a)(2)(b)(i) of the Code, then such portion shall be paid or distributed to the Executive during the ten (10) day period commencing on the earlier of (a) the expiration of the six (6)-month period measured from the date of the Executive’s Separation from Service or (b) the date of Executive’s death. Upon the expiration of the applicable six (6)-month period under Section 409A(a)(2)(b)(i) of the Code, all payments deferred pursuant to this Section 5(e) shall be paid in a lump sum payment to the Executive. Any remaining payments due under the agreement shall be paid as otherwise provided herein.

(f)         Release .   As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(b) or 5(c) above, Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form attached hereto as Exhibit A . In the event Executive does not sign the Release within the fifty (50) day period following the date of Executive’s termination of employment or revokes such Release in accordance with the terms thereof, Executive shall not be entitled to the aforesaid payments and benefits.

(g)         Exclusive Remedy .    Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5. Any payments made to Executive under this Section 5 shall be inclusive of any amounts or benefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.

(h)         No Mitigation .   Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company may be offset by the Company against amounts payable to Executive under this Section 5.

(i)         Return of the Company’s Property .   If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate his offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of his employment in any manner, as a condition to Executive’s receipt of any post-termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(i) prior to the receipt of any post-termination benefits described in this Agreement.

 

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6.         Certain Covenants .

(a)         Noncompetition .   Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however , that Executive may own, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own one percent (1%) or more of any class of securities of any such entity.

(b)         Confidential Information .   Executive and the Company have entered into the Company’s standard employee proprietary information and inventions agreement (the “ Employee Proprietary Information and Inventions Agreement ”). Executive agrees to perform each and every obligation of Executive therein contained.

(c)         Solicitation of Employees .   Executive shall not during the term of Executive’s employment and for one year following Executive’s termination of employment (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)         Solicitation of Consultants .   Executive shall not during the term of Executive’s employment and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)         Rights and Remedies Upon Breach .    If Executive breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have any rights and remedies available to the Company under law or in equity, including, without limitation, the right to cease all severance payments and benefits payable pursuant to Section 5 above in the event of Executive’s breach of any of the Restrictive Covenants.

(f)         Severability of Covenants/Blue Pencilling .   If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executive hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)         Enforceability in Jurisdictions .    The Company and Executive intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Executive that such determination not bar or in any way affect the right of

 

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the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)         Definitions .   For purposes of this Section 6, the term “ Company ” means not only ChemoCentryx, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with ChemoCentryx, Inc.

7.          Insurance; Indemnification .

(a)         Insurance .   The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Executive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executive shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.

(b)         Indemnification .   Executive will be provided with indemnification against third party claims related to his work for the Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other members of the Board and executive officers.

8.         Agreement to Arbitrate .   Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in Santa Clara County, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , however , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

9.         General Provisions .

9.1         Successors and Assigns .   The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or

 

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otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9.2         Severability .   In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

9.3         Interpretation; Construction .   The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

9.4         Governing Law and Venue .   This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

9.5         Notices.   Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address listed on the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.

9.6         Survival .    Sections 1 (“Definitions”), 5 (“Termination and Severance”), 6 (“Restrictive Covenants”), 7 (“Insurance and Indemnification”), 8 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.

9.7         Entire Agreement .   This Agreement and the Employee Proprietary Information and Inventions Agreement incorporated herein by reference together constitute the entire agreement

 

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between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Original Agreement. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

9.8         Code Section 409A .    Certain payments and benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Code. This Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the Code. To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (subject to the transitional relief under Internal Revenue Service Notice 2005-1 and other applicable authority issued by the Internal Revenue Service). As provided in Internal Revenue Service Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time and form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment may apply only to amounts that would not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

9.9         Counterparts .  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

 

 

Dated:   2/22/08                            

C HEMO C ENTRYX , I NC .

By:

 

       /s/ Thomas J. Schall

Name:

 

  Thomas J. Schall

Title:

 

     President and Chief Executive Officer

 

 

 

 

 

Dated:   Feb 22, 2008                    

E XECUTIVE

/s/ Markus Cappel

Markus J. Cappel, Ph.D.

 

 

 

Address:

 

1265 Hermosa Way

   

Menlo Park, CA 94025

 

 

 

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Exhibit 10.8

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“ Agreement ”) is made effective as of January 1, 2008 (“ Effective Date ”), by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and Susan M. Kanaya (“ Executive ”).

WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of December 6, 2005 (the “ Original Agreement ”).

WHEREAS, Executive and the Company desire to amend and restate the Original Agreement on the terms and conditions set forth below.

The parties agree as follows:

1.         Definitions .  For purposes of this Agreement, the following terms shall have the following meanings:

(a)        “ Board ” shall mean the Board of Directors of the Company.

(b)        “ California WARN Act ” means California Labor Code Sections 1400 et seq .

(c)        “ Cause ” shall mean that, in the reasonable determination of the Company, Executive:

  (i)        has committed an act of fraud, embezzlement or dishonesty in connection with Executive’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof;

  (ii)       has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any successor or parent or subsidiary thereof;

  (iii)      has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity;

  (iv)       has materially breached a Company policy, materially breached the provisions of Executive’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof, or

  (v)        has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board or the appropriate individual to whom Executive reports; provided such direction is not materially inconsistent with the Executive’s customary duties and responsibilities.

(d)        “ Change in Control ” shall mean and include each of the following:

  (i)        the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities entitled to vote generally in the


election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

   (A)        an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company,

   (B)        an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company,

   (C)        an acquisition of voting securities pursuant to a transaction described in subsection (ii) below that would not be a Change in Control under subsection (ii), or

   (D)        an acquisition of voting securities pursuant to the Company’s initial public offering of its common stock;

  Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section: an acquisition of the Company’s securities by the Company that causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; or

  (ii)       The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

   (A)        Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

   (B)        After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(d)(iii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

  (iii)      The Company’s stockholders approve a liquidation or dissolution of the Company

For purposes of subsection (i) above, the calculation of voting power shall be made as if

 

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the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes of subsection (ii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters thereto.

(e)        “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

  (i)        a material diminution in Executive’s authority, duties or responsibilities;

  (ii)       a material diminution in the authority, duties or responsibilities of the supervisor to whom Executive is required to report;

  (iii)      a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;

  (iv)      a material change in the geographic location at which Executive must perform her duties (and the Company and Executive agree that any involuntary relocation of Executive’s principal place of business to a location more than forty (40) miles in any direction from the Company’s headquarters in Mountain View, California as of the Effective Date would constitute a material change); or

  (v)       any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.

(f)        “ Involuntary Termination ” means (i) the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability, or (ii) the Executive’s Separation from Service by reason of resignation of employment with the Company for Good Reason. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if such Separation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.

(g)        “ Separation from Service ”, with respect to the Executive (or another Service Provider) means the Executive’s (or such Service Provider’s) “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(h)        “ Specified Employee ” shall mean a Service Provider who, as of the date of the Service Provider’s Separation from Service is a “Key Employee” of the Service Recipient any stock of

 

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which is publicly traded on an established securities market or otherwise. For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year. If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date. For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Treasury Regulation Section 1.415(c)-2(d)(4), from the Service Recipient for such Testing Year. The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Treasury Regulation Section 1.409A-1(i).

(i)        “ Specified Employee Effective Date ” means the first day of the fourth month following the Specified Employee Identification Date. The Specified Employee Effective Date may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(4).

(j)        “ Specified Employee Identification Date ”, for purposes of Treasury Regulation Section 1.409A-1(i)(3), shall mean December 31. The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Treasury Regulation Section 1.409A-1(a)) of the Service Recipient and all affected Service Providers. The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(3).

(k)       “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

(l)        “ Testing Year ” shall mean the twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

(m)      “ WARN Act ” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder.

2.         Term .  The term of this Agreement (the “ Term ”) shall commence on the Effective Date and shall continue in effect until December 31, 2010 (the “Initial Termination Date” ); provided , however , that this Agreement shall be automatically extended for one (1) additional year on the Initial Termination Date and on each subsequent anniversary of the Initial Termination Date, unless the Company elects not to so extend the term of the Agreement by notifying Executive, in writing, of such election not less than sixty (60) days prior to the last day of the Term as then in effect.

3.         Services to Be Rendered.

(a)         Duties and Responsibilities .    Executive shall serve as Senior Vice President, Finance, and Chief Financial Officer of the Company. In the performance of such duties, Executive shall report directly to the President and Chief Executive Officer of the Company ( “CEO” ) and shall be subject to the direction of the Board and the CEO and to such limits upon Executive’s authority as the Board and the CEO may from time to time impose. Any change in the Executive’s role without her consent such that she no longer reports directly to the CEO shall constitute a material breach of this Agreement by the Company. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the CEO. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work

 

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shall be the Company’s facility in Mountain View, California, or such other location within Santa Clara County as may be designated by the CEO from time to time. Executive shall also render services at such other places within or outside the United States as the CEO may direct from time to time. Executive shall be subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b)         Exclusive Services .   Executive shall at all times faithfully, industriously and to the best of her ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Executive hereunder and shall devote substantially all of her productive time and efforts to the performance of such duties. Subject to the terms of the Employee Proprietary Information and Inventions Agreement referred to in Section 6(b), this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with her duties to the Company, as determined in good faith by the Board or the CEO. Executive agrees that she will not join any boards, other than community and civic boards (which do not interfere with her duties to the Company), without the prior approval of the Board or the CEO.

4.         Compensation and Benefits .   The Company shall pay or provide, as the case may be, to Executive the compensation and other benefits and rights set forth in this Section 4.

(a)         Base Salary .   The Company shall pay to Executive a base salary of $304,500 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board.

(b)         Bonus .   Executive shall participate in such incentive compensation plan as may be approved by the Compensation Committee of the Board from time to time for senior executives of the Company. Executive’s target bonus award under such plan shall be twenty-five percent (25%) of Executive’s base salary. Any material reduction of Executive’s target bonus shall be considered a material breach of this Agreement by the Company.

(c)         Benefits .     Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. Any reduction of Executive’s benefits such that Executive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of the Effective Date shall be considered a material breach of this Agreement by the Company.

(d)         Expenses .   The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred in connection with the performance of her duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e)         Paid Vacation .   Executive shall be entitled to such periods of paid vacation each year as provided from time to time under the Company’s vacation policy and as otherwise provided for senior executive officers; provided that Executive shall be entitled to earn at least three (3) weeks of paid vacation per year.

 

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(f)         Equity Awards .  Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

5.         Termination and Severance .    Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

(a)         At-Will Employment; Termination .   The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b)         Severance Upon Involuntary Termination Prior to a Change in Control or More than 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated prior to a Change in Control or more than twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

  (i)        The Company shall pay to Executive her fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination; plus

  (iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of one hundred percent (100%) Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (iv)       The payments and benefits provided for in this Section 5(b) shall only be payable in the event of Executive’s Involuntary Termination prior to a Change of Control or more than twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change of Control, then Executive shall receive the payments and benefits described in Section 5(c) in lieu of the payments and benefits described in this Section 5(b).

(c)         Severance Upon Involuntary Termination Within 12 Months Following a Change in Control .  If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which

 

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Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

  (i)        The Company shall pay to Executive her fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

   (A)        Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination, plus

   (B)        One and one-half (1  1 / 2 ) times the Executive’s target bonus for the fiscal year in which the date of Involuntary Termination occurs, with such bonus determined assuming that all of the performance objectives for such fiscal year have been attained;

  (iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, for the period beginning on the date of Involuntary Termination and ending on the date which is eighteen (18) full months following the date of Involuntary Termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), the Company shall reimburse Executive for the costs associated with continuation coverage pursuant to COBRA for Executive and her eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Involuntary Termination such that Executive’s premiums are the same as for active employees (provided that Executive shall be solely responsible for all matters relating to her continuation of coverage pursuant to COBRA, including, without limitation, her election of such coverage and her timely payment of premiums);

  (iv)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of any outstanding unvested portions of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (v)        The payments and benefits provided for in this Section 5(c) shall only be payable in the event of Executive’s Involuntary Termination within twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated more than twelve (12) months following a Change of Control or prior to a Change of Control, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c). In addition, if an Executive is not a full-time employee at the time of her Involuntary Termination, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c) as a result of such Involuntary Termination.

(d)         Other Terminations . If Executive’s employment is terminated by the Company for Cause, by Executive without Good Reason, or as a result of Executive’s death or disability, or in the event the Term expires, the Company shall not have any other or further obligations to Executive under

 

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this Agreement (including any financial obligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, (ii) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law, and (iii) in the event Executive’s employment is terminated as a result of Executive’s death or disability, Executive shall be entitled to receive a prorate portion of any bonus payment to which Executive was entitled in the year in which such termination occurs, which bonus shall be paid within ten (10) days following the date of termination. In addition, all vesting of Executive’s unvested Stock Awards previously granted to him by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(e)         Delay of Payments .   Notwithstanding anything to the contrary in this Section 5, if the Executive is a Specified Employee on the date of the Executive’s Involuntary Termination, to the extent that the payments or benefits under this Section 5 are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which the executive is entitled under such Sections is required in order to avoid a prohibited distribution under Section 409A(a)(2)(b)(i) of the Code, then such portion shall be paid or distributed to the Executive during the ten (10) day period commencing on the earlier of (a) the expiration of the six (6)-month period measured from the date of the Executive’s Separation from Service or (b) the date of Executive’s death. Upon the expiration of the applicable six (6)-month period under Section 409A(a)(2)(b)(i) of the Code, all payments deferred pursuant to this Section 5(e) shall be paid in a lump sum payment to the Executive. Any remaining payments due under the agreement shall be paid as otherwise provided herein.

(f)         Release .   As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(b) or 5(c) above, Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form attached hereto as Exhibit A . In the event Executive does not sign the Release within the fifty (50) day period following the date of Executive’s termination of employment or revokes such Release in accordance with the terms thereof, Executive shall not be entitled to the aforesaid payments and benefits.

(g)         Exclusive Remedy .      Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5. Any payments made to Executive under this Section 5 shall be inclusive of any amounts or benefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.

(h)         No Mitigation .   Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company may be offset by the Company against amounts payable to Executive under this Section 5.

(i)         Return of the Company’s Property .   If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate her offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of her employment in any manner, as a condition to Executive’s receipt of any post-

 

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termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(i) prior to the receipt of any post-termination benefits described in this Agreement.

6.         Certain Covenants .

(a)         Noncompetition .  Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however , that Executive may own, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own one percent (1%) or more of any class of securities of any such entity.

(b)         Confidential Information .     Executive and the Company have entered into the Company’s standard employee proprietary information and inventions agreement (the “ Employee Proprietary Information and Inventions Agreement ”). Executive agrees to perform each and every obligation of Executive therein contained.

(c)         Solicitation of Employees .   Executive shall not during the term of Executive’s employment and for one year following Executive’s termination of employment (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)         Solicitation of Consultants .   Executive shall not during the term of Executive’s employment and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)         Rights and Remedies Upon Breach .    If Executive breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have any rights and remedies available to the Company under law or in equity, including, without limitation, the right to cease all severance payments and benefits payable pursuant to Section 5 above in the event of Executive’s breach of any of the Restrictive Covenants.

(f)         Severability of Covenants/Blue Pencilling .   If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executive hereby waives any and all right to attack the

 

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validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)         Enforceability in Jurisdictions .   The Company and Executive intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Executive that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)         Definitions .  For purposes of this Section 6, the term “ Company ” means not only ChemoCentryx, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with ChemoCentryx, Inc.

7.         Insurance; Indemnification .

(a)         Insurance .  The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Executive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executive shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.

(b)         Indemnification .   Executive will be provided with indemnification against third party claims related to her work for the Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other members of the Board and executive officers.

8.         Agreement to Arbitrate .   Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in Santa Clara County, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , however , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction

 

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pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

9.         General Provisions .

9.1         Successors and Assigns .   The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9.2         Severability .     In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

9.3         Interpretation; Construction .   The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

9.4         Governing Law and Venue .  This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

9.5         Notices.   Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at

 

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the address listed on the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.

9.6         Survival .     Sections 1 (“Definitions”), 5 (“Termination and Severance”), 6 (“Restrictive Covenants”), 7 (“Insurance and Indemnification”), 8 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.

9.7         Entire Agreement .    This Agreement and the Employee Proprietary Information and Inventions Agreement incorporated herein by reference together constitute the entire agreement between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Original Agreement. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

9.8         Code Section 409A .      Certain payments and benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Code. This Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the Code. To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (subject to the transitional relief under Internal Revenue Service Notice 2005-1 and other applicable authority issued by the Internal Revenue Service). As provided in Internal Revenue Service Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time and form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment may apply only to amounts that would not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

9.9         Counterparts .  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE D ATES SHOWN BELOW.

  C HEMO C ENTRYX , I NC .
Dated:   22 Feb 2008                                           By:  

    /s/ Thomas J. Schall

  Name:       Thomas J.Schall                                                                    
  Title:  

    President and Chief Executive Officer

  E XECUTIVE
Dated:   22 Feb 2008                              

             /s/ Susan M. Kanaya

 
  Susan M. Kanaya  
              Address:  

 

 
     

 

 

 

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Exhibit 10.9

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“ Agreement ”) is made effective as of January 1, 2008 (“ Effective Date ”), by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and Juan C. Jaen, Ph.D. (“ Executive ”).

WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of November 3, 2006 (the “ Original Agreement ”).

WHEREAS, Executive and the Company desire to amend and restate the Original Agreement on the terms and conditions set forth below.

The parties agree as follows:

1.         Definitions .  For purposes of this Agreement, the following terms shall have the following meanings:

(a)        “ Board ” shall mean the Board of Directors of the Company.

(b)        “ California WARN Act ” means California Labor Code Sections 1400 et seq .

(c)        “ Cause ” shall mean that, in the reasonable determination of the Company, Executive:

  (i)        has committed an act of fraud, embezzlement or dishonesty in connection with Executive’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof;

  (ii)       has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any successor or parent or subsidiary thereof;

  (iii)      has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity;

  (iv)      has materially breached a Company policy, materially breached the provisions of Executive’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof, or

  (v)       has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board or the appropriate individual to whom Executive reports; provided such direction is not materially inconsistent with the Executive’s customary duties and responsibilities.

(d)        “ Change in Control ” shall mean and include each of the following:

  (i)        the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities entitled to vote generally in the


election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

(A)        an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company,

(B)        an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company,

(C)        an acquisition of voting securities pursuant to a transaction described in subsection (ii) below that would not be a Change in Control under subsection (ii), or

(D)        an acquisition of voting securities pursuant to the Company’s initial public offering of its common stock;

Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section: an acquisition of the Company’s securities by the Company that causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; or

(ii)       The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(A)        Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(B)        After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(d)(iii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iii)      The Company’s stockholders approve a liquidation or dissolution of the Company

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes

 

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of subsection (ii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters thereto.

(e)        “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

  (i)        a material diminution in Executive’s authority, duties or responsibilities;

  (ii)       a material diminution in the authority, duties or responsibilities of the supervisor to whom Executive is required to report;

  (iii)      a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;

  (iv)      a material change in the geographic location at which Executive must perform his duties (and the Company and Executive agree that any involuntary relocation of Executive’s principal place of business to a location more than forty (40) miles in any direction from the Company’s headquarters in Mountain View, California as of the Effective Date would constitute a material change); or

  (v)       any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.

(f)        “ Involuntary Termination ” means (i) the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability, or (ii) the Executive’s Separation from Service by reason of resignation of employment with the Company for Good Reason. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if such Separation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.

(g)        “ Separation from Service ”, with respect to the Executive (or another Service Provider) means the Executive’s (or such Service Provider’s) “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(h)        “ Specified Employee ” shall mean a Service Provider who, as of the date of the Service Provider’s Separation from Service is a “Key Employee” of the Service Recipient any stock of which is publicly traded on an established securities market or otherwise. For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section

 

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416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year. If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date. For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Treasury Regulation Section 1.415(c)-2(d)(4), from the Service Recipient for such Testing Year. The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Treasury Regulation Section 1.409A-1(i).

(i)        “ Specified Employee Effective Date ” means the first day of the fourth month following the Specified Employee Identification Date. The Specified Employee Effective Date may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(4).

(j)        “ Specified Employee Identification Date ”, for purposes of Treasury Regulation Section 1.409A-1(i)(3), shall mean December 31. The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Treasury Regulation Section 1.409A-1(a)) of the Service Recipient and all affected Service Providers. The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(3).

(k)       “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

(l)        “ Testing Year ” shall mean the twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

(m)      “ WARN Act ” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder.

2.         Term .   The term of this Agreement (the “ Term ”) shall commence on the Effective Date and shall continue in effect until December 31, 2010 (the “Initial Termination Date” ); provided , however , that this Agreement shall be automatically extended for one (1) additional year on the Initial Termination Date and on each subsequent anniversary of the Initial Termination Date, unless the Company elects not to so extend the term of the Agreement by notifying Executive, in writing, of such election not less than sixty (60) days prior to the last day of the Term as then in effect.

3.         Services to Be Rendered.

(a)         Duties and Responsibilities .    Executive shall serve as Senior Vice President, Drug Discovery, of the Company. In the performance of such duties, Executive shall report directly to the President and Chief Executive Officer of the Company ( “CEO” ) and shall be subject to the direction of the Board and the CEO and to such limits upon Executive’s authority as the Board and the CEO may from time to time impose. Any change in the Executive’s role without his consent such that he no longer reports directly to the CEO shall constitute a material breach of this Agreement by the Company. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the CEO. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work shall be the Company’s facility in Mountain View, California, or such other location within Santa Clara County as may be designated by the CEO from time to time. Executive shall also render services at such other places within or outside the United States as the CEO may direct from time to time. Executive shall be

 

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subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b)         Exclusive Services .   Executive shall at all times faithfully, industriously and to the best of his ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Executive hereunder and shall devote substantially all of his productive time and efforts to the performance of such duties. Subject to the terms of the Employee Proprietary Information and Inventions Agreement referred to in Section 6(b), this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his duties to the Company, as determined in good faith by the Board or the CEO. Executive agrees that he will not join any boards, other than community and civic boards (which do not interfere with his duties to the Company), without the prior approval of the Board or the CEO.

4.         Compensation and Benefits .   The Company shall pay or provide, as the case may be, to Executive the compensation and other benefits and rights set forth in this Section 4.

(a)         Base Salary .   The Company shall pay to Executive a base salary of $280,000 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board.

(b)         Bonus .   Executive shall participate in such incentive compensation plan as may be approved by the Compensation Committee of the Board from time to time for senior executives of the Company. Executive’s target bonus award under such plan shall be twenty-five percent (25%) of Executive’s base salary. Any material reduction of Executive’s target bonus shall be considered a material breach of this Agreement by the Company.

(c)         Benefits .   Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. Any reduction of Executive’s benefits such that Executive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of the Effective Date shall be considered a material breach of this Agreement by the Company.

(d)         Expenses .   The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred in connection with the performance of his duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e)         Paid Vacation .   Executive shall be entitled to such periods of paid vacation each year as provided from time to time under the Company’s vacation policy and as otherwise provided for senior executive officers; provided that Executive shall be entitled to earn at least three (3) weeks of paid vacation per year.

(f)         Equity Awards .   Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

 

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5.         Termination and Severance .    Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

(a)         At-Will Employment; Termination .   The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b)         Severance Upon Involuntary Termination Prior to a Change in Control or More than 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated prior to a Change in Control or more than twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

  (i)        The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination; plus

  (iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of one hundred percent (100%) of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (iv)       The payments and benefits provided for in this Section 5(b) shall only be payable in the event of Executive’s Involuntary Termination prior to a Change of Control or more than twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change of Control, then Executive shall receive the payments and benefits described in Section 5(c) in lieu of the payments and benefits described in this Section 5(b).

(c)         Severance Upon Involuntary Termination Within 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

 

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  (i)        The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

  (ii)       Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

   (A)        Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination, plus

   (B)        One and one-half (1  1 / 2 ) times the Executive’s target bonus for the fiscal year in which the date of Involuntary Termination occurs, with such bonus determined assuming that all of the performance objectives for such fiscal year have been attained;

  (iii)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, for the period beginning on the date of Involuntary Termination and ending on the date which is eighteen (18) full months following the date of Involuntary Termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), the Company shall reimburse Executive for the costs associated with continuation coverage pursuant to COBRA for Executive and his eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Involuntary Termination such that Executive’s premiums are the same as for active employees (provided that Executive shall be solely responsible for all matters relating to his continuation of coverage pursuant to COBRA, including, without limitation, his election of such coverage and his timely payment of premiums);

  (iv)      Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of any outstanding unvested portions of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

  (v)       The payments and benefits provided for in this Section 5(c) shall only be payable in the event of Executive’s Involuntary Termination within twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated more than twelve (12) months following a Change of Control or prior to a Change of Control, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c). In addition, if an Executive is not a full-time employee at the time of his Involuntary Termination, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c) as a result of such Involuntary Termination.

(d)         Other Terminations .   If Executive’s employment is terminated by the Company for Cause, by Executive without Good Reason, or as a result of Executive’s death or disability, or in the event the Term expires, the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, (ii) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law, and (iii) in the event Executive’s employment is terminated as a result of Executive’s death or disability, Executive shall be entitled to receive a prorate portion of any bonus payment to which

 

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Executive was entitled in the year in which such termination occurs, which bonus shall be paid within ten (10) days following the date of termination. In addition, all vesting of Executive’s unvested Stock Awards previously granted to him by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(e)         Delay of Payments .   Notwithstanding anything to the contrary in this Section 5, if the Executive is a Specified Employee on the date of the Executive’s Involuntary Termination, to the extent that the payments or benefits under this Section 5 are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which the executive is entitled under such Sections is required in order to avoid a prohibited distribution under Section 409A(a)(2)(b)(i) of the Code, then such portion shall be paid or distributed to the Executive during the ten (10) day period commencing on the earlier of (a) the expiration of the six (6)-month period measured from the date of the Executive’s Separation from Service or (b) the date of Executive’s death. Upon the expiration of the applicable six (6)-month period under Section 409A(a)(2)(b)(i) of the Code, all payments deferred pursuant to this Section 5(e) shall be paid in a lump sum payment to the Executive. Any remaining payments due under the agreement shall be paid as otherwise provided herein.

(f)         Release .   As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(b) or 5(c) above, Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form attached hereto as Exhibit A . In the event Executive does not sign the Release within the fifty (50) day period following the date of Executive’s termination of employment or revokes such Release in accordance with the terms thereof, Executive shall not be entitled to the aforesaid payments and benefits.

(g)         Exclusive Remedy .   Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5. Any payments made to Executive under this Section 5 shall be inclusive of any amounts or benefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.

(h)         No Mitigation .   Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company may be offset by the Company against amounts payable to Executive under this Section 5.

(i)         Return of the Company’s Property .   If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate his offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of his employment in any manner, as a condition to Executive’s receipt of any post-termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(i) prior to the receipt of any post-termination benefits described in this Agreement.

 

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6.         Certain Covenants .

(a)         Noncompetition .   Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however , that Executive may own, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own one percent (1%) or more of any class of securities of any such entity.

(b)         Confidential Information .   Executive and the Company have entered into the Company’s standard employee proprietary information and inventions agreement (the “ Employee Proprietary Information and Inventions Agreement ”). Executive agrees to perform each and every obligation of Executive therein contained.

(c)         Solicitation of Employees .   Executive shall not during the term of Executive’s employment and for one year following Executive’s termination of employment (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)         Solicitation of Consultants .   Executive shall not during the term of Executive’s employment and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)         Rights and Remedies Upon Breach .    If Executive breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have any rights and remedies available to the Company under law or in equity, including, without limitation, the right to cease all severance payments and benefits payable pursuant to Section 5 above in the event of Executive’s breach of any of the Restrictive Covenants.

(f)         Severability of Covenants/Blue Pencilling .   If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executive hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)         Enforceability in Jurisdictions .   The Company and Executive intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Executive that such determination not bar or in any way affect the right of

 

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the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)         Definitions .   For purposes of this Section 6, the term “ Company ” means not only ChemoCentryx, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with ChemoCentryx, Inc.

7.         Insurance; Indemnification .

(a)         Insurance .   The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Executive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executive shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.

(b)         Indemnification .   Executive will be provided with indemnification against third party claims related to his work for the Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other members of the Board and executive officers.

8.         Agreement to Arbitrate .   Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in Santa Clara County, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , however , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

9.         General Provisions .

9.1         Successors and Assigns .   The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or

 

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otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9.2         Severability .    In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

9.3         Interpretation; Construction .    The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

9.4         Governing Law and Venue .   This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

9.5         Notices.   Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address listed on the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.

9.6         Survival .    Sections 1 (“Definitions”), 5 (“Termination and Severance”), 6 (“Restrictive Covenants”), 7 (“Insurance and Indemnification”), 8 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.

9.7         Entire Agreement .    This Agreement and the Employee Proprietary Information and Inventions Agreement incorporated herein by reference together constitute the entire agreement

 

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between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Original Agreement. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

9.8         Code Section 409A .    Certain payments and benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Code. This Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the Code. To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (subject to the transitional relief under Internal Revenue Service Notice 2005-1 and other applicable authority issued by the Internal Revenue Service). As provided in Internal Revenue Service Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time and form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment may apply only to amounts that would not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

9.9         Counterparts .   This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

 

C HEMO C ENTRYX , I NC .

 

Dated:   25 Feb 2008                    

 

By:         /s/ Thomas J. Schall                                                              

 
 

Name:    Thomas J. Schall                                                                   

 
 

Title:      President and Chief Executive Officer                                

 
 

E XECUTIVE

 

Dated:   Feb 25, 2008                    

 

/s/ Juan C. Jaen

 
 

Juan C. Jaen, Ph.D.

 
     

  Address:

 

154 Los Robles Dr.

 
       

Burlingame, CA 94010

 

 

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Exhibit 10.10

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“ Agreement ”) is made effective as of January 1, 2008 (“ Effective Date ”), by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and Petrus Bekker, M.D., Ph.D. (“ Executive ”).

WHEREAS, Executive and the Company are parties to that certain Employment Agreement dated as of March 16, 2005 (the “ Original Agreement ”).

WHEREAS, Executive and the Company desire to amend and restate the Original Agreement on the terms and conditions set forth below.

The parties agree as follows:

1.         Definitions . For purposes of this Agreement, the following terms shall have the following meanings:

(a)      “ Board ” shall mean the Board of Directors of the Company.

(b)      “ California WARN Act ” means California Labor Code Sections 1400 et seq .

(c)      “ Cause ” shall mean that, in the reasonable determination of the Company, Executive:

(i)      has committed an act of fraud, embezzlement or dishonesty in connection with Executive’s employment, or has intentionally committed some other illegal act that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof;

(ii)     has been convicted of, or entered a plea of “guilty” or “no contest” to, a felony, or to any crime involving moral turpitude, which causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or any successor or parent or subsidiary thereof;

(iii)    has made any unauthorized use or disclosure of confidential information or trade secrets of the Company or any successor or parent or subsidiary thereof that has, or may reasonably be expected to have, a material adverse impact on any such entity;

(iv)    has materially breached a Company policy, materially breached the provisions of Executive’s employment agreement (if any), or has committed any other intentional misconduct that has, or may be reasonably expected to have, a material adverse impact on the Company or any successor or parent or subsidiary thereof, or

(v)     has intentionally refused or intentionally failed to act in accordance with any lawful and proper direction or order of the Board or the appropriate individual to whom Executive reports; provided such direction is not materially inconsistent with the Executive’s customary duties and responsibilities.

(d)      “ Change in Control ” shall mean and include each of the following:

(i)      the acquisition, directly or indirectly, by any “person” or “group” (as those terms are defined in Sections 3(a)(9), 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) of “beneficial ownership” (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of securities entitled to vote generally in the


election of directors (“ voting securities ”) of the Company that represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities, other than:

(A)      an acquisition by a trustee or other fiduciary holding securities under any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company or by any employee benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by the Company,

(B)      an acquisition of voting securities by the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company,

(C)      an acquisition of voting securities pursuant to a transaction described in subsection (ii) below that would not be a Change in Control under subsection (ii), or

(D)      an acquisition of voting securities pursuant to the Company’s initial public offering of its common stock;

Notwithstanding the foregoing, the following event shall not constitute an “acquisition” by any person or group for purposes of this Section: an acquisition of the Company’s securities by the Company that causes the Company’s voting securities beneficially owned by a person or group to represent fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that if a person or group shall become the beneficial owner of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities by reason of share acquisitions by the Company as described above and shall, after such share acquisitions by the Company, become the beneficial owner of any additional voting securities of the Company, then such acquisition shall constitute a Change in Control; or

(ii)      The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(A)      Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(B)      After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(d)(iii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iii)    The Company’s stockholders approve a liquidation or dissolution of the Company

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes

 

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of subsection (ii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise). The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters thereto.

(e)      “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

(i)      a material diminution in Executive’s authority, duties or responsibilities;

(ii)     a material diminution in Executive’s base compensation, unless such a reduction is imposed across-the-board to senior management of the Company;

(iii)    a material change in the geographic location at which Executive must perform his duties (and the Company and Executive agree that any involuntary relocation of Executive’s principal place of business to a location more than forty (40) miles in any direction from the Company’s headquarters in Mountain View, California as of the Effective Date would constitute a material change); or

(iv)    any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive.

(f)      “ Involuntary Termination ” means (i) the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability, or (ii) the Executive’s Separation from Service by reason of resignation of employment with the Company for Good Reason. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary. The Executive’s Separation from Service by reason of resignation from employment with the Company for Good Reason shall be an “Involuntary Termination” only if such Separation from Service occurs within two (2) years following the initial existence of the act or failure to act constituting Good Reason.

(g)      “ Separation from Service ”, with respect to the Executive (or another Service Provider) means the Executive’s (or such Service Provider’s) “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

(h)      “ Specified Employee ” shall mean a Service Provider who, as of the date of the Service Provider’s Separation from Service is a “Key Employee” of the Service Recipient any stock of which is publicly traded on an established securities market or otherwise. For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year. If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the

 

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Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date. For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Treasury Regulation Section 1.415(c)-2(d)(4), from the Service Recipient for such Testing Year. The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Treasury Regulation Section 1.409A-1(i).

(i)      “ Specified Employee Effective Date ” means the first day of the fourth month following the Specified Employee Identification Date. The Specified Employee Effective Date may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(4).

(j)      “ Specified Employee Identification Date ”, for purposes of Treasury Regulation Section 1.409A-1(i)(3), shall mean December 31. The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Treasury Regulation Section 1.409A-1(a)) of the Service Recipient and all affected Service Providers. The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Treasury Regulation Section 1.409A-1(i)(3).

(k)      “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.

(l)      “ Testing Year ” shall mean the twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

(m)      “ Warn Act ” shall mean the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder.

2.         Term .  The term of this Agreement (the “ Term ”) shall commence on the Effective Date and shall continue in effect until December 31, 2010 (the “Initial Termination Date” ); provided , however , that this Agreement shall be automatically extended for one (1) additional year on the Initial Termination Date and on each subsequent anniversary of the Initial Termination Date, unless the Company elects not to so extend the term of the Agreement by notifying Executive, in writing, of such election not less than sixty (60) days prior to the last day of the Term as then in effect.

3.         Services to Be Rendered.

(a)       Duties and Responsibilities .   Executive shall serve as Vice President of Clinical and Medical Affairs of the Company. In the performance of such duties, Executive shall report directly to the President and Chief Executive Officer of the Company ( “CEO” ) and shall be subject to the direction of the Board and the CEO and to such limits upon Executive’s authority as the Board and the CEO may from time to time impose. Executive hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the CEO. Executive shall be employed by the Company on a full time basis. Executive’s primary place of work shall be the Company’s facility in Mountain View, California, or such other location within Santa Clara County as may be designated by the CEO from time to time. Executive shall also render services at such other places within or outside the United States as the CEO may direct from time to time. Executive shall be subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

 

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(b)       Exclusive Services .  Executive shall at all times faithfully, industriously and to the best of his ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Executive hereunder and shall devote substantially all of his productive time and efforts to the performance of such duties. Subject to the terms of the Employee Proprietary Information and Inventions Agreement referred to in Section 6(b), this shall not preclude Executive from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his duties to the Company, as determined in good faith by the Board or the CEO. Executive agrees that he will not join any boards, other than community and civic boards (which do not interfere with his duties to the Company), without the prior approval of the Board or the CEO.

4.         Compensation and Benefits .  The Company shall pay or provide, as the case may be, to Executive the compensation and other benefits and rights set forth in this Section 4.

(a)       Base Salary .  The Company shall pay to Executive a base salary of $290,975 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than monthly). Executive’s base salary shall be subject to review annually by and at the sole discretion of the Compensation Committee of the Board.

(b)       Bonus .  Executive shall participate in such incentive compensation plan as may be approved by the Compensation Committee of the Board from time to time for senior executives of the Company. Executive’s target bonus award under such plan shall be twenty-five percent (25%) of Executive’s base salary. Any material reduction of Executive’s target bonus shall be considered a material breach of this Agreement by the Company.

(c)       Benefits .   Executive shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein. Any reduction of Executive’s benefits such that Executive’s benefits are, in the aggregate, materially less favorable to Executive than those benefits offered to Executive as of the Effective Date shall be considered a material breach of this Agreement by the Company.

(d)       Expenses .  The Company shall reimburse Executive for reasonable out-of-pocket business expenses incurred in connection with the performance of his duties hereunder, subject to (i) such policies as the Company may from time to time establish, and (ii) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.

(e)       Paid Vacation .  Executive shall be entitled to such periods of paid vacation each year as provided from time to time under the Company’s vacation policy and as otherwise provided for senior executive officers; provided that Executive shall be entitled to earn at least three (3) weeks of paid vacation per year.

(f)       Equity Awards .  Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. Except as otherwise provided in this Agreement, Executive’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

5.         Termination and Severance .   Executive shall be entitled to receive benefits upon termination of employment only as set forth in this Section 5:

 

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(a)       At-Will Employment; Termination .   The Company and Executive acknowledge that Executive’s employment is and shall continue to be at-will, as defined under applicable law, and that Executive’s employment with the Company may be terminated by either party at any time for any or no reason, with or without notice. If Executive’s employment terminates for any reason, Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement. Executive’s employment under this Agreement shall be terminated immediately on the death of Executive.

(b)       Severance Upon Separation from Service Prior to a Change in Control or More than 12 Months Following a Change in Control .   In the event of the Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability prior to a Change in Control or more than twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Separation from Service occurs:

(i)      The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination; plus

(ii)     Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the six (6) month period following the date of termination.

(iii)    The payments and benefits provided for in this Section 5(b) shall only be payable in the event of Executive’s Separation from Service by reason of a termination of employment by the Company other than for Cause, death, or disability prior to a Change of Control or more than twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change of Control, then Executive shall receive the payments and benefits described in Section 5(c) in lieu of the payments and benefits described in this Section 5(b).

(c)       Severance Upon Involuntary Termination Within 12 Months Following a Change in Control .   If Executive’s employment is Involuntarily Terminated within twelve (12) months following a Change in Control, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) below, will be payable in a lump sum within ten (10) days following the effective date of Executive’s Release, but in no event later than two and one-half (2  1 / 2 ) months following the last day of the calendar year in which the date of Executive’s Involuntary Termination occurs:

(i)      The Company shall pay to Executive his fully earned but unpaid base salary, when due, through the date of Involuntary Termination at the rate then in effect, plus all other amounts to which Executive is entitled under any compensation plan or practice of the Company at the time of termination;

(ii)     Subject to Section 5(f) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to the sum of:

 

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(A)      Executive’s monthly base salary as in effect immediately prior to the date of Involuntary Termination for the eighteen (18) month period following the date of termination, plus

(B)      One and one-half (1  1 / 2 ) times the Executive’s target bonus for the fiscal year in which the date of Involuntary Termination occurs, with such bonus determined assuming that all of the performance objectives for such fiscal year have been attained;

(iii)    Subject to Section 5(f) and Executive’s continued compliance with Section 6, for the period beginning on the date of Involuntary Termination and ending on the date which is eighteen (18) full months following the date of Involuntary Termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), the Company shall reimburse Executive for the costs associated with continuation coverage pursuant to COBRA for Executive and his eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Involuntary Termination such that Executive’s premiums are the same as for active employees (provided that Executive shall be solely responsible for all matters relating to his continuation of coverage pursuant to COBRA, including, without limitation, his election of such coverage and his timely payment of premiums);

(iv)    Subject to Section 5(f) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of any outstanding unvested portions of Executive’s Stock Awards shall be automatically accelerated on the effective date of Executive’s Release. This provision is hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

(v)     The payments and benefits provided for in this Section 5(c) shall only be payable in the event of Executive’s Involuntary Termination within twelve (12) months following a Change of Control. If Executive’s employment is Involuntarily Terminated more than twelve (12) months following a Change of Control or prior to a Change of Control, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c). In addition, if an Executive is not a full-time employee at the time of his Involuntary Termination, then Executive shall receive the payments and benefits described in Section 5(b) and shall not be eligible to receive any of the payments and benefits described in this Section 5(c) as a result of such Involuntary Termination.

(d)       Other Terminations .   If Executive’s employment is terminated by the Company for Cause, by Executive for any reason prior to a Change in Control or more than twelve (12) months following a Change in Control, by Executive without Good Reason within twelve (12) months following a Change in Control, or as a result of Executive’s death or disability, or in the event the Term expires, the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive (i) Executive’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, and (ii) all other amounts or benefits to which Executive is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law. In addition, all vesting of Executive’s unvested Stock Awards previously granted to him by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(e)       Delay of Payments .   Notwithstanding anything to the contrary in this Section 5, if the Executive is a Specified Employee on the date of the Executive’s Involuntary Termination, to the extent that the payments or benefits under this Section 5 are subject to Section 409A of the Code and the

 

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delayed payment or distribution of all or any portion of such amounts to which the executive is entitled under such Sections is required in order to avoid a prohibited distribution under Section 409A(a)(2)(b)(i) of the Code, then such portion shall be paid or distributed to the Executive during the ten (10) day period commencing on the earlier of (a) the expiration of the six (6)-month period measured from the date of the Executive’s Separation from Service or (b) the date of Executive’s death. Upon the expiration of the applicable six (6)-month period under Section 409A(a)(2)(b)(i) of the Code, all payments deferred pursuant to this Section 5(e) shall be paid in a lump sum payment to the Executive. Any remaining payments due under the agreement shall be paid as otherwise provided herein.

(f)       Release .   As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(b) or 5(c) above, Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form attached hereto as Exhibit A . In the event Executive does not sign the Release within the fifty (50) day period following the date of Executive’s termination of employment or revokes such Release in accordance with the terms thereof, Executive shall not be entitled to the aforesaid payments and benefits.

(g)       Exclusive Remedy .   Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5. Any payments made to Executive under this Section 5 shall be inclusive of any amounts or benefits to which Executive may be entitled pursuant to the WARN Act or the California WARN Act.

(h)       No Mitigation .   Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company may be offset by the Company against amounts payable to Executive under this Section 5.

(i)       Return of the Company’s Property .   If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate his offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of his employment in any manner, as a condition to Executive’s receipt of any post-termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(i) prior to the receipt of any post-termination benefits described in this Agreement.

6.         Certain Covenants .

(a)       Noncompetition .   Except as may otherwise be approved by the Board, during the term of Executive’s employment, Executive shall not have any ownership interest (of record or beneficial) in, or have any interest as an employee, salesman, consultant, officer or director in, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however , that

 

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Executive may own, directly or indirectly, solely as an investment, securities of any entity which are traded on any national securities exchange if Executive (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own one percent (1%) or more of any class of securities of any such entity.

(b)       Confidential Information .   Executive and the Company have entered into the Company’s standard employee proprietary information and inventions agreement (the “ Employee Proprietary Information and Inventions Agreement ”). Executive agrees to perform each and every obligation of Executive therein contained.

(c)       Solicitation of Employees .   Executive shall not during the term of Executive’s employment and for one year following Executive’s termination of employment (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)       Solicitation of Consultants .   Executive shall not during the term of Executive’s employment and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)       Rights and Remedies Upon Breach .   If Executive breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have any rights and remedies available to the Company under law or in equity, including, without limitation, the right to cease all severance payments and benefits payable pursuant to Section 5 above in the event of Executive’s breach of any of the Restrictive Covenants.

(f)       Severability of Covenants/Blue Pencilling .   If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. Executive hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)       Enforceability in Jurisdictions .   The Company and Executive intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Executive that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)       Definitions .   For purposes of this Section 6, the term “ Company ” means not only ChemoCentryx, Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with ChemoCentryx, Inc.

 

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7.         Insurance; Indemnification .

(a)       Insurance .   The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Executive, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company. Executive shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.

(b)       Indemnification .   Executive will be provided with indemnification against third party claims related to his work for the Company as required by Delaware law. The Company shall provide Executive with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other members of the Board and executive officers.

8.         Agreement to Arbitrate .   Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in Santa Clara County, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association (“ AAA ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , however , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

9.         General Provisions .

9.1       Successors and Assigns .   The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall

 

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inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

9.2       Severability .    In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

9.3       Interpretation; Construction .    The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

9.4       Governing Law and Venue .    This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

9.5       Notices.    Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address listed on the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.

9.6       Survival .     Sections 1 (“Definitions”), 5 (“Termination and Severance”), 6 (“Restrictive Covenants”), 7 (“Insurance and Indemnification”), 8 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.

9.7       Entire Agreement .     This Agreement and the Employee Proprietary Information and Inventions Agreement incorporated herein by reference together constitute the entire agreement between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Original Agreement. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

9.8       Code Section 409A .     Certain payments and benefits payable under this Agreement are intended to be exempt from the requirements of Section 409A of the Code. This Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the

 

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Code. To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (subject to the transitional relief under Internal Revenue Service Notice 2005-1 and other applicable authority issued by the Internal Revenue Service). As provided in Internal Revenue Service Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time and form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment may apply only to amounts that would not otherwise be payable in 2008 and may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

9.9       Counterparts .  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

Dated:     Feb 27, 2008                

Dated:     Feb 27, 2008                

C HEMO C ENTRYX , I NC .  

By:

 

         /s/ Thomas J. Schall

 

Name:

 

  Thomas J. Schall

 

Title:

 

     President and Chief Executive Officer

 
       
E XECUTIVE  

/s/ Petrus Bekker

 

Petrus Bekker, M.D., Ph.D.

 
   

Address:

 

24 Coronado Ave

 
     

Los Altos, CA 94022

 
 

 

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Exhibit 10.11

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE – NET

AIR COMMERCIAL REAL ESTATE ASSOCIATION

1. Basic Provisions ( Basic Provisions ).

1.1 Parties: This Lease (“ Lease ”), dated for reference purposes only April 20, 2004, is made by and between Portola Land Company (“ Lessor ”) and ChemoCentryx Inc., a Delaware corporation (“ Lessee ”), (collectively the “ Parties ”, or individually a “ Party ”).

1.2 (a) Premises: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 840—850 Maude Avenue, located in the City of Mountain View, County of Santa Clara, State of California, with zip code 94043, as outlined on Exhibit      attached hereto (“ Premises ”) and generally described as (describe briefly the nature of the Premises): Freestanding single story office/laboratory building consisting of 35,755 +/- square feet.

In addition to Lessee’s rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the building containing the Premises (“ Building ”) or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the “ Project .” (See also Paragraph 2)

1.2 (b) Parking: A pro-rata share of the unreserved vehicle parking spaces (“ Unreserved Parking Spaces ”); and N/A reserved vehicle parking spaces (“ Reserved Parking Spaces ”). (See also Paragraph 2.6)

1.3 Term: Ten (10) years and zero (0) months (“ Original Term ”) commencing May 1, 2004 (“ Commencement Date ”) and ending April 30, 2014 (“ Expiration Date ”). (See also Paragraph 3)

1.4 Early Possession: Upon fully executed Lease (“ Early Possession Date ”). (See also Paragraphs 3.2 and 3.3)

1.5 Base Rent: per month (“ Base Rent ”), payable on the see Paragraph 51—Lease Base Rent day of each month commencing                      . (See also Paragraph 4)

þ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.

1.6 Lessee’s Share of Common Area Operating Expenses: Fifty percent (50%) (“ Lessee’s Share ”).

1.7 Base Rent and Other Monies Paid Upon Execution:

(a) Base Rent: $28,604.00 for the period May 1, 2004—May 31, 2004.

(b) Common Area Operating Expenses: $6,615.00 for the period May 1 thru. May 31, 2004.

(c) Security Deposit: $160, 000.00 (“ Security Deposit ”). (See also Paragraph 5)

(d) Other: $N/A for N/A.

(e) Total Due Upon Execution of this Lease: $195,219.00.

1.8 Agreed Use: General office, laboratory, research & development, and all other legally approved uses of the City of Mountain View. (See also Paragraph 6)

 

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1.9 Insuring Party. Lessor is the “ Insuring Party ”. (See also Paragraph 8)

1.10 Real Estate Brokers: (See also Paragraph 15)

(a) Representation: The following real estate brokers (the “ Brokers ”) and brokerage relationships exist in this transaction (check applicable boxes):

¨                                                               represents Lessor exclusively (“ Lessor’s Broker ”);

¨                                                               represents Lessee exclusively (“ Lessee’s Broker ”); or

þ Cornish & Carey Commercial represents both Lessor and Lessee (“ Dual Agency ”).

(b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement for the brokerage services rendered by the Brokers). It is understood that Randy Scott of Cornish & Carey Commercial is a minority owner of the Subject Premises.

1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A (“ Guarantor ”). (See also Paragraph 37)

1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 54 and Exhibits      through      , all of which constitute a part of this Lease.

2. Premises.

2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.

2.2 Condition. Lessor shall deliver that portion of the Premises contained within the Building (“ Unit ”) to Lessee broom clean and free of debris asbestos and other hazardous materials on the Commencement Date or the Early Possession Date, whichever first occurs (“ Start Date ”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“ HVAC ”), loading doors, if any, and all other such elements in the Unit, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of the Unit shall be free of material defects. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 60 days as to the remaining systems and other elements of the Unit. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense (except for the repairs to foundations, and/or bearing walls—see Paragraph 7). Also see Paragraph 51

2.3 Compliance. Lessor warrants that the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date (“ Applicable Requirements ”). Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially

 

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the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“ Capital Expenditure ”), Lessor and Lessee shall allocate the cost of such work as follows:

(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

(b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for the portion of such costs reasonably attributable to the Premises pursuant to the formula set out in Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.

2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

 

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2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called “ Permitted Size Vehicles .” Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor.

(a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee’s employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities.

(b) Lessee shall not service or store any vehicles in the Common Areas.

(c) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.7 Common Areas—Definition. The term “ Common Areas ” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas.

2.8 Common Areas—Lessee’s Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.9 Common Areas—Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations (“ Rules and Regulations ”) for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project.

2.10 Common Areas—Changes. Lessor shall have the right, in Lessor’s sole discretion, from time to time:

(a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

 

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(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available;

(c) To designate other land outside the boundaries of the Project to be a part of the Common Areas;

(d) To add additional buildings and improvements to the Common Areas;

(e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and

(f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate as long as it does not unreasonably interfere with Lessee’s work.

(g) Prior to exercising any of its rights under this paragraph that may impact Lessee’s use or occupancy of the Premises, Lessor shall give Lessee reasonable notice of the action to be taken, and shall use reasonable efforts to cooperate with Lessee to minimize the impact of such actions upon Lessee’s use and occupancy of the Premises.

3. Term.

3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Lessee’s Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date.

3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within 4 months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

 

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4. Rent.

4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“ Rent ”).

4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee’s Share (as specified in Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

(a) “ Common Area Operating Expenses ” are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Project, including, but not limited to, the following:

(i) The operation, repair and maintenance, in neat, clean, good order and condition of the following:

(aa) The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators, roofs, and roof drainage systems.

(bb) Exterior signs and any tenant directories.

(cc) Any fire detection and/or sprinkler systems.

(ii) The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered.

(iii) Trash disposal, pest control services, property management, security services, and the costs of any environmental inspections.

(iv) Reserves set aside for maintenance and repair of Common Areas.

(v) Real Property Taxes (as defined in Paragraph 10).

(vi) The cost of the premiums for the insurance maintained by Lessor pursuant to Paragraph 8.

(vii) Any deductible portion of an insured loss concerning the Building or the Common Areas.

(viii) The cost of any Capital Expenditure to the Building or the Project not covered under the provisions of Paragraph 2.3 provided; however, that Lessor shall allocate the cost of any such Capital Expenditure over a 12 year period and Lessee shall not be required to pay more than Lessee’s Share of 1/144th of the cost of such Capital Expenditure in any given month.

(ix) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense.

(b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Unit, the Building or to any other building in the Project or to the operation, repair and maintenance thereof, shall be allocated entirely to such Unit, Building, or other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Project.

 

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(c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Project already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them.

(d) Lessee’s Share of Common Area Operating Expenses shall be payable by Lessee within 10 days after a reasonably detailed statement of actual expenses is presented to Lessee. At Lessor’s option, however, an amount may be estimated by Lessor from time to time of Lessee’s Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12 month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within 60 days after the expiration of each calendar year a reasonably detailed statement showing Lessee’s Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee’s payments under this Paragraph 4.2(d) during the preceding year exceed Lessee’s Share as indicated on such statement, Lessor shall credit the amount of such over-payment against Lessee’s Share of Common Area Operating Expenses next becoming due. If Lessee’s payments under this Paragraph 4.2(d) during the preceding year were less than Lessee’s Share as indicated on such statement, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement. Lessor will deliver to Lessee within 45 days of request detailed reporting and copies of invoices of Lessee’s pro-rata share of the common area expenses.

(e) Operating cost specifically attributable to buildings other than the premises described per Paragraph 1.2(a) will not be included in the common area maintenance expenses.

(f) Notwithstanding the foregoing, the following items are excluded from Common Area Operating Expenses; (i) interest payable by Lessor with respect to any debt secured by a deed of trust of mortgage on the Building and/or the Project; (ii) payments of ground rent; (iii) depreciation; (iv) leasing commissions or other brokerage commissions of any kind; (v) expenses incurred in leasing or procuring new tenants, including advertising and marketing expenses, and expenses for preparation of leases, or renovation of space(s) for new tenant; and (vi) costs incurred which are reimbursed by third parties (including insurance carriers).

4.3 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any late charges which may be due.

5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease,

 

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if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. The provisions in Paragraph 5 will not increase the security deposit.

6 . Use.

6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

6.2 Hazardous Substances.

(a) Reportable Uses Require Consent. The term “ Hazardous Substance ” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “ Reportable Use ” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

 

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(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

(f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

(g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

6.3 Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements.

 

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6.4 Inspection; Compliance. Lessor and Lessor’s “ Lender ” (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. Lessor agrees to provide 48 hour notice (unless an emergency) to Lessee for inspection and/or to make repairs. Lessee agrees to be accompanied by Lessee and to comply with the safety regulations.

7 . Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.

7.1 Lessee’s Obligations.

(a) In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as fire detection and/or sprinkler system, fume hoods, plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, roofs, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair.

(b) Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, and obtain proposals for equipment repair for Lessor’s routine budgetary and monitoring of its fixed assets with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required by Lessor. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof.

(c) Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly reimburse Lessor for the cost thereof.

(d) Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay Interest on the unamortized balance at a rate that is commercially reasonable in the judgment of Lessor’s accountants. Lessee may, however, prepay its obligation at any time.

7.2 Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, structural roof, fire sprinkler

 

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system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

7.3 Utility Installations; Trade Fixtures; Alterations.

(a) Definitions. The term “ Utility Installations ” refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “ Trade Fixtures ” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “ Alterations ” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “ Lessee Owned Alterations and/or Utility Installations ” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent. Subject to Lessee’s right to make non-structural Alterations without approval, as set forth above, Lessor shall have a period of five (5) days from receipt of the plans within which to approve or disapprove the proposed Alteration(s), after which time they shall be deemed approved by Lessor. Any Alteration made by Lessee after consent has been given, and any fixture (except trade fixtures) shall throughout the Lease, or any extension thereof, remain the property of Lessee. Lessor will advise Lessee at the time of Consent whether the proposed Alteration may remain or will need to be removed by Lessee at the end of the Lease term or the extended Lease term.

(c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialman’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

7.4 Ownership; Removal; Surrender; and Restoration.

(a) Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a

 

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part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

(c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8. Insurance; Indemnity.

8.1 Payment of Premiums. The cost of the premiums for the insurance policies required to be carried by Lessor, pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Start Date or Expiration Date.

8.2 Liability Insurance.

(a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an “Additional Insured-Managers or Lessors of Premises Endorsement” and contain the “Amendment of the Pollution Exclusion Endorsement” for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “ insured contract ” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

(b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

 

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8.3 Property Insurance—Building, Improvements and Rental Value.

(a) Building and Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (flood and/or earthquake), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence.

(b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“ Rental Value insurance ”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period.

(c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

(d) Lessee’s Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease.

8.4 Lessee’s Property; Business Interruption Insurance.

(a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

(b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

(c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least B+, V, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which

 

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amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7 Indemnity. Except to the extent of the negligence, willful misconduct or intentional acts or omissions of Lessor, its employees, agents, or contractors, Lessee shall indemnify, protect, defend and hold harmless Lessor and its agents, and Lessor’s master lessor or ground lessor, partners, members, shareholders, managers, agents, representatives, contractors, and lenders, and the Premises, from and against any and all claims and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities based upon personal injury, death and/or property damage arising out of, involving, or in connection with, the use and/or occupancy of the Premises by lessee to the extent caused by the negligent acts or omissions, willful misconduct, or intentional acts or omissions of Lessee, its agents, contractors, and/or invitees.

Except to the extent of the negligence, willful misconduct, or intentional acts or omissions of Lessee, its employees, agents, or contractors, Lessor shall indemnify, protect, defend and hold harmless Lessee, its parent company, subsidiaries, affiliates, and their respective directors, officers, shareholders, sublesses (that are approved by Lessor), lenders, agents, representatives and contractors from and against any and all claims and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities based upon personal injury, death and/or property damage to the extent caused by the negligent acts or omissions, willful misconduct, or intentional acts or omissions of Lessor, its agents, contractors, and/or invitees.

If any action or proceeding is brought against an indemnified party by reason of the foregoing matters, the indemnifying party shall upon notice defend the same at the indemnifying party’s expense by counsel reasonably satisfactory to the indemnified party and the indemnified party shall cooperate with the indemnifying party in such defense. The indemnified party need not have first paid any such claim in order to be defended or indemnified.

8.8 Exemption of Lessor from Liability. Lessor shall not be liable, unless caused by Lessor’s gross negligence or willful misconduct, for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not be liable for nay damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project.

9. Damage or Destruction.

9.1 Definitions.

(a) “ Premises Partial Damage ” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

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(b) “ Premises Total Destruction ” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) “ Insured Loss ” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

(d) “ Replacement Cost ” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

(e) “ Hazardous Substance Condition ” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.

9.2 Partial Damage—Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3 Partial Damage—Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

 

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9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

9.6 Abatement of Rent; Lessee’s Remedies.

(a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.

10. Real Property Taxes.

10.1 Definition. As used herein, the term “ Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term “Real Property Taxes” shall also include any tax, fee, levy,

 

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assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof or a change in the improvements thereon. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

10.2 Payment of Taxes. Lessor shall pay the Real Property Taxes applicable to the Project, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2.

10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor’s records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee’s request.

10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available. Lessor’s reasonable determination thereof, in good faith, shall be conclusive.

10.5 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor’s sole judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an increase in the size of the dumpster and/or an increase in the number of times per month that the dumpster is emptied, then Lessor may increase Lessee’s Base Rent by an amount equal to such increased costs.

12. Assignment and Subletting.

12.1 Lessor’s Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

(b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 45% or more of the voting control of Lessee shall constitute a change in control for this purpose.

(c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists

 

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immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

(d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e) Notwithstanding the foregoing, Lessee may, without Lessor’s prior written consent, sublet a portion or the entire Premises or assign this Lease to a joint venture partner of Lessee, or to a subsidiary affiliate, division or corporation controlled or under common control with Lessee (“Affiliate”), or to a successor corporation related to Lessee by merger, consolidation or reorganization, provided that any such assignee or sublessee shall have a current verifiable net worth at least equal to that of Lessee as of the date of the execution of this Lease. Lessee’s foregoing right to assign this Lease or to sublet a portion or the entire Premises to an affiliate shall be subject to the following conditions: (1) Lessee shall not be in default hereunder past any applicable cure period; (2) in the case of an assignment or subletting to an affiliate, Lessee shall remain primarily liable to Lessor for the payment of Rent and the performance of all other obligations of Lessee hereunder; and (3) the transferee or successor entity shall expressly assume in writing Lessee’s obligations hereunder by a written assumption in form acceptable to Lessor which shall expressly provide, among other things, that the assignment and assumption or sublease is made expressly subject to the provisions of this Paragraph 12 of the Lease and that any subsequent assignment of the Lease or the sublease by the assignee, Lessee, or sublessee, or any subsequent sublease or sub-sublease, of all or any portion of the Premises, shall remain subject to the provisions of this Paragraph 12 of the Lease. In the event Lessee is, or becomes, a publicly traded corporation, the sale of stock shall not be deemed to constitute an assignment or transfer of this Lease.

(f) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

12.2 Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

(c) Lessor’s consent to any assignment or subletting shall not constitute consent to any subsequent assignment or subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and

 

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appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000, as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. Any such deposit paid in accordance with this provision will be applied against any fees due pursuant to Paragraph 36, below.

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

(g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

13. Default; Breach; Remedies.

13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

 

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(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 5 business days following written notice to Lessee.

(c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

(d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

(e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(g) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier’s check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor

 

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shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions” , shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to $1,500.00 for each such overdue amount during the first lease year and $3,000.00 for each such overdue amount thereafter. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

 

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13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (“Interest”) charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus 2%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6 Breach by Lessor.

(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent an amount equal to the greater of one month’s Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee’s right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Unit, or more than 25% of Lessee’s Reserved Parking Spaces, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15. Brokerage Fees.

15.1 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

 

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16. Estoppel Certificates.

(a) Each Party (as “Responding Party”) shall within 10 days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor’s interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6.2 above.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20. Limitation on Liability. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no

 

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responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

23. Notices.

23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by the other party, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by such party of the same or of any other term, covenant or condition hereof. A party’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of consent to, or approval of, any subsequent or similar act by the other party or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

(i) Lessor’s Agent . A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor : A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor : (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties, (b) A duty of honest and fair dealing and good faith, (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

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(ii) Lessee’s Agent . An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee : A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor : (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties, (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(iii) Agent Representing Both Lessor and Lessee . A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

(c) Buyer and Seller agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 125% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”),

 

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now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor.

30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32. Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary “For Sale” signs and Lessor may during the last 8 months of the term hereof place on the Premise any ordinary “For Lease” signs. Lessee may at any time place on the Premises any ordinary “For Sublease” sign.

 

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33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Except for ordinary “For Sublease” signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefore, provided, however, that Lessor’s recoverable attorney’s fees shall not exceed $500.00 in response to consent for a sublease or assignment not involving a change in use or substantial tenant improvements. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

37. Guarantor.

37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the AIR Commercial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.

37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Options. If Permitted Transferee is granted an option, as defined below, then the following provisions shall apply.

 

- 27 -


39.1 Definition. “Option” shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4 Effect of Default on Options.

(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee 3 or more notices of separate Default during any 12 month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.

40. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

41. Reservations. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights.

42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay provisions of this Lease, plus interest at the rate specified in paragraph 13.5.

43. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

 

- 28 -


44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

47. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.

48. Waiver of Jury Trial. The Parties hereby waive their respective rights to trial by jury in any action or proceeding involving the Property or arising out of this Agreement.

49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease ¨ is þ is not attached to this Lease.

50. Lease Base Rent.

 

Months

   Monthly Rate      Square Feet      Monthly Rent  
     (NNN/PSF)                

5/1/04 - 4/30/05

   $ 0.80         35,755       $ 28,604.00   

5/1/05 - 4/30/06

   $ 1.60         35,755       $ 57,208.00   

5/1/06 - 4/30/07

   $ 1.65         35,755       $ 58,995.75   

5/1/07 - 4/30/08

   $ 1.70         35,755       $ 60,783.50   

5/1/08 - 4/30/09

   $ 1.75         35,755       $ 62,571.25   

5/1/09 - 4/30/10

   $ 1.60         35,755       $ 64,359.00   

5/1/10 - 4/30/11

   $ 1.90         35,755       $ 67,934.50   

5/1/11 - 4/30/12

   $ 2.00         35,755       $ 71,510.00   

5/1/12 - 4/30/13

   $ 2.10         35,755       $ 75,085.50   

5/1/13 - 4/30/14

   $ 2.20         35,755       $ 78,661.00   

51. Condition of Lease Premises. The Lessor shall deliver the Premises with all building systems in good working order and repair and with all laboratory areas decommissioned. Lessee shall have sixty (60) days (except for HVAC which is addressed in Paragraph 2.2 above) to notify Lessor in writing after Lease commencement to ascertain that all equipment, plumbing, and electrical systems installed in the Premises are in good working condition. Lessor will be responsible for any required repairs or replacement of systems within the Premises if such repairs and replacements are deemed necessary. The Premises shall include the use of the following:

 

   

All plumbing, electrical systems, installed within the Premises

 

   

House vacuum, RO/DI water systems, compressed air, and nitrogen

 

   

Installed laboratory case work and fume hoods

 

   

Tissue Culture Rooms

 

   

All other utility systems and related infrastructure shall remain in place

 

   

Autoclave and Glass-wash equipment

 

   

All currently installed data/telephone cabling

 

   

Back-up generator

Lessor will provide Lessee with the use throughout the duration of the Lease term and any Lease extension periods of all office furniture/cubicles and equipment currently in the Premises.

 

- 29 -


52. Early Access. See Paragraph 1.4

53. Intentionally Omitted

54. Option to Extend Lease. Lessee shall have the option (“ Option ”) to extend the term of this Lease on all provisions contained in this Lease, except the Base Rent, for a period of three (3) years (the “ Extended Term ”) following the expiration of the initial term of this Lease, by giving written notice of the exercise of the Option (“ Option Notice ”) to Lessor at least six (6) months, but not more than twelve (12) months prior to the expiration of the initial term of this Lease (“ Option Notice Period ”). Once Lessee delivers the Option Notice, Lessee cannot revoke it and any attempt to revoke the exercise shall be void. Any Option Notice given at any time other than the Option Notice Period shall be void and of no effect. Notwithstanding the above, (i) if lessee is in Default of the Lease on the date of giving the Option Notice, has been late in making payments of any amounts owed pursuant to this Lease more than two (2) times, then Lessor may deem the Option Notice void and of no effect, and (ii) if Lessee is in Default of the Lease on the date the Extended Term is to begin, then Lessor may deem the Option void and terminate the Lease as of the end of the Original Term. Lessee may only exercise the Option on all but not less than all of the Premises. Any Option Notice that purports to exercise the Option for less than all of the Premises, shall be deemed to exercise the Option for all of the Premises. If Lessee has not been in possession of all of the Premises (no part of the Premises has been vacated or sublet) for all of 2013, then notwithstanding any other provision of this Lease, Lessor may, in Lessor’s sole and absolute discretion, terminate the Lease as of the end of the Original Term.

The Parties shall have thirty (30) days after Lessor receives the Option Notice during which to attempt to agree on the monthly rent during the extended term. If the parties agree on the monthly rent for the Extended Term, they shall immediately execute an amendment to this Lease which shall state the monthly rent for the Extended Term and the fact that the Extended Term shall end on April 30, 2017.

(a) If the Parties are unable during this time period to agree on the monthly Base Rent during the Extended Term, then each party shall lure a licensed real estate broker (“ Appraiser ”) with at least five years of experience representing landlords and/or tenants in comparable size space with comparable improvements in comparable locations to the Premises to determine the fair market Base Rent for the initial month of the Extended Term. Such determination shall take into account the size, location, and the improvements to the Premises. Comparable locations shall be deemed to be Mountain View, Palo Alto and Menlo Park. If the two Appraisers cannot agree on the fair market Base Rent for the initial month of the Extended Term, then they shall appoint a licensed real estate broker with at least five years of experience representing landlords and/or tenants in comparable size space within a five-mile radius of the Premises (“ Third Appraiser ”). The Third Appraiser selected shall be required to select either the Lessor’s value or Lessee’s value. Notwithstanding the above, in no event shall the Base Rent for the initial month of the Extended Term be less than the Base Rent payable immediately prior to the beginning of the Extended Term.

(b) Each party shall pay the cost of their Appraiser and one half of the cost of the Third Appraiser.

(c) Both parties agree that neither party shall have the right to have a court or other third party determine the Base Rent for any Extended Term.

Both Parties agree that neither party shall have the right to have a court or other third party (other than as stated above) determine the monthly rent for the Extended Term.

The Option granted to Lessee in this Lease is personal to the original Lessee (unless an Assignee or Sublessee as permitted under the provisions of Paragraph 12) named in Section 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Option herein granted to Lessee is not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and the Option cannot be separated from this Lease in any manner, by reservation or otherwise.

 

- 30 -


LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

 

Executed at: San Carlos, CA     Executed at: 1539 Industrial Road, San Carlos, CA 94070
on: 5/14/04     on: May 14, 2004
By LESSOR:     By LESSEE:
Portola Land Company     ChemoCentryx, Inc., a Delaware corporation
By:  

/s/ Allan Brown

    By:  

/s/ Ross E. Barrons

Name Printed:   Allan Brown     Name Printed:   Ross E. Barrons
Title:   Managing General Partner     Title:   Corporate Secretary

 

- 31 -


By:  

 

    By:  

 

Name Printed:   Sandy Freschi     Name Printed:  

 

Title:   Property Manager     Title:  

 

Address:   3197 Park Boulevard     Address:  

 

  Palo Alto, CA 94306      
Telephone:   (650) 849-9900     Telephone: (      )  

 

Facsimile:  (      )  

 

    Facsimile: (      )  

 

Federal ID No.  

 

    Federal ID No.  

 

Broker:     Broker:  
Cornish & Carey Commercial     Cornish & Carey Commercial
Attn:   Mark Daschbach     Attn:   R. Randolph Scott
Title:   Senior Vice President     Title:   Executive Vice President
Address:   245 Lytton Avenue, Suite 150     Address:   245 Lytton Avenue, Suite 150
  Palo Alto, CA 94301       Palo Alto, CA 94301
Telephone/Facsimile: (650) 688-8540/(650) 321-0719     Telephone/Facsimile: (650) 688-8540/(650) 321-0719

 

- 32 -

Exhibit 10.12

EXECUTION VERSION

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

P RODUCT D EVELOPMENT AND

C OMMERCIALIZATION A GREEMENT

B ETWEEN

G LAXO G ROUP L IMITED

and

C HEMO C ENTRYX , I NC .


T ABLE OF C ONTENTS

 

          P AGE  

ARTICLE 1

  

DEFINITIONS

     2   

1.1

  

“Acceptance”

     2   

1.2

  

“Affiliate”

     2   

1.3

  

“Asthma CCR9 PoC Trial”

     2   

1.4

  

“Back-up Compound”

     2   

1.5

  

“Breaching Party”

     2   

1.6

  

“C5aR”

     3   

1.7

  

“Calendar Quarter”

     3   

1.8

  

“CCR1”

     3   

1.9

  

“CCR9”

     3   

1.10

  

“CCR9 Option Exercise Fee”

     3   

1.11

  

“CCR9 QTc Payment”

     3   

1.12

  

“CCX282”

     3   

1.13

  

“CCX282 Back-up Compound”

     3   

1.14

  

“cGMP”

     3   

1.15

  

“ChemoCentryx Know-How”

     3   

1.16

  

“ChemoCentryx Patents”

     3   

1.17

  

“ChemoCentryx Technology”

     4   

1.18

  

“Clinical Studies”

     4   

1.19

  

“Collaboration Compound”

     4   

1.20

  

“Collaboration Know-How”

     4   

1.21

  

“Collaboration Patent”

     5   

1.22

  

“Collaboration Target(s)”

     5   

1.23

  

“Collaboration Technology”

     5   

1.24

  

“Collaboration Term”

     5   

1.25

  

“Combination Product”

     5   

1.26

  

“Competitive Infringement”

     5   

1.27

  

“Compound Patents”

     5   

1.28

  

“Confidential Information”

     5   

1.29

  

“Contract Year”

     5   


T ABLE OF C ONTENTS

 

          P AGE  

1.30

   “Control,” “Controls,” “Controlled” or “Controlling”      5   

1.31

   “Co-promote” or “Co-promotion”      6   

1.32

   “Co-promotion Right”      6   

1.33

   “Derivative”      6   

1.34

   “Develop” or “Development”      6   

1.35

   “Development Candidate”      6   

1.36

   “Development Candidate Criteria”      6   

1.37

   “Diligent Efforts”      6   

1.38

   “Disclosing Party”      7   

1.39

   “Dossier Studies”      7   

1.40

   “Dossier Study Costs”      7   

1.41

   “Early Development Program”      8   

1.42

   “Early Development Plan”      8   

1.43

   “Early Development Program Term”      8   

1.44

   “Early Development Term”      8   

1.45

   “EMEA”      8   

1.46

   “European Union” or “EU”      8   

1.47

   “Executive Officers”      8   

1.48

   “FDA”      8   

1.49

   “Field”      8   

1.50

   “First Commercial Sale”      9   

1.51

   “FTE”      9   

1.52

   “FTE Reimbursement Rate”      9   

1.53

   “Generic Product”      9   

1.54

   “GSK Incurred Costs”      9   

1.55

   “GSK Know-How”      10   

1.56

   “GSK Patents”      10   

1.57

   “GSK Reverse Royalty”      10   

1.58

   “GSK Technology”      10   

1.59

   “IBD Indication(s)”      11   

 

ii


T ABLE OF C ONTENTS

 

        P AGE   

1.60

  

“IBD Net Sales”

     11   

1.61

  

“IND”

     11   

1.62

  

“IND Studies”

     11   

1.63

  

“Indemnitee”

     11   

1.64

  

“Indication”

     11   

1.65

  

“Information”

     11   

1.66

  

“Initial Term”

     11   

1.67

  

“Initiation”

     11   

1.68

  

“Invention”

     11   

1.69

  

“Joint Patent Subcommittee”

     12   

1.70

  

“Joint Program Subcommittee” or “JPS”

     12   

1.71

  

“Joint Steering Committee”

     12   

1.72

  

“Licensed Product(s)”

     12   

1.73

  

“Losses”

     12   

1.74

  

“Major Country”

     12   

1.75

  

“Major Indication”

     12   

1.76

  

“Marketing Approval”

     12   

1.77

  

“Marketing Approval Application” or “MAA”

     12   

1.78

  

“MHLW”

     12   

1.79

  

“NDA”

     12   

1.80

  

“Net Sales”

     13   

1.81

  

“Non-breaching Party”

     14   

1.82

  

“Non-IBD Net Sales”

     14   

1.83

  

“Non-CCR9 Option Exercise Fee”

     15   

1.84

  

“Option Compound”

     15   

1.85

  

“Option Period”

     15   

1.86

  

“Party” or “Parties”

     15   

1.87

  

“Patent”

     15   

1.88

  

“Patent Costs”

     15   

1.89

  

“Payee”

     15   

 

iii


T ABLE OF C ONTENTS

 

          P AGE  

1.90

  

“Payor”

     15   

1.91

  

“Phase 1 Clinical Trial”

     15   

1.92

  

“Phase 2 Clinical Trial”

     15   

1.93

  

“Phase 3 Clinical Trial”

     15   

1.94

  

“PoC Criteria”

     16   

1.95

  

“Pre-Clinical Activities”

     16   

1.96

  

“Pre-commercial Supply Costs”

     16   

1.97

  

“Product”

     16   

1.98

  

“Product Candidate”

     16   

1.99

  

“Product Candidate Commercialization Program”

     16   

1.100

  

“Product Marketing Plan”

     17   

1.101

  

“Product Option”

     17   

1.102

  

“Progressed Compounds”

     17   

1.103

  

“Project Directors”

     17   

1.104

  

“Proof of Concept Trial” or “PoC Trial”

     17   

1.105

  

“PROTECT-1 Trial”

     17   

1.106

  

“PROTECT-2 Trial”

     17   

1.107

  

“PoC Trial Report”

     17   

1.108

  

“Prosecuting Party”

     17   

1.109

  

“Prosecution and Maintenance” or “Prosecute and Maintain”

     17   

1.110

  

“Quality Agreement”

     18   

1.111

  

“QTc Study”

     18   

1.112

  

“Receiving Party”

     18   

1.113

  

“Refused Candidate”

     18   

1.114

  

“Regulatory Approval”

     18   

1.115

  

“Regulatory Authority” or “Regulatory Authorities”

     18   

1.116

  

“Related Compound”

     18   

1.117

  

“Report Date”

     18   

1.118

  

“Research Plan”

     18   

1.119

  

“Research Program”

     18   

 

iv


T ABLE OF C ONTENTS

 

          P AGE  

1.120

  

“Research Term”

     19   

1.121

  

“Research Term Extension”

     19   

1.122

  

“Respiratory Indication”

     19   

1.123

  

“Returned Licensed Product”

     19   

1.124

  

“ROW”

     19   

1.125

  

“Stock Purchase Agreement”

     19   

1.126

  

“Subcommittee”

     19   

1.127

  

“Sublicensee”

     19   

1.128

  

“Successful CD Induction Results”

     19   

1.129

  

“Target Product Profile” or “TPP”

     19   

1.130

  

“Term”

     20   

1.131

  

“Territory”

     20   

1.132

  

“Third Party”

     20   

1.133

  

“United States” or “U.S.”

     20   

1.134

  

“Valid Claim”

     20   

ARTICLE 2

  

COLLABORATION OVERVIEW; OVERSIGHT OF THE COLLABORATION

     20   

2.1

  

Overview

     20   

2.2

  

General

     20   

2.3

  

The Joint Steering Committee

     21   

2.4

  

Project Directors

     26   

ARTICLE 3

  

RESEARCH AND DEVELOPMENT OF COLLABORATION COMPOUNDS

     27   

3.1

  

Research Program; Initial Term

     27   

3.2

  

Early Development Program; Early Development Term

     27   

3.3

  

Objectives; ChemoCentryx Diligence and Responsibilities

     29   

3.4

  

Reports; Publication of Clinical Trials Results

     33   

3.5

  

Research Plan and Collection of Data

     33   

3.6

  

Indications; Target Product Profiles; Development Candidate Selection

     35   

3.7

  

Early Development Plan(s) and Conduct of Early Development Programs

     36   

3.8

  

Evaluation of PoC Trial Results

     38   

 

v


T ABLE OF C ONTENTS

 

          P AGE  

3.9

  

Regulatory Matters

     39   

3.10

  

Exchange of Information

     39   

3.11

  

Research Program Funding

     40   

3.12

  

GSK Technology

     40   

3.13

  

Subcontracting

     40   

3.14

  

Non-Commercial Supply of Compounds

     41   

ARTICLE 4

  

GSK’S PRODUCT OPTION RIGHTS

     41   

4.1

  

Product Options

     41   

4.2

  

PoC Trial Reports

     42   

4.3

  

Exercise of Product Options

     43   

ARTICLE 5

  

GRANT OF RIGHTS; COMMERCIALIZATION

     45   

5.1

  

License Grants

     45   

5.2

  

ChemoCentryx’ CCR9 Co-Development Option

     46   

5.3

  

Effect of Exercise of Co-Development Option by ChemoCentryx

     47   

5.4

  

Technology Transfer after Exercise by GSK of a Product Option

     48   

5.5

  

Product Candidate Commercialization Program

     49   

5.6

  

ChemoCentryx Co-Promotion Right

     51   

5.7

  

Returned Licensed Products

     52   

ARTICLE 6

  

MILESTONES AND ROYALTIES; PAYMENTS

     53   

6.1

  

Upfront Payment to ChemoCentryx

     53   

6.2

  

Purchase of Preferred Stock

     53   

6.3

  

Product Option Exercise Fee for Option Compounds

     54   

6.4

  

Milestones Payments to ChemoCentryx

     54   

6.5

  

Net Sales Milestone Payments

     56   

6.6

  

Royalty Payments to ChemoCentryx

     57   

6.7

  

Refused Candidate Royalties and Reverse Royalty to GSK

     63   

6.8

  

Third Party Intellectual Property

     64   

6.9

  

Third Party Licenses Needed for Screening and Platform Technology Used in the Conduct of the Research Program

     64   

6.10

  

Payments

     64   

6.11

  

Audits

     65   

 

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6.12

  

Taxes

     66   

ARTICLE 7

  

EXCLUSIVITY

     66   

7.1

  

Covenant of Exclusivity for Collaboration Targets; Exceptions

     66   

7.2

  

Covenant of Exclusivity for Collaboration Compounds

     67   

7.3

  

Non-solicitation

     67   

ARTICLE 8

  

OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS

     68   

8.1

  

Ownership

     68   

8.2

  

Prosecution and Maintenance of Patents

     68   

8.3

  

Patent Costs

     70   

8.4

  

Defense of Claims Brought by Third Parties

     71   

8.5

  

Enforcement of Collaboration Patents and ChemoCentryx Patents

     71   

ARTICLE 9

  

CONFIDENTIALITY

     73   

9.1

  

Confidentiality; Exceptions

     73   

9.2

  

Authorized Disclosure

     74   

9.3

  

Press Release; Disclosure of Agreement

     75   

9.4

  

Termination of Prior Agreement

     75   

9.5

  

Remedies

     75   

9.6

  

Publications

     76   

ARTICLE 10

  

REPRESENTATIONS AND WARRANTIES

     76   

10.1

  

Representations and Warranties of Both Parties

     76   

10.2

  

Representations and Warranties of ChemoCentryx

     77   

10.3

  

ChemoCentryx Covenants

     78   

10.4

  

Representation and Warranty of GSK

     79   

10.5

  

Disclaimer

     79   

ARTICLE 11

  

INDEMNIFICATION; INSURANCE

     80   

11.1

  

Indemnification by GSK

     80   

11.2

  

Indemnification by ChemoCentryx

     80   

11.3

  

Procedure

     81   

11.4

  

Insurance

     81   

11.5

  

LIMITATION OF CONSEQUENTIAL DAMAGES

     82   

 

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          P AGE  

ARTICLE 12

  

TERM AND TERMINATION

     82   

12.1

  

Term; Expiration

     82   

12.2

  

Termination for Cause

     83   

12.3

  

GSK Unilateral Termination Rights

     84   

12.4

  

Termination for Insolvency

     85   

12.5

  

Effect of Termination

     85   

ARTICLE 13

  

REGULATORY

     88   

13.1

  

Tolling of Payment Obligations

     88   

ARTICLE 14

  

MISCELLANEOUS

     88   

14.1

  

Dispute Resolution

     88   

14.2

  

Governing Law

     88   

14.3

  

Assignment

     89   

14.4

  

Performance Warranty

     89   

14.5

  

Force Majeure

     89   

14.6

  

Notices

     89   

14.7

  

Export Clause

     90   

14.8

  

Waiver

     91   

14.9

  

Severability

     91   

14.10

  

Entire Agreement

     91   

14.11

  

Independent Contractors

     91   

14.12

  

Headings

     91   

14.13

  

Books and Records

     91   

14.14

  

Further Actions

     91   

14.15

  

Parties in Interest

     92   

14.16

  

Construction of Agreement

     92   

14.17

  

Supremacy

     92   

14.18

  

Counterparts

     92   

 

viii


PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (the “Agreement”) is entered into and made effective as of the 22 nd day of August, 2006 (the “ Effective Date ”) by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ ChemoCentryx ”), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England ( referred to herein as “GSK” ). ChemoCentryx and GSK are each referred to herein by name or as a “ Party ” or, collectively, as “ Parties.

RECITALS

W HEREAS , ChemoCentryx possesses proprietary technology and know-how related to the research, discovery, identification, synthesis and development of small molecule drug candidates targeting certain chemokine receptors;

W HEREAS , GSK possesses expertise in the pharmaceutical research, development, manufacturing and commercialization of human pharmaceuticals, and GSK is interested in developing such small molecule drug candidates as drug products;

W HEREAS , GSK desires to engage in a collaborative effort with ChemoCentryx pursuant to which ChemoCentryx shall carry out a research and development program with respect to four (4) different chemokine receptors as drug targets, to discover and develop small molecule receptor antagonists or agonists, through to certain proof of concept trials, and for up to six (6) of which (plus their respective back-ups), GSK shall have exclusive options, exercisable at GSK’s sole discretion, to further develop and commercialize on an exclusive basis for any and all uses in the Territory, all on the terms and conditions set forth herein;

W HEREAS , upon exercise of each of its options to such compounds by GSK, ChemoCentryx desires to grant and will grant to GSK, and GSK desires to obtain and will obtain, an exclusive license in the Territory (as defined below) under this Agreement to make, have made, use, sell, offer for sale, and import certain Licensed Products (as defined herein) throughout the Territory on the terms and conditions set forth herein; and

W HEREAS , contemporaneously with the execution of this Agreement, the Parties have executed a separate Series D Subscription Agreement and related agreements pursuant to which GSK shall purchase shares of Series D Preferred Stock of ChemoCentryx (collectively, the “ Stock Purchase Agreement ”).

N OW , THEREFORE , in consideration of the premises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties do hereby agree as follows:


ARTICLE 1

DEFINITIONS

As used in this Agreement, the following terms shall have the meanings set forth in this Article 1 unless context dictates otherwise. All references to “Dollars” means U.S. Dollars. The use of the singular form of a defined term also includes the plural form and vice versa, except where expressly noted:

1.1 Acceptance ” means the earliest date the FDA (or equivalent foreign regulatory authority) notifies GSK that it has accepted the relevant regulatory submission ( e.g., NDA or MAA) with respect to a Licensed Product.

1.2 “Affiliate” shall mean any Person, whether de jure or de facto , which directly or indirectly through one (1) or more intermediaries controls, is controlled by or is under common control with a Party to this Agreement. A Person shall be deemed to “control” another Person if it (a) owns, directly or indirectly, beneficially or legally, at least fifty percent (50%) of the outstanding voting securities or capital stock (or such lesser percentage which is the maximum allowed to be owned by a Person in a particular jurisdiction) of such other Person, or has other comparable ownership interest with respect to any Person other than a corporation; or (b) has the power, whether pursuant to contract, ownership of securities or otherwise, to direct the management and policies of the Person. For purposes of this Agreement, a “Person” shall mean any corporation, firm, partnership or other entity recognized as having a separate existence under the law.

1.3 “Asthma CCR9 PoC Trial” shall mean a Phase 2 Clinical Trial of a Collaboration Compound targeting CCR9 that is reasonably designed to demonstrate, with statistical significance either efficacy, if possible, or if demonstration of efficacy is not possible, the hypothesized mechanism of action ( i.e. , the scientific concept underlying the proposed product) for an asthma Indication.

1.4 “Back-up Compound” shall mean, with respect to a given Development Candidate, the two (2) Collaboration Compounds selected by the JSC (or by GSK) pursuant to Section 3.6.2 and Controlled by ChemoCentryx, that: (a) is closely related to, an analog of, Derivative of or improvement of such Development Candidate; (b) has demonstrated substantially similar [***] as such Collaboration Compound; (c) ChemoCentryx using Diligent Efforts has progressed up to [***] of its medicinal chemistry process against such Collaboration Target as set forth in Exhibit B; (d) meets or is expected to meet back-up compound criteria as mutually agreed upon through the JSC; and (e) addresses a known or anticipated shortcoming associated with, or is an improvement over, the Development Candidate it is intended to replace or supplant.

1.5 “Breaching Party” shall have the meaning assigned to such term in Section 12.2.

 

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1.6 “C5aR” shall mean that certain chemokine receptor designated by ChemoCentryx as C5aR and further described in Exhibit C.

1.7 “Calendar Quarter” shall mean a period of three (3) consecutive months ending on the last day of March, June, September, or December, respectively.

1.8 “CCR1” shall mean that certain chemokine receptor designated by ChemoCentryx as CCR1 and further described in Exhibit D.

1.9 “CCR9” shall mean that certain chemokine receptor designated by ChemoCentryx as CCR9 and further described in Exhibit E.

1.10 “CCR9 Option Exercise Fee” shall have the meaning set forth in Section 6.3.1.

1.11 “CCR9 QTc Payment” shall have the meaning set forth in Section 3.11.1.

1.12 “CCX282” shall mean the compound designated by ChemoCentryx as CCX282, having the structure represented in Exhibit E and any salt form thereof.

1.13 “CCX282 Back-up Compound” shall mean any Back-up Compound to CCX282.

1.14 “cGMP” shall mean all applicable standards relating to manufacturing practices for fine chemicals, intermediates, bulk products or finished pharmaceutical products. For purposes of this Agreement, cGMPs shall mean (i) the principles detailed in the U.S. Current Good Manufacturing Practices, 21 CFR Parts 210 and The Rules Governing Medicinal Products in the European Community, Volume IV Good Manufacturing Practice for Medicinal Products as each may be amended from time to time or (ii) promulgated by any governmental body having jurisdiction over the manufacture of a Collaboration Compound or Development Candidate, in the form of laws or regulations.

1.15 “ChemoCentryx Know-How” shall mean any Information that (a) is Controlled by ChemoCentryx on or after the Effective Date (and which is other than Collaboration Know-How) and (b) relates directly to any Collaboration Compound, or is directly useful for purposes of GSK conducting its obligations under the Product Candidate Commercialization Program, or otherwise is necessary for the manufacture, use or sale of any Progressed Compound, Product Candidate and/or Licensed Product.

1.16 “ChemoCentryx Patents” shall mean all Patents in the Territory Controlled by ChemoCentryx as of the Effective Date as set forth on Exhibit A, and any other Patents Controlled by ChemoCentryx during the Term (and which is other than any Collaboration Patent) which cover the research, development, manufacture, use, composition of matter, method of use, import, offer to sell or sale of any Progressed Compound, Product Candidate and/or Licensed Product.

 

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1.17 “ChemoCentryx Technology” shall mean, collectively, (i) the ChemoCentryx Patents and ChemoCentryx Know-How, and (ii) any Collaboration Technology owned solely by ChemoCentryx or jointly by ChemoCentryx and GSK pursuant to Section 8.1.

1.18 Clinical Studies ” means human studies designed to measure the safety, efficacy, tolerability and appropriate dosage of a Development Candidate, Option Compound, Product Candidate, or Licensed Product, as the context requires, including without limitation Phase 1 Clinical Trials, Phase 2 Clinical Trials (including the PoC Trial), or Phase 3 Clinical Trials. Clinical Studies shall include, without limitation: (a) any clinical studies that ChemoCentryx determines is necessary or useful to conduct in the Territory for Collaboration Compounds, Development Candidates, or Option Compounds to achieve Regulatory Approvals; or (b) any clinical studies that GSK determines are necessary or useful to conduct in the Territory for Product Candidates or Licensed Products to achieve or maintain Regulatory Approvals.

1.19 “Collaboration Compound” shall mean:

1.19.1 CCX282 and all lead compounds and backup compounds targeting CCR9, CCR1 or C5aR and existing as of the Effective Date, as listed on Exhibits C, D, or E, as applicable; or

1.19.2 any small molecule compound owned or Controlled by ChemoCentryx that has been or is identified or created by or on behalf of ChemoCentryx as of the Effective Date or during the Research Term, and that meets the following criteria:

(a) with respect to Collaboration Targets CCR9, CCR1 and C5aR, such compound interferes with the binding of endogenous ligands to any one of such Collaboration Targets so as to inhibit the response of any such Collaboration Target to such endogenous ligands at a therapeutically meaningful level, such level to be established by the JSC during the Research Term; and

(b) with respect to Collaboration Target ChemR23, such compound binds to or stimulates such Collaboration Target at a therapeutically meaningful level, such level to be established by the JSC during the Research Term, thereby triggering a response by ChemR23 positive cells similar to what the receptor’s interaction with its natural ligand would elicit.

(c) such compound is selective for a given Collaboration Target, as determined by the JSC, or as otherwise determined or represented by ChemoCentryx in documentation prior to or after the Effective Date.

1.20 “Collaboration Know-How” means any Information pertaining to a Collaboration Compound that is discovered, developed, invented or created solely by or on behalf of a particular Party (or its agent or contractors), or by the Parties jointly (or through their contractors), and/or by their respective Affiliates, in each case pursuant to work conducted during the Collaboration Term under the Research Program or under any Early Development

 

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Program in accordance with the Research Plan or the Early Development Plan or during the Product Candidate Commercialization Program.

1.21 “Collaboration Patent” means any Patent that claims or covers Collaboration Know-How.

1.22 “Collaboration Target(s)” shall mean any of the following four (4) chemokine or chemoattractant receptors: (a) C5aR; (b) CCR1; (c) CCR9; and (d) ChemR23.

1.23 “Collaboration Technology” means the Collaboration Know-How and the Collaboration Patents.

1.24 “Collaboration Term” means the period from the Effective Date until the end of the Early Development Term hereunder.

1.25 “Combination Product” shall mean Licensed Product that includes at least one other therapeutically effective active pharmaceutical ingredient (whether co-formulated or co-packaged with the Collaboration Compound in such Licensed Product) which is neither the Collaboration Compound nor part of the same molecule as that containing the Collaboration Compound. To be a Combination Product the Licensed Product and all its ingredients (including the Drug Substance) must be sold together as a single product and invoiced as one product. Notwithstanding the foregoing, drug delivery vehicles, adjuvants, and excipients shall not be deemed to be “therapeutically effective active pharmaceutical ingredients,” and their presence shall not be deemed to create a Combination Product for purposes of this Section 1.25.

1.26 “Competitive Infringement” shall have the meaning assigned to such term in Section 8.5.1.

1.27 “Compound Patents” shall have meaning assigned to such term in Section 8.2.4(a).

1.28 “Confidential Information” shall have the meaning assigned to such term in Section 9.1.

1.29 “Contract Year” shall mean a year of 365 days (or 366 days in a leap year) beginning on the Effective Date and ending one (1) year thereafter and so on year-by-year. “ Contract Year One ” shall mean the first such year; “ Contract Year Two ” shall mean the second such year, and so on, year-by-year.

1.30 “Control,” “Controls,” “Controlled” or “Controlling” shall mean possession of the legal right and ability to grant the licenses or sublicenses as provided herein without violating the terms of any agreement or other arrangement with any Third Party. A Party shall be deemed to Control Collaboration Technology to the extent of its individual or joint interest therein, as applicable.

 

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1.31 “Co-promote” or “Co-promotion” shall mean, with respect to ChemoCentryx, to engage in the agreed upon promotional activities for a Co-Development Compound as further described in Section 5.6.1.

1.32 “Co-promotion Right” shall have the meaning assigned to such term in Section 5.6.1.

1.33 “Derivative” shall mean a compound that is derived in one or more steps from a Collaboration Compound and that has, or is intended at the time of its synthesis to have, pharmacological (i.e., pharmacodynamic and not pharmacokinetic) properties substantially similar to, or superior to, the properties of the compound from which it was derived.

1.34 “Develop” or “Development” shall mean activities relating to obtaining Regulatory Approval of Licensed Products, and activities of Third Party manufacturers to develop manufacturing capabilities for Licensed Products. Development includes, but is not limited to, Pre-Clinical Activities, pharmacology studies, biomarker studies, toxicology studies, formulation, manufacturing process development and scale-up (including bulk compound production), quality assurance and quality control, technical support, pharmacokinetic studies, Clinical Studies, regulatory affairs activities.

1.35 “Development Candidate” shall mean a Collaboration Compound that has been determined by the JSC to have satisfied the Development Candidate Criteria and has been approved by the JSC as suitable for the initiation of IND Studies, and if successful, Clinical Studies, or, in the absence of the above, any Collaboration Compound that is otherwise deemed by GSK to be a Development Candidate, pursuant to GSK’s rights to make such a determination under Section 4.3.2 of this Agreement.

1.36 “Development Candidate Criteria” shall mean key data regarding the developability characteristics of a Collaboration Compound candidate for nomination as a Development Candidate for IND enabling studies. Typically the developability criteria will include data regarding [***] of the Collaboration Compound and other pharmacokinetic parameters of the Collaboration Compound in [***] as well as a preliminary assessment of the risk of [***], as well as evaluation of [***]. An assessment of toxicokinetics and selection of GLP toxicity species should be typically included with preliminary repeat dose toxicity in [***], genotoxicity (Ames test), and cardiac (hERG) safety. In addition, the properties of the Collaboration Compound regarding purity, solution and solid state stability and physicochemical properties should be included. Assessment of the consistency of the chemical form, scalability of synthetic routes and availability of starting materials will also be typically included in the assessment.

1.37 “Diligent Efforts” shall mean, with respect to a Party’s obligation under this Agreement, carrying out such obligations using sustained efforts, acting reasonably promptly and taking into account scientific and commercially relevant factors such as (as applicable) stage of development, product life, patent position, strategic value, profit and market potential, and

 

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regulatory issues, in accordance with the following:

1.37.1 For ChemoCentryx : ChemoCentryx shall apply commercially reasonable efforts in the conduct of all activities and obligations for which ChemoCentryx is responsible with respect to the research and development activities for the Research Program under the Agreement, in accordance with the activities and obligations that are set forth in the Research Plan, and in each Early Development Program in accordance with the activities and obligations under the Early Development Plan for each Collaboration Target as established hereunder. Such efforts shall at all times be consistent with the manner and degree in which ChemoCentryx would apply efforts for a compound which is a potential development candidate, a development candidate or a clinical stage compound (as applicable) in its own research and development pipeline, with similar technical, safety, medical and scientific profiles and characteristics, a similar level of development complexity, and a similar potential commercial or strategic value as compared to the Collaboration Compound in question.

1.37.2 For GSK: Upon the exercise of each of its Product Options, GSK shall apply commercially reasonable efforts in the conduct of all activities and obligations for which GSK is responsible with respect to the further development and commercialization of such Licensed Product under the Agreement. Such efforts shall at all times be consistent with the manner and degree in which GSK would apply efforts for a compound which is a clinical stage compound or potential product (as applicable) in its own pipeline, at a similar stage of development with similar technical, safety, medical and scientific profiles and characteristics, a similar level of development complexity and difficulty, and with a similar potential market value or strategic value as compared to the Licensed Product in question.

1.37.3 A Party that is required to use Diligent Efforts with respect to an obligation must: (a) promptly assign responsibility for such obligation to specific employee(s) who are held accountable for progress and monitor such progress on an on-going basis, (b) establish and consistently seek to achieve specific, meaningful and measurable objectives for carrying out such obligation, and (c) consistently make and implement decisions and allocate resources designed to advance progress with respect to such objective.

1.38 “Disclosing Party” shall have the meaning assigned to such term in Section 9.1.

1.39 “Dossier Studies” means, with respect to a given Product Candidate, those Clinical Trials (and including any related non-clinical or clinical studies) that are required by a Regulatory Authority to support and obtain Regulatory Approval for such Licensed Product for a given Indication in a Major Country.

1.40 “Dossier Study Costs” means with respect to a particular Product Candidate, the sum of the following costs to the extent incurred after the exercise by ChemoCentryx of the Co-Development Option with respect to such Product Candidate:

 

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(a) All direct internal costs and out-of-pocket expenses incurred by GSK and/or its Affiliates during such period in the conduct of all Dossier Studies, and for product material, comparator drug and placebo used in the Dossier Studies.

(b) Allocable overhead to the extent allocated to the costs described in (a), where allocable overhead shall mean costs incurred by GSK or its Affiliates which are attributable to the costs of supervisory services, occupancy, payroll, information systems, human resources and purchasing, as allocated to company departments based on space occupied, headcount or activity-based methods, in all cases as applied by such Party in accordance with its accounting standards on a consistent basis. Without limitation, allocable overhead shall not include the costs of general corporate activities including, by way of example, executive management, investor relations, business development, corporate or general legal and finance.

(c) Such costs as described in clauses (a) and (b) shall be determined in accordance with applicable Generally Accepted Accounting Principles (GAAP) and in accordance with GSK’s accounting standards on a consistent basis.

1.41 “Early Development Program” shall have the meaning set forth in Section 3.2.

1.42 “Early Development Plan” shall have the meaning assigned to such term in Section 3.7.

1.43 “Early Development Program Term” shall have the meaning set forth in Section 3.2.3.

1.44 “Early Development Term” shall have the meaning set forth in Section 3.2.4.

1.45 “EMEA” shall mean the European Medicines Evaluation Agency, and any successor entity thereto.

1.46 “European Union” or “EU” shall include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, United Kingdom, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, and any such other country or territory that may officially become part of the European Union after the Effective Date.

1.47 “Executive Officers” shall have the meaning assigned to such term in Section 2.3.4.

1.48 “FDA” shall mean the U.S. Food and Drug Administration, and any successor entity thereto.

1.49 “Field” shall mean any use or purpose, including without limitation the treatment, palliation, and/or prevention of any human or animal disease, disorder or condition; provided, however, that the Field shall specifically exclude the commercialization of protein therapeutics

 

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directed against Collaboration Targets. .

1.50 “First Commercial Sale” shall mean, with respect to each Product, the first sale for which payment has been received for use or consumption by the general public of such Product in any country in the Territory after all required Marketing Approvals have been granted, or such sale is otherwise permitted, by the Regulatory Authority in such country, excluding registration samples and compassionate use.

1.51 “FTE” shall mean a full-time technical person dedicated by ChemoCentryx to the Research Program, or in the case of less than a full-time dedicated technical person, a full-time equivalent technical person year, based upon a total of forty-seven (47) weeks ( i.e. , one thousand eight hundred eighty (1,880) hours) per year of technical work on or directly related to the Research Program. Technical work on or directly related to the Research Program to be performed by ChemoCentryx employees may include experimental laboratory work, recording and writing up results, reviewing literature and references, holding scientific discussions, seminars and symposia, managing and directing scientific staff, and carrying out management duties directly related to the Research Program.

1.52 “ [***] means initially an amount equal to $[***] per [***] per year; on January 1, 2007, and annually thereafter, such amount shall be adjusted to reflect any increase, since the prior adjustment (or the initial rate, as applicable), in the Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners, San Francisco/Oakland, based on the most recent monthly index figure available as of the adjustment date. Such [***] rate includes all benefits and any applicable overhead.

1.53 Generic Product ” means any pharmaceutical product sold by a Third Party, not authorized by GSK, an Affiliate or sublicense or GSK, and is approved in reliance on the prior approval of a Licensed Product as determined by the applicable Regulatory Authority, on the basis of it being comparable to and substitutable for such Licensed Product, as stated in a regulatory filing with such Regulatory Authority.

1.54 “GSK Incurred Costs” means, with respect to a particular Product Candidate, the sum of the following costs to the extent incurred by GSK until such time as ChemoCentryx exercises the Co-Development Option, if applicable, with respect to such Licensed Product:

(a) all direct internal costs and out-of-pocket expenses actually incurred by GSK and/or its Affiliates in the course of formulation development as required to enable the clinical studies to be used in support of regulatory filings with the FDA, to the extent required;

(b) all direct internal costs and out-of-pocket expenses incurred by GSK and/or its Affiliates during such period in the conduct of all clinical and non-clinical studies for the indication at issue and intended to generate data required for U.S. NDA approval of a Product Candidate for such indication (including clinical trials conducted by GSK in Europe, but only where the data obtained from such trials is intended to be used in obtaining or maintaining

 

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Regulatory Approval in the U.S., but excluding any clinical or related non-clinical trials or studies that are specifically necessary for Regulatory Approval of a Product Candidate in a country or jurisdiction outside the United States);

(c) all direct internal costs and out-of-pocket expenses incurred by GSK and/or its Affiliates during such period for Product Candidate material, comparator drug and placebo used in any of the aforementioned studies in (b); and

(d) allocable overhead to the extent allocated to the costs described in (a), (b) and (c), where allocable overhead shall mean costs incurred by GSK or its Affiliates which are attributable to the costs of supervisory services, occupancy, payroll, information systems, human resources and purchasing, as allocated to company departments based on space occupied, headcount or activity-based methods, in all cases as applied by such Party in accordance with its accounting standards on a consistent basis. Without limitation, allocable overhead shall not include the costs of general corporate activities including, by way of example, executive management, investor relations, business development, corporate or general legal and finance.

Such costs as described in clauses (a) through (d) shall be determined in accordance with applicable GAAP and in accordance with GSK’s accounting standards on a consistent basis.

1.55 “GSK Know-How” shall mean any Information pertaining specifically and primarily to a Progressed Compound that (a) is Controlled by GSK on the Effective Date; (b) is directly useful for purposes of ChemoCentryx conducting its obligations under the Early Development Plan; and (c) all non-patentable Inventions Controlled by GSK or its Affiliates during the Term, if any, in each case that pertains specifically and primarily to a Progressed Compound and is necessary or useful for ChemoCentryx (i) to exercise any license granted under Section 5.1; (ii) to develop, make, have made, use, import, offer to sell or sell Returned Licensed Products; or (iii) to market any Licensed Product with respect to which ChemoCentryx obtains a right to Co-promote as set forth in Section 5.6 of this Agreement.

1.56 “GSK Patents” shall mean all Patents in the Territory Controlled by GSK or its Affiliates as of the Effective Date, and any other Patent Controlled by GSK during the Term to the extent containing a claim which pertains specifically and primarily to a Progressed Compound and is necessary or useful for ChemoCentryx (a) to exercise any license granted under Section 5.1; (b) to develop, make, have made, use, import, offer to sell or sell Returned Licensed Products; or (c) to market any Licensed Product with respect to which ChemoCentryx obtains a right to Co-promote as set forth in Section 5.6 of this Agreement.

1.57 “GSK Reverse Royalty” shall have the meaning set forth in Section 6.7(b).

1.58 “GSK Technology” shall mean, any GSK Patents and GSK Know-How Controlled by GSK, or its Affiliates, in existence on the Effective Date or Controlled by GSK during the Term, including without limitation any Collaboration Technology owned by GSK either jointly or solely.

 

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1.59 “IBD Indication(s)” shall mean either or both of Crohn’s Disease and ulcerative colitis.

1.60 “IBD Net Sales” shall have the meaning assigned to such term in Section 6.6.3(a).

1.61 “IND” shall mean any investigational new drug application filed with the FDA pursuant to Part 312 of Title 21 of the U.S. Code of Federal Regulations, including any amendments thereto. References herein to IND shall include, to the extent applicable, any comparable filing(s) outside the U.S. (such as a CTA in the European Union).

1.62 “IND Studies” means Pre-Clinical Activities and Clinical Studies undertaken by ChemoCentryx to support the filing of an IND.

1.63 “Indemnitee” shall have the meaning assigned to such term in Section 11.3.

1.64 “Indication” means each therapeutic and/or prophylactic use of separate and distinct diseases, disorders or medical conditions that a Product Candidate and/or Licensed Product is intended to treat, prevent, cure, or ameliorate, or that is or is intended to be the subject of a clinical trial on a Product Candidate and/or Licensed Product where an endpoint of the trial is demonstrating an effect by such Product Candidate and/or Licensed Product in treating, preventing, curing, or ameliorating such disease, disorder or medical condition.

1.65 “Information” means all tangible and intangible (a) information, techniques, technology, practices, trade secrets, inventions (whether patentable or not), methods, knowledge, know-how, skill, experience, data, results (including pharmacological, toxicological and clinical test data and results), analytical and quality control data, results or descriptions, software and algorithms and (b) compositions of matter, cells, cell lines, assays, animal models and physical, biological or chemical material. As used herein, “ clinical test data ” shall be deemed to include all information related to the clinical or preclinical testing of a Collaboration Compound, or Licensed Product, including without limitation, patient report forms, investigators’ reports, biostatistical, pharmaco-economic and other related analyses, regulatory filings and communications, and the like.

1.66 “Initial Term” shall have the meaning set forth in Section 3.1.

1.67 “Initiation” shall mean, with respect to the studies set forth in Section 6.4.2, the first dosing of the first patient in such study.

1.68 “Invention” shall mean any new or useful process, machine, manufacture, composition of matter, or method of use relating to or comprising any Collaboration Compound, Development Candidate, Option Compound, Product Candidate or Licensed Product (including, without limitation, the formulation, delivery or use thereof), whether patentable or unpatentable, or any improvement thereof, that is conceived during the Term in connection with the Parties’ activities under this Agreement.

 

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1.69 “Joint Patent Subcommittee” shall have the meaning assigned to such term in Section 2.3.8(b).

1.70 “Joint Program Subcommittee” or “JPS” shall have the meaning assigned to such term in Section 2.3.8(a).

1.71 “Joint Steering Committee” or “JSC” shall have the meaning assigned to such term in Section 2.3.

1.72 “Licensed Product(s)” shall mean any product, including any formulation or dosage or delivery form thereof, containing or comprising a Product Candidate, including any metabolite, prodrug, ester, salt, crystalline polymorph, hydrate or solvate of any such Product Candidate.

1.73 “Losses” shall have the meaning assigned to such term in Section 11.1.

1.74 “Major Country” shall mean the United States, Japan, France, Germany, Italy, Spain, and the United Kingdom.

1.75 “Major Indication” shall mean any discrete non-orphan Indication; provided, however, that the IBD Indications shall be treated as a single indication. By way of example only, asthma and chronic obstructive pulmonary disease would be deemed to be separate Major Indications, while severe asthma and mild to moderate asthma (or alternatively, acute versus chronic asthma) would not be deemed to be separate Major Indications.

1.76 “Marketing Approval” shall mean all approvals, licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other governmental entity, necessary for the manufacturing, use, storage, import, transport and sale, and in Europe, payor approval of price and reimbursement for Licensed Product. of Licensed Products in a regulatory jurisdiction. “Marketing Approval” shall be deemed to occur upon first receipt of notice from a Regulatory Authority that sale of a Licensed Product has been approved.

1.77 “Marketing Approval Application” or “MAA” shall mean a New Drug Application (as defined in Title 21 of the U.S. Code of Federal Regulations, Section 314.50, et. seq .), or a comparable filing for Marketing Approval (not including pricing or reimbursement approval) in a country, in each case with respect to a Product in the Territory.

1.78 “MHLW” shall mean the Ministry for Health, Labor and Welfare of Japan, or the Pharmaceutical and Medical Devices Agency (the “PMDA,” formerly known as IYAKUHIN SOGO KIKO), or any successor to either of them, as the case may be.

1.79 “NDA” shall mean a New Drug Application (as more fully defined in 21 C.F.R. 314.5 et seq. or its successor regulation) and all amendments and supplements thereto filed with the FDA, or the equivalent application filed with any equivalent agency or governmental authority outside the United States of America (including any supra-national agency such as in

 

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the EU), including all documents, data, and other information concerning a pharmaceutical product which are necessary for gaining Regulatory Approval to market and sell such pharmaceutical product.

1.80 “Net Sales” shall mean, with respect to any Product, the gross invoiced sales price of such Product sold by either (i) GSK, its Affiliates or Sublicensees or (ii), as the case requires, ChemoCentryx, its Affiliates or Sublicensees (in each case, the “ Selling Party ”), in finished product form, packaged and labeled for sale, under this Agreement in arm’s length sales to Third Parties, less deductions allowed to the Third Party customer by the Selling Party, to the extent actually taken by such Third Party customer, on such sales for:

(a) trade, quantity, and cash discounts;

(b) customary and reasonable credits, rebates and chargebacks (including those to managed-care entities and government agencies), and allowances or credits to customers on account of rejection or returns (including, but not limited to, wholesaler and retailer returns) or on account of retroactive price reductions affecting such Product;

(c) freight, postage and duties, and transportation charges relating to such Product, including handling and insurance thereto; and

(d) sales (such as VAT or its equivalent) and excise taxes, other consumption taxes, customs duties and compulsory payments to governmental authorities and any other governmental charges imposed upon the importation, use or sale of such Product to Third Parties (excluding any taxes paid on the income from such sales) to the extent the Selling Party is not otherwise entitled to a credit or a refund for such taxes, duties or payments made.

Sales between GSK and its Affiliates or Sublicensees shall be excluded from the computation of Net Sales and no payments will be payable on such sales, except where such Affiliates or Sublicensees are end-users. In addition, Licensed Product provided to patients for compassionate use will not be included in Net Sales.

For purposes of determining royalties and sales milestones payable on Combination Products, Net Sales will be calculated as follows, in each calendar quarter:

(i)  If all therapeutically active agents comprising the Combination Product are marketed and sold separately in commercially relevant quantities in a particular country in a calendar quarter and the Gross Selling Price (as defined below) for each agent can be separately determined for such quarter, Net Sales of each Combination Product for determining the Royalty Payment and sales milestones payable with respect to such Combination Product shall be calculated by multiplying the Net Sales of the Combination Product by A divided by the sum of A plus B (A/(A+B)), in which A is the Gross Selling Price of the single therapeutically active agent Product contained in the Combination Product sold during the relevant payment period and B is the Gross Selling Price of the other single therapeutically active agent(s) contained in the

 

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Combination Product sold during such payment period. All Gross Selling Prices of the therapeutically active ingredients in the Combination Product shall be calculated as the weighted average of the prices (in effect with respect to the period for which royalties and sales milestones are being calculated hereunder) in effect in the countries representing the top eighty percent (80%) of the Combination Product sales (the “Market Basket”). “Gross Selling Price” means the gross price at which a product is sold to a third party before discounts, deductions, credits, taxes and allowances.

(ii) If either A or B (but not both) cannot be determined because separate sales in commercially relevant quantities of either the therapeutically active agent(s) other than the Product or the Product have not occurred in the applicable calendar quarter in which the sale of Combination Product was made or if the Gross Selling Price for either the therapeutically active agent(s) other than the Product or the Product cannot be determined for a calendar quarter, then the Net Sales of the Combination Product in such country for determining the Royalty Payment and sales milestones payable with respect to such Combination Product for such country for such period shall be calculated by multiplying Net Sales of such Combination Product in such country by either of the following, as applicable: (a) the number one (1) minus the result of dividing X over Y (1 - (X/Y)), in which X is the Gross Selling Price in the Market Basket of the therapeutically active agent(s) other than the Product if sold separately in commercially reasonable quantities during the period and Y is the Gross Selling Price in the Market Basket of the Combination Product sold in the applicable period, or (b) the quotient of dividing X over Y (X/Y), in which X is the Gross Selling Price in the Market Basket of the Product if sold separately in commercially reasonable quantities during the period and Y is the Gross Selling Price in the Market Basket of the Combination Product sold in the period in question.

(iii) If neither of the single therapeutically active agent components of the Combination Product (i.e., neither A nor B) is sold separately in commercially relevant quantities in a country during a particular payment period, then the Royalty Payment payable on such Combination Product in such country for such period will be fifty percent (50%) of the Royalty Payment that would be due on a Product that is not a Combination Product, if it contains one (1) therapeutically active agent other than Product. If such Combination Product contains two (2) or more therapeutically active agents other than Product, then the Royalty Payment payable on such Combination Product in such country shall be pro rated accordingly where the composition or use of both active agents are either covered by a patent or not covered by a patent in the country in which such Combination Product is sold. However, if the composition or use of one such active agent is covered by a patent and the other is not, the Parties will meet and negotiate an appropriate mechanism for determining the royalty payable on such Combination Product.

1.81 “Non-breaching Party” shall have the meaning assigned to such term in Section 12.2.

1.82 “Non-IBD Net Sales” shall have the meaning assigned to such term in Section 6.6.3(a).

 

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1.83 “Non-CCR9 Option Exercise Fee” shall have the meaning set forth in Section 6.3.2.

1.84 “Option Compound” shall mean a Progressed Compound which has qualified as a Development Candidate and which has been determined in accordance with the provisions of this Agreement to have satisfied the PoC Criteria as the result of successful completion of a PoC Trial conducted with such Progressed Compound.

1.85 “Option Period” shall have the meaning assigned to such term in Section 4.3.1(a).

1.86 “Party” or “Parties” shall have the meaning assigned to such term in the Preamble.

1.87 “Patent” shall mean (a) issued and unexpired letters patent, including any extension, registration, confirmation, reissue, continuation, supplementary protection certificate, divisional, continuation-in-part, re-examination or renewal thereof, (b) patent applications pending approval, and (c) foreign counterparts of any of the foregoing; in each case to the extent the same has not been held, by a court or governmental agency of competent jurisdiction, to be invalid or unenforceable in a decision from which no appeal can be taken and which are useful or necessary to research, develop, use, or manufacture the or Collaboration Targets in the Territory or to research, develop, use, manufacture or commercialize Progressed Compounds into Licensed Products in the Territory.

1.88 “Patent Costs” shall mean the reasonable fees and expenses paid to outside legal counsel, and filing, maintenance and other out-of-pocket expenses paid to Third Parties, incurred in connection with the Prosecution and Maintenance of Patents.

1.89 “Payee” shall have the meaning assigned to such term in Section 6.10.1.

1.90 “Payor” shall have the meaning assigned to such term in Section 6.10.1.

1.91 “Phase 1 Clinical Trial” means a clinical trial of a pharmaceutical product on subjects that generally provides for the first introduction into humans of such product with the primary purpose of determining safety, metabolism and pharmacokinetic properties and clinical pharmacology of such product.

1.92 “Phase 2 Clinical Trial” means a clinical trial of a pharmaceutical product on subjects, including possibly pharmacokinetic studies, the principal purposes of which are to make a preliminary determination that such product is safe for its intended use and to obtain sufficient information about such product’s efficacy to permit the design of further clinical trials.

1.93 “Phase 3 Clinical Trial” means one or more clinical trials on sufficient numbers of subjects, which trial(s) are designed to (a) establish that a drug is safe and efficacious for its intended use; (b) define warnings, precautions and adverse reactions that are associated with the

 

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drug in the dosage range to be prescribed; and (c) support Regulatory Approvals for such drug.

1.94 “PoC Criteria” shall mean the criteria to be established by the Joint Steering Committee, subject to the final approval of GSK, for a given Development Candidate to meet following the PoC Trial in order to establish Proof of Concept so as to be a possible Option Compound. The PoC Criteria shall set forth: (a) the end-points and relevant definitions and parameters for the PoC Trial in such a manner that following the PoC Trial, a determination can reasonably be made that such endpoints have been met; (b) where reasonable and appropriate, a [***] that is reasonably representative of the [***]; (c) appropriate and validated clinical and/or regulatory endpoint(s); (d) dose(s) administered in a [***] dosage which is/are (i) appropriate for a Phase 2 Clinical Trial as to which there is no known liability which would prevent the compound from being developed into a [***] and (ii) that show efficacy with a reasonable safety and tolerability profile in view of relevant clinical and regulatory considerations; (e) a drug substance which is in a salt or other chemical form that is suitable for manufacture within a commercializable formulation ( i.e. there is no known impediment which would render as impractical the commercialization of such drug substance in the proposed salt or other chemical form); and (f) a degree of [***] efficacy that is consistent with the applicable [***].

1.95 Pre-Clinical Activities ” means in vitro and in vivo studies of a Licensed Product, not in humans, including those studies conducted in whole animals and other test systems, designed to determine the toxicity, bioavailability, and pharmacokinetics of a Collaboration Compound and whether the Collaboration Compound has a desired effect.

1.96 “Pre-commercial Supply Costs” means the sum of (a) all payments made by ChemoCentryx to Third Party contract manufacturer(s) for supply and delivery to ChemoCentryx of Collaboration Compounds, Development Candidates, or Option Compounds, as applicable, (b) Third Party royalties or other payments, and (c) any other customary and reasonable overhead costs actually incurred in, and reasonably allocable to, the manufacture and procurement of Collaboration Compounds, including: import and export duties; applicable taxes assessed on the purchase of such material; port fees and storage fees; shipping and handling; quality control; and quality assurance. The methodology for calculating Pre-commercial Supply Costs shall be consistent with U.S. Generally Accepted Accounting Practices and ChemoCentryx’s methodology for other products and shall be consistent from year-to-year.

1.97 “Product” shall mean, as the case may be, any: (a) Licensed Product; (b) Returned Licensed Product; or (c) Combination Product incorporating any of the foregoing products in clauses (a)-(b).

1.98 “Product Candidate” shall mean any Option Compound (together with its associated Backup Compounds) as to which GSK has exercised its Product Option pursuant to Section 4.3, but before the time of First Commercial Sale of such Product Candidate as a Licensed Product hereunder.

1.99 “Product Candidate Commercialization Program” shall have the meaning

 

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assigned to such term in Section 5.5.1.

1.100 “Product Marketing Plan” shall mean the strategic and tactical plans developed by the GSK Sales and Marketing organization as described in Section 5.5.2 and referenced in Section 5.6 for the marketing, sales and promotion of a Licensed Product. Such Product Marketing Plan shall include marketing budgets, advertising and research plans, sales targets, and co-promotion details (if applicable).

1.101 “Product Option” shall have the meaning assigned to such term in Section 4.1.1.

1.102 “Progressed Compounds” means, with respect to a given Development Candidate or Option Compound, that Development Candidate/Option Compound as well as the [***] Back-up Compounds associated with such Development Candidate.

1.103 “Project Directors” shall have the meaning assigned to such term in Section 2.4.

1.104 “Proof of Concept Trial” or “PoC Trial” shall mean (a) with respect to a CCR9 Development Candidate, the PROTECT-1 Trial, and (b) with respect to any other Development Candidate, the first Phase 2 Clinical Trial of such Development Candidate that is reasonably designed to satisfy the PoC Criteria and demonstrate efficacy, with statistical significance within a [***] that is no longer than [***] in a [***] Indication approved by the JSC pursuant to Section 2.3.5. For clarity, the Proof of Concept Trial is intended only to demonstrate the efficacy of a particular Development Candidate, and is not intended to be a pivotal trial or dose-ranging study, or intended to otherwise provide data sufficient to support Regulatory Approvals. In the event that any single PoC Trial would exceed either (i) a total of [***] and/or (ii) a total cost of [***] Dollars ($[***]), the provisions of Section 2.3.6 shall apply.

1.105 “PROTECT-1 Trial” means the registration grade clinical trial (as may be amended or extended) being conducted by ChemoCentryx as of the Effective Date, which such trial has two phases : (a) for the induction of response or remission in patients with moderate to severe Crohn’s Disease (the “PROTECT-1 Induction Phase”) and (b) later extended to evaluate the use of CCX282 to maintain a resulting response or remission in patients with moderate to severe Crohn’s Disease (the “PROTECT-1 Maintenance Phase”) .

1.106 “PROTECT-2 Trial” means the Phase 3 Clinical Trial for the induction and maintenance of remission in patients with moderate to severe Crohn’s Disease to be conducted following the PROTECT-1 Trial, as further described in the Development Plan for CCX282.

1.107 “PoC Trial Report” shall have the meaning assigned to such term in Section 4.2.1.

1.108 “Prosecuting Party” shall have the meaning assigned to such term in Section 8.2.4(b).

1.109 “Prosecution and Maintenance” or “Prosecute and Maintain” shall mean,

 

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with regard to a Patent, the preparing, filing, prosecuting and maintenance of such Patent, as well as re-examinations, reissues, and requests for patent term extensions with respect to such Patent, together with the conduct of interferences, the defense of oppositions and other similar proceedings with respect to the particular Patent. For clarification, “Prosecution and Maintenance” or “Prosecute and Maintain” shall not include any other enforcement actions taken with respect to a Patent.

1.110 “Quality Agreement” means an agreement entered into by the Parties in connection with the provision of preclinical or clinical supplies of one or more Progressed Compounds or Product Candidates setting out the respective responsibilities of the Parties for technical and quality matters.

1.111 “QTc Study” means the study conducted by ChemoCentryx after the Effective Date relating to a human clinical trial using the approach outlined in the FDA ICH E14 guidance for industry entitled “E14 Clinical Evaluation of QT/QTc Interval Prolongation and Proarrhythmic Potential for Non-Antiarrhythmic Drugs” in order to test whether the drug causes a clinically significant delay in ventricular repolarization.

1.112 “Receiving Party” shall have the meaning assigned to such term in Section 9.1.

1.113 “Refused Candidate” shall have the meaning assigned to such term in Section 4.3.1(d).

1.114 “Regulatory Approval” means any and all approvals (including price and reimbursement approvals, if required prior to sale in the applicable jurisdiction), licenses, registrations, or authorizations of any country, federal, supranational, state or local regulatory agency, department, bureau or other government entity that are necessary for the manufacture, use, storage, import, transport and/or sale of a particular Licensed Product in the applicable jurisdiction.

1.115 “Regulatory Authority” or “Regulatory Authorities” shall mean the FDA in the U.S., and any health regulatory authority(ies) in any country in the Territory that is a counterpart to the FDA and holds responsibility for granting regulatory marketing approval for a Product in such country, and any successor(s) thereto.

1.116 Related Compound” shall mean (a) any metabolite, prodrug, ester, salt, crystalline polymorph, hydrate or solvate of a Progressed Compound, Product Candidate or Licensed Product; or (b) an analog or Derivative of a Progressed Compound, Product Candidate or Licensed Product.

1.117 “Report Date” shall have the meaning assigned to such term in Section 4.3.1(a).

1.118 “Research Plan” shall have the meaning assigned to such term in Section 3.5.1.

1.119 “Research Program” shall mean the program of research, discovery,

 

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characterization, optimization and pre-clinical testing of Collaboration Compounds up until IND Studies to be conducted by ChemoCentryx during the Research Term, as set forth in Article 3.

1.120 “Research Term” shall mean the period beginning on the Effective Date and ending on the later of: (a) the termination or expiration of the Initial Period, or (b) if elected pursuant to Section 3.1.1, the Research Term Extension.

1.121 “Research Term Extension” shall have the meaning assigned to such term in Section 3.1.1.

1.122 “Respiratory Indication” shall mean any Indication for respiratory disorders, diseases, or conditions, such as, but not limited to, asthma and chronic obstructive pulmonary disease.

1.123 “Returned Licensed Product” shall have the meaning assigned to such term in Section 5.7.1.

1.124 “ROW” shall mean all countries in the Territory except for the United States.

1.125 “Stock Purchase Agreement” shall have the meaning assigned to such term in the Preamble.

1.126 “Subcommittee” shall have the meaning assigned to such term in Section 2.3.8.

1.127 “Sublicensee” shall mean, with respect to a particular Product Candidate or Product, a Third Party to whom GSK or ChemoCentryx, as applicable, has granted a sublicense or license under any Collaboration Technology and/or the technology licensed to such Party pursuant to this Agreement.

1.128 “Successful CD Induction Results” shall have the meaning assigned to such term in Section 3.7.2(d).

1.129 “Target Product Profile” or “TPP” means, with respect to a given Development Candidate or class of compounds, and a given Indication, the desired and required attributes for an aspirational drug product based thereon to treat, delay or prevent such Indication. These attributes will be determined through an understanding of current and future unmet medical and market needs, and of the product performance necessary for regulatory approval and competitive differentiation at the time of anticipated launch. A TPP should contain information on at least the following parameters: Indication(s); Summary product proposition (e.g. improved symptom reliever, disease modifier); Target label summary - outline basis for regulatory approval; Target patients for drug - segment(s) of patient population for whom drug would be most relevant; Clinical efficacy - key endpoints, acceptable clinical effects versus baseline and placebo, main comparators; Safety and tolerability – acceptable/unacceptable level and types of adverse events, contra-indications, drug interactions; Presentation/administration - route and frequency of administration; Cost of Goods – target threshold level for cost of goods

 

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for finished commercial product; Competitive set - current gold standard and treatment options, those expected at time of potential TPP launch; Timing information – time period of future product launch for which TPP is relevant (e.g. for 2015-2020 launch).

1.130 “Term” shall have the meaning assigned to such term in Section 12.1.4.

1.131 “Territory” shall mean all of the countries and territories of the world.

1.132 “Third Party” shall mean any entity other than ChemoCentryx or GSK or an Affiliate of ChemoCentryx or GSK.

1.133 “United States” or “U.S.” shall mean the United States of America.

1.134 “Valid Claim” means a claim within an issued United States or foreign patent that is included within the ChemoCentryx Patents or the Collaboration Patents (but only for Collaboration Patents where the subject matter of such claim was invented solely by ChemoCentryx or jointly by ChemoCentryx and GSK) that has not expired, lapsed, or been cancelled or abandoned, and that has not been dedicated to the public, disclaimed, or held unenforceable, invalid, or cancelled by a court or administrative agency or other authority of competent jurisdiction in an order or decision from which no appeal can be taken or was timely taken, including without limitation, through opposition, re-examination, reissue or disclaimer.

ARTICLE 2

COLLABORATION OVERVIEW;

OVERSIGHT OF THE COLLABORATION

2.1 Overview . Pursuant to this Agreement, ChemoCentryx will undertake and be responsible for the conduct of the Research Program, the Early Development Program(s) and all PoC Trials, as further discussed in Article 3, the scope of which is the discovery, identification and development of small-molecule compounds directed toward the Collaboration Targets, for which compounds GSK shall have certain exclusive options to obtain an exclusive license on a worldwide basis, as further discussed in Article 4.

2.2 General . Generally, except as otherwise expressly provided herein, ChemoCentryx shall be solely responsible for all research, discovery and Development activities, and for all costs and expenses associated therewith, with respect to Collaboration Compounds, Development Candidates, and Option Compounds prior to exercise by GSK of its Product Option with respect to any such Option Compounds, provided, however, that ChemoCentryx shall have the right to engage Third Parties as subcontractors to conduct certain of its respective activities to be undertaken pursuant to the Research Plan, as further discussed in Sections 3.5 and 3.13 below. GSK shall be solely responsible for all development and commercialization activities, and for all costs and expenses associated therewith, with respect to Product Candidates and Licensed Products thereafter, following exercise of its Product Option.

 

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2.3 The Joint Steering Committee . Promptly and in any event within ninety (90) days after the Effective Date, the Parties shall establish a committee (the “ Joint Steering Committee ” or “JSC” ) as more fully described in this Section 2.3. The JSC shall have review and oversight responsibilities for all research and Development activities performed hereunder during the Research Term and with respect to each Early Development Program prior to exercise of a Product Option by GSK, and shall serve as a vehicle to facilitate the conduct of information between the Parties with respect to any commercialization activities and the Product Candidate Commercialization Program, in each case as more specifically provided herein. Each Party agrees to keep the JSC informed of its progress and activities within the Research Program, each Early Development Program, and each Product Candidate Commercialization Program, respectively.

2.3.1 Membership . The JSC shall be comprised of three (3) representatives (or such other number of representatives as the Parties may agree) from each of GSK and ChemoCentryx. Each Party shall provide the other with a list of its initial members of the JSC on the Effective Date. Each Party may replace any or all of its representatives on the JSC at any time upon written notice to the other Party in accordance with Section 14.6 of this Agreement. Each representative of each Party shall be of the level of vice-president or higher, and shall have expertise (either individually or collectively) in business and pharmaceutical drug discovery and development. Any member of the JSC may designate a substitute to attend and perform the functions of that member at any meeting of the JSC. Each Party may, in its reasonable discretion, invite non-member representatives of such Party to attend meetings of the JSC as a non-voting participant, subject to the confidentiality obligations of Article 9. The Parties shall designate a chairperson (each, a “Chairperson”) to oversee the operation of the JSC and prepare minutes as set forth in Section 2.3.3, each such Chairperson to serve a twelve (12) month term. The right to name the Chairperson shall alternate between the Parties, with ChemoCentryx designating the first such Chairperson.

2.3.2 Meetings . During the Collaboration Term, the JSC shall meet in person or otherwise at least once each Calendar Quarter, and more frequently as the Parties deem appropriate, on such dates, and at such places and times, as provided herein or as the Parties shall agree. Upon the conclusion of the Collaboration Term, the JSC shall meet, in person or otherwise, at least once every two (2) Calendar Quarters to provide ChemoCentryx an update regarding GSK’s efforts under the Product Candidate Commercialization Program and otherwise to perform the responsibilities assigned to it under this Agreement; provided, however, that during the Royalty Term for a particular Licensed Product, the Parties agree to periodically discuss in good faith the frequency of such ongoing meetings. Notwithstanding the foregoing, if ChemoCentryx exercises its Co-Development Option under Section 5.2 with respect to any Licensed Product, the JSC shall resume meeting at least once each Calendar Quarter, unless otherwise agreed by the Parties. Meetings of the JSC that are held in person shall alternate between the offices of the Parties, or such other place as the Parties may agree. The members of the JSC also may convene or be polled or consulted from time to time by means of telecommunications, video conferences, electronic mail or correspondence, as deemed necessary or appropriate.

 

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2.3.3 Minutes . During the Collaboration Term, the Chairperson shall be responsible for preparing and circulating minutes within fifteen (15) days after such meeting setting forth, inter alia , a description, in reasonable detail, of the discussions at the meeting and a list of any actions, decisions or determinations approved by the JSC and a list of any issues to be resolved by the Executive Officers pursuant to Section 2.3.4. Such minutes shall be effective only after approved by both Parties. With the sole exception of specific items of the meeting minutes to which the members cannot agree and which are escalated to the Executive Officers as provided in Section 2.3.4 below, definitive minutes of all JSC meetings shall be finalized no later than thirty (30) days after the meeting to which the minutes pertain. If at any time during the preparation and finalization of the JSC minutes, the Parties do not agree on any issue with respect to the minutes, such issue shall be resolved by the escalation process as provided in Section 2.3.4. The decision resulting from the escalation process shall be recorded by the Chairperson in amended finalized minutes for said meeting.

2.3.4 Decision Making . Generally, except as otherwise expressly provided herein, decisions of the JSC shall be made by consensus, with each Party having collectively one (1) vote in all decisions. In the event that the JSC is unable to reach a consensus decision within [***] days after it has met and attempted to reach such decision, then either Party may, by written notice to the other, have such issue referred to the Chief Executive Officer of ChemoCentryx, or such other person holding a similar position designated by ChemoCentryx from time to time, and the Senior Vice President of the Center of Excellence for External Drug Discovery of GSK, or such other person holding a similar position designated by GSK from time to time (collectively, the “ Executive Officers ”), for resolution. The Executive Officers shall meet promptly to discuss the matter submitted and to determine a resolution. If the Executive Officers are unable to determine a resolution in a timely manner, which shall in no case be more than [***] days after the matter was referred to them, the issue shall be resolved as follows:

(a) ChemoCentryx Decisions. Except as expressly otherwise set forth in this Agreement, ChemoCentryx shall have final decision-making authority with respect to all decisions relating to:

(i) the Research Program and Research Plan;

(ii) all Pre-Clinical Activities and Clinical Studies conducted by or on behalf of ChemoCentryx, and all Early Development Plans, including the nomination of any Development Candidate, but excluding the selection of Indications that should be addressed by any given proposed Development Candidate or its Back-up Compounds, which shall be mutually agreed upon pursuant to Section 2.3.5, and excluding any PoC Trials or design or content thereof; and

(iii) manufacture of Collaboration Compounds prior to exercise by GSK of its Product Option with respect to such Collaboration Compounds.

(b) GSK Decisions. Except as otherwise expressly set forth in this

 

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Agreement, GSK shall have final decision-making authority with respect to all decisions relating to:

(i) its decision whether to exercise its Product Option;

(ii) the development of Product Candidates after exercise by GSK of its Product Option with respect to same;

(iii) the Product Candidate Commercialization Program and

(iv) all matters pertaining to commercialization and marketing of Licensed Products after exercise of its Product Option.

2.3.5 Decision Making Regarding Indications. Notwithstanding Sections 2.3.4(a) and (b), with respect to each Development Candidate nominated by the JSC, and in the course of such nomination process, the Parties shall mutually determine which potential Indication(s) to pursue for such Development Candidate and the related set of Progressed Collaboration Compounds, (other than CCX282 and its Back-up Compounds for which ChemoCentryx shall have the right to pursue in Crohn’s Disease and in the Asthma CCR9 PoC Trial as provided for in this Agreement). Accordingly, no Indication shall be pursued by ChemoCentryx under this Agreement with respect to any such Development Candidate or Progressed Compound without the prior mutual agreement of both Parties, through the JSC. In determining which Indication to pursue, the JSC shall take into consideration the estimated costs and possible trial design of the PoC Trial for such Indication for such Development Candidate, in addition to the relevant scientific, medical, safety and commercial considerations.

In the event that the JSC is unable to reach agreement on at least one Indication for a Development Candidate or other Progressed Compound(s) against a given Collaboration Target within [***] days from first considering the issue, then the Parties shall escalate the matter for a final decision to the Executive Officers, who shall review and deliberate such matter promptly and in good faith with the objective of agreeing on at least one Indication for such Development Candidate or other Progressed Compound(s). Unless and until such Executive Officers agree upon such Indication, no Indication shall be pursued by ChemoCentryx under this Agreement with respect to such Development Candidate or Progressed Compounds.

2.3.6 Decision Making Regarding PoC Criteria and PoC Trial Design. In the event that the JSC cannot resolve any dispute arising in the JPS with respect to the content of PoC Criteria, or with respect to the design or content of a PoC Trial, within [***] days after meeting and attempting to reach agreement on such dispute, such dispute shall be submitted promptly to the Executive Officers, who shall have a period of [***] days to resolve such dispute; provided, however , that, notwithstanding anything contained in this Agreement or any interpretation of this Agreement to the contrary, with respect to any such disputes involving the content of the PoC Criteria or the design or content of any PoC Trial, as to any given Development Candidate or Progressed Compound(s), GSK shall have final decision-making

 

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authority regarding any such proposed PoC Criteria or PoC Trial design, provided that it asserts such final decision-making right in good faith, based upon credible scientific and medical evidence or upon some other rational basis in light of scientific, medical, safety and commercial considerations, and also takes into consideration the limitations thereon set forth in the definition of “PoC Trial”, as well as the Preliminary PoC Plan agreed upon by the Parties and ChemoCentryx’s reliance thereon on the conduct to date of the Early Development Program. In the event that GSK exercises such final decision-making authority, ChemoCentryx shall be obligated to conduct such PoC Trial at its sole cost and expense in accordance with the PoC Criteria and the PoC Trial design and content as finally determined by GSK, provided that in no event shall ChemoCentryx be obligated to expend in any such single PoC Trial expenditures in excess of [***] Dollars ($[***]); and provided further that in no event shall ChemoCentryx be obligated to conduct a single PoC Trial that has over [***] patients (inclusive of all active and placebo arms of such trial) even where to do so would cost less than [***] Dollars ($[***]), except as provided in the remainder of this paragraph. It is understood and agreed, however, that in the event that the total expenditures of any single PoC Trial would exceed [***] Dollars ($[***]) (as adjusted annually from the Effective Date by [***]% for inflation, “as adjusted”) ChemoCentryx may at its sole discretion, conduct, at its own expense, such PoC Trial. In the event that ChemoCentryx does not fund such amounts in excess of [***] Dollars ($[***]), as adjusted, and GSK decides, in its sole discretion, to provide funding or resources to satisfy the excess amount that would be required, then ChemoCentryx shall be obligated to conduct such PoC Trial at ChemoCentryx’s sole cost and expense up to a total expenditure of [***] Dollars ($[***]) (as adjusted), provided that the number of patients in such trial does not exceed [***] patients ([***]) and GSK shall be obligated to [***]; provided that in no event shall the total expenditures [***] of such PoC Trial Exceed [***] Dollars ($[***]). In the event that GSK in good faith believes for good scientific and/or medical reasons that the PoC Trial should include a number of patients over [***], it shall bring such matter to the JSC and ChemoCentryx shall consider such request in good faith, subject to the requirement that ChemoCentryx not be required to expend more than [***] Dollars ($[***]) (as adjusted) on such PoC Trial. As used in this Section 2.3.6, total expenditures shall include only expenditures attributable directly to the conduct of the actual Phase 2 Clinical Trial in humans, and shall expressly include expenditures for manufacturing of clinical grade materials as required for use in such PoC Trial and any safety or toxicology studies required for the PoC Trial for which the dosing period exceeds [***] days.

2.3.7 Responsibilities of the JSC . The JSC shall be responsible for overseeing the entire collaboration between GSK and ChemoCentryx during the Collaboration Term under this Agreement, including both the Research Program and each Early Development Program. With respect to the Product Candidate Commercialization Program, the JSC shall serve only as a vehicle to facilitate the transfer of information between the Parties, and the JSC will not have any decision making authority over any aspect of the Product Candidate Commercialization Program or over any other Development or commercialization matters after the exercise by GSK of its Product Option. Without limiting the foregoing, the JSC shall perform the following functions, some or all of which may be addressed directly at any given meeting of the JSC:

(a) review the overall progress of ChemoCentryx’s efforts to discover,

 

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identify, optimize and develop Collaboration Compounds, Development Candidates and Option Compounds;

(b) review, update and approve the PoC Criteria and the Target Product Profiles, all of which shall be subject to final approval by GSK;

(c) review, modify, update and approve the PoC Trial designs, as recommended by the JPS, subject to Section 2.3.6;

(d) review and approve any potential Indications that should or should not be addressed by each Development Candidate, Progressed Compound(s) or other Collaboration Compound against each Collaboration Target, as provided in Section 2.3.5;

(e) review and approve and update the Target Product Profile established by GSK for Collaboration Compounds directed against each Collaboration Target, subject to final approval and final decision-making authority by GSK;

(f) review and update the Research Plan and the Early Development Plans as set forth in Sections 3.5.1 and 3.7.1;

(g) serve as an information transfer vehicle to facilitate the discussion of Development and commercialization of Product Candidates and Licensed Products;

(h) review and coordinate all of the Parties’ activities under this Agreement during the Collaboration Term;

(i) in accordance with the procedures established in Section 2.3.4 and subject to Section 3.6.4, discuss and attempt to resolve any deadlock issues submitted to it by any Subcommittee;

(j) attempt to resolve any disputes regarding proposed publications containing Confidential Information; and

(k) such other responsibilities as may be assigned to the JSC pursuant to this Agreement or as may be mutually agreed upon by the Parties from time to time, provided, however that the JSC shall not have the power to amend or modify this Agreement.

2.3.8 Subcommittee(s) . From time to time, the JSC may establish subcommittees to oversee particular projects or activities, as it deems necessary or advisable (each, a “ Subcommittee ”). Each Subcommittee shall consist of such number of members as the JSC determines is appropriate from time to time. Such members shall be individuals with expertise and responsibilities in the areas of preclinical development, clinical development, Patents, process sciences, manufacturing, regulatory affairs, product development and/or product commercialization, as applicable to the stage of development of the project or activity.

 

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(a) The Joint Program Subcommittee .

(i) Creation of JPS. Promptly after the Effective Date, the JSC shall establish the Joint Program Subcommittee (the “ JPS ”). The JPS shall be comprised of two (2) representatives (or such other number of representatives as the Parties may agree) from each of GSK and ChemoCentryx. The JPS will report to the JSC and will be responsible for the recommendation to the JSC of all PoC Criteria, and the design of all PoC Trials and the relevant endpoints for each Development Candidate under each respective Early Development Program. In the event of a dispute within the JPS on the design or content of any PoC Criteria or on any PoC Trial design or content, such matter shall be submitted to the JSC for resolution in accordance with the provisions of Section 2.3.6 and Section 3.6.4.

(ii) Limits to Oversight by JPS for CCX282. Notwithstanding the foregoing clause (a), with respect to the design and content of the PROTECT-1 PoC Trial for CCX282, in the event of a dispute in the JPS and referral of such matter to the JSC for resolution, ChemoCentryx shall have the final decision-making authority under Section 2.3.6. With respect to the design and content of the PROTECT-2 Trial for CCX282 for the IBD Indications, in the event of a dispute in the JPS and referral of such matter to the JSC for resolution, GSK shall have the final decision-making authority under Section 2.3.6. The Parties acknowledge and agree that the JPS may only commence its efforts to design the PROTECT-2 Trial after the primary endpoints relative to the induction of remission in patients are met under the PROTECT-1 Induction Phase; provided, however, that the JSC may authorize the JPS to commence efforts to design the PROTECT-2 Trial prior to the achievement of such primary endpoints as such earlier design efforts may be scientifically and clinically prudent

(b) Creation of Joint Patent Subcommittee. Promptly after the Effective Date, the JSC shall establish a Joint Patent Subcommittee (the “Joint Patent Subcommittee”). The shall be comprised of an equal number of representatives from each of GSK and ChemoCentryx. The Joint Patent Subcommittee will report to the JSC and will be responsible for the coordination of the Parties efforts in accordance with the provisions set forth in Article 8 of this Agreement, including the review and filing of joint patent applications and assessments of inventorship of inventions created during the Collaboration Term. In the event of a dispute within the Joint Patent Subcommittee, such matter shall be submitted to the JSC for resolution.

2.4 Project Directors . Promptly after the Effective Date, each Party shall appoint an individual (other than an existing member of the JSC) to act as the project leader for such Party (each, a “Project Director”). Each Project Director shall thereafter be permitted to attend meetings of the JSC as a nonvoting observer, subject to the confidentiality provisions of Article 9. The Project Directors shall be the primary point of contact for the Parties regarding the collaboration activities contemplated by this Agreement and shall facilitate all such activities hereunder including, but not limited to, the exchange of Information described in Section 3.10. The Project Directors shall also be responsible for assisting the JSC in performing its oversight responsibilities and the JPS in performing its responsibilities. The name and contact information

 

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for such Project Director, as well as any replacement(s) chosen by ChemoCentryx or GSK, in their sole discretion, from time to time, shall be promptly provided to the other Party in accordance with Section 14.6 of this Agreement.

ARTICLE 3

RESEARCH AND DEVELOPMENT OF COLLABORATION COMPOUNDS

3.1 Research Program; Initial Term . The Research Program shall commence as soon as practicable after the Effective Date. Subject to the oversight and management of the JSC, ChemoCentryx shall have principal responsibility for the conduct of the Research Program, including all scientific, clinical, and regulatory activities in accordance with the Research Plan described in Section 3.5. GSK shall provide research funding to support activities under the Research Program pursuant to Section 3.7, and consultation and advice with respect to such activities, which shall be considered in good faith by ChemoCentryx. The Research Program will terminate upon the end of the third (3 rd ) Contract Year (the “Initial Term” ), unless earlier terminated, or extended in accordance with Section 3.1.1.

3.1.1 Research Term Extension . At least six (6) months prior to the expiration of the Initial Term, the Initial Term may be extended by GSK for a period of one (1) year from the date of the expiration of the Initial Term (such extension, the “ Research Term Extension ”). In the event that GSK desires to exercise the Research Term Extension, it shall [***].

3.1.2 Clarifications. The Research Program shall be conducted by ChemoCentryx for each Collaboration Target throughout the duration of the Research Term unless earlier terminated by a decision of the JSC. The objective of the Research Program is to identify a Development Candidate and at least two (2) Backup Compounds to each Development Candidate for each Collaboration Target.

3.2 Early Development Program; Early Development Term.

3.2.1 Early Development Program. An early Development program shall be conducted by ChemoCentryx with respect to each Development Candidate as well as, where necessary in light of failure (prior to conduct of the PoC Trial) of such Development Candidate, the Back-Up Compounds for such Development Candidate, against each Collaboration Target (each, an “ Early Development Program ”). The JSC may, at its discretion at any time during the Early Development Program (prior to conduct of the PoC Trial), substitute for the Development Candidate either of the two Back-up Compounds for further Development, provided such Back-up Compounds meet the Development Candidate Criteria. ChemoCentryx shall have principal responsibility for the conduct of each Early Development Program for each Development Candidate, in accordance with the Early Development Plan described in Section 3.7, and shall have sole responsibility for all costs and expenses for each Early Development Program hereunder. GSK shall provide consultation and advice with respect to such activities, which shall be considered in good faith by ChemoCentryx. For clarity, with

 

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respect to any given Collaboration Target, there may be more than one Early Development Program where more than one Development Candidate has been nominated by the JSC (or by GSK) with respect to such Collaboration Target. The Parties agree to cooperate during the Collaboration Term in identifying and implementing opportunities to reduce the costs incurred in the conduct of the Research Program and any Early Development Program, including costs of equipment, consumables such as laboratory supplies and Third Party services such as toxicology, clinical studies or manufacturing services, provided such cooperation does not unduly delay or hamper ChemoCentryx in the performance of its activities thereunder. These attempts may include exploration of GSK’s preferred supply arrangements, the use of GSK’s reverse auction technology and other procurement expertise.

3.2.2 If No Development Candidate Selected. For clarity, if no Development Candidate has been selected by the JSC (or by GSK) against a certain Collaboration Target by the end of the Research Term, as may be extended, ChemoCentryx shall not be required to conduct any activities under any Early Development Program with respect to such Collaboration Target and the Collaboration Compounds directed against such Collaboration Target shall revert to ChemoCentryx subject to the other terms and conditions of this Agreement; provided, however that if at the end of the Research Term, no Collaboration Compound has been nominated by the JSC as a Development Candidate which targets a given Collaboration Target other than CCR9, GSK shall have the right (exercisable only once per Collaboration Target), upon the payment of the Development Candidate Selection Milestone set forth in Section 6.4.2, to nominate at its sole discretion, a Collaboration Compound as a Development Candidate against such Collaboration Target (as well as two (2) additional Collaboration Compounds against such Collaboration Target to be deemed as Back-up Compounds thereto), such nominated Collaboration Compound to be deemed a Development Candidate (and thus, with its Back-up Compounds, Progressed Compounds) for all purposes under this Agreement, whereupon an Early Development Program for such Development Candidate for the relevant Collaboration Target shall be prepared and conducted by ChemoCentryx as provided in Section 3.2.1 and in accordance with the relevant provisions of this Agreement.

3.2.3 Early Development Program Term. Each Early Development Program will start at the earlier of commencement of activities under such Early Development Program or adoption of the Early Development Plan by the JSC, and will terminate upon the earlier of (a) the date on which GSK exercises its Product Option for the sixth (6 th ) Option Compound, (b) the date on which the JSC agrees to terminate such Early Development Program without either the JSC or GSK nominating a substituting Backup Compound for the lead Development Candidate against such Collaboration Target; or (c) ten (10) years from the start of the Early Development Program (the “Early Development Program Term” ), unless earlier terminated pursuant to other applicable provisions of this Agreement; provided however, that ChemoCentryx’ diligence obligations shall apply only to the first five (5) years of any such Early Development Program Term.

3.2.4 Early Development Term. The Early Development Term (i.e. the overall term for all Early Development Programs under the Agreement) will commence at the start of

 

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the first Early Development Program under the Agreement and will terminate upon the termination of the last to terminate Early Development Program Term (the “Early Development Term” ), unless earlier terminated in accordance with the other provisions of this Agreement.

3.2.5 Enabling Studies. GSK shall have the right at all times during the Research Term and during any relevant Early Development Program Term, exercisable at its sole discretion and its sole cost and expense, to conduct enabling activities such as formulation development, pre-clinical animal studies and/or compound scale-up (“ Enabling Studies ”) which either GSK or the JSC deems necessary or useful for the purpose of supplementing pre-clinical and/or clinical activities conducted by ChemoCentryx and relating to one or more of the Development Candidates. ChemoCentryx shall offer GSK reasonable cooperation in relation to such enabling activities including, subject to availability, the transfer of quantities of compounds, if necessary. It is understood and agreed by the Parties that any such Enabling Studies are to be conducted by GSK in its sole discretion and not as part of any Early Development Plan or PoC Trial and that ChemoCentryx shall not be required to delay the progress of any Early Development Plan to await the results of any such Enabling Studies.

3.3 Objectives; ChemoCentryx Diligence and Responsibilities .

3.3.1 ChemoCentryx Diligence. The common objective of the Parties is to identify and develop at least four (4) and up to a maximum of six (6) Option Compounds (and their Back-Up Compounds) for Development and commercialization in the Territory under the terms of this Agreement. ChemoCentryx shall at all times use its Diligent Efforts to carry out and conduct the Research Program for each Collaboration Target in accordance with the Research Plan, and each Early Development Program for each Development Candidate or its Backup Compound in accordance with the relevant Early Development Plan. To that end, ChemoCentryx shall dedicate to the Research Program and to each Early Development Program appropriate resources and allocate personnel with an appropriate level of education, experience and training in order to achieve the objectives of this Agreement efficiently and expeditiously, which resources and personnel shall be consistent with the requirements of the Research Plan and of the Early Development Programs/Plan and shall be consistent always with the standard under this Agreement applicable to ChemoCentryx for its Diligent Efforts .

3.3.2 ChemoCentryx Diligence Failure Event. In the event that ChemoCentryx materially fails to conduct (i) the Research Program with respect to a given Collaboration Target at any time during the Research Term, or (ii) any Early Development Program with respect to a given Development Candidate or its Back-up Compound at any time during the relevant Early Development Program Term, in accordance with its diligence obligations under Section 3.3.1, then GSK shall have the right to allege a failure of diligence on the part of ChemoCentryx (a “ChemoCentryx Diligence Failure Event” ) by written notice of same to ChemoCentryx, such notice to set forth the detailed basis for such alleged failure of diligence. Subject to Section 3.3.3 below, upon receipt of such notice of a ChemoCentryx Diligence Failure Event, ChemoCentryx shall have a period of ninety (90) days in which to cure such ChemoCentryx Diligence Failure Event, and, in the event that such failure is not due to any neglect or undue delay on the part of

 

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ChemoCentryx with respect to the performance of its obligations hereunder or to a lack of financial wherewithal, if ChemoCentryx has during such ninety day period been continuously and diligently conducting activities designed to cure such failure, and ChemoCentryx can demonstrate that such cure is not possible during a ninety-day period, GSK shall consider in good faith providing a further extension of up to an additional ninety (90) days or such period of time as may be appropriate depending on the required cure, to the cure period, such extension not to be unreasonably refused. Upon conclusion of such ninety (90) day cure period as may be extended as described above, if ChemoCentryx has not cured such ChemoCentryx Diligence Failure Event to GSK’s reasonable satisfaction, GSK shall have the right to immediately (a) terminate (1) the Research Program with respect to a given Collaboration Target to which the ChemoCentryx Diligence Failure Event relates, or (2) terminate the Early Development Program ongoing with respect to a given Development Candidate or Backup Compound to which the ChemoCentryx Diligence Failure Event relates; and (b) select, at its sole discretion, either one of the remedies set forth in subsections (1) and (2) herein, either of which such remedy shall be the sole and exclusive remedy to GSK for such ChemoCentryx Diligence Failure Event. The Parties understand and agree that, due to the nature of the collaboration under this Agreement, damages to GSK resulting from a material breach by ChemoCentryx of its diligence obligations under this Agreement would be difficult to calculate accurately, and thus the remedies set forth in either of subsections (1) or (2) below represent a rational relationship between the damages from the material breach of diligence on the one hand, and the cumulative loss to GSK of its expectation interest and its lost investment and lost potential return on investment due to the upfront payment, milestone payments made and research funding provided hereunder.

(1) ChemoCentryx shall pay to GSK an amount equal to [***] times the Allocated Amount (the “ChemoCentryx Payment” ) within thirty (30) days of GSK’s election under this subsection (1). As used herein, the “Allocated Amount” means the cumulative sum of a certain percentage of each of: (i) the cash Upfront Payment; plus (ii) [***]; up to the date that is the conclusion of the ninety (90) day cure period, as may be extended. Such percentages shall be determined by the particular Collaboration Target that is the subject of the alleged ChemoCentryx Diligence Failure Event, as set forth in the following chart.

 

Collaboration Target That is

the Subject of the

ChemoCentryx Diligence

Failure Event

  

Percentage

CCR9

   [***] % of cash Upfront Payment + [***] % of [***]

CCR1

   [***] % of cash Upfront Payment + [***] % of [***]

C5aR

   [***] % of cash Upfront Payment + [***] % of [***]

ChemR23

   [***] % of cash Upfront Payment + [***] % of [***]

 

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If GSK selects option (1) herein, ChemoCentryx shall pay the ChemoCentryx Payment within thirty (30) days after expiration of the ninety (90) day cure period as may be extended (provided that ChemoCentryx has not cured such ChemoCentryx Diligence Failure Event), subject to Section 3.3.3 below. OR

(2) In the case of a ChemoCentryx Diligence Failure Event relating to a given Early Development Program, ChemoCentryx shall grant and does hereby grant, effective only in such event (subject to Section 3.3.3) to GSK an exclusive, worldwide license (with the right to sublicense) under all of ChemoCentryx’s rights and interest in and to the ChemoCentryx Technology to research, develop, and commercialize in the Field the Progressed Compounds (i.e., the Development Candidate and the two (2) associated Back-up Compounds) that are the subject of such Early Development Program and to make, have made, use, sell, offer for sale, and import in the Field products based upon or incorporating any of such Collaboration Compound(s) or any formulation or dosage or delivery form thereof, and including, without limitation, any metabolite, prodrug, ester, salt, crystalline polymorph, hydrate or solvate thereof, subject to the payment by GSK of a [***] percent ([***] %) royalty to ChemoCentryx on the annual Net Sales of any such products ultimately commercialized by GSK or its Sublicensees. No milestone payments or other fees, costs or payments of any kind shall be owed to ChemoCentryx on account of the exclusive license described above, and the grant of such license shall not count against any of GSK’s Product Options hereunder; however, once such a license is elected by GSK as provided in this Section 3.3.2 (2) with respect to such Progressed Compounds, ChemoCentryx shall be released from its diligence obligations under Section 3.3.1 with respect to the Collaboration Target against which such Progressed Compounds licensed to GSK are directed. In the case of a ChemoCentryx Diligence Failure Event relating to the conduct of the Research Program with respect to a particular Collaboration Target under the Research Program, ChemoCentryx shall grant to GSK and does hereby grant effective only in such event (subject to Section 3.3.3) an exclusive, worldwide license (with the right to sublicense) under all of ChemoCentryx’s rights and interest in and to the ChemoCentryx Technology to research, develop, and commercialize in the Field any Collaboration Compounds that target such Collaboration Target and are the subject of such ChemoCentryx Diligence Failure Event and selected by GSK, and to make, have made, use, sell, offer for sale, and import in the Field products based upon or incorporating any of such Collaboration Compounds, including any formulation or dosage or delivery form thereof, and including, without limitation, any metabolite, prodrug, ester, salt, crystalline polymorph, hydrate or solvate of any such Collaboration Compound, subject to the payment by GSK of [***] percent ([***] %) royalty to ChemoCentryx on the annual Net Sales of any such products ultimately commercialized by GSK or its Sublicensees. No milestone payments or other fees, costs or payments of any kind shall be owed to ChemoCentryx on account of the exclusive license described above, and the grant of such license shall not count against any of GSK’s Product Options hereunder; however, once such a license is elected by GSK as provided in this Section 3.3.2 (2), ChemoCentryx shall be released from its diligence obligations under Section 3.3.1 with respect to the Collaboration Target against which such Collaboration Compounds licensed to GSK are directed.

3.3.3 Dispute. In the event that ChemoCentryx disputes the allegation of a

 

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ChemoCentryx Diligence Failure Event in good faith, ChemoCentryx shall have the right to pursue such dispute in accordance with Section 14.1. The ChemoCentryx Payment set forth in Section 3.3.2 above, if elected as the remedy, shall only be due or granted following [***]. If the exclusive license grant set forth in Section 3.3.2 above, is elected as the remedy, then upon conclusion of the Mediation process as described in Section 14.1, GSK shall be granted such license, but only on a non-exclusive basis, and without the right to grant sublicenses except for research and/or development purposes; provided however that upon the first adjudication by a court of competent jurisdiction or settlement of such dispute in GSK’s favor, such license shall be converted to an exclusive license, with the unrestricted right to grant sublicenses, and if not in GSK’s favor, such non-exclusive license shall terminate and revert to ChemoCentryx. During the entire time pending the final resolution of any such dispute, including without limitation, during Mediation or during litigation, settlement negotiations or any other related legal proceeding, ChemoCentryx shall not grant any license to any Third Party under the ChemoCentryx Technology with respect to the same subject matter, which would conflict or otherwise interfere with the potential exclusive license to GSK.

3.3.4 ChemoCentryx’s Responsibilities . During the Research Term and each Early Development Program Term, and consistent with the Research Plan and Early Development Plan(s), as updated or amended from time to time, ChemoCentryx shall:

(a) have the right and responsibility to manufacture, or have manufactured, the Collaboration Compounds prior to GSK’s exercise of its Product Option with respect thereto, including all required bulk drug substance and clinical materials. ChemoCentryx will keep the JSC advised of its manufacturing plans and activities;

(b) conduct all research and development activities it reasonably determines are required to identify and develop Collaboration Compounds, including screening for new antagonists (or agonists as applicable) of Collaboration Targets as necessary and conducting medicinal chemistry with respect to potential leads and lead series, as well as the identification and development of at least two Back-up Compounds to CCX282 against CCR9 which do not have the intellectual property issues associated with CCX282 (as described in Article 6 below) and at least two Back-up Compounds to each other Development Candidate for each other Collaboration Target, in accordance with Section 3.6.2.

(c) conduct all Pre-Clinical Activities and Clinical Studies, up to and including all PoC Trials for Development Candidates, as deemed necessary or desirable by ChemoCentryx , in accordance with the applicable Early Development Plan;

(d) conduct formulation development of Collaboration Compounds consistent with the Early Development Plans;

(e) keep GSK informed through the JSC meetings and of progress being made by ChemoCentryx with respect to the Research Program and any Early Development Program;

 

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(f) execute the instructions of the JSC with respect to potential Indications which should or should not be addressed by the appropriate Development Candidates, except as otherwise expressly stated in this Agreement with respect to CCX282 or a CCR9 Back-up Compound;

(g) consider in good faith all reasonable suggestions received from GSK regarding the Research Program and any Early Development Program; and

(h) perform such other obligations with respect to the Research Program, each Early Development Program, and the PoC Trial plans as the JSC may assign to ChemoCentryx from time to time, and consistent with the Research Plan and Early Development Plans.

3.4 Reports; Publication of Clinical Trials Results.

3.4.1 Reports. During the Research Term and the Early Development Term, ChemoCentryx shall provide to the JSC reasonable progress and spending updates at each Calendar Quarter meeting of the JSC on the status of the Research Program and of the Early Development Programs, summaries of data associated with ChemoCentryx’s research and development efforts, summaries of the areas of spending and expenses incurred to date specifically on each program, and the likelihood of and timetable for completion of the respective programs or development activities and advancement of compounds to the next phase of research or Development, as applicable. Any such written summaries shall be provided to JSC members at least three (3) working days in advance of the upcoming JSC meeting.

3.4.2 Publication of Clinical Trials Results. Each of GSK and ChemoCentryx shall have the right to publish summaries of results from any human clinical trials conducted by such Party under this Agreement, without requiring the consent of the other Party; provided however that GSK shall have no right, without the consent of ChemoCentryx, to so publish data generated by ChemoCentryx prior to the exercise of its Product Option with respect to the relevant Progressed Compound, and after the exercise of its Product Option, GSK shall have the right to so publish such data generated by ChemoCentryx with respect to the relevant Progressed Compound(s) without obtaining the consent of ChemoCentryx . The Parties shall discuss and reasonably cooperate in order to facilitate the process to be employed in order to ensure the publication of any such summaries of human clinical trials data and results as required on the clinical trial registry of each respective Party, and shall provide the other Party via submission to the Joint Patent Subcommittee established under Section 2.3.8(b), at least forty five (45) days prior notice to review the clinical trials results to be published for the purposes of preparing any necessary Patent filings.

3.5 Research Plan and Collection of Data.

3.5.1 Research Plan. The Research Program will be carried out by ChemoCentryx pursuant to an overall research plan (the “ Research Plan ”), which will outline,

 

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for each Collaboration Target, as appropriate: discovery and research activities in connection with the identification of Collaboration Compounds including high-throughput compound screening (as necessary) and lead optimization programs; identification and optimization of at least two (2) Back-up Compounds, and estimated timelines for completion of the studies and activities to be undertaken by ChemoCentryx thereunder; and (c) activity outlines of overall staffing estimated to be dedicated to the Research Program with respect to such Collaboration Target. The outline for the Research Plan has been agreed to by the Parties and is annexed hereto as Exhibit F . The outlined Research Plan will be finalized by the JSC following the Effective Date, and thereafter shall be reviewed as necessary at each meeting of the JSC, and at any other time upon the request of either Party, and may be modified by the JSC as appropriate to reflect material scientific or commercial developments and changes. The Research Plan shall be updated by ChemoCentryx as needed, but at least twice per Contract Year and submitted to the JSC for its review and comment and may be further amended, at any time and from time to time, by ChemoCentryx, to reflect material events or changes under the current Research Plan. It is expected that the level of detail required for activities with respect to each Collaboration Target will vary depending on the state of progression of ChemoCentryx’s efforts with regard to such Collaboration Target (i.e., programs at an earlier stage of development will have more detail in the Research Plan).

3.5.2 Data Integrity .

(a) ChemoCentryx acknowledges the importance to GSK of ensuring that the Research Programs are undertaken in accordance with the following good data management practices (“Good Data Management Practices”):

(i) Data are being generated using sound scientific techniques and processes;

(ii) Data are being accurately recorded in accordance with good scientific practices by persons conducting research hereunder;

(iii) Data are being analyzed appropriately without bias in accordance with good scientific practices;

(iv) Data and results are being stored securely and can be easily retrieved, and

(v) where, pursuant to then-existing policies and procedures, ChemoCentryx’s senior management documents in writing its key decisions, it will follow its internal procedures and policy, so as to demonstrate and/or reconstruct key decisions made by such senior management during the conduct of the research and development activities under this Agreement.

(b) ChemoCentryx agrees that it shall carry out the Research Programs and the Early Development Programs and collect and record any data generated therefrom in a

 

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manner consistent with the above requirements as set forth in (a) above.

3.6 Indications; Target Product Profiles; Development Candidate Selection.

3.6.1 Target Product Profiles. For each Collaboration Target, GSK shall establish and submit an aspirational Target Product Profile for adoption by the JSC. The JSC shall review and approve such Target Product Profile for Collaboration Compounds directed against each Collaboration Target. Upon nomination of a Development Candidate, such aspirational TPP shall be updated, amended or modified to specifically address the particular qualities and features of such Development Candidate. In the event of a disagreement at the JSC, GSK shall have the final say on the content of the Target Product Profile. It is understood and agreed that the Target Product Profile is aspirational in nature, and that any given Development Candidate may not meet all targeted features and requirements of a given TPP, and that certain features of the TPP may only apply to later stages of Development of a given Development Candidate (such as development of a sustained release formulation, etc.).

3.6.2 Nomination of Development Candidates and Back-Up Compounds. Using the Target Product Profile as a guide in its decision making, ChemoCentryx shall conduct all studies it determines appropriate, applying at all times its Diligent Efforts, and shall select such Collaboration Compound it determines has met the Development Candidate Criteria and is appropriate for nomination by the JSC as a Development Candidate, and shall propose to the JSC such Collaboration Compound as a Development Candidate. The JSC shall review all relevant information and study results concerning each such proposed Development Candidate, and, subject to the JSC’s unanimous approval of such selection, ChemoCentryx shall then have the right to conduct and shall conduct IND Studies and further Clinical Studies up to and through PoC Trials, pursuant to an Early Development Program for each Development Candidate and pursuant to the Early Development Plan. In the event that no proposed Development Candidate with respect to a given Collaboration Target has been approved by the JSC as described above by the end of the Research Term, the Parties shall proceed in accordance with Section 3.2.2 with respect to such Collaboration Target. Upon nomination of a Development Candidate, ChemoCentryx shall also identify two Collaboration Compounds as preliminary Back-Up Compounds to such Development Candidate. Pursuant to the Research Program, or Early Development Program, as applicable, ChemoCentryx shall (where successful) progress such Back-Up Compounds to [***] as it deems appropriate and in light of data produced from Pre-Clinical and Clinical Studies with respect to the Development Candidate. As the Research Program progresses and prior to approval by the JSC of a Development Candidate for an Early Development Program, ChemoCentryx shall review all relevant data and may from time to time choose alternative Collaboration Compounds as preliminary Back-Up Compounds in lieu of previously proposed preliminary Backup Compounds, however, once a Development Candidate has been approved for Development by the JSC (or under Section 3.2.2) under an Early Development Program, only the JSC by unanimous decision (or GSK under Section 3.2.2) shall have the authority to make the decision on selecting the final two (2) Backup Compounds for such Development Candidate, and only the JSC shall have the authority to decide whether to terminate the Development of a Development Candidate which is under an Early Development

 

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Program and substitute in its place one of the Back-Up Compounds; it being understood that the objective at all times during the Early Development Program is to have identified at least two (2) Back-Up Compounds to the given Development Candidate then at issue.

3.6.3 Indications. At the time of the JSC decision regarding nomination of a potential Development Candidate targeting a given Collaboration Target, the Parties, through the JSC, shall mutually determine which potential Indication(s) to pursue for such proposed Development Candidate and the related set of Progressed Collaboration Compounds. Notwithstanding the foregoing, the Parties agree that ChemoCentryx shall have the right to pursue CCX282 and its Back-up Compounds for CCR9, in Crohn’s Disease and in the Asthma CCR9 PoC Trial as provided for in this Agreement. In the event the JSC cannot agree on such Indications, it shall proceed as provided in Section 2.3.5.

3.6.4 PoC Criteria and PoC Trial Design; Disputes . At the time of, and as part of the process of, selection of the Development Candidate as provided in Section 3.6.2, the Parties, through the JSC and/or JPS, shall discuss and agree upon the appropriate development strategy and plan for establishing PoC for such Development Candidate for the Indication selected pursuant to Section 3.6.3, for such Development Candidate targeting such Collaboration Target, including the possible trial design and protocol for the PoC Trial, and associated costs and timelines, it being understood that such trial design and timelines are preliminary only, and are subject to change based upon results of any Clinical Studies and/or market or regulatory factors (the “Preliminary PoC Plan” ). ChemoCentryx shall have the right to reasonably rely on such in undertaking its Phase I Clinical Trials of such Development Candidate. Notwithstanding the foregoing, and ChemoCentryx’s discretion in the overall conduct of the Research Program and Early Development Programs, the PoC Criteria and final design for the PoC Trial for such Development Candidate shall be subject to the review and unanimous approval of the JSC as set forth in Section 2.3.6, and in the event of any disagreement at the JSC with respect to the design or content of the PoC Criteria and the design or content of the PoC Trial, GSK shall have the final decision making right regarding any such proposed PoC Criteria or PoC Trial design subject to and as provided in Section 2.3.6.

3.6.5 Ongoing Review. The Early Development Plan with respect to a Development Candidate, including each Target Product Profile and the design of any PoC Trials, will be reviewed as necessary at each meeting of the JPS, and at any other time upon the request of either Party, and may be modified by the JPS or JSC as appropriate to reflect material scientific or commercial developments, subject to Section 3.6.4 and all other applicable provisions of this Agreement.

3.7 Early Development Plan(s) and Conduct of Early Development Programs.

3.7.1 For Collaboration Compounds Other than CCX282. For each Development Candidate other than CCX282, as provided in Section 3.6, The JSC shall review and discuss ChemoCentryx’s proposed plan for IND Studies and Phase 1 Clinical Studies and other related Development activities. Based on these discussions, ChemoCentryx will prepare a

 

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detailed plan for the Development of the Development Candidate for each such Collaboration Compound (an “ Early Development Plan ” and such Development program with respect to a given set of Progressed Compounds, an “Early Development Program” ) for review by the JSC at its next regularly scheduled meeting. ChemoCentryx shall then undertake Development of such Collaboration Compound based upon the Early Development Plan through Phase 1 Clinical Studies, and in accordance with Section 3.6.4 and other applicable provisions of this Agreement, up to the point of completion of the PoC Trial. Each Early Development Plan shall identify (or shall promptly be updated to identify) any potential or previously identified Back-up Compounds to the Development Candidate under development, as approved by the JSC. ChemoCentryx shall update the JSC at its regularly scheduled meetings as to the progress of each Early Development Program, and the JSC shall review all data and results of all studies conducted thereunder. In addition, provided the PoC Criteria and the PoC Trial design have been approved by the JSC as provided in Section 3.6.4 and in accordance with other applicable provisions of this Agreement, , ChemoCentryx shall conduct such PoC Trial.

3.7.2 For CCX282.

(a) General; PROTECT-1 Trial. The summary in outline form of the existing development plan for CCX282 (the “CCX282 Development Plan” ) is set forth in Schedule 3.7.2. Following the Effective Date, ChemoCentryx shall continue the conduct of the PROTECT-1 Trials, including the rolling over of patients from the PROTECT-1 Induction Phase into the longer term PROTECT-1 Maintenance Phase (or the initiation of a separate maintenance phase, as appropriate, and subject to the relevant provisions of this Agreement), in accordance with the CCX282 Development Plan.

(b) QTc Study. ChemoCentryx shall also have the right, but not the obligation, to conduct the QTc Study with respect to CCX282 at such time as it determines appropriate. In the event GSK exercises its Product Option with respect to CCX282 pursuant to Article 4, it shall [***], provided that GSK shall have approved in advance the study design for such QTc Study, and provided further that where ChemoCentryx selects a vendor or other Third Party provider for use in such QTc Study which has a relationship with GSK, the Parties cooperate to utilize GSK’s procurement systems pursuant to Section 3.2.1 in order to enhance the cost effectiveness of such Third Party provider.

(c) Asthma CCR9 PoC Trial . ChemoCentryx shall also have the option, at its discretion, to conduct an Asthma CCR9 PoC Trial; provided, however, that GSK shall have the right to review and comment on the design of the Asthma CCR9 PoC Trial before it is finalized, and GSK must approve the final study design and content of such Asthma CCR9 PoC Trial prior to initiation, such approval not to be unreasonably withheld. The Parties understand and acknowledge that it is possible that the Asthma CCR9 PoC Trial may be completed prior to the PROTECT-1 Trial, and therefore GSK may first have the opportunity to exercise its Product Option with respect to CCX282 in accordance with Section 4.3.1(b) based upon data resulting from such Asthma PoC Trial, and not from the PROTECT-1 Trial. Regardless of whether GSK exercises its Product Option at such time or at a different time under Section 4.3.1(b),

 

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ChemoCentryx will continue the PROTECT-1 Trial unless terminated for good scientific, safety or ethical reasons.

(d) PROTECT-2 Trial. In addition, where CCX282 meets the primary endpoint for the PROTECT-1 Induction Phase as set forth in the protocol therefor and no serious adverse events have been reported sufficient to terminate the continued Development of CCX282 and CCX282 meets the tolerability criteria set forth in the protocol for the PROTECT-1 Trial (referred to herein as “Successful CD Induction Results” ), [***], and ChemoCentryx, shall have the right, but not the obligation, to commence the PROTECT-2 Trial as established by the JPS in accordance with Sections 2.3.6 and 2.3.8(b) and in accordance with the CCX282 Development Plan; provided however that in the event GSK exercises its Product Option with respect to CCX282 following completion of the PROTECT-1 Trial in accordance with Article 4, at such point GSK shall assume all responsibility for, and ongoing costs associated with the PROTECT-2 Trial and shall reimburse ChemoCentryx its internal and out-of-pocket costs incurred to date with respect to the PROTECT-2 Trial up to the time of such assumption of such trial by GSK.

3.8 Evaluation of PoC Trial Results.

3.8.1 For CCX282. Unless and until GSK exercises its Product Option with respect to CCX282, promptly after the conduct of each of the following (a) the PROTECT-1 Induction Phase, (b) the PROTECT-1 Maintenance Phase, and (c) the Asthma CCR9 PoC Trial, as applicable, if ChemoCentryx determines that CCX282 meets the PoC Criteria therefor, ChemoCentryx shall promptly notify GSK, in writing, of such event. The JSC will, at a special ad hoc meeting to be scheduled, confirm that CCX282 meets such PoC Criteria and that the PoC Trial has successfully met the relevant endpoints. Following such confirmation, GSK shall have the right to exercise its Product Option with respect to CCX282 in accordance with Section 4.3.1(b) and Article 4. Where GSK does not so elect to exercise its Product Option at the timepoint referenced in clause (a) above, as provided in Section 4.3, then following the time point referenced in clause (b) or (c), if ChemoCentryx again determines that CCX282 meets the PoC Criteria, ChemoCentryx shall promptly notify GSK, in writing, of such event. The JSC will, a special ad hoc meeting to be scheduled, confirm that CCX282 meets such PoC Criteria. Following such confirmation, GSK shall again have the right to exercise its Product Option with respect to CCX282 in accordance with Article 4 and Section 4.3.1(b). Such process shall again continue with respect to all three (3) time points described in clauses (a), (b) and (c) above, as and to the extent ChemoCentryx conducts such PoC Trials, and CCX282 meets the PoC Criteria with respect to the PoC Trial referenced therein, GSK shall thus have a total of up to three (3) opportunities to exercise its Product Option with respect to CCX282 in accordance with Section 4.3.1(b), and the failure by GSK to exercise any of such opportunities shall not count against GSK’s Product Options, unless and until all of such opportunities with respect to CCX282 arising hereunder are declined by GSK.

3.8.2 For Development Candidates Other than CCX282. Following the conduct of the PoC Trial for any Development Candidate, in the event that such Development Candidate meets the PoC Criteria established by the JSC for possible selection by GSK as a Product

 

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Candidate and that the PoC Trial has successfully met the endpoints, ChemoCentryx shall promptly notify GSK, in writing, of such event. The JSC will, at a special ad hoc meeting to be scheduled, confirm that such Collaboration Compound meets the PoC Criteria. The JSC shall maintain a list of all Development Candidates after confirming that each meets or is deemed to have met the PoC Criteria under this Section 3.8.2. In addition, ChemoCentryx shall provide to GSK the report set forth in Section 4.2.

3.9 Regulatory Matters.

3.9.1 Compliance . ChemoCentryx shall conduct all Pre-clinical Activities and Clinical Trials in good scientific manner, and in compliance in all material respects with all requirements of applicable laws, rules and regulations, and all other applicable requirements of cGMP, good laboratory practice and current good clinical practice.

3.9.2 Ownership . ChemoCentryx shall own and maintain all regulatory filings for Collaboration Compounds developed pursuant to this Agreement, including all INDs. Upon exercise by GSK of its Product Option with respect to an Option Compound, ChemoCentryx shall transfer to GSK ownership of such regulatory filings for such Product Candidate, including all relevant INDs, and provide GSK with copies of such INDs and other regulatory filings, and all pre-clinical and clinical data and results (including pharmacology, toxicology, formulation, and stability studies).

3.9.3 Adverse Event Reporting . Beginning on the Effective Date and continuing until such time, if any, that GSK exercises its Product Option with respect to a Collaboration Compound, ChemoCentryx shall be responsible for reporting all adverse drug reaction experiences related to such Collaboration Compound in connection with the activities of ChemoCentryx under this Agreement to the appropriate Regulatory Authorities in the countries in the Territory in which the Collaboration Compound is being developed, in accordance with the appropriate laws and regulations of the relevant countries and Regulatory Authorities. ChemoCentryx shall provide GSK notice of such event within forty-eight (48) hours and provide copies of all reports to GSK as soon as possible prior to any filing with a Regulatory Authority. Through the JSC, GSK shall have the right to review from time to time ChemoCentryx’s pharmacovigilance policies and procedures. GSK and ChemoCentryx agree to cooperate and use good faith efforts to ensure that ChemoCentryx’s adverse event database is organized in a format that is compatible with GSK’s adverse event databases.

3.9.4 ChemoCentryx shall provide copies of all such reports to GSK within ten (10) days of any filing with a Regulatory Authority. Through the JSC, GSK shall have the right to review from time to time ChemoCentryx’s pharmacovigilance policies and procedures.

3.10 Exchange of Information . Subject in all cases to the provisions of Article 9, each of GSK and ChemoCentryx will share any Information directly relating to Collaboration Compounds and/or Product Candidates that is generated in the course of the Parties’ activities hereunder with the JSC, on an ongoing basis, in order to facilitate GSK’s decision-making in

 

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connection therewith and to monitor the obligations of the Parties. All such exchanges of Information shall be coordinated by the Project Directors. The provision of all such Information shall be performed in a timely matter to accommodate all regulatory deadlines and ensure compliance with the timelines set forth in any agreed plan.

3.11 Research Program [***] .

3.11.1 [***] QTc Study. Throughout the conduct of the QTc Study and until such QTc Study is completed, ChemoCentryx shall provide to GSK, for information purposes only, a monthly invoice detailing its reasonable FTE and out-of-pocket costs associated with the conduct of the QTc Study for the prior month. In the event GSK exercises its Product Option with respect to CCX282, [***].

3.11.2 [***] Research Program and Early Development Program. Commencing upon the Effective Date, [***], it being agreed and understood by the Parties that the total aggregate Research Program and Early Development Program funding payments under this Section 3.11.2 to be provided by GSK shall be no more than Five Million Dollars ($5,000,000) per Contract Year.

3.12 GSK Technology . Although ChemoCentryx will conduct the Research Program, if the Parties mutually agree that if GSK informs the JSC or JPS that it possesses certain technology pertaining specifically and primarily to the use or administration or formulation of a particular Collaboration Compound or Development Candidate that would be useful in the Research Program or any Early Development Program or, if ChemoCentryx reasonably believes that GSK possesses any such useful technology, upon the reasonable request of ChemoCentryx, GSK, in its sole discretion, shall consider, in good faith, making the use of such GSK Technology available to ChemoCentryx solely for the purposes of conducting the Research Program or such Early Development Program, subject in all cases to any existing obligations GSK may have to any Third Party with respect to such GSK Technology, and subject to the terms and conditions of this Agreement including, but not limited to, the grant of a license under Section 5.1.2.

3.13 Subcontracting . Each Party shall have the right to engage Third Party subcontractors to perform certain of its obligations under this Agreement. Any subcontractor to be engaged by a Party to perform a Party’s obligations set forth in the Agreement shall meet the qualifications typically required by such Party for the performance of work similar in scope and complexity to the subcontracted activity. Notwithstanding the preceding, any Party engaging a subcontractor hereunder (including for the performance of clinical trials) shall remain responsible and obligated for such activities and shall in all cases retain or obtain Control of any and all intellectual property created by (or used with the relevant Party’s permission by) such subcontractor directly related to such subcontracted activity. However, it is understood that, in some cases, it may not be commercially reasonable for such Party to obtain exclusive Control of trade secrets or know-how or patents to be created by such subcontractor. To the extent that such exclusive Control of rights cannot be obtained with respect to any intellectual property from any

 

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such subcontractor, prior to entering into any such arrangement with such subcontractor, such Party shall bring such matter to the JSC for a determination of whether to enter into such arrangement.

3.14 Non-Commercial Supply of Compounds. ChemoCentryx shall, itself or through one or more Third Party contract manufacturers, supply to GSK, upon written request by GSK under the terms and conditions of this Section 3.14, quantities of Collaboration Compounds, Development Candidates, Progressed Compounds or Option Compounds reasonably required by GSK for preclinical and clinical activities, as approved by the JSC and consistent with the Product Candidate Commercialization Program to develop the Product Candidate or Licensed Product in the Territory. ChemoCentryx agrees that the provisioning of any such compound quantities may, at GSK’s option, be the subject of one or more additional supply agreements, including but not limited to a Quality Agreement to be entered into by the Parties. ChemoCentryx shall supply to GSK reasonable (as determined by the Joint Steering Committee) quantities, at no cost to GSK, of bulk active Development Candidate or Collaboration Compound or Progressed Compound as reasonably required for certain enabling studies which GSK may from time to time undertake, pursuant to Section 3.2.5 on enabling studies. The price for supply by ChemoCentryx of excess quantities of such preclinical supply or clinical supply of Collaboration Compounds, Development Candidates or Option Compounds shall be the [***]. The forecast of price, quantity, schedule, and specifications for supply of Collaboration Compounds, Development Candidates, or Option Compounds under this Section 3.14 shall be mutually coordinated through the JPS and shall be consistent with the Product Candidate Commercialization Program; provided, however, that the forecast shall be non-binding and operative only for planning purposes, and neither Party shall have any contractual obligation with respect thereto. Following GSK’s exercise of a Product Option with respect to an Option Compound, ChemoCentryx shall transfer to GSK any then existing “on-hand” supplies of such Option Compound pursuant to Section 5.4.1 and the Parties will work together to assign any Third Party manufacturing arrangements with respect to such Option Compound to GSK.

ARTICLE 4

GSK’S PRODUCT OPTION RIGHTS

4.1 Product Options.

4.1.1 ChemoCentryx hereby grants to GSK the exclusive right, exercisable at GSK’s sole discretion, to elect to obtain exclusive worldwide rights to continue to develop and commercialize at least four (4) and no more than six (6) Option Compounds (and their associated Back-up Compounds) as set forth below in Section 4.3, as Product Candidates and into Licensed Products under the terms and conditions set forth in this Agreement (each such right to elect, a “ Product Option ”). Each such Option Compound together with its associated Backup Compounds are collectively referred to as one set of Progressed Compounds, all of which are included within and subject to a single Product Option exercise. For clarity, the exercise by GSK

 

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of a Product Option with respect to a given set of Progressed Compounds shall be specific to that particular set of Progressed Compounds only and results in the grant to GSK of the exclusive, worldwide and sublicenseable right and license to Develop and commercialize any Product Candidates or Licensed Products based upon or which incorporate any of such Progressed Compounds. Any additional Collaboration Compounds that are developed subsequently (or in tandem) by ChemoCentryx against the same Collaboration Target (other than the associated Backup Compounds to a given Option Compound) and which progress to become an Option Compound shall be the subject of a separate and distinct Product Option and exercise of the same by GSK.

4.1.2 Upon exercise of a Product Option, GSK shall also have the exclusive worldwide license to develop and commercialize the two (2) Back-up Compounds associated with such Option Compound and selected by the JSC (or Backup Compounds that are otherwise selected by GSK) as set forth in Section 3.6.2 which two (2) Backup Compounds shall be included in the set of Progressed Compounds which are the subject of the same Product Option. Following exercise of its Product Option with respect to an Option Compound, GSK may, in its sole discretion, substitute any one of the two Back-up Compounds for the Option Compound as the selected Product Candidate, or where the Option Compound is successful as a Product Candidate, may in addition, at GSK’s sole discretion, develop and commercialize either or both of its two (2) associated Back-up Compounds, subject to GSK’s obligations under this Agreement.

4.1.3 During the Research Term and any Early Development Program Term, ChemoCentryx will not grant to any Third Party rights to any ChemoCentryx Technology which are inconsistent with or which would interfere with the grant of the licenses resulting from the exercise of the Product Options to GSK hereunder. For the avoidance of doubt, the Parties understand and agree that GSK’s Product Option rights, as described herein, shall be exclusive options over the Progressed Compounds that are the subject of a given Early Development Program, and unless and until such time (if any) as GSK declines to exercise or permits to lapse all of its pending or outstanding Product Option rights with respect to any such Early Development Programs, ChemoCentryx shall not have the right to offer or negotiate with any Third Party with respect to the grant to such Third Party of any right or license or other encumbrance of any kind in or to any of such Progressed Compounds or any related ChemoCentryx Technology. Subject to Section 5.7, any Product Option exercised by GSK with respect to an Option Compound shall be irrevocable.

4.2 PoC Trial Reports .

4.2.1 For Collaboration Compounds Other than CCX282. Once a Development Candidate has been determined to meet the PoC Criteria and the endpoints of the PoC Trial by the JSC, ChemoCentryx shall, within sixty (60) days of such occurrence (unless impractical depending on the nature of the trial and the data generated thereunder), provide a data package to GSK containing all analysis, results and raw data from the PoC Trial for such Option Compound, as well as any previously undisclosed preclinical data and/or clinical data generated or any

 

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related correspondence or information received from or sent to any Regulatory Authority up to the completion of the PoC Trial relating to the Progressed Compounds at issue, in each case to assist and enable GSK to make its decision on whether to elect to exercise its Product Option with respect to such Option Compound and its associated Back-up Compounds, as Product Candidates for further development and commercialization (the “ PoC Trial Report ”).

4.2.2 For CCX282. Notwithstanding the foregoing Section 4.2.1, a new and different PoC Trial Report for CCX282 shall be delivered to GSK within sixty (60) days of the JSC having determined that CCX282 meets the PoC Criteria and has successfully met the endpoints for the PoC Trial in each of the following situations: (a) the PROTECT-1 Induction Phase, (b) the PROTECT-1 Maintenance Phase, and (c) the Asthma CCR9 PoC Trial, and each such PoC Trial Report shall include all the preclinical and clinical data showing that the clinical endpoints have been achieved demonstrating the successful outcome of the respective portion of the PROTECT-1 Trial or the Asthma CCR9 PoC Trial, as the case may be.

4.3 Exercise of Product Options .

4.3.1 Option Period/Triggering of Options.

(a) GSK may exercise its Product Option with respect to an Option Compound by delivering to ChemoCentryx a written notice of exercise, not later than ninety (90) days (unless extended as permitted herein pending clearance of the Hart-Scott-Rodino initial waiting period) after receipt by GSK of the PoC Trial Report from ChemoCentryx with respect to the Progressed Compounds at issue (such date of receipt, the “ Report Date ”), specifying the Progressed Compounds as to which the Product Option is being exercised, accompanied by the CCR9 Option Exercise Fee or Non-CCR9 Option Exercise Fee, as applicable. The period extending from the Report Date until ninety (90) days after the Report Date shall be referred to in this Agreement as the “ Option Period ”. Provided that GSK reasonably determines in good faith that the exercise of any Product Option by GSK under this Agreement is required to be filed with the Federal Trade Commission (the “FTC”) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. §18a) (“HSR”), the Option Period shall be extended automatically for [***] an additional [***] days from the expiration of the original Option Period (the “Option Period Extension”) in the event that: (i) the HSR initial waiting period is still pending upon expiration of the original Option Period; or (ii) a “Second Request” that GSK intends to respond to is received from the FTC in connection with such filing and clearance has not been granted upon expiration of the Option Period. In the event that HSR clearance has still not been granted upon expiration of the Option Period Extension, ChemoCentryx and GSK shall promptly meet to discuss in good faith whether an additional extension of the Option Period is [***]. Upon proper exercise of its Product Option with respect to an Option Compound during the Option Period, such Option Compound shall be deemed a Product Candidate, and any Back-Up Compound associated with such Option Compound shall also be deemed a Product Candidate upon initiation of Clinical Studies by or on behalf of GSK with respect thereto. Notwithstanding the foregoing, in GSK’s sole discretion, it shall have the right to exercise a Product Option prior to the Report Date, at any time after the identification by the JSC (or after identification by GSK of two Backup

 

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Compounds if the JSC has not yet selected two Backup Compounds to the lead Collaboration Compound for a given Collaboration Target at the time that GSK seeks early exercise of its Product Option) of a given set of Progressed Compounds, by providing ChemoCentryx written notice thereof. Any such exercise shall nonetheless comprise one of the six (6) Product Options to which GSK is entitled, and shall require the same payments as provided under this Agreement for an Option Compound as to which GSK exercises its Product Option.

(b) For CCX282, GSK shall have a total of three (3) potential opportunities to exercise its Product Option, as follows. The Product Option for CCX282 shall be exercisable by GSK, at its sole discretion, upon each of the following occasions: within ninety (90) days (as may be extended pursuant to Section 4.3.1(a) above) after ChemoCentryx provides to GSK a PoC Trial Report with the preclinical and clinical data showing that clinical endpoints have been successfully met demonstrating the successful outcome of (i) the PROTECT-1 Induction Phase, (ii) the PROTECT-1 Maintenance Phase, and (iii) the Asthma CCR9 PoC Trial, if conducted, for CCX282. In the event that GSK declines such exercise on the first or on the first two of such three opportunities to exercise its Product Option for CCX282, such election(s) to decline to exercise at such first two opportunities shall not count against any of GSK’s Product Options, and GSK shall still retain a third opportunity to exercise its Product Option, if and when a third opportunity is triggered as described above. The Parties understand and agree that such third opportunity may never be available in the event that ChemoCentryx elects not ever to conduct the Asthma CCR9 PoC Trial. In addition, for clarity, the Parties understand and agree that CCX282 and its two Backup Compounds collectively constitute only one Option Compound hereunder and only one Product Option hereunder, regardless of the total number of times that GSK’s Product Option is triggered for such set of Progressed Compounds by completion of successful PoC Trials for CCX282 and/or any of its Backup Compounds, and regardless of the number of different Indications, formulations, methods of delivery, prodrugs, esters, salts, crystalline polymorphs, hydrates or solvates thereof which are Developed hereunder for such Progressed Compounds, taken collectively. It being understood however that ChemoCentryx shall have no obligation to pursue any such different Indications, formulations, and the like.

(c) With respect to Progressed Compounds other than CCX282 and its Backup Compounds, the Parties understand and agree that each set of Progressed Compounds for a given Collaboration Target shall collectively constitute only one Option Compound hereunder and shall result in the triggering of only one Product Option hereunder, regardless of the total number of times that such set of Progressed Compounds results in a successful PoC Trial, taken collectively, and regardless of the number of different Indications pursued, formulations, methods of delivery, prodrugs, esters, salts, crystalline polymorphs, hydrates or solvates which are Developed hereunder for such Progressed Compounds, taken collectively. It being understood however that ChemoCentryx shall have no obligation to pursue any such different Indications, formulations, and the like.

(d) Except as set forth in Section 4.3.1(b), if GSK does not exercise its Product Option when triggered with respect to a particular set of Progressed Compounds (such compounds, “Refused Candidates” ) within the Option Period, then the Product Option shall

 

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expire with respect to those Refused Candidates, and ChemoCentryx will thereafter have all rights, itself or with a Third Party or through a Third Party sublicensee, to develop and commercialize the Refused Candidates at ChemoCentryx’s sole expense, subject to a royalty payment obligation to GSK of a Refused Candidate Royalty as set forth in Section 6.7(a).

4.3.2 Right to Exercise Product Options for Development Candidates after Expiration of the Research Term . For clarity, it is understood and agreed by the Parties that, with respect to each Collaboration Target, GSK’s rights to exercise its Product Option with respect to any Progressed Compounds that are at the Development Candidate stage or later (or for which GSK has otherwise paid the Candidate Selection milestone thereby designating such Collaboration Compound as a Development Candidate) but have not yet completed or entered PoC Trials at the time of expiration of the Research Term, shall remain in effect until and shall be exercisable until completion of the relevant PoC Trial at the end of the Early Development Program Term for such Progressed Compounds. In addition, if, upon the expiration of the Early Development Program Term for a given set of Progressed Collaboration Compounds, a Development Candidate (a) has achieved the PoC Criteria or is in the PoC Trial, or (b) has completed Phase 1 Clinical Trials and the JPS is planning the PoC Trial therefor, then in each case ChemoCentryx nonetheless shall be obligated to complete the relevant PoC Trial and to provide to GSK a corresponding PoC Trial Report, and GSK shall have the full ninety (90) day time period (extendable as described above for HSR clearance) from the Report Date to exercise its Product Option with respect thereto, which shall not be affected by the expiration of the Research Term.

ARTICLE 5

GRANT OF RIGHTS; COMMERCIALIZATION

5.1 License Grants.

5.1.1 Development . GSK hereby grants to ChemoCentryx a non-exclusive, non-royalty bearing, license to use subject matter within the GSK Technology pertaining specifically and primarily to a Progressed Compound, solely as necessary or important to conduct activities for which ChemoCentryx is responsible under the Research Plan during the Research Term.

5.1.2 Commercialization . On a Product Option-by-Product Option basis, and subject to the terms and conditions of this Agreement and upon GSK’s exercise of its Product Option in accordance with Section 4.3, ChemoCentryx shall be hereby deemed to have granted and hereby grants to GSK the exclusive (even as to ChemoCentryx), right and license in the Territory, with the right to grant sublicenses, under all of ChemoCentryx’s rights, title and interest in and to the ChemoCentryx Technology, to make, have made, use, sell, offer for sale and import the Progressed Compounds which are the subject of each of such Product Options as and into Product Candidates and as and into Licensed Products in the Field during the Term of this Agreement.

 

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5.1.3 Trademarks for Licensed Products. To the extent that ChemoCentryx owns any trademark(s) that GSK believes would be necessary or useful for the commercialization and sale of a Product Candidate or Licensed Product, ChemoCentryx shall assign its rights and title to such trademark(s) to GSK reasonably in advance of GSK’s anticipated First Commercial Sale of such Licensed Product, upon request by GSK.

5.2 ChemoCentryx’ CCR9 Co-Development Option . In the event that GSK exercises its Product Option with respect to a Progressed Compound targeting CCR9, the terms of this Section 5.2 shall apply:

5.2.1 Generally. Following GSK’s exercise of its Product Option, but not later than twelve (12) months prior to the first expected NDA filing for such Product Candidate targeting CCR9, GSK shall provide to ChemoCentryx a detailed development plan and associated budget for the conduct of the Dossier Studies for such Licensed Product targeting CCR9 (the “Development Plan and Budget” ). ChemoCentryx shall have the right to review and comment upon such Development Plan and Budget, and shall have the option (the “Co-Development Option” ) within ninety (90) days following receipt of the final Development Plan and Budget to co-fund Dossier Studies for either (i) the Regulatory Approval of Crohn’s Disease only (the “CD Development Option”); or (ii) the Regulatory Approval of Crohn’s Disease as well as ulcerative colitis (the “CD/UC Development Option”). In the event that GSK subsequently updates the Development Plan and Budget to include studies targeting the ulcerative colitis Indication, GSK shall promptly notify ChemoCentryx of such update, and ChemoCentryx shall have an additional ninety (90) days within which to review and comment upon such updated Development Plan and Budget and exercise the CD/UC Development Option, at its discretion. Depending on its election, ChemoCentryx shall receive additional royalties as set forth in Section 6.6.5. For clarity, the Parties understand that ChemoCentryx’s Co-Development Option under this Agreement shall apply only to CCR9 and shall apply only for either Crohn’s Disease alone or Crohn’s Disease and Ulcerative Colitis.

5.2.2 Reimbursement of GSK Costs. Upon exercise of the Co-Development Option, ChemoCentryx shall pay to GSK a one time cash payment equal to [***] percent ([***]%) of the GSK Incurred Costs for either the Crohn’s Disease Dossier Studies, or the Crohn’s Disease and Ulcerative Colitis Dossier Studies, depending on whether ChemoCentryx exercised the CD Development Option or the CD/UC Development Option. In addition, following exercise of the Co-Development Option, ChemoCentryx shall reimburse, on a quarterly basis, in arrears, [***] percent ([***]%) of all applicable Dossier Study Costs with respect to such Licensed Product through and including approval of the NDA.

(a) In the event that the actual Dossier Study Costs are reasonably expected to exceed [***] percent ([***]%) of the estimated costs for such studies as set forth in the Development Plan and Budget, ChemoCentryx shall have the option to either continue to co-fund such additional Dossier Study Costs, or to elect, in writing, to withdraw from its co-development participation in such Licensed Product entirely, or with respect to the Indication at issue, as the case may be, in which case GSK shall refund all Dossier Study Costs and all GSK

 

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Incurred Costs then paid to GSK to date by ChemoCentryx (the “Repayment Amount” ) in four (4) quarterly payments over the course of the following twelve (12) months.

(b) In addition, in the event that ChemoCentryx is unable to make its ongoing co-funding payments due to lack of financial wherewithal, but not due to any negative clinical trial results or lack of progress or any Third Party commitment or any change in the competitive environment, then ChemoCentryx shall have the right to elect, upon written notice to GSK, to withdraw from its co-development participation in such Product Candidate entirely, in which case GSK shall refund to ChemoCentryx the Repayment Amount, in the form of a royalty on U.S Net Sales, as follows. In the event that ChemoCentryx is more than one hundred and twenty (120) days late on any co-funding payment due hereunder, GSK shall have the right to terminate ChemoCentryx’s right to participate in the Co-Development by default). GSK shall pay to ChemoCentryx, in addition to the royalties otherwise owed under Section 6.6.1 or 6.6.2, a royalty of [***] percent ([***]%) on worldwide Net Sales of such Licensed Product, [***] the “Royalty Differential” equals [***]. As used herein, the “Royalty Differential” shall mean the difference between the amount that would have been paid on such worldwide Net Sales pursuant to the rates set forth in Section 6.6.1 or 6.6.2, and the amounts paid pursuant to the higher rates set forth in Section 6.6.5(a) or 6.6.5(b). Thereafter, ChemoCentryx shall be paid the lower royalty on worldwide Net Sales in accordance with Section 6.6.1 or 6.6.2.

(c) For clarity, ChemoCentryx’s Co-Development Options shall be available to ChemoCentryx only with respect to each Product Candidate targeting CCR9 and which is under Development for Crohn’s Disease and/or Ulcerative Colitis.

5.3 Effect of Exercise of Co-Development Option by ChemoCentryx.

5.3.1 If ChemoCentryx exercises the Co-Development Option as to a particular Product Candidate targeting CCR9, such Product Candidate shall be deemed a “Co-Developed Product” , and the Parties shall proceed as set forth in Schedule 5.3. Any GSK internal costs incurred in conducting development of a Co-Developed Product following exercise of the Co-Development Option shall be as specified in the applicable Development Plan and Budget.

5.3.2 Promptly after ChemoCentryx exercises the Co-Development Option as to a particular Product Candidate targeting CCR9, GSK shall continue to have the responsibility to update the Development Plan and Budget for the applicable Co-Developed Product, which plan and budget shall be consistent with the Development Plan and Budget for such Licensed Product that was provided by GSK except as the JSC may otherwise agree, and shall submit such updated Development Plan and Budget to the JSC pursuant to Section 5.2. In the event of any disagreement at the JSC with respect to the content or design of the Dossier Studies or of the Development Plan or any related matter for any such Co-Developed Product, GSK shall have final decision-making authority on the matter. Such Development Plan and Budget shall govern all development activities of GSK (and its Affiliates) with respect to the Dossier Studies covered by such plan (and associated budget) on the applicable Co-Developed Product. GSK shall use its Diligent Efforts to conduct such Dossier Studies on the Co-Developed Product in a timely

 

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fashion in accordance with the schedule and budget in such Development Plan and Budget and to seek Regulatory Approval of such Co-Developed Product as soon as practicable. ChemoCentryx shall reimburse GSK for thirty-five percent (35%) of the total ongoing Dossier Study Costs for the Co-Developed Product, on a quarterly basis, within thirty (30) days of receipt of invoice from GSK.

5.4 Technology Transfer after Exercise by GSK of a Product Option.

5.4.1 Generally . After GSK exercises its Product Option for a set of Progressed Compounds pursuant to Section 4.3, ChemoCentryx shall promptly deliver to GSK, at no cost to GSK, all ChemoCentryx Technology and other Information in its possession and Control relating to the Progressed Compounds, including, but not limited to all Information regarding the bulk drug substance and methods of manufacturing the same, which is necessary for the exercise by GSK of the rights granted under Section 5.1.2, together with (a) the full disclosure of all Information (including, without limitation, clinical and protocol results, analytical methodologies, bulk and final product manufacturing processes, batch records, vendor information, validation documentation, regulatory documentation, patent information), all regulatory filings, transfer of information related to regulatory information and filings, all pre-clinical and clinical data, adverse event data, all regulatory correspondence, analyses, manufacturing data, applicable reference standards; and (b) all bulk drug substance, or other materials used to manufacture the applicable Licensed Product, pursuant to Section 5.4.3. Without limiting the foregoing, ChemoCentryx shall use reasonable efforts with respect to those activities for which it is responsible to ensure orderly transition and uninterrupted development of Product Candidates.

5.4.2 Continuing Cooperation . After the transfer described in Section 5.4.1 above, and for a six (6) month period thereafter, ChemoCentryx shall use reasonable efforts, at no cost to GSK, to cooperate fully with GSK to provide GSK with any other ChemoCentryx Technology and Information, as it may be developed or identified to which GSK has a right or license under this Agreement that is necessary or useful for GSK to further develop, produce, commercialize or otherwise exploit the progression of Progressed Compounds into Licensed Product(s). After the transfer described in Section 5.7.2 below, and for a six (6) month period thereafter, GSK shall use reasonable efforts, at no cost to ChemoCentryx, to cooperate fully with ChemoCentryx to provide ChemoCentryx with any other GSK Technology and Information pertaining specifically and primarily to any Refused Candidates and/or Returned Licensed Products, as it may be developed, to which ChemoCentryx has a right or license under this Agreement that is necessary or useful for ChemoCentryx to further develop, produce, commercialize or otherwise exploit the progression of Refused Candidates and/or Returned Licensed Product(s).

5.4.3 Additional Services . In the event that GSK requests ChemoCentryx to provide GSK with any materials or services beyond those set forth in Sections 5.4.1 and 5.4.2, such materials and/or services shall be scheduled and provided by ChemoCentryx to GSK on such terms and conditions as may be mutually agreed between the Parties at the time of any such

 

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request, if the Parties mutually desire to engage in the transfer or provision of such additional materials or services. In the event that ChemoCentryx requests GSK to provide ChemoCentryx with any materials or services beyond those set forth in Sections 5.4.2 and 5.7.2, such materials and/or services shall be provided by GSK to ChemoCentryx on such terms and conditions as may be mutually agreed between the Parties at the time of any such request, if the Parties mutually desire to engage in the transfer or provision of such additional materials or services.

5.5 Product Candidate Commercialization Program.

5.5.1 Commencement; Term . GSK shall promptly commence and pursue a program of ongoing Development and commercialization for each Product Candidate as soon as practicable after the first exercise by GSK of a Product Option for a Product Candidate and receipt from ChemoCentryx of all reasonably required materials to proceed with further Development with respect to such Product Candidate (the overall program for all such Product Candidates referred to as the “ Product Candidate Commercialization Program ”).

5.5.2 GSK Diligence; Responsibilities . During the Product Candidate Commercialization Program, GSK shall exercise its Diligent Efforts in developing and commercializing each Option Compound as a Product Candidate and Licensed Product for whatever Indications are selected by GSK, at GSK’s sole discretion. GSK shall be entitled to make all decisions in good faith with respect to the progression of the Development and commercialization of any Product Candidate in any country and for any Indication consistent with the application of its Diligent Efforts and consistent with its usual business practices and on the basis of any reasonable scientific, medical, safety, marketing, manufacturing, commercial, regulatory, patent and/or strategic factors or considerations, and shall have the right to discontinue (or not to initiate) the development or commercialization of any such Product Candidate for any Indication on the basis of any of such factors or considerations and consistent with its Diligent Efforts, [***]. In particular except as set forth in Section 5.2, GSK, either itself and/or by and through its Affiliates, Sublicensees or contractors, shall be responsible for and shall have sole decision-making authority with respect to, and shall have the exclusive right to engage in, all further Development, manufacturing, marketing, advertising, promotional, launch, commercialization and sales activities in connection with the further development, commercialization, sales and marketing of the Product Candidates and Licensed Products. As part of the Product Candidate Commercialization Program, GSK shall use its Diligent Efforts to:

(a) conduct all Clinical Studies following PoC Trials for the Product Candidates, as deemed necessary or desirable by GSK , in accordance with this Section 5.5.2;

(b) conduct additional formulation development of Product Candidates as and if deemed necessary or appropriate by GSK and as consistent with the Product Candidate Commercialization Program;

(c) develop additional pharmacogenomic and biomarker assays as and if GSK determines them to be useful or desirable for the Product Candidates and/or the potential

 

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Licensed Products consistent with the Product Candidate Commercialization Program as necessary;

(d) be responsible for preparing and filing all regulatory filings for Product Candidates, including all NDAs;

(e) have the exclusive right and responsibility for manufacturing or having manufactured (including process development and scale up) all bulk drug substance or drug product material with respect to Product Candidates for ongoing development and commercial requirements, consistent with GSK’s reasonable internal practices, industry standards and all applicable laws and regulations;

(f) own all MAAs, Marketing Approvals and other regulatory filings and approvals, and all brands and trademarks for the Product Candidate(s) and Licensed Products in the Territory;

(g) prepare and execute Product Marketing Plans for each of the Licensed Products in the Territory, and all promotional and selling materials for use in connection with the sales of Licensed Products;

(h) conduct, or cause to be conducted, manage and oversee all analysis and other support necessary with respect to the manufacture, marketing and sale of all Licensed Products in the Territory;

(i) consider in good faith all reasonable suggestions received from ChemoCentryx regarding the Product Candidate Commercialization Program;

(j) consider in good faith any reasonable concerns ChemoCentryx may have regarding the launch of Licensed Products within various marketing regions of the Territory and in all cases promptly respond to ChemoCentryx regarding such concerns; and

(k) maintain records, in sufficient detail, which shall be complete and accurate and shall fully and properly reflect all work done and results achieved in connection with the Product Candidate Commercialization Program in the form required under all applicable laws and regulations.

5.5.3 Pharmacovigilance . After GSK exercises its Product Option with respect to a Collaboration Compound, GSK shall be responsible for maintaining a safety database with respect to such Product Candidate, and reporting all adverse drug reaction experiences related to such Product Candidate in connection with the activities of GSK under this Agreement to the appropriate Regulatory Authorities in the countries in the Territory in which the Product Candidate is being developed, in accordance with the appropriate laws and regulations of the relevant countries and Regulatory Authorities and in accordance with GSK’s internal policies.

5.5.4 ChemoCentryx Responsibilities . As part of the Product Candidate

 

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Commercialization Program, ChemoCentryx shall use its Diligent Efforts to:

(a) transfer to GSK, at no cost to GSK, ownership of all regulatory filings relating to Product Candidates, including all INDs, to GSK, and assign to GSK as sole owner all trademarks and related rights with respect to any Progressed Compound, Product Candidate or Licensed Product that are owned or Controlled by ChemoCentryx as of the Effective Date or during the Term, and provide GSK with copies of such INDs and other regulatory filings, all pre-clinical and clinical data and results as set forth in Section 5.4; and

(b) transfer to GSK, or its designee, at no cost to GSK, all bulk drug substance or other materials used to manufacture the Product Candidate. If such bulk drug substance or other materials are not in ChemoCentryx’s possession and Control or are not reasonably transferable, ChemoCentryx shall provide notice to GSK and upon request work with GSK to recover such materials.

5.6 ChemoCentryx Co-Promotion Right.

5.6.1 Exercise. Prior to and up to the date of filing of an NDA for each Co-Developed Product, ChemoCentryx shall have the option to co-promote each such Co-Developed Product (the “Co-promotion Right”), in the U.S. only, by providing up to fifty percent (50%) of the requisite detailing effort (as determined in good faith by GSK) to agreed-upon specialist physicians as set forth in the Product Marketing Plan, pursuant to a definitive co-promotion agreement which will incorporate and be consistent with all of the terms and conditions described in this Section 5.6 and all other relevant provisions of this Agreement (the “Co-Promotion Agreement”) , the full set of terms and conditions for such definitive co-promotion agreement will be in accordance with a written commercialization plan to be prepared by GSK’s sales and marketing organization (the “Product Marketing Plan” ). If ChemoCentryx exercises its Co-promotion Right prior to or upon NDA filing for such Co-Developed Product, such co-promotion shall be in accordance with the Product Marketing Plan and using only GSK-approved promotional messages and materials, in accordance with Section 5.5.2 of this Agreement which shall be updated and amended as necessary upon ChemoCentryx’s exercise of the Co-Development Option with respect to such Product Candidate, and in accordance with all applicable laws and regulations (including without limitation those promulgated by the FDA and the Division of Drug Marketing and Communications). ChemoCentryx shall be responsible for ensuring that its sales force representatives are of an acceptable standard in knowledge, experience and skills as judged by GSK’s Sales Management Organization. ChemoCentryx will ensure that its sales force representatives shall be trained to the same level and with consistent materials as GSK’s own sales force representatives, and achieve similar pass rates in sales training exams as determined by GSK at the time of such training. ChemoCentryx’s sales force representatives shall attend, as appropriate in view of GSK’s policies, such training seminars as are held for GSK’s own sales force representatives. Notwithstanding such co-promotion rights, GSK shall not be restricted in its promotional and selling efforts to any specialist or general practice physicians, and ChemoCentryx shall have no rights to detail or otherwise promote Licensed Products to family practitioners, internal medicine or any other general practice

 

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physicians. It is understood that ChemoCentryx’s Co-promotion activities shall be supplemental to and consistent with, the promotion capabilities of GSK. For clarity, ChemoCentryx’s Co-Promotion Rights shall only apply to Co-Developed Products.

5.6.2 Compliance. ChemoCentryx shall be responsible for all costs associated with establishing and training its sales force to conduct such co-promotion activities. ChemoCentryx will be solely responsible for ensuring its sales force abides by all applicable legal regulations and regulatory rules. GSK shall pay ChemoCentryx for each specialist detail to targeted physicians as defined in the Product Marketing Plan a per-detail promotion fee consistent with market rates in effect at that time, and with the degree of incentive compensation weighting for the Licensed Product.

5.6.3 Non-Transferability. In no event shall ChemoCentryx’s Co-promotion Right or any license granted to ChemoCentryx under Section 5.6.1 or under any resulting definitive co-promotion agreement be assignable, sublicenseable or transferable, in any way, by ChemoCentryx.

5.6.4 Change in Control. In the event that ChemoCentryx undergoes a Change in Control Event, GSK shall have the right to immediately terminate ChemoCentryx’s Co-Promotion Right upon written notice, such termination to be effective upon the date of receipt (by the surviving entity from the Change of Control Event) of such notice . For the purposes of this Section 5.6.4, a “Change in Control Event” is a transaction in which ChemoCentryx: (i) merges or consolidates with any Pharmaceutical Company (other than a wholly-owned subsidiary of ChemoCentryx); or (ii) effects any other transaction or series of transactions; in each case of clause (i) or (ii), such that the stockholders of ChemoCentryx immediately prior thereto, in the aggregate, no longer own, directly or indirectly, beneficially or legally, at least fifty percent (50%) of the outstanding voting securities or capital stock of the surviving entity following the closing of such merger, consolidation, other transaction or series of transactions. As used herein, “Pharmaceutical Company” means any Person that, together with its Affiliates, [***].

5.7 Returned Licensed Products .

5.7.1 Termination of Development by GSK . In the event that GSK exercises its Product Option and accepts a particular Progressed Compound into the Product Candidate Commercialization Program and thereafter determines in good faith, for any reason, to cease the development and commercialization of a Product Candidate or Licensed Product, either in its entirety, or on a country-by-country basis, and provides ChemoCentryx written notice of such intent, GSK shall be deemed to have terminated its rights to such Licensed Product and thereafter such Licensed Product shall be deemed a “ Returned Licensed Product, ” subject to the provisions of this Section 5.7.

5.7.2 Effect of Termination. Upon any such termination (a) all licenses in and to the ChemoCentryx Technology for such Returned Licensed Product granted to GSK by

 

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ChemoCentryx, in the country(ies) or the Territory, as applicable, shall be immediately terminated and (b) GSK (i) shall promptly return to ChemoCentryx all data and materials transferred by ChemoCentryx to GSK (if GSK’s rights terminate throughout the Territory), (ii) hereby grants, conditional upon the occurrence of such termination, a non-exclusive license to ChemoCentryx in the relevant country(ies) of the Territory, as applicable, under GSK’s right and title in and to any GSK Technology pertaining specifically to such Returned Licensed Product and which was actually used by GSK in connection with the Development or commercialization of such Returned Licensed Product, for use by ChemoCentryx solely in connection with such Returned Licensed Product; and (iii) shall, if GSK’s rights terminate throughout the Territory, transfer to ChemoCentryx, at no cost, all readily available bulk drug substance or drug product material of the applicable Returned Licensed Product in its possession and other related materials, (iv) shall provide ChemoCentryx with copies of all clinical study data and results, and all other information, regulatory filings, and the like developed by or for the benefit of GSK relating to such Returned Licensed Product, and (v) if GSK’s rights terminate throughout the Territory, assign to ChemoCentryx any regulatory filings, and trademarks (but only for trademarks where such Returned Licensed Product has previously been launched or had a First Commercial Sale) related to such Returned Licensed Product. Notwithstanding anything to the contrary in this Agreement, the terms and conditions of Section 7.1 shall not apply to any such Returned Licensed Product.

5.7.3 ChemoCentryx’s Right to Commercialize. Subject always to the obligation to pay to GSK the Reverse Royalties as set forth in Section 6.7, ChemoCentryx shall be free to develop and commercialize any such Returned Licensed Product, alone or with any Third Party or through any Third Party sublicensee. In the event ChemoCentryx decides to further develop and/or commercialize such Returned Licensed Product, ChemoCentryx shall be solely responsible for satisfying any and all obligations to Third Parties with respect to the development, manufacture or commercialization of such Returned Licensed Product including, but not limited to, any ongoing obligations of GSK under any Third Party manufacturing or licensing agreements.

ARTICLE 6

MILESTONES AND ROYALTIES; PAYMENTS

6.1 Upfront Payment to ChemoCentryx . In consideration for GSK’s Product Options hereunder, GSK shall pay a one-time-only initial non-refundable, non-creditable fee of Thirty-Eight Million, Five Hundred Thousand U.S. Dollars ($38,500,000) no later than thirty (30) days after receipt by GSK of an invoice from ChemoCentryx on or after the Effective Date of this Agreement (the “Upfront Payment” ).

6.2 Purchase of Preferred Stock . GSK shall purchase from ChemoCentryx Twenty Five Million U.S. Dollars ($25,000,000) worth of Series D Preferred Stock of ChemoCentryx on the terms and conditions set forth in the Stock Purchase Agreement.

 

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6.3 Product Option Exercise Fee for Option Compounds.

6.3.1 For Option Compounds Targeting CCR9. Upon exercise of the Product Option by GSK for an Option Compound targeting CCR9 in accordance with Section 4.3.1, GSK shall pay to ChemoCentryx a non-creditable, non-refundable option exercise fee (the “CCR9 Option Exercise Fee”) of Thirty-Five Million U.S. Dollars ($35,000,000). The milestone payment of [***] U.S. Dollars ($[***]) for [***], shall be [***], and in the event that such milestone payment is made, then [***] Dollars ($[***]).

6.3.2 For Option Compounds Targeting a Collaboration Target Other Than CCR9. For each exercise of a Product Option by GSK for an Option Compound targeting a Collaboration Target other than CCR9 in accordance with Section 4.3.1, GSK shall pay to ChemoCentryx a non-creditable, non-refundable option exercise fee (the “Non-CCR9 Option Exercise Fee”) of [***] Dollars ($[***]).

6.4 Milestones Payments to ChemoCentryx . As further consideration for ChemoCentryx’s performance of the Research Plan and the Early Development Plans, and its grant of the rights and licenses to GSK hereunder, for each set of Progressed Collaboration Compounds as to which GSK exercises a given Product Option, GSK shall pay to ChemoCentryx the following milestone payments within thirty (30) days after the achievement by GSK of each of the listed milestone events and upon receipt of an invoice from ChemoCentryx for a Licensed Product, as set forth below.

6.4.1 Milestone Payments for Licensed Products Targeting CCR9 . GSK shall pay to ChemoCentryx the following milestone payments within thirty (30) days after the achievement by GSK and upon receipt of an invoice from ChemoCentryx upon achievement of each of the listed milestone events with respect to any of the Licensed Products targeting CCR9. GSK shall promptly notify ChemoCentryx in writing of the occurrence of any such milestone event.

 

Milestone Event for Licensed Products Targeting CCR9

   Milestone Payments  

[***]

     [***] 1  

[***]

     [***] 2  

[***]

     [***] 2  

[***]

     [***] 2  

[***]

     [***] 2  

[***]

     [***] 2  

[***]

     [***] 2  

 

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1  

[***]

2  

[***]

6.4.2 Milestones for each Licensed Product Targeting Collaboration Targets Other Than CCR9 . GSK shall pay to ChemoCentryx the following milestone payments within thirty (30) days after the achievement by GSK of the milestone event and upon receipt of an invoice from ChemoCentryx upon achievement of each of the listed milestone events with respect to Licensed Products targeting each Collaboration Target other than CCR9. GSK shall promptly notify ChemoCentryx in writing of the occurrence of any such milestone event.

 

Milestone Event for Progressed

Compounds or Licensed Products

Targeting a Collaboration Target Other

Than CCR9

   Milestone Payments  

Development Candidate Selection

   $ 5,000,000 1  

Initiation of a First in Humans Study

   $ 10,000,000 2  

[***]

   $ [***] 3  

[***]

   $ [***] 3  

[***]

   $ [***] 3  

[***]

   $ [***] 3  

[***]

   $ [***] 3  

[***]

   $ [***] 3  

 

1  

[***]

2  

[***]

3  

[***]

6.4.3 General. No milestone payments are owed for any milestone event that is not achieved, and in the case where one Licensed Product is substituted for another Licensed Product, then the milestones payable with respect to the new Licensed Product are only for future milestone events, except where expressly provided. Each milestone payment shall be payable only once for each Licensed Product to achieve the corresponding milestone event. All milestones paid for a given Product Candidate will be considered achieved for a subsequent Product Candidate in the same Indication that targets the same Collaboration Target if the first Product Candidate is no longer under development by GSK. By way of illustration and without limitation, if a Product Candidate targeting CCR9 in an IBD Indication has achieved [***] for filing but is not granted [***], and if a subsequent Product Candidate targeting CCR9 for an IBD Indication achieves [***], such milestone will be deemed to have already been paid. In addition, no milestone payments are owed on the basis of any different formulations, methods or vehicles of delivery, dosage or release forms, etc. for the same Collaboration Compound or same

 

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Licensed Product if such Collaboration Compound or Licensed Product has already qualified for a milestone payment; provided however , that milestone payments shall be due for different formulations, methods, or vehicles of delivery, dosage or release forms, etc. with respect to the same Licensed Product if such Licensed Product is for a different Major Indication and if such milestone payment is expressly authorized pursuant to the terms and conditions set forth in the relevant footnotes in Sections 6.4.1 and 6.4.2.

6.5 Net Sales Milestone Payments . In General . All Net Sales milestones and the corresponding Net Sales milestone payments described in this Section 6.5 shall be available only one time under this Agreement for a given Collaboration Target. No milestone payments are owed for any milestone event that is not achieved.

6.5.1 Licensed Products Targeting CCR9. GSK shall pay to ChemoCentryx, within thirty (30) days following the achievement of the specified milestones (each, a “CCR9 Sales Milestone”) and upon receipt of an invoice, with respect to the total aggregate annual worldwide Net Sales of all Licensed Products targeting CCR9 (whether such milestone event is achieved by GSK, its Affiliate or any of their respective Sublicensees), the milestone payment applicable to such CCR9 Sales Milestone as set forth below. Each such payment shall be made when the designated CCR9 Sales Milestone is first achieved for the total aggregate annual worldwide Net Sales of all Licensed Products targeting CCR9. All such payments shall be non-refundable and non-creditable against any other obligations due under the Agreement.

 

Total Aggregate Annual Worldwide Net Sales of

Licensed Products Targeting CCR9

   Milestone Payment Amount  

$[***]

   $ [***]   

$[***]

   $ [***]   

$[***]

   $ [***]   

$[***]

   $ [***]   

6.5.2 Licensed Products Targeting Collaboration Targets Other Than CCR9 . GSK shall pay to ChemoCentryx, within thirty (30) days following the achievement of the specified milestones (each, a “Non-CCR9 Sales Milestone”) and upon receipt of an invoice with respect to the total aggregate annual worldwide Net Sales of all Licensed Products targeting a Collaboration Target other than CCR9 (whether such milestone event is achieved by GSK, its Affiliate or any of their respective Sublicensees), the milestone payment applicable to each Non-CCR9 Sales Milestone shall be made when the designated Non-CCR9 Sales Milestone is first achieved for the total aggregate annual worldwide Net Sales of all Licensed Products targeting the same Collaboration Target. All Milestone payments shall be non-refundable and non-creditable against any other obligations due under the Agreement as follows:

 

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Total Aggregate Annual Worldwide Net Sales of

Licensed Products Targeting a Collaboration

Target Other Than CCR9

   Milestone Payment Amount  

$[***]

   $ [***]   

$[***]

   $ [***]   

$[***]

   $ [***]   

$[***]

   $ [***]   

6.6 Royalty Payments to ChemoCentryx.

As further consideration to ChemoCentryx for the license and other rights granted to GSK under Article 5 of this Agreement, and subject always to the provisions of Section 6.6.6, GSK shall pay to ChemoCentryx royalties as follows:

6.6.1 Royalty Payments for Licensed Products Targeting CCR9 for the IBD Indications . For each Licensed Product targeting CCR9 for the IBD Indications, GSK shall pay to ChemoCentryx a royalty on annual IBD Net Sales as specified below for annual Net Sales tiers achieved in the U.S. and the Rest of World (ROW), determined separately, in accordance with this Section 6.6.1, at the percentage rates set forth below, which rate shall increase for increasing Net Sales tiers as the total aggregate annual IBD Net Sales of such Licensed Product increases over the course of the particular calendar year in either the U.S. or the ROW, as provided in the following schedule. Royalties on such IBD Net Sales shall be calculated using the applicable royalty rate set forth below, which shall be dependent on whether such Net Sales occur in the US or ROW. IBD Net Sales shall be calculated in accordance with Section 6.6.3.

 

Annual IBD Net Sales in Specified Countries of

Each Licensed Product Targeting CCR9 for

the IBD Indications

   Royalty Rate
for Net  Sales in
the US
    Royalty Rate for
Net Sales

in the ROW
 

For that portion of annual Net Sales less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales greater than $[***] but less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***]

     [***]     [***]

6.6.2 Royalty Payments for Licensed Products Targeting CCR9 for Non-IBD Indications. For each Licensed Product targeting CCR9 for Indications other than the IBD Indication ( “Non-IBD Indications” ), GSK shall pay to ChemoCentryx a royalty on annual Non-

 

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IBD Net Sales (as defined below) as specified below for annual Net Sales tiers achieved in the U.S. or the Rest of World (ROW), determined separately, in accordance with this Section 6.6.2, at the percentage rate set forth below, [***], as provided in the following schedule. Royalties on such Non-IBD Net Sales shall be calculated using the applicable royalty rate set forth below, which shall be dependent on whether such Non-IBD Net Sales are accrued in the US or ROW. Non-IBD Net Sales shall be calculated in accordance with Section 6.6.3. Non-IBD Net Sales shall be calculated in accordance with Section 6.6.3.

 

Annual Non-IBD Net Sales in Specified

Countries of Each Licensed Product Targeting CCR9 for an Indication Other

Than the IBD Indication

   Royalty Rate
for Net  Sales in
the US
    Royalty Rate
for Net Sales
in the ROW
 

For that portion of annual Net Sales Less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***]

     [***]     [***]

6.6.3 Calculating IBD Net Sales and Non-IBD Net Sales .

(a) For the purposes of Sections 6.6.1 and 6.6.2, “IBD Net Sales” and “Non-IBD Net Sales” for each of the U.S. and the ROW shall be based on total annual Net Sales in the U.S. or the ROW, determined separately, which are divided or apportioned by means of the Sales Tracking Methodology (as defined in subsection (b) below). Specifically, the Sales Tracking Methodology shall differentiate Net Sales arising from use of the CCR9 Licensed Products in the IBD Indications from use in all Non-IBD Indications, taken as a whole. Total Net Sales shall equal the sum of IBD Net Sales and Non-IBD Net Sales. For clarity, it is understood that the royalty rates set forth under Sections 6.6.1 and 6.6.2 herein shall be applied incrementally to that portion of IBD Net Sales and Non-IBD Net Sales within the Net Sales tiers shown for each applicable range. In determining total royalties owed, GSK shall calculate first the applicable royalty tiers on aggregate Total Net Sales in the U.S or ROW, as the case may be, and then shall determine what percentage of such Net Sales is IBD Net Sales and what percentage is Non-IBD Net Sales, in accordance with Section 6.6.3(b), and shall pay the applicable rate for each portion of Net Sales within the applicable Net Sales tiers as set forth above for such IBD Net Sales and Non-IBD Net Sales. By way of example only, if GSK records [***] Dollars ($[***]) in Total Net Sales in the U.S. of Licensed Products targeting CCR9, and the Data Services utilized in Section 6.6.3(b) show that [***] Dollars ($[***]) of such Total Net Sales in the U.S. are attributable to use of such Licensed Products for the IBD Indication, then GSK shall pay a royalty rate of [***] percent ([***]%) on such [***] ($[***]) amount that is attributable to IBD Net Sales in the U.S. With respect to the remaining [***] Dollars ($[***]) of Non-IBD Net Sales in the U.S. for

 

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Licensed Products targeting indications other than the IBD Indication, GSK shall pay ChemoCentryx a royalty rate of [***] percent ([***]%) on the portion of Net Sales that are less than and equal to [***] Dollars ($[***]),[***] percent ([***] %) on the portion of Net Sales that is greater than [***] Dollars ($[***]) but less than [***] Dollars ($[***]), and [***] percent ([***]%) on the portion of Net Sales greater than [***] Dollars ($[***]).

(b) Sales Tracking. In the event GSK has obtained Regulatory Approval for a Licensed Product for any IBD Indication for a Licensed Product as to which GSK owes royalties pursuant to this Section 6.6, and in the further event GSK also seeks to obtain Regulatory Approval for a Licensed Product for any Non-IBD Indication for the same Licensed Product as to which GSK owes royalties pursuant to this Section 6.6 (or vice versa where GSK has first obtained Regulatory Approval for a Non-IBD Indication), then prior to such filing for Regulatory Approval, GSK and ChemoCentryx shall meet and agree upon a method for tracking sales attributed to use of the Licensed Product in such Indications. The Parties agree to first consider in good faith the use of, alone or in combination with other data, any sales tracking mechanism that GSK already has in place, such as GSK internal factory sales audits for SKU numbers, packaging variations, dose levels, and customer segments specific for the sale of Licensed Products for certain Indications. In the event that the Parties cannot agree that such GSK sales tracking mechanisms are appropriate, either alone or in combination with other data, to track sales which are attributable to use of a particular Licensed Product for the IBD Indication and such other Indications, then GSK and ChemoCentryx shall meet and agree upon the acquisition of one or more prescription data services or other relevant market research generally recognized in the pharmaceutical industry as having an adequate and reasonably reliable degree of accuracy and reliability in the tracking of sales of such Licensed Product attributable to such Other Indications or IBD or other gastro-intestinal Indications, as the case may be, for which the Licensed Product has obtained Regulatory Approval (the “Data Services” ), and the methodology for applying any such resulting data and information to the Net Sales of such Licensed Product in the United States (including, for example, use of random sampling, use of data regarding distribution channels as proxy for indication-specific sales and development of mathematical models for approximating indication-specific sales), as well as the Major Countries, and the remainder of the Territory (the “Sales Tracking Methodology” ). All costs associated with the acquisition and application of such Data Services and Sales Tracking Methodology shall be shared by the Parties in proportion to their then-current economic interests in the Net Sales of such Licensed Product in the United States. ChemoCentryx’s portion of such costs shall be the total costs multiplied by a fraction determined by calculating the amount due to ChemoCentryx under the applicable royalty rate and dividing such amount by the total Net Sales for such Licensed Product for such Indication. In addition, the Parties shall also meet and confer with respect to: (i) how to account for prescriptions to patients with multiple afflictions (i.e., IBD Indications and non-IBD Indications; (ii) the right for ChemoCentryx to audit (subject to the conditions of Section 6.11, applied mutatis mutandis to ChemoCentryx), on a periodic basis, the application by GSK of the Sales Tracking Methodology and use of the Data Services; and (iii) a mechanism for addressing prescriptions that are tracked back to sole source purchasing agreements. In the event of any dispute or disagreement under this Section 6.6.3(b) the Parties will submit such issue or disagreement to a mutually acceptable Third Party neutral arbitrator,

 

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who is skilled and knowledgeable with respect to pharmaceutical sales practices and sales tracking, for final resolution.

6.6.4 Royalty Payments for Each Licensed Product Targeting a Collaboration Target Other Than CCR9 . For each Licensed Product other than a CCR9 Licensed Product for any Indication sold in the U.S. or ROW, GSK shall pay to ChemoCentryx a royalty on annual Net Sales thereof, to be determined separately for the U.S. and ROW, in accordance with this Section 6.6.4, at the rate set forth below, which rate shall be payable on the specified tier of sales and increase each tier as total aggregate annual Net Sales of such Licensed Products increase over the course of the particular calendar year, as each tier is achieved for the U.S. or ROW regions as described in the following schedules.

 

Annual U.S. Net Sales of Each Licensed Product Targeting a

Collaboration Target Other than CCR9

   Royalty Rate
for U.S. Net
Sales
 

For that portion of annual Net Sales Less than or equal to $[***]

     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]

For that portion of annual Net Sales Greater than $[***]

     [***]

Annual ROW Net Sales of Each Licensed Product Targeting a

Collaboration Target Other than CCR9

   Royalty Rate
for ROW Net
Sales
 

For that portion of annual Net Sales Less than or equal to $[***]

     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]

For that portion of annual Net Sales Greater than $[***]

     [***]

By way of example only, if GSK records [***] Dollars ($[***]) in total annual U.S. Net Sales of Licensed Products targeting a Collaboration Target other than CCR9, then GSK shall pay ChemoCentryx a royalty payment at the rate of [***] percent ([***]%). If GSK in a different calendar year records Net Sales in the U.S. of [***] Dollars ($[***]), then GSK shall pay a royalty rate of [***] percent ([***]%) on the $[***] portion of annual U.S. Net Sales, and a royalty rate of [***] percent ([***]%) on the remaining [***] Dollars ($[***]) portion of cumulative annual U.S. Net Sales.

6.6.5 Co-Development Option Royalty Rates.

(a) Increased Royalty Rate if CD Development Option Exercised By ChemoCentryx With Respect to Licensed Product Targeting CCR9 . Following ChemoCentryx’s

 

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exercise of its CD Development Option with respect to a Licensed Product targeting CCR9 as set forth under Section 5.2(a) for the Crohn’s Disease Indication, GSK shall pay to ChemoCentryx an increased royalty rate (in lieu of the royalty rate that would otherwise be applicable as described above in Section 6.6) on the annual IBD Net Sales, to be determined separately for the U.S. and the ROW, at the percentage rates set forth below, with such increased royalty rate to be effective immediately as of the date of such exercise.

 

Annual Net Sales for IBD in U.S. or

ROW of Each Licensed Product

Targeting CCR9

   Royalty Rate for IBD
Net Sales in the US
Upon Exercise of CD
Development Option
    Royalty Rate for IBD
Net Sales in the ROW
Upon Exercise of CD
Development Option
 

For that portion of annual Net Sales Less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

     [***]     [***]

For that portion of annual Net Sales Greater than $[***]

     [***]     [***]

(b) Increased Royalty Rate if CD/UC Development Option Exercised By ChemoCentryx With Respect to Licensed Product Targeting CCR9 . Following ChemoCentryx’s exercise of its CD/UC Development Option with respect to a Licensed Product targeting CCR9 as set forth under Section 5.2(a) for the Crohn’s Disease Indication and Ulcerative Colitis Indication, GSK shall pay to ChemoCentryx an increased royalty rate (in lieu of the royalty rate that would otherwise be applicable as described above in Section 6.6.1) on the annual IBD Net Sales, to be determined separately for the U.S. and the ROW, at the percentage rates set forth below, with such increased royalty rate to be effective immediately as of the date of such exercise.

 

Annual Net Sales for IBD in U.S. or

ROW of Each Licensed Product

Targeting CCR9

   Royalty Rate for Net
Sales for IBD in US
Upon Exercise of
CD/UC Development

Option
    Royalty Rate for Net
Sales for IBD in
ROW Upon Exercise
of CD/UC
Development Option
 

For that portion of annual Net Sales Less than or equal to $[***]

     [***]     [***]

 

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For that portion of annual Net Sales Greater than $[***] but less than or equal to $[***]

   [***]%    [***]%

For that portion of annual Net Sales Greater than $[***]

   [***]%    [***]%

6.6.6 Application of Royalty Rates. All Royalties set forth under this Section 6.6 shall be subject always to the provisions of this Section 6.6.6, and shall only be payable as follows:

(a) For so long as a Valid Claim of a ChemoCentryx Patent or of a Collaboration Patent included within the ChemoCentryx Technology (i.e. other than a Valid Claim invented solely by GSK) covers or claims the composition of matter or the relevant approved method of use of the Licensed Product being sold in the country of sale and at the time of such sale, then the royalty rates as set forth above shall apply, subject to subsection (c) and (d) below.

(b) In the absence of such a Valid Claim as described in subsection (a) above at the time of sale and in the country of sale of the Licensed Product, but where ChemoCentryx owns or Controls a pending patent application within the ChemoCentryx Patents or within the Collaboration Patents with a claim (other than where the subject matter of such claim was invented solely by GSK) that claims the composition of matter or an approved method of use of the Licensed Product being sold at the time of sale and in the country of sale, GSK shall pay to ChemoCentryx royalty payments at [***] percent ([***]%) of the relevant royalty rate that would otherwise be payable under Section 6.6 for a period of [***] years from the date of First Commercial Sale of the Licensed Product at issue (subject to subsection (c) and (d) below), and shall pay the remaining [***] percent ([***]%) of the relevant royalty rate in escrow as provided below, until the earlier of (i) such time as a Valid Claim as described in subsection (a) above issues with respect to such pending patent application, in which case Section 6.6.6(a) shall apply; or (ii) the date which is [***] years from the date of First Commercial Sale of the Licensed Product at issue. The payments accruing under the remaining [***] percent ([***]%) of the relevant royalty rate shall be deposited into an escrow account to be maintained by GSK on behalf of ChemoCentryx (with interest from such account being reinvested into such account). Upon the occurrence of subsection (i) herein prior to the term of [***] years from the date of First Commercial Sale of the Licensed Product at issue, the remaining [***] percent ([***]%) of such payments (and interest) shall be promptly paid to ChemoCentryx. In the event a Valid Claim does not issue within such time frame, GSK shall retain all such amounts paid into escrow.

(c) No royalty is payable under Section 6.6 in the event that neither subsection (a) or (b) above applies at the time of sale and in the country of sale for a given Licensed Product, or if subsection (a) or (b) are applicable, but subsection (d) below is triggered.

 

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(d) Elimination of Royalty Following Entry of Generic Product. In the event that a particular Licensed Product is sold in a country and a Generic Product is sold in such country, then at the end of the first [***] day period (the “Generic Entry Period”) during which one or more Third Parties sell a number of units of a relevant Generic Product in the Territory that comprises [***] percent ([***]%) or more of the aggregate number of units of such Licensed Product sold in such country during such Generic Entry Period (based upon mutually acceptable Third Party objective data sources), the otherwise applicable royalty rate set forth in Section 6.6 will not apply, and no royalties shall be due or payable to ChemoCentryx for any sales of such Licensed Product in such country after the conclusion of such Generic Entry Period

(e) “Annual” as used in this Article 6 shall mean calendar year.

6.7 Refused Candidate Royalties and Reverse Royalty to GSK.

(a) In the event that ChemoCentryx or its Affiliate or Sublicensee develops and commercializes any Refused Candidate, it shall pay to GSK a royalty of three percent (3%) on annual, worldwide Net Sales of such Refused Candidate ( “Refused Candidate Royalties” ); provided, however, that in no event shall cumulative Refused Candidate Royalties exceed a total of Fifty Million Dollars ($50,000,000).

(b) In the event that ChemoCentryx or its Affiliate or Sublicensee develops and commercializes any Returned Licensed Product, it shall pay to GSK the following applicable royalty rate (the applicable royalty rate referred to as the “Reverse Royalty” ):

(i) In the event that such Returned Licensed Product has at the time it is reverted to ChemoCentryx entered into but not yet successfully completed a clinical trial which is later deemed by a Regulatory Authority to be a pivotal Phase 3 Clinical Trial, ChemoCentryx shall pay to GSK a royalty of three percent (3%) on annual, worldwide Net Sales of such Returned Licensed Product.

(ii) In the event that such Returned Licensed Product has at the time it is reverted to ChemoCentryx successfully completed at least one pivotal Phase 3 Clinical Trial, ChemoCentryx shall pay to GSK a royalty of five percent (5%) on annual, worldwide Net Sales of such Returned Licensed Product.

(c) In the event that any scenario under Article 12 or otherwise under this Agreement occurs wherein rights to a Progressed Compound, Option Compound, Product Candidate or Licensed Product revert back to ChemoCentryx from GSK, then in any such scenario, and regardless of whether such reversion of rights occurs as the result of any material breach of this Agreement or of any provision hereof by GSK, then such compound shall be deemed a Returned Licensed Product hereunder, and the provisions of subsection (b)(i) and b(ii) above of this Section 6.7 shall apply to any such compound and any resulting product that is ultimately commercialized by ChemoCentryx or its Affiliate or Sublicensee.

 

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6.8 Third Party Intellectual Property. With respect to all Third Party intellectual property GSK and ChemoCentryx shall share, as provided in this Section 6.8, certain license fees (i.e., one-time payments, upfront or milestone) or royalties (collectively “ Third Party Intellectual Property License Fees ”) owed on one or more licenses from a Third Party under valid, enforceable Third Party Patents covering or claiming Licensed Products or use thereof in the Field, where such license(s) are necessary to prevent GSK from infringing such Third Party’s Patents by the manufacture, use, import or sale of the Licensed Product as and to the extent licensed to GSK under this Agreement (each, a “ Third Party Intellectual Property License ”). GSK and ChemoCentryx shall equally share all Third Party Intellectual Property License Fees, provided however, that GSK shall have the right to deduct its fifty percent (50%) share of such Third Party Intellectual Property License Fees from the otherwise applicable royalties payable to ChemoCentryx for such particular Calendar Quarter; provided further, however, that in no event shall the otherwise applicable royalty rate to ChemoCentryx be reduced by more than fifty percent (50%) in a given Calendar Quarter. GSK shall have the right to carry forward and apply any such unused offset or deduction to which GSK is entitled in future Calendar Quarters or years in the event that such fifty percent threshold would be exceeded, until the full amount of offset or deduction to which GSK is entitled is satisfied.

6.9 Third Party Licenses Needed for Screening and Platform Technology Used in the Conduct of the Research Program. ChemoCentryx shall have sole financial responsibility for all royalty and other payments required to be paid to any Third Party specifically relating to sales of Refused Products or Returned Products sold by ChemoCentryx as permitted hereunder. Such payments shall be made by ChemoCentryx directly to the relevant Third Party in accordance with the provisions of the applicable Third Party license agreement. ChemoCentryx shall also have sole financial responsibility for satisfying in full all royalties, fees and other payments, and all other obligations, liabilities or claims of any kind owed to any Third Party in order to obtain and maintain any licenses or other rights necessary in order for ChemoCentryx to screen its compound library or to use any platform technology to be used by ChemoCentryx in order to identify and optimize Collaboration Compounds as hits and leads as contemplated under this Agreement for the conduct of the Programs hereunder.

6.10 Payments .

6.10.1 Commencement. Beginning with the Calendar Quarter in which the First Commercial Sale for an applicable Licensed Product is made and for each Calendar Quarter thereafter, royalty payments shall be made to ChemoCentryx pursuant to Section 6.6 (the “ Payee ”) within forty-five (45) days following the end of each such Calendar Quarter. Each royalty payment shall be accompanied by a report, summarizing the total gross sales of the applicable Licensed Product and total Net Sales for the applicable Licensed Product (including an itemization of the deductions applied to such gross sales to derive such Net Sales) during the relevant Calendar Quarter and the calculation of royalties, if any, due thereon. In the event that GSK is paying royalties to ChemoCentryx on a single Licensed Product at different rates dependent upon the Indication in accordance with Sections 6.6.1, 6.6.2 or 6.6.5, and the Parties have agreed under Section 6.6.3(b) to utilize Third Party Data Services in the agreed upon Sales

 

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Tracking Methodology to GSK’s Net Sales of such Licensed Product to calculate Indication-specific sales, GSK shall first pay to ChemoCentryx royalties on GSK’s good faith estimate of its Net Sales of such Licensed Product in each particular Indication (the “Initial Estimated Payment”), which such estimate shall be in conformance with GSK’s own forecasts and other internal estimates. Promptly after the calculation of actual Net Sales attributable to the Indications at issue is conducted, based upon receipt of such Data Services’ Indication-specific sales reports and such other data as is included in such Sales Tracking Methodology for such Licensed Product (but in any event no later than forty-five (45) days after payment of such Initial Estimated Payment unless otherwise mutually agreed by the Parties), GSK shall submit a final invoice specifying whether its Initial Estimated Payment was an underpayment or overpayment. In the event such Initial Estimated Payment was an underpayment, GSK shall provide the remainder of the royalty payment with its final invoice. If the Initial Estimated Payment was an overpayment, such overpaid amount shall be promptly credited back to GSK by ChemoCentryx. Notwithstanding the foregoing, in the event that no royalties are payable in respect of a given Calendar Quarter, the Party making the payments (the “ Payor ”) shall submit a royalty report so indicating.

6.10.2 Mode of Payment . All payments under this Agreement shall be payable, in full, in U.S. dollars, regardless of the country(ies) in which sales are made. For the purposes of computing Net Sales of Licensed Products sold in a currency other than U.S. dollars, such currency shall be converted into U.S. dollars as calculated at the actual average rates of exchange for the pertinent quarter or year to date, as the case may be, as used by GSK in producing its quarterly and annual accounts, as confirmed by GSK’s auditors. Such payments shall be without deduction of exchange, collection or other charges.

6.10.3 Records Retention . Commencing with the First Commercial Sale of a Licensed Product, the Payor shall keep complete and accurate records pertaining to the sale of such Licensed Products, for a period of two (2) calendar years after the year in which such sales occurred, and in sufficient detail to permit the Payee to confirm the accuracy of the royalties paid by the Payor hereunder.

6.11 Audits . During the term of this Agreement and for a period of three (3) years thereafter, at the request and expense of the Payee, the Payor shall permit an independent, certified public accountant of nationally recognized standing appointed by the Payee, and reasonably acceptable to the Payor, at reasonable times and upon reasonable notice, but in no case no more than once per calendar year thereafter, to examine such records as may be necessary for the sole purpose of verifying the calculation and reporting of Net Sales and the correctness of any royalty payment made under this Agreement for any period within the preceding three (3) years. Results of any such examination shall be made available to both Payor and Payee. The independent, certified public accountant shall disclose to the Payee only the royalty amounts which the independent auditor believes to be due and payable hereunder to the Payee and shall disclose no other information revealed in such audit. Any and all records examined by such independent accountant shall be deemed the Payor’s Confidential Information which may not be disclosed by said independent, certified public accountant to any Third Party.

 

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If, as a result of any inspection of the books and records of the Payor, it is shown that a Payee’s payments under this Agreement were less than the amount which should have been paid, then the Payor shall make all payments required to be made to eliminate any discrepancy revealed by said inspection within sixty (60) days. The Payee shall pay for such audits, except that in the event that the royalty payments made by the Payor were less than ninety percent (90%) of the undisputed amounts that should have been paid during the period in question, the Payor shall pay the reasonable costs of the audit.

6.12 Taxes .

6.12.1 Sales or Other Transfers . The recipient of any transfer under this Agreement of ChemoCentryx Technology, GSK Technology, Information, Collaboration Compounds, Licensed Products or Returned Licensed Products, as the case may be, shall be solely responsible for any sales, use, value added, excise or other taxes applicable to such transfer.

6.12.2 Withholding . In the event that the Payor is required to withhold any tax to the tax or revenue authorities in any country regarding any payment to the Payee due to the laws of such country, such amount shall be deducted from the payment to be made by the Payor, and the Payor shall promptly notify the Payee of such withholding and, within a reasonable amount of time after making such deduction, furnish the Payee with copies of any tax certificate or other documentation evidencing such withholding. Each of Payor and Payee agrees to cooperate with the other in claiming exemptions from such deductions or withholdings under any agreement or treaty from time to time in effect. However, any such deduction or withholding shall be an expense of and borne solely by the Payee.

ARTICLE 7

EXCLUSIVITY

7.1 Covenant of Exclusivity for Collaboration Targets; Exceptions.

7.1.1 Collaboration Targets. Except as may be expressly stated to the contrary in this Agreement under Article 12 or in Section 5.7.2, and except as expressly authorized under the provisions of this Agreement and as necessary to perform its obligations hereunder, ChemoCentryx hereby covenants that it shall not, either alone or with/for any Third Party: with respect to each Collaboration Target, during the period commencing on the Effective Date and ending on the first anniversary of the last day of the Research Term, as may be extended (the “Research Exclusivity Period” ), conduct any research or development activities or grant any license or other rights with respect to the identification or optimization of small molecule antagonists (or agonists as applicable) of any Collaboration Targets. Following the end of the Research Exclusivity Period, with respect to any Collaboration Target which is the subject of any Early Development Program being drafted under the auspices of the JSC or then underway, ChemoCentryx also hereby covenants that it shall not, either alone or with/for any Third Party:

 

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with respect to each such Collaboration Target, conduct any research or development activities or grant any license or other rights with respect to the identification or optimization of small molecule antagonists (or agonists, as applicable) of any Collaboration Target(s) unless and until the earlier of (i) exercise by GSK of its last Product Option with respect to all of such Early Development Programs directed against such Collaboration Target, or (ii) the termination of all Early Development Programs with respect to such Collaboration Target (the “Development Exclusivity Period” ). It being understood and agreed however, that after the end of the Research Exclusivity Period for those Collaboration Targets as to which at such time there is no Early Development Program either being drafted under the auspices of the JSC or then underway, and after the end of the Development Exclusivity Period for those Collaboration Targets as to which there is an Early Development Program, ChemoCentryx shall have the right, alone or with a Third Party, to conduct any research and development activities with respect to such Collaboration Target, including for example the rescreening of compounds against such Collaboration Target, subject at all times to GSK’s rights under Article 4 and to the covenant under Section 7.2, and GSK’s rights pursuant to any Product Options.

7.1.2 Exception Upon Termination with respect to Collaboration Target. In the event that GSK terminates this Agreement or the Research Program and/or Early Development Program under the provisions of Article 12 with respect to research and development activities against a specific Collaboration Target, then the terms of Section 7.1.1 shall no longer apply to any Collaboration Compounds, Development Candidates, or Option Compounds, Compounds targeting such Collaboration Target.

7.2 Covenant of Exclusivity for Collaboration Compounds. During the Research Term or any Early Development Program, and continuing on for so long as GSK continues to develop and commercialize any Progressed Compound, following exercise by GSK of its Product Option with respect to a set of Progressed Compounds, except as may be expressly stated to the contrary in this Agreement, and except as expressly authorized and necessary to perform its obligations under this Agreement, ChemoCentryx hereby covenants that it shall not, either alone or with/for any Third Party , during the Term, identify, research, develop, optimize or commercialize or grant any license or other rights with respect to any (i) Collaboration Compound or any Progressed Compound or (ii) any Related Compound to any such Progressed Compound or (iii) any metabolite, prodrug, ester, salt, crystalline polymorph, hydrate or solvate or analog or Derivative of any Collaboration Compound that has completed ChemoCentryx’s Tier 3 level within its screening and optimization program as described in Exhibit B with respect to the same Collaboration Target and screening program which led to the identification and optimization of any such Progressed Compound. In the event GSK declines to exercise its Product Option, or the Option Period expires unexercised with respect to any set of Progressed Compounds, or terminates early its exclusive license to such Progressed Compounds, the provisions of this Section 7.2 shall not apply with respect to the relevant Progressed Compounds and Related Compounds, but the terms of Section 7.1 may still apply to the extent there exists any other Early Development Programs with respect to the same Collaboration Target.

7.3 Non-solicitation. During the first [***] years of the Research Term, neither Party

 

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shall solicit any Key Employee to leave the employment of the other Party and accept employment or work as a consultant with the soliciting Party. Notwithstanding the foregoing, nothing herein shall restrict or preclude either Party’s right to make generalized searches for employees by way of a general solicitation for employment placed in a trade journal, newspaper or website. For the purposes of this Section 7.3, a “Key Employee” shall be employees who are material to the performance of the Research Program, including without limitation any members of any committees or subcommittees authorized under this Agreement.

ARTICLE 8

OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS

8.1 Ownership.

8.1.1 ChemoCentryx Technology and GSK Technology. ChemoCentryx shall retain all of its rights, title and interest in and to the ChemoCentryx Know-How and ChemoCentryx Patents and GSK shall retain all of its rights, title and interest in and to the GSK Know-How and GSK Patents, except to the extent that any rights or licenses are expressly granted by one Party to the other Party under this Agreement.

8.1.2 Collaboration Technology. GSK shall be the sole owner of any Collaboration Technology invented solely by or on behalf of GSK personnel pursuant to the Research Program or any Early Development Program or any Candidate Commercialization Program, and GSK shall retain all of its rights, title and interest thereto, except to the extent that any rights or licenses are expressly granted thereunder by GSK to ChemoCentryx under this Agreement. ChemoCentryx shall be the sole owner of any Collaboration Technology invented solely by or on behalf of ChemoCentryx personnel pursuant to the Research Program or any Early Development Program, or any Product Candidate Commercialization Program and ChemoCentryx shall retain all of its rights, title and interest thereto, except to the extent that any rights or licenses are expressly granted thereunder to GSK under this Agreement. Any Collaboration Technology that is invented jointly by or on behalf of GSK and ChemoCentryx pursuant to the Research Program or an Early Development Program or any Product Candidate Commercialization Program shall be owned jointly by GSK and ChemoCentryx, and all rights, title and interest thereto shall be jointly owned by the Parties, except to the extent that any exclusive rights or licenses are expressly granted to a Party under this Agreement. Except as expressly provided in this Agreement, neither Party shall have any obligation to account to the other for profits, or to obtain any consent of the other Party to license or exploit patented jointly-owned subject matter, by reason of joint ownership thereof, and each Party hereby waives any right it may have under the laws of any jurisdiction to require any such consent or accounting

8.2 Prosecution and Maintenance of Patents.

8.2.1 Patent Filings . The Party responsible for Prosecution and Maintenance of any Collaboration Patents as set forth in Sections 8.2.3 and 8.2.4 below shall use reasonable

 

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diligent efforts to obtain a reasonable scope of protection for Collaboration Compounds, Development Candidates and Licensed Products, as applicable, using counsel of its own choice but reasonably acceptable to the other Party. Each Party shall keep the other Party informed as to material developments with respect to the Prosecution and Maintenance of such Collaboration Patents, including without limitation, by providing upon request copies of any office actions or any other substantive documents that such Party receives from any patent office, including notice of all interferences, reissues, re-examinations, oppositions or requests for patent term extensions, and by providing the other Party the timely opportunity to have reasonable input into the strategic aspects of such Prosecution and Maintenance. In addition, ChemoCentryx will use diligent efforts to obtain a reasonable scope of protection for Collaboration Compounds, Development Candidates and Licensed Products, as applicable, covered by any claims of any ChemoCentryx Patents, using counsel of its own choice but reasonably acceptable to GSK, and will consider and discuss in good faith reasonable comments timely provided GSK. In the event of any dispute in the Joint Patent Subcommittee regarding the Prosecution and Maintenance of any ChemoCentryx Patents or Collaboration Patents, ChemoCentryx shall have the final say with respect to decisions made prior to GSK’s exercise of its Product Option, and GSK shall have final say after such exercise, with respect to those claims in Collaboration Patents which cover any Development Candidate as to which GSK exercises its Product Option.

8.2.2 Joint Collaboration Patents . The responsibility and strategy for Prosecution and Maintenance of Collaboration Patents claiming any jointly owned Collaboration Know-How shall be mutually agreed by GSK and ChemoCentryx through the Joint Patent Subcommittee. The Parties shall cooperate through the Joint Patent Subcommittee to prepare and prosecute patent applications for Patents claiming any such Collaboration Know-How in a manner that ensures a reasonable scope of protection for such subject matter. In the event of any dispute in the Joint Patent Subcommittee, ChemoCentryx shall have the final say with respect to decisions made prior to GSK’s exercise of its Product Option, and GSK shall have final say after such exercise, with respect to those claims in Collaboration Patents which cover any Development Candidate as to which GSK exercises its Product Option.

8.2.3 Solely Owned Collaboration Patents . GSK or ChemoCentryx, as the case may be, shall control the Prosecution and Maintenance of Collaboration Patents claiming any Collaboration Know-How owned solely by such Party in accordance with Section 8.1.2, in each case at its own cost and using counsel of its choice and in such countries as such Party determines is appropriate, in accordance with Section 8.2.4, as applicable.

8.2.4 Other Matters Pertaining to Prosecution and Maintenance of Patents.

(a) The Parties shall coordinate through the Joint Patent Subcommittee the Prosecution and Maintenance of Collaboration Patents claiming any jointly owned Collaboration Know-How or any Patent claiming solely owned Collaboration Know-How that claims the composition of, or method of making or using, a Collaboration Compound (such solely owned Patents, “ Compound Patents ”). Each Party shall submit to the other Party copies of all correspondence with patent authorities covering such Collaboration Patents for which such Party

 

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has responsibility for Prosecution and Maintenance pursuant to Section 8.2.1, and ChemoCentryx shall submit to GSK the same with respect to such correspondence regarding ChemoCentryx Patents which are Compound Patents. Each Party shall keep the other Party informed as to material developments with respect to the Prosecution and Maintenance of such Collaboration Patents or ChemoCentryx Patents, including without limitation, by providing upon request copies of any office actions or any other substantive documents that such Party receives from any patent office, including notice of all interferences, reissues, re-examinations, oppositions or requests for patent term extensions, and by providing the other Party the timely opportunity to have reasonable input into the strategic aspects of such Prosecution and Maintenance. Without limiting the foregoing, neither Party shall file an application for such a Collaboration Patent unless it has first disclosed the same to the Other Party. ChemoCentryx’s obligations under this Section 8.2.4(a) shall terminate with respect to a given set of claims or Patents to the extent they contain only claims covering Progressed Compounds as to which GSK has elected not to exercise its Product Option.

(b) If, during the Term, the Party responsible for prosecuting a Patent claiming jointly owned Collaboration Know-How or any Compound Patent (the “ Prosecuting Party ”), intends to allow such Collaboration Patent to lapse or become abandoned without having first filed a substitute, the Prosecuting Party shall, whenever practicable, notify the other Party of such intention at least sixty (60) days prior to the date upon which such Patent shall lapse or become abandoned, and such other Party shall thereupon have the right, but not the obligation, to assume responsibility for the Prosecution and Maintenance thereof at its own expense with counsel of its own choice.

8.3 Patent Costs.

8.3.1 Collaboration Technology . As set forth in Section 8.2.3, each Party shall be responsible for costs associated with the Prosecution and Maintenance of any Collaboration Patents that it owns solely. ChemoCentryx and GSK shall share equally the Patent Costs associated with the Prosecution and Maintenance of Patents claiming any jointly owned Collaboration Patents, unless the Parties otherwise agree.

8.3.2 Existing ChemoCentryx Patents and GSK Patents . ChemoCentryx shall be responsible for [***] percent ([***]%) of the Patent Costs incurred by ChemoCentryx prior to and after the Effective Date in all countries in the Territory with respect to any ChemoCentryx Patents. GSK shall be responsible for [***] percent ([***]%) of the Patent Costs incurred by GSK prior to and after the Effective Date in all countries in the Territory with respect to GSK Patents.

8.3.3 Patent Costs Following GSK’s Exercise of the Product Option. Notwithstanding the foregoing, following GSK’s exercise of a Product Option, GSK, upon receipt of invoice from ChemoCentryx, shall reimburse ChemoCentryx its Patent Costs associated with the Prosecution and Maintenance of all ChemoCentryx Patents and Collaboration Patents over which ChemoCentryx has the responsibility for Prosecution and Maintenance and

 

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which contain claims covering such Progressed Compounds. In addition, the Parties, through the Joint Patent Subcommittee, will cooperate to determine if and when any divisional applications shall be filed with respect to such ChemoCentryx Patents and Collaboration Patents. In addition, If GSK is no longer satisfied with external counsel used by ChemoCentryx after GSK exercises its Product Option, GSK has the right to take over control of prosecution of such Patent claims using an external law firm to be mutually agreed.

8.4 Defense of Claims Brought by Third Parties .

8.4.1 Collaboration Compounds. If a Third Party asserts that a Patent or other right owned by it is infringed by the manufacture, use, sale or importation of any Collaboration Compound as to which GSK has not exercised its Product Option, ChemoCentryx shall have the primary right but not the obligation to defend against any such assertions at its cost and expense. In the event ChemoCentryx elects to defend against any such Third Party claims, ChemoCentryx shall have the sole right to direct the defense of any such Third Party claims and to elect to settle such claims. In the event that ChemoCentryx elects not to defend against such Third Party claims within one hundred twenty (120) days of learning of same, GSK shall have the right, but not the duty, to defend against such an action and thereafter shall have the right to direct the defense of any such Third Party claim(s), including, without limitation the right to settle such claims, but only with the consent of ChemoCentryx, not to be unreasonably withheld. In any event, the Parties shall reasonably assist one another and cooperate in any such litigation at the other’s request without expense to the requesting Party. Each Party may at its own expense and with its own counsel join any defense brought by the other Party.

8.4.2 Licensed Products . If a Third Party asserts that a Patent or other right owned by it is infringed by the manufacture, use, sale or importation of any Licensed Product (except for a Returned Licensed Product which shall be subject to Section 8.3.1(a)), GSK shall have the primary right but not the obligation to defend against any such assertions at its cost and expense. In the event GSK elects to defend against any such Third Party claims, GSK shall have the sole right to direct the defense of any such Third Party claims and to elect to settle such claims. In the event that GSK elects not to defend against such Third Party claims within one hundred twenty (120) days of learning of same, ChemoCentryx shall have the right, but not the duty, to defend against such an action and thereafter shall have the sole right to direct the defense of any such Third Party claim(s), including, without limitation the right to settle such claims. In any event, the Parties shall reasonably assist one another and cooperate in any such litigation at the other’s request without expense to the requesting Party. Each Party may at its own expense and with its own counsel join any defense brought by the other Party.

8.5 Enforcement of Collaboration Patents and ChemoCentryx Patents.

8.5.1 Duty to Notify of Competitive Infringement . If any Party learns of an infringement, unauthorized use, misappropriation or threatened infringement or other such activity by a Third Party with respect to any Collaboration Patent or ChemoCentryx Patent by

 

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reason of the manufacture, use or sale of a product identical to or substantially similar to any Progressed Compounds, Option Compound, Product Candidate or Licensed Product following exercise by GSK of its Product Option with respect thereto, within the Territory (“ Competitive Infringement ”), such Party shall promptly notify the other Party and shall provide such other Party with available evidence of such Competitive Infringement.

8.5.2 Prior to Exercise of Product Option. Prior to GSK’s exercise of its Product Option, ChemoCentryx shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to any such Competitive Infringement, by counsel of its own choice, and GSK shall have the right, at its own expense, to be represented in that action by counsel of its own choice. If ChemoCentryx fails to bring any such action or proceeding within a period of one hundred twenty (120) days after first being notified of such Competitive Infringement, then GSK shall have the right, but not the obligation, to bring and control any such action by counsel of its own choice, and ChemoCentryx shall have the right to be represented in any such action by counsel of its own choice at its own expense.

8.5.3 Following Exercise of Product Option. Following GSK’s exercise of its Product Option with respect to the Progressed Compounds which are the subject of any Competitive Infringement, GSK shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect thereto by counsel of its own choice, and ChemoCentryx shall have the right, at its own expense, to be represented in that action by counsel of its own choice. If GSK fails to bring an action or proceeding within a period of one hundred twenty (120) days after first being notified of such Competitive Infringement, ChemoCentryx shall have the right to bring and control any such action by counsel of its own choice, and GSK shall have the right to be represented in any such action by counsel of its own choice at its own expense.

8.5.4 Share of Recoveries. If one Party brings any such action or proceeding in accordance with this Section 8.5, the second Party agrees to be joined as a party plaintiff where necessary and to give the first Party reasonable assistance and authority to file and prosecute the suit. The costs and expenses of the Party bringing suit under this Section 8.5 shall be borne by such Party, and any damages or other monetary awards recovered shall be shared as follows: (i) the amount of such recovery actually received by the Party controlling such action shall first be applied to the out-of-pocket costs of such action; and then (ii) any remaining proceeds shall be allocated between the Parties (A) if such action related solely to Licensed Products (i.e., after exercise by GSK of its Product Option), allocated between the Parties such that the Party bringing suit under this Section 8.5 retains [***] percent ([***]%) and the other Party retains [***] percent ([***]%) of such amount, or (B) if such action related solely to products identical to or substantially similar to Collaboration Compounds that are not yet Product Candidates or Licensed Products, retained [***] percent ([***]%) by ChemoCentryx. A settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.5 may be entered into without the consent of the Party not bringing the suit; provided that such settlement, consent judgment or other disposition does not admit the invalidity or unenforceability of the relevant Patent, ChemoCentryx Technology or GSK Technology and provided further , that any rights

 

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granted under the relevant Patent to continue the infringing activity in such settlement, consent judgment or other disposition shall be limited to those rights that the granting Party otherwise has the right to grant.

8.5.5 Other Infringement. Subject to Sections 8.5.1 through 8.5.4 above, with respect to the infringement of jointly owned Collaboration Patents which is not a Competitive Infringement, each Party may proceed in such manner as the law permits. Each Party shall bear its own expenses, and any recovery obtained by either Party may be retained by such Party unless otherwise agreed. In addition, ChemoCentryx shall retain all rights to pursue an infringement of any ChemoCentryx Patent or Collaboration Patent solely owned by ChemoCentryx which is other than a Competitive Infringement, and GSK shall retain all rights to pursue an infringement of any GSK Patent or Collaboration Patent solely owned by GSK which is other than a Competitive Infringement.

8.5.6 35 USC 271(e)(2) Infringement. Notwithstanding anything to the contrary in this Section 8.5, for infringement under 35 USC 271(e)(2) where GSK has exercised its Product Option under Article 4 of this Agreement and where GSK is the holder of the applicable NDA, and for so long as GSK maintains or retains its exclusive license under such Product Option, GSK has the sole right to initiate legal action to enforce all ChemoCentryx Patents and Collaboration Patents licensed to it pursuant to Section 5.1.2(b) against infringement or misappropriation by Third Parties or defend any declaratory judgment action relating thereto at its sole expense

8.5.7 Regulatory Data Protection. To the extent required by law or permitted by law, each Party will use commercially reasonable efforts to promptly, accurately and completely list, with the applicable regulatory authorities during the term of this Agreement, all applicable Patents for any Product that such Party intends to, or has begun to commercialize, and that have become the subject of a marketing application submitted to FDA, such listings to include all so called “Orange Book” listings required under the Hatch-Waxman Act and all so called “Patent Register” listings as required in Canada. Prior to such listings, the Parties will meet, through the Joint Patent Subcommittee, to evaluate and identify all applicable Patents. Notwithstanding the preceding sentence, the Party responsible for marketing the applicable Product will retain final decision making authority as to the listing of all applicable Patents for such Product, regardless of which Party owns such Patent.

ARTICLE 9

CONFIDENTIALITY

9.1 Confidentiality; Exceptions . Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that the receiving Party (the “ Receiving Party ”) shall keep confidential and shall not publish or otherwise disclose or use for any purpose other than as provided for in this Agreement any Information or other confidential and proprietary information and materials, patentable or otherwise, in any form (written, oral,

 

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photographic, electronic, magnetic, or otherwise) which is disclosed to it by the other Party (the “ Disclosing Party ”) or otherwise received or accessed by a Receiving Party in the course of performing its obligations or exercising its rights under this Agreement including, but not limited to trade secrets, know-how, inventions or discoveries, proprietary information, formulae, processes, techniques and information relating to a Party’s past, present and future marketing, financial, and research and development activities of any product or potential product or useful technology of the Disclosing Party and the pricing thereof (collectively, “ Confidential Information ”), except to the extent that it can be established by the Receiving Party that such Confidential Information:

9.1.1 was in the lawful knowledge and possession of the Receiving Party prior to the time it was disclosed to, or learned by, the Receiving Party, or was otherwise developed independently by the Receiving Party, as evidenced by written records kept in the ordinary course of business, or other documentary proof of actual use by the Receiving Party;

9.1.2 was generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party;

9.1.3 became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the Receiving Party in breach of this Agreement; or

9.1.4 was disclosed to the Receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the Disclosing Party not to disclose such information to others.

9.2 Authorized Disclosure . Except as expressly provided otherwise in this Agreement, a Receiving Party may use and disclose Confidential Information of the Disclosing Party as follows: (i) under appropriate confidentiality provisions similar to those in this Agreement, in connection with the performance of its obligations or exercise of rights granted or reserved in this Agreement (including, without limitation, the rights to commercialize Product Candidates, Licensed Products and to grant licenses and sublicenses hereunder); or (ii) to the extent such disclosure is reasonably necessary in filing or prosecuting patent, copyright and trademark applications, prosecuting or defending litigation, complying with applicable governmental regulations, obtaining regulatory approval, conducting preclinical activities or clinical trials, marketing Licensed Products, or otherwise required by law; provided, however , that if a Receiving Party is required by law or regulation to make any such disclosure of a Disclosing Party’s Confidential Information it will, except where impracticable for necessary disclosures, for example in the event of medical emergency, give reasonable advance notice to the Disclosing Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed; or (iii) in communication with investors, consultants, advisors or others on a need to know basis, in each case under appropriate confidentiality provisions substantially equivalent to those of this Agreement; or (iv) to the

 

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extent mutually agreed to in writing by the Parties.

9.3 Press Release; Disclosure of Agreement. On or promptly after the Effective Date, the Parties shall individually or jointly issue a public announcement of the execution of this Agreement in such form separately agreed upon between the Parties. Neither Party shall be free to issue any press release or other public disclosure regarding the Agreement or the Parties activities hereunder, or any results or data arising hereunder, except with the other Party’s consent, or except as reasonably necessary to comply with all applicable laws or regulations. The Parties agree to consult with each other reasonably and in good faith with respect to the text and timing of any such press releases prior to the issuance thereof, and a Party may not unreasonably withhold consent to such releases. Except to the extent required by law or as otherwise permitted in accordance with this Section 9.3, neither Party shall make any public announcements concerning this Agreement or the subject matter hereof without the prior written consent of the other, which shall not be unreasonably withheld. The principles to be observed by ChemoCentryx and GSK in any such permitted public disclosures with respect to this Agreement shall be: accuracy, the requirements of confidentiality under this Article 9, and the normal business practice in the pharmaceutical and biotechnology industries for disclosures by companies comparable to ChemoCentryx and GSK. Notwithstanding the foregoing, to the extent information regarding this Agreement has already been publicly disclosed, either Party may subsequently disclose the same information to the public without the consent of the other Party. Each Party shall be permitted to disclose the terms of this Agreement, in each case under appropriate confidentiality provisions substantially equivalent to those of this Agreement, to any actual or potential acquirors, merger partners, and professional advisors. In addition, GSK understands that ChemoCentryx is a private company with consistent capital requirements, and that ChemoCentryx may, on a selected basis, disclose the financial terms of this Agreement to potential, bona fide investors and investment bankers in each case, where practicable, under appropriate confidentiality provisions substantially equivalent to those of this Agreement. Each Party shall give the other Party a reasonable opportunity to review all filings with the United States Securities and Exchange Commission describing the terms of this Agreement prior to submission of such filings, and shall give due consideration to any reasonable comments by the non-filing Party relating to such filing, including without limitation the provisions of this Agreement for which confidential treatment should be sought.

9.4 Termination of Prior Agreement . This Agreement supersedes the Non-Disclosure Agreement executed by ChemoCentryx and GSK dated December 12, 2005 (including any and all amendments thereto). All information exchanged between the Parties under that Agreement shall be deemed Confidential Information hereunder and shall be subject to the terms of this Article 9.

9.5 Remedies. Each Party shall be entitled to seek, in addition to any other right or remedy it may have, at law or in equity, a temporary injunction, without the posting of any bond or other security, enjoining or restraining the other Party from any violation or threatened violation of this Article 9.

 

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9.6 Publications . Neither Party or its Affiliates shall publish or publicly disclose the results of any of the research and/or development activities conducted under the Research Program or under any Early Development Program, without the prior written consent of the other Party, except that after the end of the Research Term, the foregoing shall not apply to ChemoCentryx for results that do not relate to any Collaboration Compounds, or to GSK for results that relate directly to any of the Product Candidates or Licensed Products. The Parties recognize that it may be useful or required to publish or publicly disclose the results of development work on Licensed Products, and GSK (and its Affiliates and Sublicensees) shall be free to publish or publicly disclose such results, subject to the prior review by ChemoCentryx for patentability and protection of its Confidential Information. GSK shall provide to ChemoCentryx at GSK’s earliest practical opportunity any proposed abstracts, manuscripts or summaries of presentations which cover the results of clinical development of any Licensed Product, for review and comment as to matters relating to its patents and Confidential Information. ChemoCentryx shall respond in writing promptly and in no event later than thirty (30) days after receipt of the proposed material, or within such reasonably shorter period as is required (and promptly communicated by GSK to ChemoCentryx) by the relevant publication deadline, with either approval of the proposed material or a specific statement of concern, based upon either the need to seek patent protection or concern regarding competitive disadvantage arising from the proposal. In the event of concern, GSK agrees not to submit such publication or to make such presentation that contains such information until ChemoCentryx is given a reasonable period of time (not to exceed sixty (60) days) to seek patent protection for any material in such publication or presentation which it believes is patentable or to resolve any other issues. This Section 9.6 shall cease to apply with respect to any Licensed Product upon the commercial launch of such Licensed Product. Furthermore, with respect to any proposed abstracts, manuscripts or summaries of presentations by investigators or other Third Parties, such materials shall be subject to review under this Section 9.6 to the extent that GSK or ChemoCentryx (as the case may be) has the right to do so.

ARTICLE 10

REPRESENTATIONS AND WARRANTIES

10.1 Representations and Warranties of Both Parties . Each Party hereby represents and warrants to the other Party, as of the Effective Date, that:

10.1.1 such Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof;

10.1.2 such Party has taken all necessary action on its part to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder;

10.1.3 this Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, binding obligation, enforceable against it in accordance with

 

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the terms hereof;

10.1.4 the execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over such Party;

10.1.5 no government authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, under any applicable laws, rules or regulations currently in effect, is or will be necessary for, or in connection with, the transaction contemplated by this Agreement or any other agreement or instrument executed in connection herewith, or for the performance by it of its obligations under this Agreement and such other agreements except as may be required under the Stock Purchase Agreement or to obtain Hart-Scott-Rodino clearance; and

10.1.6 it has not employed (and, to the best of its knowledge without further duty of inquiry, has not used a contractor or consultant that has employed) and in the future will not employ (or, to the best of its knowledge without further duty of inquiry, use any contractor or consultant that employs) any individual or entity debarred by the FDA (or subject to a similar sanction of EMEA), or, to the best of its knowledge without further duty of inquiry, any individual who or entity which is the subject of an FDA debarment investigation or proceeding (or similar proceeding of EMEA), in the conduct of the Preclinical Activities or Clinical Studies of Collaboration Compounds and its activities under the Research Program.

10.2 Representations and Warranties of ChemoCentryx . ChemoCentryx hereby represents and warrants to GSK, as of the Effective Date, that:

10.2.1 To the best of its knowledge and belief, ChemoCentryx is the owner of, or otherwise has the right to grant all rights and licenses it purports to grant to GSK with respect to the ChemoCentryx Technology under this Agreement, and all rights and licenses that were granted to Forest Laboratories or to any Third Party prior to the Effective Date with respect to any of the Collaboration Targets or any intellectual property pertaining to any compound with activity against CCR1 or any compound with activity against any other Collaboration Target have been terminated and have reverted fully to ChemoCentryx, without any lien, encumbrance, restriction or obligation;

10.2.2 ChemoCentryx’s license agreement with Forest Laboratories, Inc. has been terminated and as of the Effective Date is no longer in effect;

10.2.3 To the best of its knowledge and belief without having conducted any special inquiry and without any further duty of inquiry, ChemoCentryx does not require any licenses or other intellectual property rights from any Third Parties in order to conduct research, discovery, and Development activities as set forth under the Research Plan and any Early

 

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Development Program;

10.2.4 ChemoCentryx has no present knowledge from which it concludes that any of the ChemoCentryx Patents are invalid or unenforceable;

10.2.5 To the best of its knowledge without having conducted any special inquiry and without any further duty of inquiry, (i) there are no additional licenses (beyond those granted to GSK under Article 5 pursuant to the exercise of a Product Option) required by GSK under any intellectual property owned or Controlled by ChemoCentryx or its Affiliate as of the Effective Date or during the Term which would be required in order for GSK to further Develop and commercialize any Progressed Compound, Product Candidate or Licensed Product as contemplated under this Agreement pursuant to the exercise by GSK of any of its Product Options, and (ii) all such intellectual property owned or Controlled by ChemoCentryx as of the Effective Date and during the Term shall be included within the ChemoCentryx Technology;

10.2.6 Subject to Section 7.1.2, ChemoCentryx has not as of the Effective Date, and during the Term shall not, grant any right or license to any Third Party relating to any of the ChemoCentryx Technology which would conflict or interfere with any of the rights or licenses granted to GSK hereunder. ChemoCentryx will not, during the Term, as applicable, encumber any of the ChemoCentryx Technology with any license or with any liens, mortgages, security interests or another similar interest that would give the holder the right to convert the interest into ownership.

10.2.7 To the best of its knowledge without having conducted any special inquiry and without any further duty of inquiry, ChemoCentryx has disclosed to GSK all material data and Information, and all material correspondence to/from any Regulatory Authority regardless of whether such data, correspondence and Information would have a positive, neutral, or negative impact on the potential commercial, scientific or strategic value or attractiveness of the Collaboration Compounds in existence as of the Effective Date, that would in ChemoCentryx’s reasonable opinion be material and relevant to a reasonable assessment, of the scientific, commercial, safety, and regulatory liabilities of such Collaboration Compounds.

10.3 ChemoCentryx Covenants. ChemoCentryx hereby covenants that:

10.3.1 all employees of ChemoCentryx or its Affiliates and working under this Agreement shall be under the obligation to assign all right, title and interest in and to their inventions and discoveries, whether or not patentable, if any, to ChemoCentryx as the sole owner thereof;

10.3.2 ChemoCentryx shall not employ (or, to the best of its knowledge without further duty of inquiry, shall not use any contractor or consultant that employs) any individual or entity debarred by the FDA (or subject to a similar sanction of EMEA), or, to the best of its knowledge without further duty of inquiry, any individual who or entity which is the subject of an FDA debarment investigation or proceeding (or similar proceeding of EMEA), in the conduct

 

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of the Preclinical Activities or Clinical Studies of Collaboration Compounds and its activities under any Program;

10.3.3 ChemoCentryx shall perform its activities pursuant to this Agreement in compliance with good laboratory and clinical practices and cGMP, in each case as applicable under the laws and regulations of the country and the state and local government wherein such activities are conducted, and with respect to the care, handling and use in research and development activities hereunder of any non-human animals by or on behalf of ChemoCentryx, shall at all times comply (and shall ensure compliance by any of its subcontractors) with all applicable federal, state and local laws, regulations and ordinances, and also with the most current best practices in the industry for the proper care, handling and use of animals in pharmaceutical research and development activities, subject to GSK’s reasonable right of inspection.

10.3.4 ChemoCentryx hereby covenants to GSK that it shall disclose to GSK and exchange all data and Information, and all correspondence to/from any Regulatory Authority regardless of whether such data, correspondence and Information would have a positive, neutral, or negative impact on the potential commercial, scientific or strategic value or attractiveness of the asset, that would be material and relevant to a reasonable assessment, in its best determination, of the scientific, commercial, safety, and regulatory liabilities of the asset to be considered by GSK in deciding whether or not to exercise its Product Option with respect to each Option Compound.

10.4 Representation and Warranty of GSK. GSK hereby represents and warrants to ChemoCentryx, as of the Effective Date, without having conducted any special inquiry and without any further duty of inquiry, that: to the best of GSK’s knowledge and belief, GSK does not have any research, development, or commercialization activities (on its own behalf or with or for a Third Party) relating to the discovery of target-selective small molecule compounds which exclusively target any single target included within the Collaboration Targets, which activities are at the stage of candidate selection or later except in conjunction with ChemoCentryx and pursuant to this Agreement. The Parties understand that the representation and warranty made in this paragraph is applicable only with respect to the research, development and commercialization activities of GSK existing as of the Effective Date.

10.5 Disclaimer. Except as otherwise expressly set forth in this Agreement, neither Party makes any representation or extends any warranty of any kind either express or implied, including, but not limited to, any warranty that any Patents are valid or enforceable or that their exercise does not infringe any patent rights of Third Parties. A holding of invalidity or unenforceability of any Patent, from which no further appeal is or can be taken, shall not affect any obligation already accrued hereunder, but shall only affect the payment of royalties otherwise due under this Agreement as and to the extent provided in Article 6. GSK understands that the Collaboration Compounds are the subject of ongoing clinical research and development and that ChemoCentryx cannot assure the safety or usefulness of resulting Development Candidates, Option Compounds, and/or Licensed Products. In addition, ChemoCentryx makes

 

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no warranties except as set forth in this Article 10 concerning the ChemoCentryx Technology or the Collaboration Technology. Without limiting the generality of the foregoing, each Party expressly does not warrant, and disclaims any warranties with regards to: (a) the success of any study or test commenced under the Research Program, (b) the safety or usefulness for any purpose of the technology or materials, including any Collaboration Compounds, it provides or discovers under this Agreement; and/or (c) the validity, enforceability, or non-infringement of any intellectual property rights or technology it provides or licenses to the other Party under this Agreement.

ARTICLE 11

INDEMNIFICATION; INSURANCE

11.1 Indemnification by GSK . GSK shall indemnify, defend and hold harmless ChemoCentryx, and its Affiliates, and its or their respective directors, officers, employees and agents, from and against any and all liabilities, damages, losses, costs and expenses including, but not limited to, the reasonable fees of attorneys and other professionals (collectively “ Losses ”), arising out of or resulting from any and all Third Party suits, claims, actions, proceedings or demands ( “Claims” ) based upon:

11.1.1 the negligence, recklessness or wrongful intentional acts or omissions of GSK and/or its Affiliates and its or their respective directors, officers, employees and agents, in connection with GSK’s performance of its obligations or exercise of its rights under this Agreement;

11.1.2 any breach of any representation or warranty or express covenant made by GSK under Article 10 or any other provision under this Agreement; or

11.1.3 the Development that is actually conducted by and/or on behalf of GSK (excluding any Development carried out by and/or on behalf of ChemoCentryx hereunder), the handling and storage by and/or on behalf of GSK of any chemical agents or other compounds for the purpose of conducting Development by or on behalf of GSK, and the manufacture, marketing, commercialization and sale by GSK, its Affiliate or Sublicensees of any Product Candidate or Licensed Product pursuant to the exercise by GSK of the relevant Product Option ;

except , in each case above, to the extent such Claim arose out of or resulted from or is attributable to the negligence, recklessness or wrongful intentional acts or omissions of ChemoCentryx and/or its Affiliate or Sublicensee or contractor, and its or their respective directors, officers, employees and agents;

11.2 Indemnification by ChemoCentryx . ChemoCentryx shall indemnify, defend and hold harmless GSK and its Affiliates, and its or their respective directors, officers, employees and agents, from and against any and all Losses, arising out of or resulting from any and all Third Party Claims based upon:

 

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11.2.1 the negligence, recklessness or wrongful intentional acts or omissions of ChemoCentryx and/or its Affiliates and/or its or their respective directors, officers, employees and agents, in connection with ChemoCentryx’s performance of its obligations or exercise of its rights under this Agreement;

11.2.2 any breach of any representation or warranty or express covenant made by ChemoCentryx under Article 10 or any other provision under this Agreement; or

11.2.3 the research and/or Development actually conducted by or on behalf of ChemoCentryx (excluding any Development carried out by GSK), or the storage, handling, manufacture, marketing, commercialization and sale of any Collaboration Compounds or any product resulting therefrom (including, without limitation, all Progressed Compounds, Development Candidates, Product Candidates, Refused Candidates and Returned Licensed Products) by ChemoCentryx, its Affiliates, agents or Sublicensees ;

except , in each case above, to the extent such Claim arose out of or resulted from or is attributable to the negligence, recklessness or wrongful intentional acts or omissions of GSK and/or its Affiliate, and its or their respective directors, officers, employees and agents.

11.3 Procedure . In the event that any person (an “ Indemnitee ”) entitled to indemnification under Section 11.1 or Section 11.2 is seeking such indemnification, such Indemnitee shall (i) inform, in writing, the indemnifying Party of the claim as soon as reasonably practicable after such Indemnitee receives notice of such claim, (ii) permit the indemnifying Party to assume direction and control of the defense of the claim (including the sole right to settle it at the sole discretion of the indemnifying Party, taking into consideration in good faith any reasonable concerns or objections raised by the Indemnitee; provided that such settlement does not impose any obligation on, or otherwise adversely affect, the Indemnitee or other Party), (iii) cooperate as reasonably requested (at the expense of the indemnifying Party) in the defense of the claim, and (iv) undertake all reasonable steps to mitigate any loss, damage or expense with respect to the claim(s).

11.4 Insurance .

11.4.1 ChemoCentryx’s Insurance Obligations . ChemoCentryx shall maintain, at its cost, with effect from prior to the date of first administration of any Collaboration Compound (including, without limitation, all Progressed Compounds, Development Candidates, Product Candidates, Refused Candidates and Returned Licensed Products and any product based thereon) for testing in humans hereunder and during the Term thereafter, adequate insurance against liability and other risks associated with its activities contemplated by this Agreement, including but not limited to its clinical trials and its indemnification obligations herein, in such amounts and on such terms as are customary for prudent practices in the pharmaceutical industry for the activities to be conducted by it under this Agreement. At a minimum, ChemoCentryx shall maintain, in force from thirty (30) days following the Effective Date and thereafter during the Term, at its cost, a general liability insurance policy providing coverage of at least Ten Million

 

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U.S. Dollars ($10 Million) per claim and annual aggregate, provided that such coverage is at least (a) Ten Million U.S. Dollars ($10 Million) before ChemoCentryx enters Phase II Clinical Trials with respect to any Collaboration Compound and is increased to at least (b) Fifty Million U.S. Dollars ($50 Million) before ChemoCentryx initiates the First Commercial Sale of any Collaboration Compound or related product hereunder. ChemoCentryx shall furnish to GSK evidence of such insurance, upon request.

11.4.2 GSK’s Insurance Obligations . GSK hereby represents and warrants to ChemoCentryx that it is self-insured against liability and other risks associated with its activities and obligations under this Agreement in such amounts and on such terms as are customary for prudent practices for large pharma in the pharmaceutical industry for the activities to be conducted by it under this Agreement. GSK shall furnish to ChemoCentryx evidence of such self-insurance, upon request.

11.5 LIMITATION OF CONSEQUENTIAL DAMAGES . EXCEPT FOR A BREACH OF ARTICLE 9 OR FOR CLAIMS OF A THIRD PARTY WHICH ARE SUBJECT TO INDEMNIFICATION UNDER THIS ARTICLE 11 OR AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, NEITHER CHEMOCENTRYX NOR GSK, NOR ANY OF THEIR AFFILIATES OR SUBLICENSEES WILL BE LIABLE TO THE OTHER PARTY TO THIS AGREEMENT, ITS AFFILIATES OR ANY OF THEIR SUBLICENSEES FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, RELIANCE OR PUNITIVE DAMAGES OR LOST OR IMPUTED PROFITS OR ROYALTIES, LOST DATA OR COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, WHETHER LIABILITY IS ASSERTED IN CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT PRODUCT LIABILITY), INDEMNITY OR CONTRIBUTION, AND IRRESPECTIVE OF WHETHER THAT PARTY OR ANY REPRESENTATIVE OF THAT PARTY HAS BEEN ADVISED OF, OR OTHERWISE MIGHT HAVE ANTICIPATED THE POSSIBILITY OF, ANY SUCH LOSS OR DAMAGE.

ARTICLE 12

TERM AND TERMINATION

12.1 Term; Expiration . This Agreement shall become effective as of the Effective Date and shall continue in force and effect until expiration as described in this Section 12.1, unless earlier terminated pursuant to the other provisions of this Article 12, and shall expire as follows:

12.1.1 on a Licensed Product-by-Licensed Product and country-by-country basis, on the date of expiration of all payment obligations under this Agreement with respect to such Licensed Product in such country; and

12.1.2 in its entirety upon the expiration of all payment obligations under this Agreement with respect to the last Licensed Product in all countries in the Territory pursuant to

 

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Section 12.1.1; or

12.1.3 where GSK declines to exercise all of its Product Options hereunder, this Agreement will terminate within thirty (30) days of the termination of the Option Period with respect to the sixth (6th) Product Option as to which GSK does not elect its Product Option.

12.1.4 The period from the Effective Date until the date of expiration of the entire Agreement, or as the case may be, until the date of expiration of the Agreement in part with respect to a given Licensed Product, pursuant to this Section 12.1. shall be the “ Term ” of the Agreement in its entirety or with respect to a given Licensed Product, respectively.

12.1.5 Effect of Expiration of the Term.

(a) Following the expiration of the Term with respect to a Licensed Product in a country pursuant to Section 12.1.1, subject to the terms and conditions of this Agreement, GSK shall have an exclusive, fully-paid and royalty-free, right and license, with the right to grant sublicenses, under all of ChemoCentryx’s rights in and to the ChemoCentryx Technology solely to continue to make, have made, use, sell, offer to sell and import Licensed Products in the Field in such country, for so long as it continues to do so.

(b) Following expiration of the Term in its entirety pursuant to Section 12.1.2, subject to the terms and conditions of this Agreement, GSK shall have an exclusive, fully-paid and royalty-free, right and license, with the right to grant sublicenses, under all of ChemoCentryx’s rights in and to the ChemoCentryx Technology solely to continue to make, have made, use, sell, offer to sell and import Licensed Products in the Field in the Territory, for so long as it continues to do so. Following the expiration of the Term in its entirety pursuant to Section 12.1.2, subject to the terms and conditions of this Agreement, ChemoCentryx shall have an exclusive, fully-paid and royalty-free, right and license, with the right to grant sublicenses, under GSK Technology solely as necessary to continue to make, have made, use, sell, offer to sell, and import Returned Licensed Product for so long as it continues to do so.

(c) Following expiration of the Term in its entirety pursuant to Section 12.1.3, subject to the terms and conditions of this Agreement, GSK shall have no further rights in, or options to, any Collaboration Compounds, and all licenses granted hereunder to GSK shall terminate and be of no further force and effect.

12.2 Termination for Cause .

12.2.1 During the Collaboration Term and Prior to any Exercise of Product Options . Either Party (the “ Non-breaching Party ”) may, without prejudice to any other remedies available to it at law or in equity, terminate this Agreement during the Collaboration Term, on a Collaboration Target by Collaboration Target basis, or in its entirety, as may be appropriate to protect the interest of the Non-Breaching Party arising from such alleged breach, in the event the other Party (the “ Breaching Party ”) shall have materially breached or defaulted in the performance of any of its material obligations hereunder either with respect to a particular

 

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Collaboration Target, or the Agreement as a whole, as the case may be, and such default shall have continued for ninety (90) days after written notice thereof was provided to the Breaching Party by the Non-breaching Party, such notice describing with particularity and in detail the alleged material breach.

12.2.2 Following exercise of a Product Option. Either Party (the “ Non-breaching Party ”) may, without prejudice to any other remedies available to it at law or in equity, terminate this Agreement in its entirety, or in part on a Collaboration Target by Collaboration Target basis, or on an Early Development Program by Early Development Program basis, or on a Licensed Product by Licensed Product basis, in the event the other Party (the “ Breaching Party ”) shall have materially breached or defaulted in the performance of any of its material obligations hereunder either with respect to a particular Collaboration Target, Early Development Program, Licensed Product or generally with respect to the Agreement, and such default shall have continued for ninety (90) days after written notice thereof was provided to the Breaching Party by the Non-breaching Party such notice describing with particularity and in detail the alleged material breach.

12.2.3 Termination by GSK due to ChemoCentryx Diligence Failure Event. GSK shall have the right, at its sole discretion, to terminate the Agreement in its entirety or in part on a Collaboration Target by Collaboration Target basis, or on an Early Development Program by Early Development Program basis, or on a Licensed Product by Licensed Product basis in the event of an uncured material breach by ChemoCentryx with respect to Diligent Efforts in regard to the Research Program or any Early Development Program with respect to any one or more Collaboration Targets, and such termination shall be in accordance with the provisions of Section 3.3.

12.2.4 Disagreement. If the Parties reasonably and in good faith disagree as to whether there has been a material breach, the Party which seeks to dispute that there has been a material breach may contest the allegation in accordance with Section 14.1,. Notwithstanding the above sentence, the cure period for any allegation made in good faith as to a material breach under this Agreement will run from the date that written notice was first provided to the Breaching Party by the Non-Breaching Party. Any such termination of the Agreement under this Section 12.2 shall become effective at the end of such ninety (90) day period, unless the Breaching Party has cured any such breach or default prior to the expiration of such ninety (90) day period. The right of either Party to terminate this Agreement, or a portion of this Agreement, as provided in this Section 12.2 shall not be affected in any way by such Party’s waiver or failure to take action with respect to any previous default.

12.3 GSK Unilateral Termination Rights . GSK shall have the right, at its sole discretion, exercisable at any time during the Term, to terminate this Agreement in its entirety or with respect to the research and development activities for a given Collaboration Target, for any reason or no reason at all, upon ninety (90) days written notice to ChemoCentryx, subject to the obligations set forth in Section 12.5.1. In the event that GSK terminates the entire Agreement under this Section 12.3 during Contract Year One or Contract Year Two, GSK shall owe to

 

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ChemoCentryx a payment equivalent to the amount that would have been outstanding as accrued, due and payable to ChemoCentryx as of the end of the Contract Year Two if such termination had not occurred. GSK shall not have any additional cost, liability, expense, or obligation of any kind whatsoever on account of any termination under this Section 12.3.

12.4 Termination for Insolvency .

12.4.1 Either Party may terminate this Agreement, if, at any time, the other Party shall file in any court or agency pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the Party or of substantially all of its assets, or if the other Party proposes a written agreement of composition or extension of substantially all of its debts, or if the other Party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, or if the other Party shall propose or be a party to any dissolution or liquidation, or if the other Party shall make an assignment of substantially all of its assets for the benefit of creditors.

12.4.2 All rights and licenses granted under or pursuant to any section of this Agreement are and shall otherwise be deemed to be for purposes of Section 365(n) of Title 11, United States Code (the “ Bankruptcy Code ”) licenses of rights to “intellectual property” as defined in Section 101(56) of the Bankruptcy Code. The Parties shall retain and may fully exercise all of their respective rights and elections under the Bankruptcy Code. Upon the bankruptcy of any Party, the non-bankrupt Party shall further be entitled to a complete duplicate of, or complete access to, any such intellectual property, and such, if not already in its possession, shall be promptly delivered to the non-bankrupt Party, unless the bankrupt Party elects to continue, and continues, to perform all of its obligations under this Agreement.

12.5 Effect of Termination .

12.5.1 Upon Unilateral Termination by GSK .

(a) In the event of a unilateral termination of this Agreement in its entirety by GSK pursuant to Section 12.3:

(i) Notwithstanding anything contained herein to the contrary, all licenses granted to GSK with respect to Product Candidates and Licensed Products, if any, for which GSK has previously exercised its Product Option as of the effective date of such termination shall continue in full force and effect, in accordance with the terms and conditions of this Agreement, including without limitation, GSK’s payment obligations under Article 6 with respect to any Licensed Products; and

(ii) All Product Options that are not yet triggered by the successful completion of a PoC Trial for an Option Compound under Sections 4.3.1(a) or 4.3.1(b) with respect to any Collaboration Targets as of the date that ChemoCentryx receives such notice from GSK shall be cancelled and of no force and effect;

 

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(b) In the event of a termination of this Agreement in part by GSK pursuant to Section 12.2.2 with respect to a given Licensed Product, (i) such Licensed Product shall be deemed a Returned Licensed Product under Section 5.7; and (ii) thereafter, the terms and conditions of Section 6.7 pertaining to the obligation to pay Reverse Royalties to GSK shall apply with respect to such Returned Licensed Product.

(c) All of ChemoCentryx’s exclusivity obligations under Article 7 shall immediately terminate and no longer be of any force or effect with respect to the Collaboration Target(s) being terminated and the Collaboration Compounds relating to such terminated Collaboration Targets.

12.5.2 Upon Termination by GSK for Cause .

(a) In the event of a termination of this Agreement in its entirety by GSK pursuant to Section 12.2.1 before the end of the Collaboration Term, the Collaboration Term shall terminate, with no additional amounts owed to ChemoCentryx pursuant to Section 3.6.

(b) In the event of a termination of this Agreement pursuant to Section 12.2.2 or Section 12.2.3 upon the breach of ChemoCentryx; or (2) pursuant to Section 12.4 upon the insolvency of ChemoCentryx:

(i) notwithstanding anything contained herein to the contrary, all licenses granted to GSK with respect Licensed Products for which GSK has previously exercised its Product Option as of the effective date of such termination shall continue in full force, in accordance with the terms and conditions of this Agreement, including without limitation, GSK’s payment obligations under Article 6 with respect to any Licensed Products, except that in the case of a termination by GSK under Section 12.2.3 due to a material breach by ChemoCentryx with respect to Diligent Efforts, the payment obligations of GSK shall be in accordance solely with Section 3.3, and the terms of Article 6 shall not apply; and

(ii) all Product Options that are pending as of the effective date of such termination by GSK shall continue under their terms.

(c) All of ChemoCentryx’s exclusivity obligations under Article 7 shall immediately terminate and no longer be of any force or effect with respect to the Collaboration Target(s) being terminated and the Collaboration Compounds relating to such terminated Collaboration Targets.

12.5.3 Upon Termination by ChemoCentryx for Cause .

(a) In the event of a termination of this Agreement by ChemoCentryx pursuant to Section 12.2.2 with respect to a given Licensed Product, (i) such Licensed Product shall be deemed a Returned Licensed Product under Section 5.7; and (ii) thereafter, the terms and conditions of Sections 5.7.2 and 5.7.3 shall apply with respect to such Returned Licensed Product, subject to the obligation to pay Reverse Royalties to GSK in accordance with Section 6.7.

 

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(b) In the event of a termination of this Agreement in its entirety by ChemoCentryx (1) pursuant to Section 12.2.1 upon the breach of GSK; or (2) pursuant to Section 12.4 upon the insolvency of GSK:

(i) GSK shall have no right to exercise any Product Option rights and all Product Options that are pending as of the effective date of such termination by GSK shall have no further force and effect

(ii) At ChemoCentryx’s option, and notwithstanding anything contained herein to the contrary, all licenses granted to GSK with respect Licensed Products for which GSK has previously exercised its Product Option as of the effective date of such termination shall terminate and any such Licensed Product shall be deemed a Returned Licensed Product under Section 5.7; and (ii) thereafter, the terms and conditions of Sections 5.8.2 and 5.8.3 shall apply with respect thereto, subject to the obligation to pay Reverse Royalties to GSK in accordance with Section 6.7.

(c) All of ChemoCentryx’s exclusivity obligations under Article 7 shall immediately terminate and no longer be of any force or effect, with respect to the Collaboration Target(s) being terminated and the Collaboration Compounds relating to such terminated Collaboration Targets.

12.5.4 Regulatory Filings. Upon termination or expiration of this Agreement pursuant to Section 12.2.2 by ChemoCentryx, or by GSK pursuant to Section 12.3:

(a) If Prior to First Commercial Sale of Licensed Product : GSK would exclusively license or assign and deliver to ChemoCentryx all relevant documents, safety databases, regulatory filings, and manufacturing information to the extent pertaining specifically to any Product Candidates and Licensed Products and which is necessary or important for commercial use and exploitation in the Territory; and

(b) If Following First Commercial Sale of a Licensed Product : With respect to all affected countries, GSK would exclusively license or assign and deliver to ChemoCentryx all relevant documents, safety data, regulatory filings, manufacturing information, trademarks as well as any other information, data and materials reasonably requested by ChemoCentryx, to the extent pertaining specifically to any Product Candidates and Licensed Products and which is necessary or important for commercial use and exploitation in the Territory . In addition, GSK shall provide for reasonable transitional support, such support to be not less than nine (9) months in countries in which the Licensed Product is approved for marketing and ChemoCentryx is not promoting or otherwise responsible for the Licensed Product.

12.5.5 Accrued Rights; Surviving Provisions of the Agreement .

(a) Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of any Party prior to such termination, relinquishment or expiration including, without limitation, the payment

 

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obligations under Article 6 hereof and any and all damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve any Party from obligations which are expressly indicated to survive termination of this Agreement.

(b) The provisions of Articles 5 and 6 (in accordance with Article 12 or to the extent owing), and Articles 9, 11, 12, and 14, and Sections 3.3.2, 3.3.3, 3.4.2, 3.9.2, 3.9.3, 8.1, 8.3, 8.5.6 and 8.5.7 shall survive the termination or expiration of this Agreement for any reason, in accordance with their respective terms and conditions, and for the duration stated, and where no duration is stated, shall survive indefinitely.

ARTICLE 13

REGULATORY

13.1 Tolling of Payment Obligations . If the exercise by GSK of any Product Option under Article 4 requires the making of filings under the Hart-Scott-Rodino Antitrust Improvements Act (the “HSR ACT”), or under any similar premerger notification provision in the European Union or any other jurisdiction, then all rights and obligations related to the exercise of such Product Option shall be tolled until the applicable waiting period has expired or been terminated or until approval or clearance from the reviewing authority has been received, and each Party agrees to cooperate at the request of the Party which decides in its sole discretion to respond to any such request for information to expedite review of such transaction.

ARTICLE 14

MISCELLANEOUS

14.1 Dispute Resolution . Prior to the commencement of any litigation under this Agreement, the Executive Officer of the Party considering commencement of such litigation shall notify the Executive Officer of the other Party that such litigation is being contemplated. For at least thirty (30) days following the delivery of such notice, the Parties’ Executive Officers shall use good faith efforts to make themselves available to discuss the dispute and attempt to resolve the matter. If the dispute is not resolved within such thirty (30) days, the Parties agree to submit the dispute for non-binding mediation (with the understanding that the role of the mediator shall not be to render a decision but to assist the Parties in reaching a mutually acceptable resolution) in Chicago, Illinois (or such other location as may be mutually agreed upon by the Parties), for a period of not more than sixty (60) days, unless extended by the mutual written agreement of the Parties. If the dispute is not resolved within such sixty (60) days, as may be extended, the Party that originally providing notice hereunder may commence litigation with respect to the subject matter of the dispute and with respect to any other claims it may have and thereafter neither Party hereto shall have any further obligation under this Section 14.1.

14.2 Governing Law . This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with the laws of

 

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the State of Delaware, U.S.A., without reference to conflicts of laws principles.

14.3 Assignment . This Agreement shall not be assignable by either Party to any Third Party hereto without the prior written consent of the other Party hereto. Notwithstanding the foregoing, either Party may assign this Agreement, without any consent of the other Party, to an Affiliate or to an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains (whether by merger, reorganization, acquisition, sale or otherwise), and agrees in writing to be bound by the terms and conditions of this Agreement. No assignment and transfer shall be valid and effective unless and until the assignee/transferee shall agree in writing to be bound by the provisions of this Agreement. The terms and conditions of this Agreement shall be binding upon and shall inure to the benefit of the successors, heirs, administrators and permitted assigns of the Parties.

14.4 Performance Warranty . Each Party hereby acknowledges and agrees that it shall be responsible for the full and timely performance as and when due under, and observance of all the covenants, terms, conditions and agreements set forth in this, Agreement by its Affiliate(s) and Sublicensees.

14.5 Force Majeure . No Party shall be held liable or responsible to the other Parties nor be deemed to be in default under, or in breach of any provision of, this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement when such failure or delay is due to force majeure, and without the fault or negligence of the Party so failing or delaying. For purposes of this Agreement, force majeure is defined as causes beyond the control of the Party, including, without limitation, acts of God; acts, regulations, or laws of any government; war; civil commotion; destruction of production facilities or materials by fire, flood, earthquake, explosion or storm; labor disturbances; epidemic; and failure of public utilities or common carriers. In such event ChemoCentryx or GSK, as the case may be, shall immediately notify the other Parties of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement as it is thereby disabled from performing for so long as it is so disabled for up to a maximum of ninety (90) days, after which time ChemoCentryx or GSK, the Party not affected by the force majeure , may terminate this Agreement. To the extent possible, each Party shall use reasonable efforts to minimize the duration of any force majeure.

14.6 Notices . Any notice or request required or permitted to be given under or in connection with this Agreement shall be deemed to have been sufficiently given if in writing and personally delivered or sent by certified mail (return receipt requested), facsimile transmission (receipt verified), or overnight express courier service (signature required), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below:

 

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If to ChemoCentryx, addressed to:    ChemoCentryx, Inc.
     850 Maude Avenue
     Mountain View, CA 94043
     Attention: Chief Executive Officer
     Telephone:   (650) 210-2900
     Telecopy:     (650) 210-2910
  with a copy to:    Cooley Godward LLP
     Five Palo Alto Square
     3000 El Camino Real
     Palo Alto, CA 94306
     Attention: Barbara A. Kosacz
     Telephone:   (650) 843-5818
     Telecopy:     (650) 849-7400

 

  If to GSK, addressed to:
         Attention: Vice President, Business Development
         Center of Excellence for External Drug Discovery
         GlaxoSmithKline
         [***]
  with a copy to:     
         Attention: Vice President and Associate General Counsel,
         R&D Legal Operations
         GlaxoSmithKline
         [***]

or to such other address for such Party as it shall have specified by like notice to the other Parties, provided that notices of a change of address shall be effective only upon receipt thereof. If delivered personally or by facsimile transmission, the date of delivery shall be deemed to be the date on which such notice or request was given. If sent by overnight express courier service, the date of delivery shall be deemed to be the next business day after such notice or request was deposited with such service. If sent by certified mail, the date of delivery shall be deemed to be the third business day after such notice or request was deposited with the U.S. Postal Service.

14.7 Export Clause . Each party acknowledges that the laws and regulations of the United States restrict the export and re-export of commodities and technical data of United States origin. Each party agrees that it will not export or re-export restricted commodities or the technical data of the other party in any form without the appropriate United States and foreign government licenses.

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

-90-


14.8 Waiver . Neither Party may waive or release any of its rights or interests in this Agreement except in writing. The failure of either Party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition. No waiver by either Party of any condition or term in any one or more instances shall be construed as a continuing waiver of such condition or term or of another condition or term.

14.9 Severability . If any provision hereof should be held invalid, illegal or unenforceable in any jurisdiction, the Parties shall negotiate in good faith a valid, legal and enforceable substitute provision that most nearly reflects the original intent of the Parties and all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the Parties hereto as nearly as may be possible. Such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction.

14.10 Entire Agreement . This Agreement, together with the Schedules and Exhibits hereto, the Side Letter Agreement between the Parties dated August 22, 2006, and the accompanying Stock Purchase Agreement, set forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersede and terminate all prior agreements and understanding between the Parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties.

14.11 Independent Contractors . Nothing herein shall be construed to create any relationship of employer and employee, agent and principal, partnership or joint venture between the Parties. Each Party is an independent contractor. Neither Party shall assume, either directly or indirectly, any liability of or for the other Party. Neither Party shall have the authority to bind or obligate the other Party and neither Party shall represent that it has such authority.

14.12 Headings . Headings used herein are for convenience only and shall not in any way affect the construction of or be taken into consideration in interpreting this Agreement.

14.13 Books and Records . Any books and records to be maintained under this Agreement by a Party or its Affiliates or Sublicensees shall be maintained in accordance with U.S. generally accepted accounting principles in the case of ChemoCentryx, and shall be maintained in accordance with International Financial Reporting Standards (IFRS) in the case of GSK, consistently applied, except that the same need not be audited.

14.14 Further Actions . Each Party shall execute, acknowledge and deliver such further instruments, and do all such other acts, as may be necessary or appropriate in order to carry out the expressly stated purposes and the clear intent of this Agreement.

 

-91-


14.15 Parties in Interest . All of the terms and provisions of this Agreement shall be binding upon, and shall inure to the benefit of and be enforceable by the Parties hereto and their respective successors, heirs, administrators and permitted assigns.

14.16 Construction of Agreement . The terms and provisions of this Agreement represent the results of negotiations between the Parties and their representatives, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and each of the Parties hereto hereby waives the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement.

14.17 Supremacy . In the event of any express conflict or inconsistency between this Agreement and the Research Plan or any Early Development Plan or Product Candidate Commercialization Program or of any Schedule or Exhibit hereto, the terms of this Agreement shall control. The Parties understand and agree that the Schedules and Exhibits hereto are not intended to be the final and complete embodiment of any terms or provisions of this Agreement, and are to be updated from time to time during the Term, as appropriate and in accordance with the provisions of this Agreement.

14.18 Counterparts . This Agreement may be signed in counterparts, each and every one of which shall be deemed an original, notwithstanding variations in format or file designation which may result from the electronic transmission, storage and printing of copies of this Agreement from separate computers or printers. Facsimile signatures and signatures transmitted via pdf shall be treated as original signatures.

* - * - * - *

 

-92-


IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

 

ChemoCentryx, Inc.

By:

 

/s/ Thomas J. Schall

Name:

 

Thomas J. Schall, Ph.D.

Title:

 

President and CEO

Date:

 

 

Glaxo Group Limited

By:

 

/s/ Paul Williamson

Name:

 

Paul Williamson

Title:

 

For and on behalf of

 

Edinburgh Pharmaceutical Industries Limited

 

Corporate Director

Date:

 

22 August 2006


EXHIBIT A

ChemoCentryx Patents

 

BHGL Ref

Country

  

Title

  

Inventors

  

Application No.

Filing Date

  

Patent No.

Issue Date

  

Status

Remarks

[***]

 

10709-31

US

   Diaryl sulfonamide compounds for modulating CCR9   

Zheng Wei,

Brett Premack,

Thomas Schall,

John J. Wright,

Andrew Pennell,

Solomon Ungashe

  

60/427,670

11/18/2002

     

Completed.

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

10709-54

PCT

  

Bis-Aryl Sulfonamides

  

Solomon

Ungashe,

Zheng Wei,

John J. Wright,

Andrew Pennell,

Brett Premack,

Thomas Schall

  

PCT/US03/37035

11/18/2003

     

Completed.

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

10709-39

US

  

Aryl Sulfonamides

  

Solomon

Ungashe,

Zheng Wei,

John J. Wright,

Andrew Pennell

  

10/716,170

11/17/2003

  

6,939,885

9/6/2005

  

Completed.

10709-55

PCT

  

Aryl Sulfonamides

  

Solomon

Ungashe,

Zheng Wei,

John J. Wright,

Andrew Pennell

  

PCT/US03/36766

11/17/2003

     

Completed.

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


BHGL Ref

Country

  

Title

  

Inventors

  

Application No.

Filing Date

  

Patent No.

Issue Date

  

Status

Remarks

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

10709-11509-115

South Africa

   Aryl Sulfonamides   

Solomon

Ungashe,

Zheng Wei,

John J. Wright,

Andrew Pennell

   2005/03663    2005/03663 12/25/2005    Completed.

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

10709-66

US

   Aryl Sulfonamides   

Solomon

Ungashe,

Andrew Pennell,

John J. Wright

  

60/570,569

5/12/2004

      Completed.

10709-67

US

   Biaryl Sulfonamides   

Solomon

Ungashe,

John J. Wright,

Andrew Pennell

  

60/570,568

5/12/2004

      Completed.

10709-68

US

   Aryl Sulfonamides   

Solomon

Ungashe,

John J. Wright,

Andrew Pennell

  

60/570,710

5/12/2004

      Completed.

10709-71

US

   Aryl Sulfonamides   

Solomon

Ungashe,

John J. Wright,

Andrew Pennell

  

60/571,868

5/12/2004

      Completed.

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

[***]

  

[***]

  

[***]

  

[***]

  

[***]

  

[***]

 

TTC Ref

Country

ATTY(s)

Handling

 

Client’s

Ref

 

Title

 

Inventor

 

Application No.
Filing Date

 

Patent

No.

Issue

Date

 

Status

Remarks

[***]

019934-

003700US

WBK (WMS)

  Chem5  

Anti-

Inflammatory Compositions and Methods of Use

   

60/453711

06/12/2002

    Inactive Expired

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


TTC Ref

Country

ATTY(s)

Handling

 

Client’s

Ref

 

Title

 

Inventor

 

Application No.
Filing Date

 

Patent

No.

Issue

Date

 

Status

Remarks

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

019934-

005000US

WBK (WMS)

  Chem5   Bicyclic and Bridged Nitrogen Heterocycles  

Pennell,

Andrew M. K.

Aggen, James

B.

Wright, J. J.

Kim

Sen, Subabrata

Chen, Wei

Dairaghi,

Daniel Joseph

 

60/550246

03/03/2004

    Inactive Expired

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

019934-

005900US

(WBK)

  Chem5   Azaindazole Compounds and Methods of Use  

Zhang, Penglie

Pennell,

Andrew M. K.

Wright, John

J. Kim

Chen, Wei

Leleti,

Manmohan

Reddy

 

60/693525

06/22/2005

    Inactive Expired

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

[***]                    

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT B

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT C

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT D

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT E

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT F

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


SCHEDULE 3.7.2

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


SCHEDULE 5.3

[***]

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

Exhibit 10.13

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 1

to

PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This Amendment No. 1 (“Amendment”) to that certain PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (the “Agreement”) entered into and made effective as of the 22 nd day of August, 2006 by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ ChemoCentryx ”), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England (referred to herein as “GSK” ), collectively, the “ Parties ”, is hereby entered into by the Parties with an Amendment effective date of September 30th, 2007 (the “Amendment Effective Date”). All capitalized terms not expressly defined in this Amendment shall have the meanings given to them in the Agreement.

The Parties agree to amend and do hereby amend the Agreement as follows:

A. Amendments Pertaining to Addition of a Celiac CCR9 PoC Trial

1. The following new Section 1.135 is added to the Agreement:

1.135 “Celiac CCR9 PoC Trial” shall mean a Phase 2 Clinical Trial of a Collaboration Compound targeting CCR9 that is designed in accordance with Exhibit 1, which is attached hereto and is hereby incorporated by reference, as has been mutually agreed by the Parties for a Celiac Indication (as defined under Section 1.136). Exhibit 1 shall include, and incorporate by reference, the memorandum of understanding and protocol covering such Phase 2 Clinical Trial.

2. The following new Section 1.136 is added to the Agreement:

1.136 “Celiac Indication” means an autoimmune intestinal disorder typically triggered by a specific food component called gluten (which is found in all forms of wheat, rye, barley and other related grains).

3. Section 2.3.5 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

2.3.5 Decision Making Regarding Indications . Notwithstanding Sections 2.3.4(a) and (b), with respect to each Development Candidate nominated by the JSC, and in the course of such nomination process, the Parties shall mutually determine which potential Indication(s) to pursue for such Development Candidate and the related set of Progressed


Collaboration Compounds, (other than CCX282 and CCX282 Back-up Compounds for which ChemoCentryx shall have the right to pursue in Crohn’s Disease, in asthma as reflected in the Asthma CCR9 PoC Trial and in the Celiac Indication as reflected in a Celiac CCR9 PoC Trial as provided for in this Agreement). Accordingly, no Indication shall be pursued by ChemoCentryx under this Agreement with respect to any such Development Candidate or Progressed Compound without the prior mutual agreement of both Parties, through the JSC. In determining which Indication to pursue, the JSC shall take into consideration the estimated costs and possible trial design of the PoC Trial for such Indication for such Development Candidate, in addition to the relevant scientific, medical, safety and commercial considerations.

4. Section 3.6.3 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

3.6.3 Indications. At the time of the JSC decision regarding nomination of a potential Development Candidate targeting a given Collaboration Target, the Parties, through the JSC, shall mutually determine which potential Indication(s) to pursue for such proposed Development Candidate and the related set of Progressed Collaboration Compounds. Notwithstanding the foregoing, the Parties agree that ChemoCentryx shall have the right to pursue CCX282 and CCX282 Back-up Compounds for CCR9, in Crohn’s Disease, in asthma as reflected in the Asthma CCR9 PoC Trial and in the Celiac Indication as reflected in a Celiac CCR9 PoC Trial as provided for in this Agreement. In the event the JSC cannot agree on such Indications, it shall proceed as provided in Section 2.3.5.

5. Section 3.7.2 is hereby amended by adding the following new paragraph (e):

3.7.2 (e) Celiac CCR9 PoC Trial . ChemoCentryx shall also have the right, in its sole discretion, to conduct a Celiac CCR9 PoC Trial; provided, however, that GSK shall have the right to review and comment on the design of any Celiac CCR9 PoC Trial before it is finalized, and GSK must approve the final applicable PoC Criteria and the final study design and content of such Celiac CCR9 PoC Trial prior to initiation, such approval not to be unreasonably withheld. The Parties understand and acknowledge that it is possible that a Celiac CCR9 PoC Trial may be completed prior to the PROTECT-1 Trial or the Asthma CCR9 PoC Trial, and therefore GSK may first have the opportunity to exercise its Product Option with respect to CCX282 in accordance with Section 4.3.1(b) based upon data resulting from such Celiac CCR9 PoC Trial rather than from the PROTECT-1 Trial or the Asthma CCR9 PoC Trial. Regardless of whether GSK exercises its Product Option at such time for the Celiac CCR9 PoC Trial or at a different time under Section 4.3.1(b), ChemoCentryx will continue the PROTECT-1 Trial unless terminated for good scientific, safety or ethical reasons.

6. Section 3.8.1 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

3.8.1 For CCX282. Unless and until GSK exercises its Product Option with respect to CCX282 or a CCX282 Back-up Compound , promptly after the conduct of each of the following (a) the PROTECT-1 Induction Phase, (b) the PROTECT-1 Maintenance Phase,

 

2


(c) a Celiac CCR9 PoC Trial, and (d)  the Asthma CCR9 PoC Trial, as applicable, if ChemoCentryx determines that CCX282 or the CCX282 Back-up Compound meets the PoC Criteria therefor, ChemoCentryx shall promptly notify GSK, in writing, of such event. The JSC will, at a special ad hoc meeting to be scheduled, confirm that CCX282 or the CCX282 Back-up Compound meets such PoC Criteria and that the PoC Trial has successfully met the relevant endpoints. Following such confirmation, GSK shall have the right to exercise its Product Option with respect to CCX282 or the CCX282 Back-up Compound in accordance with Section 4.3.1(b) and Article 4. Where GSK does not so elect to exercise its Product Option at the time point referenced in clause (a) above, as provided in Section 4.3, then following the time point referenced in clause (b), (c), or (d) above, if ChemoCentryx again determines that CCX282 or a CCX282 Back-up Compound meets the PoC Criteria, ChemoCentryx shall promptly notify GSK, in writing, of such event. The JSC will, at a special ad hoc meeting to be scheduled, confirm that CCX282 or a CCX282 Back-up Compound meets such PoC Criteria. Following such confirmation, GSK shall again have the right to exercise its Product Option with respect to CCX282 or the CCX282 Back-up Compound in accordance with Article 4 and Section 4.3.1(b). Such process shall again continue with respect to all four (4)  time points described in clauses (a), (b), (c) and (d)  above, as and to the extent ChemoCentryx conducts such PoC Trials in accordance with the provisions of this Agreement, and CCX282 or a CCX282 Back-up Compound meets the PoC Criteria with respect to the PoC Trial referenced therein . GSK shall thus have a total of up to four (4)  opportunities to exercise its Product Option with respect to CCX282 or a CCX282 Back-up Compound in accordance with Section 4.3.1(b), and the failure by GSK to exercise any of such opportunities shall not count against GSK’s Product Options, unless and until all of such opportunities with respect to CCX282 or a CCX282 Back-up Compound arising hereunder are declined by GSK.

7. Section 4.2.2 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

4.2.2 For CCX282 or a CCX282 Back-up Compound . Notwithstanding the foregoing Section 4.2.1, a new and different PoC Trial Report for CCX282 or a CCX282 Back-up Compound shall be delivered to GSK within sixty (60) days of the JSC having determined that CCX282 or a CCX282 Back-up Compound meets the PoC Criteria and has successfully met the endpoints for the PoC Trial in each of the following situations: (a) the PROTECT-1 Induction Phase, (b) the PROTECT-1 Maintenance Phase, (c) a Celiac CCR9 PoC Trial, and (d)  the Asthma CCR9 PoC Trial, and each such PoC Trial Report shall include all the preclinical and clinical data showing that the clinical endpoints have been achieved demonstrating the successful outcome of the respective portion of the PROTECT-1 Trial or a Celiac CCR9 PoC Trial or the Asthma CCR9 PoC Trial, as the case may be.

8. Section 4.3.1(b) is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

4.3.1(b) For CCX282 or a CCX282 Back-up Compound , GSK shall have a total of four (4)  potential opportunities to exercise its Product Option, as follows. The Product

 

3


Option for CCX282 shall be exercisable by GSK, at its sole discretion, upon each of the following occasions: within ninety (90) days (as may be extended pursuant to Section 4.3.1(a) above) after ChemoCentryx provides to GSK a PoC Trial Report with the preclinical and clinical data showing that clinical endpoints have been successfully met demonstrating the successful outcome of (i) the PROTECT-1 Induction Phase, (ii) the PROTECT-1 Maintenance Phase, (iii) a Celiac CCR9 PoC Trial, if conducted, and (iv ) the Asthma CCR9 PoC Trial, if conducted, for CCX282. In the event that GSK declines such exercise on the first or on the first three of such four opportunities to exercise its Product Option for CCX282 or a CCX282 Back-up Compound , such election(s) to decline to exercise at such first three opportunities shall not count against any of GSK’s Product Options, and GSK shall still retain a fourth opportunity to exercise its Product Option, if and when a fourth opportunity is triggered as described above. The Parties understand and agree that such a third and/or fourth opportunity may never be available in the event that ChemoCentryx elects not ever to conduct the Asthma CCR9 PoC Trial and/or a Celiac CCR9 PoC Trial . In addition, for clarity, the Parties understand and agree that CCX282 and its two Back-up Compounds collectively constitute only one Option Compound under this Agreement and only one Product Option hereunder, regardless of the total number of times that GSK’s Product Option is triggered for such set of Progressed Compounds by completion of successful PoC Trials for CCX282 and/or any of its Back-up Compounds, and regardless of the number of different Indications, formulations, methods of delivery, prodrugs, esters, salts, crystalline polymorphs, hydrates or solvates thereof which are Developed hereunder for such Progressed Compounds, taken collectively. It being understood, however that ChemoCentryx shall have no obligation to pursue any such different Indications, formulations, and the like.

B. Amendments Pertaining to Co-Development and Co-Promotion Rights for the Celiac Indication and to ChemoCentryx’ Change of Control

1. Section 5.2.1 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

5.2.1 Generally. Following GSK’s exercise of its Product Option, but not later than twelve (12) months prior to the first expected NDA filing for such Product Candidate targeting CCR9, GSK shall provide to ChemoCentryx a detailed development plan and associated budget for the conduct of the Dossier Studies for such Licensed Product targeting CCR9 (the “Development Plan and Budget” ). ChemoCentryx shall have the right to review and comment upon such Development Plan and Budget, and shall have the option (the “Co-Development Option”) within ninety (90) days following receipt of the final Development Plan and Budget to co-fund Dossier Studies for any or all of (i) the Regulatory Approval of Crohn’s Disease only (the “CD Development Option”); (ii) the Regulatory Approval of Crohn’s Disease as well as ulcerative colitis (the “CD/UC Development Option”); or (iii) the Regulatory Approval of the Celiac Indication (the “Celiac Development Option”). In the event that GSK subsequently significantly amends the Development Plan and Budget to include for the first time the ulcerative colitis Indication or the Celiac Indication by the addition of new Clinical S tudies targeting the ulcerative colitis Indication or the Celiac Indication , GSK shall promptly

 

4


notify ChemoCentryx of such amendment , and ChemoCentryx shall have an additional ninety (90) days within which to review and comment upon such amended Development Plan and Budget and exercise the CD/UC Development Option or the Celiac Development Option , at its discretion. Depending on its election, ChemoCentryx shall receive additional royalties as set forth in Section 6.6.5(a) or Section 6.6.5(b), as applicable. The royalty rate increases resulting from exercise of the Celiac Development Option will be the same as for exercise of the CD Development Option. For clarity, the Parties understand that ChemoCentryx’s Co-Development Option under this Agreement shall apply only to CCR9.

2. Section 5.2.2 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

5.2.2 Reimbursement of GSK Costs. Upon exercise of the Co-Development Option, ChemoCentryx shall pay to GSK a one time cash payment equal to thirty-five percent (35%) of the GSK Incurred Costs for any of the Crohn’s Disease Dossier Studies, the Crohn’s Disease and Ulcerative Colitis Dossier Studies , or the Celiac Disease Dossier Studies , depending on whether ChemoCentryx exercised the CD Development Option, the CD/UC Development Option or the Celiac Development Option, respectively . In addition, following exercise of the Co-Development Option, ChemoCentryx shall reimburse, on a quarterly basis, in arrears, thirty-five percent (35%) of all applicable Dossier Study Costs with respect to such Licensed Product through and including approval of the NDA.

(a) In the event that the actual Dossier Study Costs are reasonably expected to exceed [***] percent ([***]%) of the estimated costs for such studies as set forth in the Development Plan and Budget, ChemoCentryx shall have the option to either continue to co-fund such additional Dossier Study Costs, or to elect, in writing, to withdraw from its co-development participation in such Licensed Product entirely, or with respect to the Indication at issue, as the case may be, in which case GSK shall refund all Dossier Study Costs and all GSK Incurred Costs then paid to GSK to date by ChemoCentryx (the “Repayment Amount”) in four (4) quarterly payments over the course of the following twelve (12) months.

(b) In addition, in the event that ChemoCentryx is unable to make its ongoing co-funding payments due to lack of financial wherewithal, but not due to any negative clinical trial results or lack of progress or any Third Party commitment or any change in the competitive environment, then ChemoCentryx shall have the right to elect, upon written notice to GSK, to withdraw from its co-development participation in such Product Candidate entirely, in which case GSK shall refund to ChemoCentryx the Repayment Amount, in the form of a royalty on U.S. Net Sales, as follows. In the event that ChemoCentryx is more than one hundred and twenty (120) days late on any co-funding payment due hereunder, GSK shall have the right to terminate ChemoCentryx’s right to participate in the Co-Development by default). GSK shall pay to ChemoCentryx,

 

 

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in addition to the royalties otherwise owed under Section 6.6.1 or 6.6.2, a royalty of [***] percent ([***]%) on worldwide Net Sales of such Licensed Product, [***] the “Royalty Differential” equals [***]. As used herein, the “Royalty Differential” shall mean the difference between the amount that would have been paid on such worldwide Net Sales pursuant to the rates set forth in Section 6.6.1 or 6.6.2, and the amounts paid pursuant to the higher rates set forth in Section 6.6.5(a) or 6.6.5(b). Thereafter, ChemoCentryx shall be paid the lower royalty on worldwide Net Sales in accordance with Section 6.6.1 or 6.6.2.

(c) For clarity, ChemoCentryx’s Co-Development Options shall be available to ChemoCentryx only with respect to each Product Candidate targeting CCR9 and which is under Development for Crohn’s Disease and/or Ulcerative Colitis , or for the Celiac Indication .

3. The following new Section, 5.2.3, is hereby added as follows:

5.2.3 Change in Control. In the event that ChemoCentryx undergoes a Change in Control Event, ChemoCentryx’ Co-Development Option under Section 5.2 shall [***]. For the purposes of this Section 5.2.3, a “Change in Control Event” means: (i) a merger or consolidation of ChemoCentryx with any pharmaceutical or biotechnology or other life sciences company in which (A) ChemoCentryx is not the surviving corporation and (B) the holders of ChemoCentryx securities immediately prior to the merger or consolidation receive less than [***] percent ([***]%) of the combined voting power entitled to vote in the election of the board of directors of the surviving entity by reason of their ownership of ChemoCentryx securities; or (ii) an acquisition which results in beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by ChemoCentryx or a subsidiary of ChemoCentryx or other entity controlled by ChemoCentryx) of securities of ChemoCentryx representing at least [***] percent ([***]%) of the combined voting power entitled to vote in the election of the board of directors; provided, however that clauses (i) and (ii) of this Section 5.2.3 shall not apply to a merger effected exclusively for the purpose of changing the domicile of ChemoCentryx. In no event shall “Change of Control” include any transaction in which the Company or its successor(s) issues securities to financial investors solely for capital raising purposes, provided that the principal business of any such financial investors is not the development and/or commercialization of pharmaceutical, biotech or biopharmaceutical products.

 

 

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4. Section 5.6.1 is hereby amended and restated in its entirety as follows:

5.6.1 Exercise of Co-promotion Right.

(a) Subject to subsections 5.6.1(a)(i) and 5.6.1(a)(ii) herein, prior to and up to the date of filing of an NDA for each Co-Developed Product, ChemoCentryx shall have the option to co-promote each such Co-Developed Product (the “Co-promotion Right”), in the U.S. only, by providing up to fifty percent (50%) of the requisite detailing effort (as determined in good faith by GSK) to agreed-upon specialist physicians as set forth in the Product Marketing Plan, pursuant to a definitive co-promotion agreement which will incorporate and be consistent with all of the terms and conditions described in this Section 5.6 (including, without limitation, subsections 5.6.1(a)(i) and 5.6.1(a)(ii) herein) and all other relevant provisions of this Agreement (the “Co-Promotion Agreement”), the full set of terms and conditions for such definitive co-promotion agreement will be in accordance with a written commercialization plan to be prepared by GSK’s sales and marketing organization (the “Product Marketing Plan” ).

(i) If ChemoCentryx exercises its Co-promotion Right under Section 5.6.1(a) for a given Co-Developed Product as to which ChemoCentryx already exercised its CD Development Option or the CD/UC Development Option (as set forth under Sections 5.2.1(i) and 5.2.1(ii), respectively), then ChemoCentryx shall also shall have the option, exercisable upon written notice to GSK, to co-promote the same Co-Developed Product (i.e., such Co-Developed Product is the same molecule as the product as to which ChemoCentryx is exercising its co-promotion option) for the Celiac Indication in the U.S. (following approval therefor by the FDA) regardless of whether ChemoCentryx has as of such time exercised its Celiac Development Option or not with respect to such Co-Developed Product, by providing up to fifty percent (50%) of the requisite detailing effort (as determined in good faith by GSK) to gastrointestinal specialist physicians, pursuant to the relevant Co-Promotion Agreement then in effect (where such Co-Promotion Agreement has as of such time been executed), which Co-Promotion Agreement shall be amended to include the co-promotion of such same Co-Developed Product for the Celiac Indication. For clarity, such right to co-promote such Co-Developed Product for the Celiac Indication as set forth under this Section 5.6.1(a)(i) shall be available to ChemoCentryx even if ChemoCentryx has not exercised its Celiac Development Option as to such specific Co-Developed Product.

(ii) If ChemoCentryx does not exercise the CD Development Option or the CD/UC Development Option (as set forth under Sections 5.2.1(i) and 5.2.1(ii), respectively) but does exercise the Celiac Development Option, ChemoCentryx shall have the right to exercise, at its sole discretion, its Co-Promotion Right to co-promote such Co-Developed Product for the Celiac Indication in the U.S.; provided that ChemoCentryx is able to demonstrate to GSK’s reasonable satisfaction, using commercially reasonable market analysis and projections, that the potential market for such Co-Developed Product for the Celiac Indication in the U.S. is equal to or exceeds

 

7


[***] Dollars ($[***]). In any event, ChemoCentryx shall have the right to exercise, at its sole discretion, its Co-promotion Right to co-promote such Co-Developed Product for the Celiac Indication in the U.S. three (3) months after the first complete calendar year in which actual Net Sales for such Co-Developed Product in the U.S. equal at least [***] dollars ($[***]), but only where such sales level is achieved prior to or at the end of the fourth full calendar year following the first launch of the Co-Developed Product in the U.S. Under such an exercise of its Co-Promotion Right hereunder, ChemoCentryx may provide up to fifty percent (50%) of the requisite detailing effort (as determined in good faith by GSK) to gastrointestinal specialist physicians, pursuant to the Co-Promotion Agreement to be entered into by the Parties.

(b) If ChemoCentryx exercises its Co-promotion Right prior to or upon NDA filing for such Co-Developed Product, such co-promotion shall be in accordance with the Product Marketing Plan and using only GSK-approved promotional messages and materials, in accordance with Section 5.5.2 of this Agreement which shall be updated and amended as necessary upon ChemoCentryx’s exercise of the Co-Development Option with respect to such Product Candidate, and in accordance with all applicable laws and regulations (including without limitation those promulgated by the FDA and the Division of Drug Marketing and Communications). ChemoCentryx shall be responsible for ensuring that its sales force representatives are of an acceptable standard in knowledge, experience and skills as judged by GSK’s Sales Management Organization. ChemoCentryx will ensure that its sales force representatives shall be trained to the same level and with consistent materials as GSK’s own sales force representatives, and achieve similar pass rates in sales training exams as determined by GSK at the time of such training. ChemoCentryx’s sales force representatives shall attend, as appropriate in view of GSK’s policies, such training seminars as are held for GSK’s own sales force representatives. Notwithstanding such co-promotion rights, GSK shall not be restricted in its promotional and selling efforts to any specialist or general practice physicians, and ChemoCentryx shall have no rights to detail or otherwise promote Licensed Products to family practitioners, internal medicine or any other general practice physicians. It is understood that ChemoCentryx’s Co-promotion activities shall be supplemental to and consistent with, the promotion capabilities of GSK. For clarity, ChemoCentryx’s Co-Promotion Rights shall only apply to Co-Developed Products.

C. Amendments Pertaining to the Governance of Co-Development Activities

1. Section 2.3.4 (b) is hereby amended and restated in its entirety as follows (newly added text in bold and underlined)

(b) GSK Decisions. Except as otherwise expressly set forth in this Agreement, GSK shall have final decision-making authority with respect to all decisions relating to:

(i) its decision whether to exercise its Product Option;

 

 

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8


(ii) the development of Product Candidates after exercise by GSK of its Product Option with respect to same, or the co-development (pursuant to the exercise by ChemoCentryx of its Co-Development Option under Sections 5.2 and 5.3) of Product Candidates (provided; however, that the governance and dispute resolution process for activities and decisions with respect to Co-Developed Products shall be in accordance with the process as described in Schedule 5.3, and not as described in the preamble of this Section 2.3.4);

(iii) the Product Candidate Commercialization Program; and

(iv) all matters pertaining to commercialization and marketing of Licensed Products after exercise of its Product Option.

2. Schedule 5.3 is hereby amended and restated in its entirety as follows: (changes shown in bold and underlined text).

SCHEDULE 5.3

[***]

(The remainder of page 9 and page 10 are redacted.)

 

 

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D. Amendments Pertaining to the Joint Steering Committee and Early Development Program

 

1. The first paragraph of Section 2.3 (but not any of Sections 2.3.1 through 2.3.8 except as expressly stated below) is hereby amended and restated in its entirety as follows:

2.3 The Joint Steering Committee . Promptly and in any event within ninety (90) days after the Effective Date, the Parties shall establish a committee (the “Joint Steering Committee” or “JSC” ) as more fully described in Sections 2.3.1 through 2.3.8 of this Section 2.3. The JSC shall have review and oversight responsibilities for all research and Development activities performed hereunder during the Research Term and with respect to each Early Development Program prior to exercise of a Product Option by GSK, and shall serve as a vehicle to facilitate the conduct of information between the Parties with respect to any commercialization activities and the Product Candidate Commercialization Program, in each case as more specifically provided herein. Each Party agrees to keep the JSC informed of its progress and activities within the Research Program, each Early Development Program, and each Product Candidate Commercialization Program, respectively. At its sole discretion, ChemoCentryx may terminate its participation in the JSC upon the earlier of (a) the date on which GSK exercises its Product Option for the sixth (6 th ) Option Compound, (b) the date on which the JSC agrees to terminate the Research Program and all Early Development Programs then in progress without either the JSC or GSK nominating a substitute Backup Compound for the lead Development Candidate against Collaboration Targets being developed under such Early Development Programs; or (c) ten (10) years from the Effective Date. In the event that ChemoCentryx elects to terminate its participation on the JSC pursuant to subsection (c) herein, the Parties understand and agree that (i) if at such time there is on-going an Early Development Program as of such election date, such Early Development Program shall remain in effect and continue (unless otherwise terminated in accordance with Section 3.2.3) and remain subject to the terms and conditions of this Agreement; and (ii) GSK shall assume sole decision-making authority with respect to all decisions otherwise delegated to the JSC under Section 2.3.7 with respect to any such continuing Early Development Program.

2. Section 2.3.4(a) Decision Making, ChemoCentryx Decisions, clause (i)  is hereby restated in its entirety as follows (newly added text in bold and underlined):

(i) the Research Program and Research Plan and Development Candidate Criteria for each Collaboration Target;

3. Section 2.3.7 Responsibilities of the JSC, subsection (a) is hereby restated in its entirety as follows (newly added text in bold and underlined):

(a) review the overall progress of ChemoCentryx’s efforts to discover, identify, optimize and develop Collaboration Compounds, Development Compounds, Development Candidates and Option Compounds and to establish, review, update and approve the

 

10


Development Candidate Criteria for each Collaboration Target (subject to Section 2.3.4(a)) ;

4. Section 3.2.3 is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

3.2.3 Early Development Program Term. Each Early Development Program will start at the earlier of commencement of activities under such Early Development Program or adoption of the Early Development Plan by the JSC, and will terminate upon the earlier of (a) the date on which GSK exercises its Product Option for the sixth (6 th ) Option Compound, (b) the date on which the JSC agrees to terminate such Early Development Program without either the JSC or GSK nominating a substituting Backup Compound for the lead Development Candidate against such Collaboration Target; or (c) ten (10) years from the start of such Early Development Program (the “Early Development Program Term” ), unless earlier terminated pursuant to other applicable provisions of this Agreement. Notwithstanding anything to the contrary herein, ChemoCentryx’ diligence obligations shall apply only to the first five (5) years of any such Early Development Program, but in any event shall not apply, as to any Early Development Program, after ten (10) years following the initiation of the first Early Development Program.

5. Section 1.94, “PoC Criteria” is hereby amended to change the term “Proof of Concept” in the first sentence to “proof of concept”.

E. Amendments Pertaining to the Exchange of Information.

1. Section 3.10 is hereby amended and restated in its entirety as follows:

3.10 Exchange of Information . Subject in all cases to the provisions of Article 9, each of GSK and ChemoCentryx will share any Information directly relating to Collaboration Compounds and/or Product Candidates that is generated in the course of the Parties’ activities hereunder with the JSC, on an ongoing basis, in order to facilitate GSK’s decision-making in connection therewith and to monitor the obligations of the Parties. All such exchanges of Information shall be coordinated by the Project Directors. In addition, in the event that ChemoCentryx terminates its participation on the JSC pursuant to Section 2.3, the Parties will share such Information, and GSK will share with ChemoCentryx any Information otherwise shared with or through the JSC, directly through each of their respective Project Directors. The provision of all such Information shall be performed in a timely matter to accommodate all regulatory deadlines and ensure compliance with the timelines set forth in any agreed plan.

F. Except as expressly modified by this Amendment, all the other provisions of the Agreement shall remain unchanged and in full force and effect.

 

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IN WITNESS WHEREOF , each of the Parties has caused this Amendment to be duly executed by its duly authorized representatives as of the Amendment Effective Date.

 

GLAXO GROUP LIMITED
By:  

/s/ V.A. Whyte

Name:  

V.A. Whyte

Title:  

Assistant Secretary

Date:   8 November 2007
CHEMOCENTRYX, INC.
By:  

/s/ Thomas J. Schall

Name:  

Thomas J. Schall, Ph.D.

Title:  

President & CEO

Date:   8 November 2007

 

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Exhibit 1

Celiac CCR9 Trial Design

MEMORANDUM OF UNDERSTANDING

[***]

Between: ChemoCentryx Inc. (CCX)  & GlaxoSmithKline Plc. (GSK)

Date: 30 th  May 2007

[***]

(The remainder of this page and page 15 are redacted.)

 

 

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[***]

 

[***]:    [***]
[***]:    [***]
[***]:    [***]
Indication:    Celiac Disease
Sponsor:    ChemoCentryx, Inc.
Development Phase:    II
Sponsor:   

ChemoCentryx, Inc.

850 Maude Avenue

Mountain View

CA 94043

Sponsor Signatory:

 

[***]:

  

Pirow Bekker, MD PhD

 

[***]

[***]:    [***]
Approval Date:    29 th June 2007
[***]:    [***]

Confidential

The information contained herein is the property of the Sponsor and may not be reproduced, published, or disclosed to others without written authorization of the Sponsor

This study will be conducted according to the principles of Good Clinical Practice as described in International Conference on Harmonization guidelines, including the archiving of essential documents

 

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[***]

_____________________________________

      _____________

Principal Investigator

 

 

      Date
_____________________________________      
Printed Name      
     

 

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[***]

______________________________________       _____________________________
Pirow Bekker, MD PhD      

Date

Vice President, Medical and Regulatory Affairs      

 

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[***]

(This page and page 20 are redacted.)

 

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Synopsis

 

Name of Sponsor

 

ChemoCentryx, Inc

     [***]   [***]
   

[***]

          
   

[***]

          
   

[***]

          
   

[***]

    

Phase of Development:

 

            Phase II

   
 

[***]

 

Patients with celiac disease suffer from intolerance to gluten, an important ingredient in the daily diet, found in wheat, barley, and rye. Gluten ingestion in this patient population causes small bowel mucosal damage. [***]. The current treatment of celiac disease involves strict adherence to a life-long gluten-free diet. Patients worldwide have expressed their need for additional treatments.

[***]

(The remainder of this page and pages 22-29 are redacted.)

 

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1 Introduction

1.1 Background

Celiac disease (celiac sprue, gluten-sensitive enteropathy) is a genetically associated disorder, where the ingestion of gluten-containing cereals wheat, barley and rye results in small intestinal mucosal inflammation, villous atrophy and crypt hyperplasia. Today it is understood that the nature of celiac disease is much more complex than simple intestinal malabsorption, which in fact is a feature now no longer essential for the diagnosis. Furthermore, the ingestion of gluten-containing cereals can also induce manifestations outside the gut (Mäki and Collin 1997). Recent population-based screening studies have shown the disease to be highly prevalent; approximately 1% of the populations both in Europe and the United States suffer from celiac disease (Mäki et al. 2003, Fasano et al. 2003, West et al. 2003, Bingley et al. 2004).

The only accepted gold standard for celiac disease diagnosis is the finding of gluten-induced small intestinal injury (Walker-Smith et al. 1990, American Gastroenterology Association 2006, Rostom et al. 2006). Clinical findings are usually equivocal: newly diagnosed patients eating normal gluten-containing food may, in some cases, have only vague gastrointestinal symptoms whereas in others symptoms may be severe; in people with extra-intestinal manifestations gastrointestinal symptoms may be absent; or the disease may even be clinically silent. One feature that is common to all however is the manifest gluten-sensitive small intestinal mucosal lesion, villous atrophy and crypt hyperplasia. In untreated celiac disease the degree of malabsorption is determined by the length of functionally impaired bowel and the presence of symptoms does not relate at all to the histological features of the proximal biopsy (MacDonald et al. 1964, Marsh and Crowe 1995). This also explains why oral glucose tolerance tests, fecal fat excretion, D -xylose excretion tests, hematologic investigations, and radiologic examination of the small bowel failed to distinguish patients with suspected malabsorption from those with or without mucosal atrophy and, thus, frequently gave misleading results (Sanderson et al. 1975). Based on the current literature in 2002, in a review article in the New England Journal of Medicine, it was concluded that only patients with extensive and severe enteropathy will have evidence of steatorrhea and increased intestinal permeability; in patients with mild-to-moderate enteropathy these tests will remain normal and therefore these tests are no longer important tools in cases of suspected celiac disease or while monitoring dietary treatment (Farrell and Kelly 2002). Furthermore, recent guidelines and management models for celiac disease diagnosis and treatment in the USA no longer recommend these functional studies (Hill et al. 2005, Rostom et al. 2006). Instead, during the last two decades, highly sensitive and specific gluten-dependent serum autoantibody tests have been used for celiac disease case finding, population-based screening studies, monitoring the gluten-free diet, and measurement of mucosal relapse on gluten challenge (Mäki et al. 1984, Mäki et al. 1989, Mäki et al. 1991 a, Dieterich et al. 1998, Sulkanen et al. 1998, Mustalahti et al. 2002 a, Kaukinen et al. 2002, Mäki et al. 2003, Korponay-Szabo et al. 2005, Collin et al 2005, Hill et al. 2005, Holm et al. 2006, Raivio et al. 2006, Rostom et al. 2006 ). As reviewed by Mäki (1995), antibody titers correlate well with the small intestinal mucosal status.

As reviewed by Marsh and Crowe (1995), time-course studies of gluten challenges provide clear evidence of an inflammatory process, a dose-dependent accumulation of lymphocytes to the epithelium during the lower-dose challenges. Upon further challenge, crypt hyperplasia occurs and lastly, villous effacement is seen (flat mucosal lesion).

 

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The Celiac Disease Study Group in Tampere, Finland, has extensively used small intestinal mucosal morphometric analyses to determine ingested wheat-, rye-, and barley- (gluten)-induced mucosal inflammation and mucosal architectural changes in early developing celiac disease, in active and clinically silent disease, during treatment follow-up of patients when the mucosa is healing (Mäki et al. 1991b, Holm et al. 1992, Holm 1993, Iltanen et al. 1999 a, b, Kaukinen et al. 1998, Kaukinen et al. 1999, Kaukinen et al. 2000, Kaukinen et al. 2001, Järvinen et al. 2003, Peräaho et al. 2003, Järvinen et al. 2004, Collin et al. 2004 b, Kaukinen et al. 2005, Kaukinen et al. 2006 a, Salmi et al. 2006), as well as during gluten challenge (Holm et al. 2006, Kaukinen et al. 2006 b). These parameters have included determination of the villous height/crypt depth ratio to establish manifest gluten-induced mucosal architectural change, and counting of the intraepithelial densities of all T lymphocytes (CD3-positive IELs), densities of a ß+ and y d + T cell receptor-bearing IELs, as well as evaluation of the expression of mucosal HLA-DR to reveal gluten-induced inflammatory changes. A decrease in villous height/crypt depth ratio of > 0.5 upon gluten challenge has been regarded as clinically significant. Similarly, a 30% or higher increase in the densities of intraepithelial CD3+ or a ß+ lymphocytes has been regarded as clinically significant (Kaukinen et al. 2005).

A lifelong gluten-free diet is currently the only treatment for celiac disease. The alleviation of symptoms and recovery of mucosal damage are evident with a strict gluten-free diet. It is generally agreed that a gluten-free diet should be as strict as possible. On the other hand, a diet completely devoid of gluten is probably impossible to maintain. There is also evidence in the literature that the small intestinal mucosa does not heal upon strict diet. In one study, only 20% of patients were found to have complete healing of the mucosa (Lee et al. 2003). This may be due to persisting in situ activation of intraepithelial T cells even in well-treated celiac patients (Olaussen et al. 2007), unintentional gluten ingestion, or poor gluten-free dietary compliance (Mayer et al. 1991, Kaukinen et al. 1999, Kaukinen et al. 2002, Collin et al. 2004 c, Viljamaa et al 2005, Rostom et al. 2006, Hischenhuber et al. 2006, Hauser 2007). It is evident that a gluten-free diet is more expensive than a so-called ‘normal’ diet; also social life and travel contribute to dietary lapses. Taken together, there is a need for alternative treatments, ideally in the form of a safe and effective “celiac pill” (Sollid and Khosla 2004).

While the etiology of celiac disease remains unknown, it is characterized by loss of immunological tolerance to wheat, rye and barley gluten in genetically susceptible individuals (reviewed in Sollid 2002, Koning et al. 2005, Alaedini and Green 2005, Jabri and Sollid 2006, and Kagnoff 2007). There is strong evidence that celiac disease is a T-cell-mediated chronic inflammatory bowel disorder with gluten as an autoimmune trigger. CD4-effector T-cells seem to be particularly important in driving the underlying chronic inflammatory process. The small intestinal mucosa is the tissue compartment where ingested gluten initially triggers the T-cell mediated cascade of events that result in loss of mucosal integrity, and subsequent ill health and disease.

It is known that the trafficking of T cells to the small intestinal mucosa is, both under homeostatic and inflammatory conditions, controlled by chemokine receptor CCR9 and its ligand CCL25 (previously known as TECK). The CCR9 receptor is expressed by most T cells in the thymus as well as in the intestine (Kunkel et al, 2000), and by a small population of T cells in the peripheral blood (Papadakis et al, 2003). CCR9 positive T cells also express the a 4ß7 integrin, which along with CCR9, is considered essential for gut-homing cells to reach their destination (Stagg et al, 2002). Circulating CCR9 positive T cells have been shown to have a memory phenotype indicative of cells central to antigen specific responses. In the gut antigens such as gluten are processed by resident dendritic cells in the lamina propria which then migrate to the local mesenteric

 

20


lymph nodes. Once in the local lymph nodes, the dendritic cells present antigen to naïve lymphocytes and secrete retinoic acid (Iwata et al, 2004), enabling the expression of the gut homing integrin a 4ß7 and the chemokine receptor CCR9. These T lymphocytes, having encountered gluten antigen are capable of trafficking to the gut under the influence of gut-expressed CCL25. Once these T cells reach the gut they are thought to play a very substantial role in the pathological response associated with gluten exposure. Use of a CCR9 antagonist to both inhibit the education of naïve lymphocytes to gluten antigen and CCR9-dependent T cell homing to the gut is a highly promising therapeutic strategy for the treatment of celiac disease.

[***]

People eating an average Western diet ingest approximately 15-25 g gluten per day. In celiac disease, the onset of symptoms and signs of gluten intolerance may occur in childhood but become evident most often only in adulthood or in the elderly after decades of gluten ingestion. It has been shown in previous clinical gluten challenge studies that older children, adolescents and young adults with long-term treated celiac disease can tolerate well the ingestion of 10-20 g gluten per day (Mäki et al 1989, Holm et al. 2006). Also, a gluten challenge with repeated small intestinal mucosal biopsies has until fairly recently been mandatory to establish the definite diagnosis of celiac disease, especially in children (in some parts of the world this regimen is still followed). The effect of small gluten loads on the mucosal integrity and a safe gluten threshold in treated celiac disease is still under discussion (Peräaho et al. 2003, Collin et al. 2004 a, Catassi et al. 2006, Hischenhuber et al. 2006). In this proof-of-concept clinical trial we propose to challenge subjects with a moderate amount gluten (5g per day for three months). The literature and our clinical experience tell us that this moderate dose of gluten should cause some mucosal deterioration and inflammation but without inducing clinical symptoms and causing resultant dropout of subjects from the trial. This fixed daily amount of gluten corresponds to the ingestion of approximately to 2-3 slices of wheat flour-based bread per day. The drug under evaluation, to be clinically effective, should be able to significantly reduce or prevent the mucosal deterioration caused by this 5g daily gluten challenge.

The ultimate goal in celiac disease clinical research is to prevent disease and sustain health, and also to develop new therapeutic strategies, less burdensome than a strict life-long gluten-free diet (Sollid and Khosla 2004). In this way it is hoped that celiac disease patients may in the future be able to ingest foods containing wheat, barley, and rye.

[***]

(The remainder of the document is redacted.)

 

 

*** Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

21

Exhibit 10.14

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 2

to

PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This Amendment No. 2 (“Amendment No. 2”) to that certain PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT entered into and made effective as of the 22nd day of August, 2006, and as amended by Amendment No. 1 effective as of the 30th day of September, 2007 (the “Agreement”) by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ChemoCentryx”), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England (referred to herein as “GSK”), collectively, the “Parties”, is hereby entered into by the Parties with an Amendment No. 2 effective date of 6th day of October, 2008 (the “Amendment No. 2 Effective Date”).

WHEREAS, the Parties now agree that ChemoCentryx will undertake under the Agreement a QTc Phase I clinical study for CCX282 under the Agreement entitled “A Randomized, Double-Blind, Placebo-Controlled Phase 1 Thorough QT/QTc Study in Healthy Volunteers”, (the “ Study ”);

WHEREAS, the Parties now agree to establish a budget and payment schedule that shall apply to the Study under the Agreement, subject to the terms and conditions herein, and to establish or clarify certain other issues with respect to the Agreement; and

NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the Parties do hereby amend the Agreement and otherwise agree as follows:

1.        Except as amended hereby, the Agreement will remain unchanged and in full force and effect. The Agreement together with this Amendment No. 2 will be read, taken and construed as one and the same instrument. All terms used in this Amendment No. 2, but not defined herein, will have the same meaning set forth for that term in the Agreement.

2.        The Study is in regards to the Collaboration Compound CCX282 and is included under and as part of the Early Development Program for the Collaboration Compound CCX282 and is designed as set forth in the protocol in Exhibit 1, which is attached hereto and is hereby incorporated by reference.

3.        Reimbursement of ChemoCentryx Costs.


(a)        During the term of the Study, GSK shall pay to ChemoCentryx up to [***] Dollars ($[***]) which shall be used to reimburse ChemoCentryx solely for its documented internal FTE and out-of-pocket expenses actually incurred directly and solely in connection with the conduct of the Study. Payment by GSK will be in quarterly installments based upon a calendar year. ChemoCentryx will provide GSK with a proposed budget, which provides an estimate of anticipated spend by quarter for the Study. ChemoCentryx will provide updated budgets from time to time but at least on a quarterly basis. ChemoCentryx will submit invoices to GSK supported by documents clearly setting forth the actual expenses in such calendar quarter. All invoiced charges shall be solely in accordance with the agreed Study protocol. All payments due under this Amendment No. 2 will be paid by GSK net thirty (30) days upon receipt by GSK of a complete, accurate and audit-worthy invoice as well as clear supporting documentation of expenses. All invoices provided to GSK shall reference the Agreement and shall be sent to GSK Licensing & Benefits Group, GSK House, Great West Road, Brentford, Middlesex, TW8 9GS, UK, Attn: Mark Hancock with an identical copy sent to John Throup, GSK Center of Excellence for External Drug Discovery, [***].

(b)        GSK shall have the right, without incurring any additional costs or expenses or obligations of any kind whatsoever other than as expressly set forth in this paragraph, to terminate its funding of the Study at its sole discretion, for any reason, with or without cause, such termination to be effective ninety (90) days after written notice is provided to ChemoCentry, whereupon, ChemoCentryx shall (i) have all rights to continue, at its sole discretion, the conduct and funding of the Study independently of GSK, but shall be under no obligation to do so, or (ii) have the right to terminate the Study. Upon termination of funding of the Study by GSK and if ChemoCentryx elects not to continue funding the Study independently of GSK, ChemoCentryx shall terminate the Study. Upon election by ChemoCentryx in such case to terminate the Study, ChemoCentryx shall take all reasonable efforts to minimize costs and shall proceed in an orderly fashion to terminate any outstanding cancelable commitments and to stop the Study. All costs incurred by ChemoCentryx associated with termination will be considered reimbursable costs, including costs incurred prior to the notice of termination but which have not been reimbursed, and commitments existing at the time the notice of termination is received which cannot be cancelled. In the event ChemoCentryx believes the costs incurred by it to conduct the Study will exceed the amount budgeted, it shall notify GSK and explain the reasons underlying such expected overage. In no event will reimbursement under this Amendment No. 2 exceed Five Million Dollars, unless otherwise agreed to in writing by the Parties.

(c)        In the event that ChemoCentryx, or its successors and assigns, no longer wishes to continue the Study (for reasons other than safety reasons mutually-agreed by the Parties through the JSC or for termination of funding by GSK as described in paragraph 3(b) above), ChemoCentryx, or its successors or assigns, shall not have the right to terminate the Study without GSK’s prior written consent.

(d)        Total expenses incurred by ChemoCentryx for the Study to be reimbursed by GSK shall not exceed [***] Dollars without the prior written consent of GSK. Any modifications to the Study protocol (Exhibit 1) shall not be implemented without the prior written consent of GSK.

 

 

2

 

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


4.        The provisions of Section 3.7.2(b) and Section 3.11.1 of the Agreement are hereby superseded and replaced entirely by the provisions of this Amendment No. 2, and are declared null and void; provided, however that if GSK exercises its right to unilaterally terminate its funding of the Study, and ChemoCentryx elects to nonetheless complete such Study, such provisions will remain in force and effect to the extent necessary for ChemoCentryx to have its non-funded costs reimbursed in the event GSK exercises its Product Option with respect to CCX282.

5.        All other provisions of the Agreement will remain unchanged and remain in full force and effect. This Amendment No. 2 may be executed in counterparts and all such counterparts taken together shall be deemed to constitute one and the same instrument.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS

 

 

3


IN WITNESS WHEREOF, each of the Parties has caused this Amendment No. 2 to be duly executed by its duly authorized representatives as of the Amendment No. 2 Effective Date.

 

GLAXO GROUP LIMITED

By: /s/ Hugh Cowley

Name:  Hugh Cowley                                     

Title:  SVP Leed                                             

Date: 8 Oct. 2008

CHEMOCENTRYX, INC.

By: /s/ Thomas J. Schall

Name:  Thomas J. Schall                                 

Title:  President and Chief Executive Officer

Date: 10 Oct. 2008

Exhibit 10.15

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 3

to

PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This Amendment No. 3 (“ Amendment No. 3 ”) to that certain PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT entered into and made effective as of the 22 nd day of August, 2006, and as amended by Amendment No. 1 effective as of the 30 th day of September, 2007, and by Amendment No. 2 effective as of the 6 th day of October, 2008 (the “ Agreement ”), by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ ChemoCentryx ”), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England (referred to herein as “ GSK ”), collectively, the “ Parties ”, is hereby entered into by the Parties with an Amendment No. 3 effective date of August 22nd, 2009 (the “ Amendment No. 3 Effective Date ”).

WHEREAS, ChemoCentryx has been conducting research under the Agreement during the Research Term to identify Development Candidates for each of four (4) different Collaboration Targets, pursuant to a Research Plan;

WHEREAS, the Research Term is scheduled to expire on August 22, 2009, and GSK did not exercise its right to extend the Research Term by one (1) year by February 22, 2009, as set forth in Section 3.1.1 of the Agreement; and

WHEREAS, notwithstanding the expiration of the Research Term on August 22, 2009, and notwithstanding the requirements under Section 3.1.1 for invoking a Research Term Extension, the Parties desire that ChemoCentryx continue after such expiration to conduct certain limited research activities, and that GSK continue to fund such activities, in each case under the terms and conditions herein.

NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the Parties do hereby amend the Agreement and otherwise agree as follows:

1.        Except as amended hereby, the Agreement will remain unchanged and in full force and effect. The Agreement together with this Amendment No. 3 will be read, taken and construed as one and the same instrument. All terms used in this Amendment No. 3 but not defined herein will have the same meanings set forth for such terms in the Agreement.


2.        In Sections 1.19.2 and 1.19.2(b) of the Agreement, after “Research Term”, insert “or Additional Research Period”.

3.        Section 1.119 of the Agreement is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

1.119     Research Program ” shall mean the program of research, discovery, characterization, optimization and pre-clinical testing of Collaboration Compounds up until IND Studies to be conducted by ChemoCentryx during the Research Term and for Collaboration Target ChemR23, during the Additional Research Period , as set forth in Article 3.

4.        In Sections 2.3 and 5.1.1 of the Agreement, after “Research Term”, insert “and Additional Research Period”.

5.        Section 3.1.2 of the Agreement is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

3.1.2     Clarifications .    The Research Program shall be conducted by ChemoCentryx for each Collaboration Target throughout the duration of the Research Term and for Collaboration Target ChemR23 throughout the duration of the Additional Research Period unless earlier terminated by a decision of the JSC. The objective of the Research Program is to identify a Development Candidate and at least two (2) Backup Compounds to each Development Candidate for each Collaboration Target.

6.        The following new Section 3.1.3 is hereby added to the Agreement:

3.1.3     Additional Research Period .    Notwithstanding anything in this Agreement to the contrary, following, the expiration of the Research Term on August 22, 2009, until February 28, 2010 (the “Additional Research Period”), ChemoCentryx shall continue to conduct research under the Research Plan for Collaboration Target ChemR23 only. Prior to the expiration of the Research Term, as necessary, the JSC shall amend the Research Plan to reflect the research activities ChemoCentryx will conduct during the Additional Research Period. During the Additional Research Period, ChemoCentryx will have the responsibilities applicable to its activities under the Research Plan with respect to ChemR23 as set forth in Section 3.3.4. GSK shall provide funding for ChemoCentryx’ activities during the Additional Research Period pursuant to Section 3.11.3 .

7.        Section 3.2.2 of the Agreement is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

3.2.2     If No Development Candidate Selected .    For clarity, if no Development Candidate has been selected by the JSC (or by GSK) against a certain Collaboration Target (other than ChemR23) by the end of the Research Term, or against ChemR23 by the end of the Additional Research Period , ChemoCentryx shall not be required to conduct any activities under any Early Development Program with respect to such Collaboration Target and the Collaboration Compounds directed against such Collaboration Target shall revert to ChemoCentryx subject to the other terms and conditions of this Agreement; provided, however that if at the end of the Research Term, no Collaboration Compound has been nominated by the

 

2


JSC as a Development Candidate which targets a given Collaboration Target other than CCR9 or ChemR23, or if at the end of the Additional Research Period, no Collaboration Compound has been nominated by the .ISC as a Development Candidate against ChemR23 , GSK shall have the right (exercisable only once per Collaboration Target), upon the payment of the Development Candidate Selection Milestone set forth in Section 6.4.2, to nominate at its sole discretion, a Collaboration Compound as a Development Candidate against such Collaboration Target (as well as two (2) additional Collaboration Compounds against such Collaboration Target to be deemed as Back-up Compounds thereto), such nominated Collaboration Compound to be deemed a Development Candidate (and thus, with its Back-up Compounds, Progressed Compounds) for all purposes under this Agreement, whereupon an Early Development Program for such Development Candidate for the relevant Collaboration Target shall be prepared and conducted by ChemoCentryx as provided in Section 3.2.1 and in accordance with the relevant provisions of this Agreement.

8.        The third sentence of Section 3.6.2 of the Agreement is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

In the event that no proposed Development Candidate with respect to a given Collaboration Target (other than ChemR23) has been approved by the JSC as described above by the end of the Research Term or, with respect to ChemR23, by the end of the Additional Research Period , the Parties shall proceed in accordance with Section 3.2.2 with respect to such Collaboration Target.

9.        The following new Section 3.11.3 is hereby added to the Agreement:

3.11.3 Funding for Additional Research Period .    GSK will support ChemoCentryx’ efforts under the Research Plan during the Additional Research Period by paying ChemoCentryx two (2) research funding payments, each in the amount of [***] Dollars ($[***]), as provided in and subject to the adjustment described in this Section 3.11.3. On or before each of September 1, 2009 and December 1, 2009, ChemoCentryx shall submit to GSK an invoice for such amount, and GSK shall pay each such invoice within thirty (30) days of receipt of the invoice. Within thirty (30) days after the end of the Additional Research Period, ChemoCentryx shall submit to GSK a statement setting forth the actual FTE costs (based on the number of FTEs that actually worked on the Research Plan during the Additional Research Period, multiplied by the [***] in effect when such costs were incurred) and other reasonable out-of-pocket expenses incurred by ChemoCentryx in performing the Research Plan during the Additional Research Period (all such costs and expenses, the “Additional Research Cost”), as supported by written documentation. If the Additional Research Cost is less than [***] Dollars ($[***]) and GSK has paid the invoices described above in this Section 3.11.3, then ChemoCentryx shall pay GSK an amount equal to the difference between [***] Dollars ($[***]) and the Additional Research Cost, within thirty (30) days after the end of the Additional Research Period. If the Additional Research Cost exceeds [***] Dollars ($[***]), then no further payments shall be due from GSK to ChemoCentryx under this Section 3.11.3 beyond the invoices described above .

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

3


10.        For the avoidance of doubt, this Amendment No. 3 shall have no effect on the Research Term, which shall expire on August 22, 2009, or on the time periods in Article 7 of the Agreement that are measured in terms of and/or with reference to the Research Term and/or its expiration date.

11.        The first sentence of Section 9.6 of the Agreement is hereby amended and restated in its entirety as follows (newly added text in bold and underlined):

Neither Party or its Affiliates shall publish or publicly disclose the results of any of the research and/or development activities conducted under the Research Program or under any Early Development Program, without the prior written consent of the other Party, except that after the end of the Additional Research Period with respect to ChemR23, and after the end of the Research Term with respect to all other Collaboration Targets , the foregoing shall not apply to ChemoCentryx for results that do not relate to any Collaboration Compounds, or to GSK for results that relate directly to any of the Product Candidates or Licensed Products.

12.        All other provisions of the Agreement will remain unchanged and remain in full force and effect. This Amendment No. 3 may be executed in counterparts and all such counterparts taken together shall be deemed to constitute one and the same instrument.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS

 

4


IN WITNESS WHEREOF , each of the Parties has caused this Amendment No. 3 to be duly executed by its duly authorized representatives as of the Amendment No. 3 Effective Date.

 

GLAXO GROUP LIMITED

By: /s/ Paul Williamson                            

Name: Paul Williamson

Title:

  For and on behalf of Edinburgh Pharmaceutical
 

Industries Limited

Corporate Director

 

CHEMOCENTRYX, INC.

By: /s/ Thomas J. Schall                            

Name: Thomas J. Schall

Title:

  President and Chief Executive Officer

 

5

Exhibit 10.16

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 4

to

PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This Amendment No. 4 (“Amendment No. 4”) to that certain PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT entered into and made effective as of the 22” day of August, 2006, and as amended by Amendment No. 1 effective as of the 30th day of September, 2007, by Amendment No. 2 effective as of the 6th day of October 2008, and by Amendment No. 3 effective as of the 22” day of August 2009 (the “Agreement”) by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ ChemoCentryx ”), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England (referred to herein as “ GSK ”), collectively, the “ Parties ”, is hereby entered into by the Parties with an Amendment No. 4 effective date of February 26, 2010 (the “ Amendment No. 4 Effective Date ”).

WHEREAS, the Parties now agree to conduct (i) a preclinical study for the AMD indication for the C5aR Collaboration Target entitled, “Studies for Evaluation of CCX168 in [***]” to support AMD indication (the “[***] Study”), and (ii) a [***] Toxicology Evaluation of CCX168 (the “Tox Study”) under the Agreement (collectively hereinafter the “C5aR Program Studies”); and

WHEREAS, the Parties now agree to establish a budget and payment schedule that shall apply to each of the C5aR Program Studies referenced under this Amendment No. 4, subject to the terms and conditions herein, and to establish or clarify certain other issues with respect to the Agreement; and

NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the Parties do hereby amend the Agreement and otherwise agree as follows:

1.        Except as amended hereby, the Agreement is ratified, confirmed and reaffirmed in all respects. The Agreement together with this Amendment No. 4 will be read, taken and construed as one and the same instrument. All terms used in this Amendment No. 4, but not defined herein, will have the same meaning set forth for that term in the Agreement.

2.        The C5aR Program Studies are in regards to the Development Candidate CCX168 targeting the Collaboration Target C5aR and are designed in accordance with Exhibit 1 and Exhibit 2, which are attached hereto and incorporated by reference. Exhibit 1 shall include, and

 

 

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


incorporate by reference, the protocol covering the [***] Study and Exhibit 2 shall include and incorporate by reference the protocol covering the Tox Study (each such protocol, as included in Exhibit 1 or Exhibit 2, an “Experimental Protocol”).

3.        Reimbursement of ChemoCentryx Costs. The C5aR Program Studies shall be part of the Early Development Program for CCX168. Notwithstanding Section 3.2.1 of the Agreement, GSK shall be responsible for the costs and expenses of the C5aR Program Studies as follows:

(a)        The [***] Study. GSK shall reimburse ChemoCentryx for its out-of-pocket expenses incurred as a result of the activities relating to the conduct of the [***] Study, which expenses are estimated to be [***] GBP (£[***]) [or USD$ equivalent]. Payment by GSK will be in two separate installments as follows: (i) approximately £[***] [or USD$ equivalent] upon the completion of the Experimental Protocol for Study 1, and (ii) approximately £[***] [or USD$ equivalent] upon the completion of the Experimental Protocol for Study lb. Following completion of each of Study 1 and Study lb, ChemoCentryx will submit an invoice to GSK setting forth the actual out-of-pocket expenditures incurred to conduct the Experimental Protocol for Study 1 or Study lb. All invoiced charges shall be in accordance with the agreed Study 1 and Study lb Experimental Protocol. All payments due under this Amendment No. 4 will be paid by GSK net thirty (30) days upon receipt by GSK of a complete, accurate and audit-worthy invoice. All invoices provided to GSK shall reference the Agreement and shall be sent electronically to GSK Attn: [***] for processing. For clarity, except as provided below in this Section 3(a), the maximum amount of money to be paid by GSK for expenses incurred during a calendar year period for the [***] Study shall be capped at [***] GBP (£[***]) [or USD $ equivalent] (the “[***] Study Cap”). If ChemoCentryx anticipates that the total out-of-pocket expenses to conduct the [***] Study according to the Experimental Protocol will exceed the [***] Study Cap, ChemoCentryx shall promptly notify GSK in writing. GSK shall notify ChemoCentryx within fifteen (15) days of receipt of such notice of GSK’s decision either to fund or not to fund such excess amount, which decision shall be at GSK’s sole discretion. If GSK decides not to fund such excess amount, ChemoCentryx shall have the right, at its sole discretion, to fund such excess amount. If neither Party decides to fund such excess amount, ChemoCentryx shall not be obligated to complete the [***] Study according to the Experimental Protocol, and shall have the right to amend the Experimental Protocol for Study 1 or Study lb, upon written notice to GSK, such that the total out-of-pocket expenses incurred by ChemoCentryx to conduct the [***] Study do not exceed the [***] Study Cap. In no event shall either Party be responsible for any amounts to conduct the [***] Study in excess of the [***] Study Cap without such Party’s prior written consent.

(b)        The Tox Study. GSK shall reimburse ChemoCentryx for its out-of-pocket expenses incurred as a result of the activities relating to the conduct of the Tox Study, which expenses are estimated to be [***] Thousand USD ($[***]). Payment by GSK will be in quarterly installments based upon a calendar year. Following each calendar quarter during which ChemoCentryx conducts the Tox Study, ChemoCentryx will submit an invoice to GSK setting forth the actual out-of-pocket expenditures incurred to conduct the Tox Study in such calendar quarter and a quarterly budget update of incurred expenses. All invoiced charges shall be in accordance with the agreed Tox Study Experimental Protocol. All payments due under this Amendment No. 4 will be paid by GSK net thirty (30) days upon receipt by GSK of a complete, accurate and audit-worthy invoice. All invoices provided to GSK shall reference the Agreement

 

 

 

2

 

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


and shall be sent electronically to GSK Attn: [***] for processing. For clarity, the maximum amount of money to be paid by GSK for expenses incurred during a calendar year period for the Tox Study shall be capped at [***] Thousand USD ($[***]) (the “Tox Study Cap”).

(c)        GSK has the right to terminate funding the [***] Study and/or the Tox Study at its sole discretion, for any reason, with or without cause, such termination to be effective ninety (90) days after written notice is provided to ChemoCentryx; whereupon, ChemoCentryx has the opportunity (i) to continue funding the [***] Study and/or the Tox Study, as applicable, independently of GSK, or (ii) to close the [***] Study and/or the Tox Study, as applicable, down. Upon termination of funding of the [***] Study or the Tox Study by GSK and if ChemoCentryx closes the [***] Study or Tox Study, ChemoCentryx shall take all reasonable efforts to minimize costs and shall proceed in an orderly fashion to terminate any outstanding cancelable commitments and to stop the [***] Study or the Tox Study, as applicable. All costs to ChemoCentryx associated with termination will be considered reimbursable costs, as well as costs incurred prior to the notice of termination but which have not been reimbursed, and commitments existing at the time the notice of termination is received which cannot be cancelled. In no event will reimbursement under this Amendment No. 4 exceed the total budgeted amount stated under 3(a), the [***] Study Cap, or 3(b), the Tox Study Cap, above, unless otherwise agreed to in writing by the Parties.

(d)        In the event that ChemoCentryx, or its successors and assigns, no longer wish to continue the C5aR Program Studies, ChemoCentryx, or its successors and assigns, cannot terminate the C5aR Program Studies without GSK’s prior written consent, not to be unreasonably withheld; provided that in no event shall ChemoCentryx be obligated to incur expenses to conduct the C5aR Program Studies in excess of the budgeted amounts set forth in Sections 3(a), the [***] Study Cap, and 3(b) the Tox Study Cap.

4.        For clarification, this Amendment No. 4 applies only to the Early Development Program associated with the CCX168 compound and the Collaboration Target C5aR, and no other program or compound under the Agreement. All amounts spent by GSK or ChemoCentryx under this Amendment No. 4 do not qualify, in any way, as PoC Trial expenditures under Section 2.3.6 of the Agreement.

5.        All other provisions of the Agreement will remain unchanged and remain in full force and effect. This Amendment No. 4 may be executed in counterparts and all such counterparts taken together shall be deemed to constitute one and the same instrument.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS

 

 

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

 

 

3

 

 


IN WITNESS WHEREOF , each of the Parties has caused this Amendment No. 4 to be duly executed by its duly authorized representative as of the Amendment No. 4 Effective Date.

GLAXO GROUP LIMITED

 

By :

  /s/ Paul Williamson                                                      

Name:

 

Paul Williamson

 

For and on behalf of

 

Edinburgh Pharmaceutical Industries Limited

Title:

 

Corporate Director

CHEMOCENTRYX, INC.

 

By:

  /s/ Thomas J. Schall                                                      

Name:

 

Thomas J. Schall

Title:

 

President and Chief Executive Officer

 

 

4

 


ChemoCentryx, Inc.

CCX168

         

EXHIBIT 1

Studies for Evaluation of CCX168 in [***]

(29 January 2010)

Experimental protocol for Study 1

Rationale: To test the effect of CCX168 on [***]

The objectives of the study include:

[***]

Experimental plan: [***]

Timings and Cost

[***]

Experimental protocol for Study 1b

Rationale: To test the effect of CCX168 on [***]

The objectives of the study include:

[***]

Experimental plan: [***]

Timings and Cost

[***]

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

 

     Page 5 of 7    26-February-2010


ChemoCentryx, Inc.

CCX168

         

EXHIBIT 2

[***] TOXICOLOGY EVALUATION OF CCX168

 

Synthesis of API to support Toxicology studies

  

Starting Materials:

     $[***]   

Manufacture:

     $[***]   

13-Week Toxicology studies

  

Develop suitable tox formulation for [***]

     $[***]   

[***]

     $[***]   

[***]

     $[***]   

[***]

     $[***]   

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

     Page 6 of 7    26-February-2010


ChemoCentryx, Inc.

CCX168

         

Exhibit 2: The Quarterly Budget for Tox Study is attached hereto and made a part hereof:

[***]

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

     Page 7 of 7    26-February-2010

Exhibit 10.17

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 5

to

PRODUCT DEVELOPMENT AND

COMMERCIALIZATION AGREEMENT

This Amendment No. 5 (“Amendment No. 5”) to that certain PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT entered into and made effective as of the 22 nd day of August, 2006, and as amended by Amendment No. 1 effective as of the 30 th day of September, 2007, by Amendment No. 2 effective as of the 6 th day of October 2008, by Amendment No. 3 effective as of the 22 nd day of August 2009, and by Amendment No. 4 effective as of the 26 th day of February, 2010 (the “Agreement” ) by and between ChemoCentryx, Inc., a Delaware corporation having its principal place of business at 850 Maude Avenue, Mountain View, CA 94043 (“ChemoCentryx” ), and Glaxo Group Limited, a company existing under the laws of England and Wales, having its registered office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 0NN, England (referred to herein as “GSK” ), collectively, the “Parties” , is hereby entered into by the Parties with an Amendment No. 5 effective date of November  15 , 2010 (the “Amendment No. 5 Effective Date” ).

WHEREAS, the Parties now agree to progress the Development Candidate CCX168 targeting the Collaboration Target C5aR in a non-Major Indication, and that development activities in such non-Major Indication shall satisfy certain obligations under the Agreement with respect to Major Indications; and

WHEREAS, the Parties now agree, as a result, to amend certain milestone payments with respect to the progression of Development Candidate CCX168 in a non-Major Indication, as set forth in this Amendment No. 5, and to establish or clarify certain other issues with respect to the Agreement.

NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants set forth below, the Parties do hereby amend the Agreement and otherwise agree as follows:

1.         No Additional Changes; Use of Capitalized Terms .     Except as amended hereby, all other provisions of the Agreement will remain unchanged and remain in full force and effect and the Agreement, as amended, is hereby ratified, confirmed and reaffirmed in all respects. The Agreement together with this Amendment No. 5 will be read, taken and construed as one and the same instrument. All terms used in this Amendment No. 5, but not defined herein, will have the same meaning set forth for that term in the Agreement.

2.         Proof of Concept Trial .     The Parties agree that pursuant to Section 3.6.3 of the Agreement, they have selected renal vasculitis, a non-Major Indication, as an Indication to

 

1


pursue for the Development Candidate CCX168. Notwithstanding anything in the Agreement to the contrary, the Parties agree that the first Phase 2 Clinical Trial of CCX168 that is reasonably designed to satisfy the PoC Criteria in a non-Major Indication (e.g., an orphan indication such as renal vasculitis) approved by the Parties shall be deemed a Proof of Concept Trial (or PoC Trial) for all purposes under the Agreement, notwithstanding that such Indication is not a Major Indication. Without limiting the generality of the foregoing:

(a)        completion of such Phase 2 Clinical Trial by ChemoCentryx shall satisfy ChemoCentryx’s obligation under Section 3.7.1 to undertake Development of CCX168 through completion of a PoC Trial; and

(b)        if based on such Phase 2 Clinical Trial, the JSC determines in accordance with Section 3.8.2 that CCX168 satisfies the applicable PoC Criteria, CCX168 shall be deemed an Option Compound, and GSK’s Product Option under Section 4.1 of the Agreement shall apply to such Option Compound (and its Back-up Compounds CCX1378 and CCX1641, which were designated by the JSC on March 19, 2009, and accepted by GSK in the context of the[***]), such Option Compound and its designated Back-up Compounds collectively referred to as one set of Progressed Compounds, all of which are included within and subject to a single Product Option exercise. GSK would owe to ChemoCentryx the Non-CCR9 Option Exercise Fee under Section 6.3.2 of the Agreement for exercise of such Product Option.

3.         Amendment of Section 6.4.2, Footnote 3. Section 6.4.2, Footnote 3 shall be amended to add the following sentence to the end of Footnote 3:

“[***]”

3.        This Amendment No. 5 may be executed in counterparts and all such counterparts taken together shall be deemed to constitute one and the same instrument.

4.        This Amendment No. 5 and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, U.S.A., without reference to conflicts of laws principles.

***    Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

 

2


IN WITNESS WHEREOF , each of the Parties has caused this Amendment No. 5 to be duly executed by its duly authorized representative as of the Amendment No. 5 Effective Date.

 

GLAXO GROUP LIMITED

By:

 

/s/ Paul Williamson                                                          

Name:

 

Paul Williamson                

Title:

  Authorised Signatory
for and on behalf of
Edinburgh Pharmaceutical Industries Limited
Corporate Director                                             

CHEMOCENTRYX, INC.

By:

 

/s/ Thomas J. Schall                            

Name:

 

Thomas J. Schall                                

Title:

 

President and Chief Executive Officer

 

3

Exhibit 10.19

 

AMENDMENT TO SERIES D PREFERRED STOCK SUBSCRIPTION AGREEMENT

This Amendment (the “Amendment”) to Series D Preferred Stock Subscription Agreement (the “ Agreement ”) dated as of November 8, 2007 is entered into by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”) and Glaxo Group Limited, a limited liability company organized under the laws of England doing business as GlaxoSmithKline (“ GSK ”).

The Company and GSK wish to amend Sections 7.18 and 7.19 of the Agreement which relate only to the rights and obligations of the Company and GSK to provide for the purchase by GSK of $7 million of the Company’s Common Stock concurrently with an initial public offering of the Company’s Common Stock. The remainder of the Agreement shall remain in full force and effect.

Section 7.8 of the Agreement permits the amendment of such provisions with only the consent of GSK and the Company.

Capitalized terms used herein without definition shall have the same meanings as in the Agreement.

Accordingly, the Company and GSK each hereby agree that Sections 7.18 and 7.19 are hereby amended and restated to read in their entirety as follows:

7.18   Purchase of Common Stock in Initial Public Offering; Selling Restrictions .

(a)      GSK agrees to purchase an aggregate amount of $7 million of the Company’s Common Stock (the “Common Shares”) at a per share price equal to the per share initial public offering price in a private placement closing (the “ Common Closing ”) to be held concurrently with the closing of an initial public offering of at least $25 million in gross proceeds to the Company. At the Common Closing the Company shall deliver to GSK one or more Common Stock certificates, in accordance with GSK’s reasonable request. Each such certificate shall be registered in the name of GSK or one of its affiliates as GSK shall instruct. The Company’s obligation to issue and deliver such shares at the Common Closing shall be subject to the following conditions, any of which may be waived by the Company: (i) receipt by the Company of a certified or official bank check or checks or wire transfer of funds in the full amount of the purchase price for the Common Shares; (ii) the accuracy in all material respects of the representations of GSK made herein as of the Common Closing; (iii) no judgment, decree, injunction, order or ruling of any court or governmental or regulatory body would be violated by the consummation of the transaction; and (iv) all authorizations, approvals, or permits, if any, of any governmental authority or regulatory body which are legally required shall have been obtained and be effective. GSK’s obligations to purchase the Common Shares at the Common Closing shall be subject to the following conditions, any of which may be waived by GSK: (i) receipt by GSK of one or more certificates representing the Common Shares; and (ii) the accuracy in all material respects of the representations and warranties of the Company made herein as of the Common Closing, provided, however, that for this purpose the representations and warranties of the Company included herein shall be deemed to be updated and modified by information included in the final prospectus relating to the Company’s initial public offering, a copy of which


shall have been furnished to GSK and on which GSK shall be entitled to rely. GSK acknowledges that the Common Shares will not be registered and will be appropriately legended as restricted stock. It is the intent of the Company and GSK that the Common Shares purchased hereunder be treated as “Registrable Securities” pursuant to the Investors Rights Agreement. The Company shall use its reasonable best efforts to obtain any necessary consents from the necessary parties to the Investors Rights Agreement to effect such an amendment to the Investors Rights Agreement prior to the closing of the initial public offering.

(b)      GSK agrees that for a period commencing on the date of the Closing and ending on the earliest of (a) the third anniversary of the date of the Closing, (b) the consummation of a Qualified IPO (as defined in the Investors Rights Agreement) and (c) the closing of a transaction in which a third party acquires a majority of the outstanding voting shares of the Company (the “ Restricted Period ”), neither GSK, nor any of its affiliates, shall offer, sell, contract to sell, pledge, grant an option to purchase, make a short sale or otherwise dispose of any Securities held by GSK or any of its affiliates, or grant an option or other rights to any person or entity to acquire any Securities, without the prior written consent of the Company; provided that notwithstanding anything in this Section 7.18 to the contrary, GSK and its affiliates shall be bound by the Market-Standoff Agreement in Section 1.14 of the Investors Rights Agreement. During the Restricted Period, the consent of the Company shall not be required for the transfers by GSK of all or a portion of the Securities to its affiliates (a “ Permitted Transferee ”); provided, however, that such affiliate agrees to become a party to, and be bound by, all of the terms and conditions of this Agreement by duly executing and delivering a joinder agreement. During the two year period from and after the expiration of the Restricted Period, GSK and/or its affiliates shall not offer, sell, contract to sell, pledge, grant an option to purchase, make a short sale or otherwise dispose of any of the Securities purchased by GSK pursuant to this Agreement other than pursuant to a registration statement under the Securities Act or pursuant to Rule 144 under the Securities Act without the prior written consent of the Company.

7.19   Standstill .

(a)      During the Research Term (as defined in the Product Development and Commercialization Agreement between the Company and Glaxo Group Limited dated as of August 22, 2006) and the first year thereafter, neither GSK nor any of its affiliates shall, in any manner, directly or indirectly, except as agreed by the Company in writing or as provided expressly in Sections 7.19(b) or 7.19(c) or otherwise under this Agreement: (i) make, effect, initiate, cause or participate in any acquisition of beneficial ownership of any securities or any assets of the Company; (ii) form, join or participate in a “group” (as defined in the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) with respect to the beneficial ownership of any securities of the Company; (iii) agree or offer to take, or encourage or propose (publicly or otherwise) the taking of any action referred to in subsections (i) or (ii) of this Section 7.19(a); or (iv) assist, induce or encourage any other person or entity to take any action of the type referred to in subsections (i), (ii) or (iii) of this Section 7.19(a).

(b)      Nothing herein shall prevent GSK or its affiliates (or in the case of Section 7.19(b)(v), their employees) from: (i) purchasing the Shares at the Closing; (ii) purchasing the Common Shares at the Common Closing, (iii) purchasing additional Securities pursuant to the provisions of the Investors Rights Agreement or the Certificate; (iv) acquiring Securities issued in


connection with stock splits or recapitalizations; (v) following the consummation of a Qualified IPO (as defined in the Investors Rights Agreement) purchasing Securities for (A) a pension plan established for the benefit of GSK’s employees, (B) any employee benefit plan of GSK, (C) any stock portfolios not controlled by GSK or any of its affiliates that invest in the Company among other companies, or (D) any account of a GSK director, officer or employee in such individual’s personal capacity; or (vi) acquiring securities of another biotechnology or pharmaceutical company that beneficially owns any Securities; provided that any Securities so acquired shall be subject to the provisions of Section 7.18 of this Agreement on the same basis as the Shares purchased pursuant to this Agreement.

(c)      GSK and its affiliates shall be free from the restrictions and limitations contained in this Section 7.19 in the event that: (i) the Board of Directors of the Company publicly announces or publicly acknowledges that (A) the Board of Directors of Company has decided to sell the Company or (B) the Company is for sale; (ii) the Company enters into a written agreement with a third party providing for a transaction which would give rise to a change of control in the Company; (iii) any third party commences or otherwise undertakes any tender or exchange offer (as such terms are defined or used under the Exchange Act) for the Company; or (iv) any third party initiates a “solicitation” of “proxies” (as such terms are defined or used in Regulation 14A of the Exchange Act) with respect to the Company.

The foregoing Amendment is hereby entered into by the Company and GSK as of November 8, 2007.

 

CHEMOCENTRYX, INC.
By:  

            /s/ Thomas J. Schall

  Name:  Thomas J. Schall
 

Title:    President & Chief Executive        

             Officer

GLAXO GROUP LIMITED
By:  

            /s/ V. A. Whyte

   Name:  V. A. Whyte
   Title:    Assistant Secretary

Exhibit 10.20

SERIES E PREFERRED STOCK SUBSCRIPTION AGREEMENT

This Series E Preferred Stock Subscription Agreement (the “ Agreement ”) dated as of August 26, 2008 is entered into by and between ChemoCentryx, Inc., a Delaware corporation (the “ Company ”), and the individual or entity (collectively, the “ Purchasers ” and individually, the “ Purchaser ”) whose name appears on the last page of this Agreement.

The Company desires to sell shares of its Series E Preferred Stock, par value $0.001 per share (the “ Series E Stock ”), to the Purchasers, and the Purchasers desire to purchase such shares of Series E Stock, on the terms and subject to the conditions set forth in this Agreement. This Agreement, including the agreements set forth as Exhibits hereto, shall be collectively referred to as the “ Agreements .”

Each Purchaser understands that, pursuant to the Agreements, the Company proposes to offer and sell to a limited number of sophisticated investors an aggregate maximum of 6,800,000 shares of Series E Stock at a price of $7.36 per share (the “ Offering ”).

The total number of shares of Series E Stock issued pursuant to the Agreements is hereinafter referred to as the “ Shares .” The Shares will have, on the date of the Closing (as defined below), the rights, preferences and privileges provided for in the Company’s Amended and Restated Certificate of Incorporation (the “ Certificate ”), attached hereto as Exhibit A , and the Amended and Restated Investors Rights Agreement (the “ Investors Rights Agreement ”), attached hereto as Exhibit B .

Accordingly, each Purchaser agrees with the Company as follows (except as to Section 7.18, Section 7.19, Section 7.20 and Section 7.21, which are applicable only to Purchaser Glaxo Group Limited, a limited liability company organized under the laws of England doing business as GlaxoSmithKline (“ GSK ”)):

1.         Sale of Shares .  Each Purchaser will purchase from the Company the number of Shares set forth opposite the Purchaser’s name on the last page of this Agreement at a price of $7.36 per share, and in consideration therefor the Company agrees to issue to each Purchaser a stock certificate for the number of Shares set forth opposite each Purchaser’s name on the last page of this Agreement.

2.         Closing; Delivery .

  2.1         Closing .  Each Purchaser understands that the Company is under no obligation to sell any of the Shares to the Purchasers unless the Company accepts and signs this Agreement. The closing of the purchase and sale of the Shares to the Purchasers hereunder shall be held at the offices of Latham & Watkins LLP, 600 West Broadway, Suite 1800, San Diego, California 92101, at 10:00 a.m. on August 26, 2008 (the “ Closing ”).

  2.2         Delivery .  At the Closing, the Company will deliver to each Purchaser a certificate for the number of Shares set forth opposite each Purchaser’s name on the last page of this Agreement in exchange for a check payable to the Company or wire transfer to the


Company’s bank account in an amount equal to $7.36 times the number of Shares being acquired by such Purchaser.

3.         The Company’s Representations and Warranties .  Except as set forth in the Schedule of Exceptions attached hereto as Exhibit C , which exceptions shall be deemed to be representations and warranties as made hereunder, the Company represents and warrants as of the Closing to each Purchaser as follows:

  3.1         Organization and Standing .  The Company is a corporation duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is qualified to do business as a foreign corporation in all jurisdictions in which the failure to be so qualified would have a material adverse affect on the Company’s business, financial condition or results of operations.

  3.2         Corporate Power .    The Company will have at the Closing all requisite legal and corporate power and authority to execute and deliver the Agreements, to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Shares and to carry out and perform its obligations under the terms of the Agreements.

  3.3         Subsidiaries .    The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity.

  3.4         Capitalization .  As of the Closing and after giving effect to the sale of the Shares pursuant to the terms of the Agreements (i) the authorized capital stock of the Company will consist of (a) 68,000,000 shares of common stock, par value $0.001 per share (the “ Common Stock ”), of which 8,226,830 shares will be issued and outstanding, 3,000,000 shares will be reserved for issuance upon the conversion of outstanding shares of Series A-1 Preferred Stock of the Company, par value $0.001 per share (the “ Series A-1 Stock ”), 1,000,000 shares will be reserved for issuance upon the conversion of outstanding shares of Series A-2 Preferred Stock of the Company, par value $0.001 per share (the “ Series A-2 Stock ”), 1,000,000 shares will be reserved for issuance upon the conversion of outstanding shares of Series A-3 Preferred Stock of the Company, par value $0.001 per share (the “ Series A-3 Stock ”), 24,390,790 shares will be reserved for issuance upon the conversion of outstanding shares or outstanding warrants to purchase shares of Series B Preferred Stock of the Company, par value $0.001 per share (the “ Series B Stock ”), 5,048,469 shares will be reserved for issuance upon the conversion of outstanding shares of Series C Preferred Stock, par value $0.001 per share (the “ Series C Stock ”), 7,750,655 shares will be reserved for issuance upon conversion of outstanding shares of Series D Stock, par value $0.001 per share (the “ Series D Stock ” and, collectively with the Series A-1 Stock, the Series A-2 Stock, the Series A-3 Stock, the Series B Stock, the Series C Stock and the Series E Stock, the “ Preferred Stock ”), 6,800,000 shares will be reserved for issuance upon the conversion of outstanding Series E Stock, 4,686,842 shares will be issuable upon the exercise of outstanding options and warrants to purchase Common Stock, and 2,074,189 shares will be reserved for issuance upon the grant of options currently reserved for issuance under the Company’s stock incentive plans, and (b) 48,989,914 shares of Preferred Stock, par value $0.001

 

2


per share, consisting of (1) 3,000,000 shares designated as Series A-1 Stock, all of which will be issued and outstanding, (2) 1,000,000 shares designated as Series A-2 Stock, all of which will be issued and outstanding, (3) 1,000,000 shares designated as Series A-3 Stock, all of which will be issued and outstanding, (4) 24,390,790 shares designated as Series B Stock, of which 23,664,713 shares will be issued and outstanding and 726,077 shares will be reserved for issuance upon exercise of outstanding warrants to purchase Series B Stock, (5) 5,048,469 shares designated as Series C Stock, all of which will be issued and outstanding, (6) 7,750,655 shares designated as Series D Stock, all of which will be issued and outstanding and (7) 6,800,000 shares designated as Series E Stock of which 6,800,000 shares (assuming the sale and/or issuance of 6,800,000 of Series E Stock in the Offering) will be outstanding; (ii) all issued and outstanding shares of capital stock of the Company (including the Shares) are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of or subject to any preemptive or similar rights; and (iii) except as otherwise set forth in this Section 3.4, the Company will not have outstanding any shares of capital stock or voting stock of the Company, stock or other securities convertible into or exchangeable for any shares of capital stock of the Company, any rights to subscribe for or to purchase or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of any capital stock, or any stock or securities convertible into or exchangeable for any capital stock of the Company. All shares of Common Stock issuable upon conversion of the Shares have been duly authorized and validly reserved for issuance and, when issued in accordance with the terms of the Certificate, will be validly issued, fully paid and nonassessable and will be free and clear of any liens, charges or other encumbrances or restrictions on sale created by or through the Company and will be free and clear of all preemptive or similar rights.

  3.5         Authorization .  All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of the Agreements by the Company, the authorization, sale, issuance and delivery of the Shares and the performance of all of the Company’s obligations under the Agreements has been taken or will be taken prior to the Closing. The Agreements, when executed and delivered by the Company, shall constitute valid and binding obligations of the Company, enforceable in accordance with their terms, except (i) as subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies and (ii) to the extent the indemnification provisions in the Investors Rights Agreement may be limited by applicable federal or state securities laws. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable. The shares of Common Stock issued upon conversion of the Shares (together with the Shares, the “ Securities ”) in accordance with the Certificate will be duly authorized, validly issued, fully paid and non-assessable. The Series E Stock will have the rights, preferences and privileges described in the Certificate. The Shares will be free of any liens, charges or encumbrances or restrictions on sale created by or through the Company and free and clear of all preemptive or similar rights; provided , however , that the Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein and the Investors Rights Agreement.

  3.6         Labor Agreements and Actions .  The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or

 

3


implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Each officer and each employee of the Company is not party to any employment agreement and the employment of such individuals is terminable at the will of the Company.

  3.7         Agreements; Action .

      (a)        Except for agreements explicitly contemplated hereby, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof nor are there agreements or understandings between any person and/or entities, which affect or relate to the voting or giving of written consents with respect to any security or by a director of the Company.

      (b)        There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $100,000.00, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company’s products or services.

      (c)        The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) made any loans or advances to any person, other than ordinary advances for travel expenses, (iii) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business, or (iv) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $100,000.00 or collectively in excess of $500,000.00.

      (d)        For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.

      (e)        The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Certificate or Bylaws, that adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition.

 

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      (f)        The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company.

      (g)        Each of the contracts listed in Section 3.7 of the Schedule of Exceptions (the “ Material Contracts ”) is a valid and binding obligation of the Company. No event or circumstance has occurred which would result in a breach or default under any of the Material Contracts by the parties thereto nor is any party thereto currently in breach or default under any Material Contract, other than which would not reasonably be expected to have a material adverse affect on the business, properties, prospects or financial condition of the Company.

  3.8         Title .  The Company has good and marketable title to its properties and assets and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable and (ii) liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business.

  3.9         Compliance with Other Instruments .    The Company is not in violation or default of any term of its Certificate or Bylaws, or of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment, order or decree, and to its knowledge is not in violation of any statute, rule or regulation applicable to the Company where such violation would materially and adversely affect the Company. The execution, delivery and performance of and compliance with the Agreements, and the issuance of the Shares, has not resulted and will not result in any material violation of, or conflict with, or constitute with or without the passage of time and the giving of notice a material violation or default under, the Company’s Certificate or Bylaws or any material agreements or instruments to which the Company is a party or by which the Company is otherwise bound nor result in the creation of, any mortgage, security interest, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company nor violate any material order, judgment, law, statute, rule or regulation applicable to the Company. To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company’s loss of any material right granted under any material license, distribution agreement or other agreement.

  3.10       Litigation .    There are no actions, claims, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the Company’s knowledge, is there any reasonable basis therefor or threat thereof) that might result in any material adverse effect on the assets, properties, financial condition, operation, results or business of the Company. The foregoing includes, without limitation, actions pending or threatened (or any reasonable basis therefor known to the Company) involving the prior

 

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employment of any of the Company’s employees or consultants, their use in connection with the Company’s business of any information or techniques allegedly proprietary to any of their former employers or their obligations under any agreement with their former employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate.

  3.11         Employees .    To the Company’s knowledge, no employee or consultant of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company.

  3.12         Registration Rights; Voting Rights .    Except as set forth in the Investors Rights Agreement, the Company is not under any contractual obligation to register any of its presently outstanding securities or any of its securities that may hereafter be issued. To the Company’s knowledge, no stockholders of the Company have entered into any agreement with respect to the voting of capital shares of the Company.

  3.13         Governmental Consent, etc.   No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Securities, or the consummation of any other transaction contemplated hereby, except (a) filing of the Certificate in the office of the Delaware Secretary of State, or (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Securities under the California Corporate Securities Law of 1968, as amended and applicable Blue Sky laws, which filings and qualifications, if required, will be accomplished in a timely manner.

  3.14         Offering .  Subject to the accuracy of the Purchaser’s representations in Section 4 hereof, the offer, sale and issuance of the Securities will constitute a transaction exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the “ Securities Act ”), and will be in compliance with applicable state securities laws.

  3.15         Patents and Trademarks .  Section 3.15 of the Schedule of Exceptions sets forth a complete listing of all of the material patents, patent rights, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, trade name applications, copyrights and copyright applications of the Company (the “ Rights ”). The Rights and the material trade secrets, proprietary information, proprietary rights and processes, formulae, biological materials, test results, customer lists and know how of the Company are referred to herein as its “ Intellectual Property .” To its knowledge, after reasonable inquiry, the Company has sufficient title to and ownership of or rights to use, without any conflict with or infringement of the rights of others, all of (a) the Rights and (b) the Intellectual Property which it deems necessary for its business as now conducted; except for which would not have a material adverse effect on the business, properties, prospects or financial condition of the Company. The Company has not received any communications alleging any claims that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other

 

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proprietary rights of any other person or entity or that the Intellectual Property is invalid or unenforceable or infringes on the rights of any other person or entity or that the Company does not have good title to any of the Intellectual Property, except for which would not have a material adverse effect on the business, properties, prospects or financial condition of the Company. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with the use of such employee’s best efforts to promote the interests of the Company or that would materially conflict with the Company’s business as proposed to be conducted. Neither the execution nor delivery of the Agreements, nor the carrying on of the Company’s business by the employees of the Company, will, to the best of the Company’s knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees are now obligated, except for which would not have a material adverse effect on the business, properties, prospects or financial condition of the Company. The Company does not believe it will be necessary to utilize any inventions of any of the Company’s employees (or people it currently intends to hire) made prior to their employment by the Company which are not currently licensed to or owned by the Company. Other than as set forth on Section 3.15 of the Schedule of Exceptions, to the Company’s knowledge, the Company has not granted to any other person or entity any rights in the Intellectual Property or current products or services of the Company. The Company is not currently obligated or under any existing liability to make any material royalty or other payments to any owner of, licensor of, or other claimant to, any patent, trademark, service name, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of their respective businesses as now conducted or as proposed to be conducted or otherwise. The Company shall use its commercially reasonable efforts to comply with the provisions of 37 C.F.R 1.56 (“ Duty to disclose information material to patentability ”) during prosecution of the U.S. patent applications listed in Section 3.15 of the Schedule of Exceptions. To the Company’s knowledge, except with respect to the rights of third parties to the Intellectual Property that the Company is licensed or otherwise authorized by third parties to use, market, distribute or incorporate in the Intellectual Property, no third party has any express rights to reproduce distribute, market or exploit any works or materials of which any of the Intellectual Property is a “derivative work” as that term is defined in the United States Copyright Act, Title 17, U.S.C. Section 101.

  3.16         Obligations to Related Parties .  There are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and (c) for other standard employee benefits made generally available to employees. None of the officers, directors or stockholders of the Company, or any members of their immediate families are indebted to the Company or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, except that officers, directors and/or stockholders of the Company may own stock in publicly traded companies which may compete with the Company. To the Company’s knowledge, no officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company (other than such contracts as relate to any such person’s ownership of capital stock or other securities of the Company). The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation.

 

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  3.17         Disclosure .  To the Company’s knowledge, the Agreements and all other certificates delivered in connection herewith, when taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein not misleading in light of the circumstances under which they were made. The Company has provided each Purchaser with all the information that each Purchaser has requested for deciding whether to purchase the Shares and all information which the Company believes is reasonably necessary to enable each Purchaser to make such decision. To the Company’s knowledge, all information provided to the Purchasers does not contain any misstatement or omission of a material fact, and such information, including without limitation the patent files, are materially complete.

  3.18         Employee Benefit Plans .  The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.

  3.19         Tax Returns and Payments .  The Company has filed all tax returns and reports as required by law when due. These returns and reports are true and correct in all material respects. The Company has timely paid all material taxes and other assessments due.

  3.20         Proprietary Information and Inventions Agreements .  Each current and former employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms made available to each Purchaser, if requested. The Company is not aware that any of its current and former employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation.

  3.21         Permits .  The Company has all franchises, permits, licenses and any similar authority necessary for the ownership of its assets and conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company is not in default under any of such franchises, permits, licenses or other similar authority, no condition exists that would constitute a material default thereunder and none of them will be terminated or impaired by the transactions contemplated hereby.

  3.22         Corporate Documents .  The Certificate and Bylaws of the Company are in the form made available to each Purchaser, if requested. The copy of the minute books of the Company made available to each Purchaser, if requested, contains minutes of all meetings of directors (and any committees of directors) and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects.

  3.23         Insurance .  The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed.

  3.24         Use of Proceeds .  The Company agrees to use the proceeds received by the Company pursuant to this Agreement for general corporate purposes.

 

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  3.25         Finders Fee .  The Company represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction.

  3.26         Employee Matters .

        (a)        The Company is in compliance in all material respects with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not engaged in any unfair labor practice, except for which would not have a material adverse effect on the business, properties, prospects or financial condition of the Company.

        (b)        No employee or former employee of the Company will become entitled to any bonus, retirement, severance, job security or similar benefit or enhanced such benefit (including acceleration of vesting or exercise of an incentive award) as a result of the transactions contemplated hereby.

        (c)        Thomas Schall has not advised the Company (orally or in writing) that he intends to terminate his employment with the Company.

  3.27         Financial Statements .  The Company has delivered to each Purchaser (a) its audited balance sheet and statements of operations and cash flows as of and for the fiscal years ended December 31, 2006 and 2007 and (b) its unaudited balance sheet as of June 30, 2008 (collectively, the “ Financial Statements ”). The Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the period indicated, except that the unaudited balance sheet as of June 30, 2008 does not contain footnotes. The Financial Statements accurately set out and describe the financial condition and operating results of the Company in all material respects as of the date, and for the period, indicated therein. The Company has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except (a) the liabilities and obligations set forth in the Financial Statements and (b) liabilities and obligations which have been incurred subsequent to December 31, 2007 in the ordinary course of business.

  3.28         Environmental Matters .  No hazardous waste, substances or materials, or oil or petroleum products have been generated, transported, used, disposed, stored or treated by the Company, except in material compliance with applicable environmental laws. To the knowledge of the Company, no hazardous wastes, substances or materials, or oil or petroleum products have been released, discharged, disposed or otherwise caused to enter the soil or water in or upon any real property owned, leased or operated by the Company, except in material compliance with applicable environmental laws. To the knowledge of the Company, the Company has complied in all material respects with all applicable environmental, health and safety laws and regulations, except where the failure to so comply has not had or is not reasonably likely to have a material adverse effect on the Company or its operations.

  3.29         C Corporation Status .  The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended, to be treated as a Subchapter S corporation.

 

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4.         Representation and Warranties of the Purchaser .  The Purchaser represents and warrants to the Company, severally and not jointly, as follows:

  4.1         Authorization .  Each Purchaser has full power and authority to enter into this Agreement, and the Investors Rights Agreement. This Agreement and the Investors Rights Agreement constitute each Purchaser’s valid and legally binding obligation, enforceable in accordance with its terms.

  4.2         Purchase Entirely for Own Account .  This Agreement is made with Purchaser in reliance upon Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, Purchaser hereby confirms, that the Securities to be acquired by Purchaser will be acquired for investment for Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same; provided , however , nothing contained herein shall prevent Purchaser from transferring the Securities to an investment fund managed or advised by Purchaser (a “ Purchaser Fund ”), to any manager, member or advisor of Purchaser, to any affiliate or successor of the Purchaser or any manager, member or advisor of Purchaser or any general or limited partner of any Purchaser Fund. By executing this Agreement, Purchaser further represents that Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. Purchaser has not been formed for the specific purpose of acquiring the Securities.

  4.3         Disclosure of Information .  Purchaser has discussed the Company and its plans, operations and financial condition with the Company’s officers and has received all such information as Purchaser deems necessary and appropriate to enable Purchaser to evaluate the financial risk inherent in making an investment in the Securities. To Purchaser’s knowledge, Purchaser has received satisfactory and complete information concerning the business and financial condition of the Company in response to the Purchaser’s inquiries.

  4.4         Sophistication .  Purchaser realizes that the purchase of the Securities will be a highly speculative investment. Purchaser is able, without impairing Purchaser’s financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of Purchaser’s investment. Purchaser recognizes that the Company has a limited financial and operating history and the investment in the Company involves substantial risks. Purchaser understands all of the risks related to the purchase of the Securities. By virtue of Purchaser’s experience in evaluating and investing in private placement transactions of securities in companies similar to the Company, Purchaser is capable of evaluating the merits and risks of the Purchaser’s investment in the Company and has the capacity to protect Purchaser’s own interests.

  4.5         Restricted Securities .  Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser’s representations as expressed herein. Purchaser understands that the Securities are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission

 

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and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors Rights Agreement. Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy.

  4.6         Accredited Investor .  Purchaser is an “accredited investor” as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

  4.7         Qualified Institutional Buyer .  Purchaser is either (i) a Qualified Institutional Buyer within the meaning of Rule 144A promulgated under the Securities Act or (ii) an “accredited investor”, as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act, having investments of at least $10 million.

  4.8         Subscription .  Purchaser understands that the financing may not be fully subscribed and, even if fully subscribed, the proceeds of this financing may not be sufficient to carry the Company to the point of profitability.

  4.9         Forecasts .  Purchaser understands that while management forecasts were made in good faith, such forecasts may be inaccurate and operating results could differ dramatically and materially from the results forecast by management.

  4.10       No Public Market .  Purchaser understands that no public market now exists for the Securities, and that the Company has made no assurances that a public market will ever exist for the Securities.

  4.11       Legends .  Purchaser understands that the Securities, and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends:

      (a)        “THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.”

      (b)        Any legend set forth in the other Agreements.

      (c)        Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended.

  4.11       Foreign Investors .  If Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended) (a “ Foreign Purchaser ”),

 

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Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Shares. Purchaser’s subscription and payment for and continued beneficial ownership of the Shares, will not violate any applicable securities or other laws of Purchaser’s jurisdiction.

5.         Conditions of the Purchaser’s Obligations at Closing .  Purchaser’s obligations to purchase the Shares at the Closing are, at the option of Purchaser, subject to the fulfillment of the following conditions:

  5.1         Representations and Warranties Correct .  The representations and warranties made by the Company in Section 3 hereof shall be true and correct as of the Closing.

  5.2         Performance; Compliance Certificate .  The Company shall have performed and complied with, in all material respects, all covenants, agreements, obligations and conditions that are required to be performed or complied with by it on or before the Closing. The Company shall have delivered to each Purchaser a certificate of the Company executed by the President or Chief Financial Officer of the Company, dated as of the date of the Closing certifying to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement.

  5.3         Qualifications .  All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of the Closing.

  5.4         Amended and Restated Certificate .  The Certificate shall have been filed with the Delaware Secretary of State.

  5.5         Investors Rights Agreement .  The Company and each Purchaser shall have executed and delivered the Investors Rights Agreement in substantially the form attached hereto as Exhibit B .

  5.6         Stock Certificate .  The Company shall have executed a stock certificate representing the Shares.

  5.7         Opinion of Counsel .  Each Purchaser shall have received from Latham & Watkins LLP (“ LW ”), counsel for the Company, an opinion dated as of the Closing, in substantially the form of Exhibit D .

  5.8         Good Standing Certificate .  The Company shall have received, and provided a copy to the Purchasers, a certificate of good standing from the Secretary of State of the State of Delaware, and each other jurisdiction in which failure to be so qualified would have a material adverse affect on the Company’s business, financial condition or results of operations.

 

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  5.9         Incumbency Certificate .  The Purchasers shall have received a certificate certifying the genuineness of the signature of the President and Chief Executive Officer of the Company.

  5.10       Consents .  The Company shall have received all consents and approvals from third parties required for the execution, delivery and performance of this Agreement by the Company.

  5.11       Board of Directors .  The Board of Directors shall consist of five (5) directors, which members shall be: Regina Herzlinger, D.B.A., Roger Lucas, Ph.D., Thomas Schall, Ph.D., Samuel Wertheimer, Ph.D. and Edward Penhoet, Ph.D.

  5.12       Secretary’s Certificate .  The Purchasers shall have received from the Company’s Secretary a certificate having attached thereto (i) the Company’s Amended and Restated Certificate of Incorporation as in effect at the time of the Closing, (ii) the Company’s Bylaws as in effect at the time of the Closing, (iii) resolutions approved by the Board of Directors authorizing the transactions contemplated hereby, and (iv) resolutions approved by the Company’s stockholders authorizing the filing of the Amended and Restated Certificate of Incorporation.

  5.13       Stockholder Approval .  The stockholders of the Company shall have approved the transactions contemplated by the Agreement to the extent required under the Delaware General Corporation Law, the California Corporations Code and the Company’s existing Amended and Restated Certificate of Incorporation.

6.         Conditions of the Company’s Obligations at Closing .  The Company’s obligations to sell the Shares at the Closing are, at the option of the Company, subject to fulfillment of the following conditions:

  6.1         Representations and Warranties .  The representations and warranties made by the Purchasers in Section 4 hereof shall be true and correct in all material respects as of the Closing.

7.         Miscellaneous .

  7.1         Governing Law .  This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in all respects by the laws of the State of California, without regard to the conflict of law provisions thereof.

  7.2         Survival .  The representations and warranties and covenants contained herein shall survive the execution and delivery of this Agreement and the sale of the Shares.

  7.3         Successors and Assigns .  Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto, or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

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  7.4         Entire Agreement .  The Agreements embody the entire understanding and agreement between the Purchasers and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.

  7.5         Notices, etc.   All notices and other communications required or permitted hereunder shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight delivery or sent by telegram or confirmed facsimile, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed (a) if to the Purchasers, at his or her address set forth on the last page of this Agreement, or at such other address as the Purchasers shall have furnished the Company in writing, or (b) if to the Company, at the address of its principal office, or at such other address as the Company shall have furnished to the Purchasers in writing; provided , however , that registered or certified mail shall not be used to effectuate the delivery of any such notice to addresses outside the United States.

  7.6         California Corporate Securities Law .  THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.

  7.7         Titles and Subtitles .  The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

  7.8         Waivers and Amendments .  Any term of this Agreement may be amended only with the written consent of the Company and the holders of at least a majority of the then outstanding Shares (on an as converted basis and including any Shares converted to Common Stock); provided , however , any amendment to Section 7.18, Section 7.19, Section 7.20 or Section 7.21 hereof may be amended only with the written consent of GSK and the Company. Any amendment or waiver effected in accordance with this Section 7.8 shall be binding upon the Purchasers and each transferee of the Shares (or the Common Stock issuable upon conversion thereof), each future holder of all such Securities, and the Company.

  7.9         Counterparts .  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

  7.10       Finders Fee .  Each Purchaser represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder’s fee (and the costs and expenses of defending against such

 

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liability or asserted liability) for which such Purchasers or any of its officers, employees, or representatives is responsible.

  7.11         Attorney’s Fees .  If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

  7.12         Severability .  If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms.

  7.13         Delays or Omissions .  No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

  7.14         Confidentiality .  Each party hereto agrees that for a period of two (2) years, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of the Shares purchased hereunder (the “ Confidential Information ”). Notwithstanding the foregoing, either party can disclose the Confidential Information to its affiliates and agents, provided such affiliates have agreed in writing to disclose such information only as permitted hereunder. Confidential Information shall not include any information which: (a) the party receiving Confidential Information rightfully receives, obtained or obtains from a third party without incurring obligations of confidentiality, (b) the party receiving Confidential Information rightfully developed or develops independently without reference to information obtained from the other party hereunder, (c) enters into the public domain by no fault of the party receiving Confidential information, or (d) is required by applicable law, regulation or legal process to be disclosed. The provisions of this Section 7.14 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby.

 

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  7.15         Fees and Expenses .  The Company agrees to pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the issuance of the Shares and all shares of Common Stock issuable upon conversion of the Shares.

  7.16         Withholding Tax, etc .  The parties hereby acknowledge that payments with respect to the Shares (or shares of Common Stock issuable upon conversion of the Shares) made by the Company to each Purchaser, if Purchaser is a Foreign Purchaser, may be subject to United States withholding tax. Each Purchaser, if Purchaser is a Foreign Purchaser, shall timely provide to the Company two copies of IRS Form W-8ECI or IRS Form W-8BEN (or any successor form) to claim such an exemption or reduction in accordance with the applicable law.

  7.17         Waiver of Conflicts .  Each party to this Agreement acknowledges that LW, counsel to the Company, has in the past performed and is or may now or in the future represent one or more of the Purchasers or their affiliates in matters unrelated to the Offering, including representation of such Purchasers or their affiliates in matters of a similar nature to the Offering. The applicable rules of professional conduct require that LW inform the parties hereunder of this representation and obtain their consent. LW has served as outside general counsel to the Company and has negotiated the terms of the Offering solely on behalf of the Company. It is the belief of LW that these terms and conditions represent an arm’s length transaction between the Company and the Purchasers. The Purchasers have been represented by independent legal counsel regarding the terms of the Offering. The Company and each Purchaser hereby (i) acknowledge that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation, (ii) acknowledge that with respect to the Offering, LW has represented solely the Company, and not any Purchaser or any stockholder, director or employee of the Company or any Purchaser, and (iii) gives its informed consent to LW’s representation of the Company in the Offering.

  7.18         Selling Restrictions .  GSK agrees that for a period commencing on the date of the Closing and ending on the earliest of (a) the third anniversary of the date of the Closing, (b) the consummation of a Qualified IPO (as defined in the Investors Rights Agreement) and (c) the closing of a transaction in which a third party acquires a majority of the outstanding voting shares of the Company (the “ Restricted Period ”), neither GSK, nor any of its affiliates, shall offer, sell, contract to sell, pledge, grant an option to purchase, make a short sale or otherwise dispose of any Securities held by GSK or any of its affiliates, or grant an option or other rights to any person or entity to acquire any Securities (i) to any person engaged in the pharmaceutical or biotechnology industries or (ii) in excess of such amount as is necessary to avoid consolidation of the Company’s financial performance with the performance of GSK, without the prior written consent of the Company; provided that notwithstanding anything in this Section 7.18 to the contrary, GSK and its affiliates shall be bound by the Market-Standoff Agreement in Section 1.14 of the Investors Rights Agreement. During the Restricted Period, the consent of the Company shall not be required for the transfers by GSK of all or a portion of the Securities to its affiliates (a “ Permitted Transferee ”); provided , however , that such affiliate agrees to become a party to, and be bound by, all of the terms and conditions of this Agreement by duly executing and delivering a joinder agreement. During the two year period from and after the expiration of the Restricted Period, GSK and/or its affiliates shall not offer, sell, contract to sell, pledge, grant an option to purchase, make a short sale or otherwise dispose of any of the Securities purchased by GSK

 

16


pursuant to this Agreement other than pursuant to a registration statement under the Securities Act or pursuant to Rule 144 under the Securities Act without the prior written consent of the Company.

  7.19         Standstill .

  (a)          Following the earlier to occur of (i) the termination of the Right to Match Period (as defined below) or (ii) the completion of an initial public offering by the Company, during the any portion of the Research Term (as defined in the Product Development and Commercialization Agreement between the Company and Glaxo Group Limited dated as of August 22, 2006) and the first year thereafter, neither GSK nor any of its affiliates shall, in any manner, directly or indirectly, except as agreed by the Company in writing or as provided expressly in Sections 7.19(b) or 7.19(c) or otherwise under this Agreement: (i) make, effect, initiate, cause or participate in any acquisition of beneficial ownership of any securities or any assets of the Company; (ii) form, join or participate in a “group” (as defined in the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) with respect to the beneficial ownership of any securities of the Company; (iii) agree or offer to take, or encourage or propose (publicly or otherwise) the taking of any action referred to in subsections (i) or (ii) of this Section 7.19(a); or (iv) assist, induce or encourage any other person or entity to take any action of the type referred to in subsections (i), (ii) or (iii) of this Section 7.19(a).

        (b)        Nothing herein shall prevent GSK or its affiliates (or in the case of Section 7.19(b)(iv), their employees) from: (i) purchasing the Shares at the Closing; (ii) purchasing additional Securities pursuant to the provisions of the Investors Rights Agreement or the Certificate; (iii) acquiring Securities issued in connection with stock splits or recapitalizations; (iv) following the consummation of a Qualified IPO (as defined in the Investors Rights Agreement) purchasing Securities for (A) a pension plan established for the benefit of GSK’s employees, (B) any employee benefit plan of GSK, (C) any stock portfolios not controlled by GSK or any of its affiliates that invest in the Company among other companies, or (D) any account of a GSK director, officer or employee in such individual’s personal capacity; or (v) acquiring securities of another biotechnology or pharmaceutical company that beneficially owns any Securities; provided that any Securities so acquired shall be subject to the provisions of Section 7.18 of this Agreement on the same basis as the Shares purchased pursuant to this Agreement.

        (c)        GSK and its affiliates shall be free from the restrictions and limitations contained in this Section 7.19 in the event that: (i) the Board of Directors of the Company publicly announces or publicly acknowledges that (A) the Board of Directors of Company has decided to sell the Company or (B) the Company is for sale; (ii) the Company enters into a written agreement with a third party providing for a transaction which would give rise to a change of control in the Company; (iii) any third party commences or otherwise undertakes any tender or exchange offer (as such terms are defined or used under the Exchange Act) for the Company; or (iv) any third party initiates a “solicitation” of “proxies” (as such terms are defined or used in Regulation 14A of the Exchange Act) with respect to the Company.

 

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  7.20         No Shop/Right to Match .

        (a)        The Company agrees that, without the consent of GSK, neither it nor its employees, officers directors, nor any agent acting on their behalf or on behalf of the Company, will for a period of 180 days from the date of the Closing (the “ No Shop Period ”) take any action to solicit, initiate, encourage, enter into any discussions relating to, or provide any assistance with respect to any proposal, negotiation or offer from any person or entity other than its existing stockholders relating to the acquisition, sale, lease, merger, or other disposition of the Company or any material part of the stock or assets of the Company (other than in a public offering or private financing for capital raising purposes) (collectively, a “ Sale Transaction ”) and shall notify GSK in writing of any inquiries by any third parties in regards to the foregoing.

        (b)        Without limiting the restrictions set forth in Section 7.20(a), the Company further agrees that during the No Shop Period and until the later of: (i) six (6) months after the end of the No Shop Period or (ii) thirty (30) days after GSK’s receipt of top-line maintenance data from its PROTECT-1 clinical study (but in no event later than twelve (12) months after the end to the No Shop Period) (the “ Right to Match Period ”), it will not enter into discussions with, or provide any person or entity other than its existing stockholders with information relating to a Sale Transaction, without notifying GSK of such discussions within five (5) business days of their commencement. During the Right to Match Period the Company shall provide in writing to GSK the terms of any proposed Sale Transaction deemed by the Board of Directors of the Company to be acceptable, negotiated in good faith, and not subject to any additional due diligence by a third party. GSK will then have ten (10) business days (the “ Negotiation Period ”) to conduct due diligence and negotiate and execute a definitive agreement to enter into a Sale Transaction on terms materially equivalent to those proposed terms disclosed to GSK, provided that the Company provides reasonable cooperation to GSK during such period. If GSK enters into a definitive agreement during the Negotiation Period then GSK and the Company will have thirty (30) business days (which thirty (30) days period shall be extended in order to obtain required regulatory approvals) to complete and close the Sale Transaction. Regardless of whether GSK enters into a definitive agreement during the Negotiation Period, all rights under this Section 7.20 shall remain in effect through the duration of the Right to Match Period if the Company does not close the previously proposed Sale Transaction on substantially the proposed terms disclosed to GSK.

        (c)        Notwithstanding the foregoing, all rights under this Section 7.20 shall immediately terminate in the event of an initial public offering which causes an automatic conversion of the Company’s outstanding Preferred Stock as provided in the Company’s then outstanding Amended and Restated Certificate of Incorporation.

  7.21         No Participation in the Company’s Initial Public Offering .

        (a)        GSK acknowledges that on November 9, 2007 the Company filed with the Securities and Exchange commission a Registration Statement on Form S-1 (as amended, the “ Registration Statement ”) in contemplation of its initial public offering (“ IPO ”) and GSK agrees that neither it nor any of its affiliates shall (i) purchase securities in an IPO by the Company pursuant to the Registration Statement or (ii) purchase securities in any IPO of the Company completed within twelve (12) months of the Closing, unless such IPO is conducted by the

 

18


Company pursuant to a registration statement filed subsequent to an abandonment of the Registration Statement by the Company performed in accordance with Rule 155(c) promulgated under the Securities Act.

        (b)        Notwithstanding the foregoing, nothing in this Agreement shall be deemed to terminate GSK’s agreement, pursuant to Section 7.18 of that certain Series D Preferred Stock Agreement dated August 22, 2006 by and between the Company and the purchasers party thereto, as amended, to purchase an aggregate amount of $7 million of the Company’s Common Stock in a private placement to be completed concurrently with the closing of an IPO by the Company that raises at least $25 million in proceeds.

  7.22         Post-Closing HSR Filings .     In the event of post-closing conversion of the Shares requiring notification under the Hart-Scott Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder (the “ HSR Act ”), the Purchasers agree to (i) file such notification under the HSR Act with the Federal Trade Commission and the Department of Justice Antitrust Division, (ii) pay all required filing fees associated with such notification, and (iii) notify the Company of the fact the Purchasers intend to acquire voting securities of the Company as required by the HSR Act.

 

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The foregoing Agreement is hereby confirmed and accepted by the Company as of the date above first written.

 

CHEMOCENTRYX, INC.
By:  

            /s/ Susan Kanaya

  Name:   Susan Kanaya
  Title:   Chief Financial Officer

[COUNTERPART SIGNATURE PAGE TO SERIES E PREFERRED STOCK SUBSCRIPTION AGREEMENT]


The undersigned hereby executes and delivers the Agreement to which this signature page is attached, which, together with all counterparts of the Agreement and signature pages of the other parties named in said Agreement, shall constitute one and the same document in accordance with the terms of the Agreement

 

    GLAXO GROUP LIMITED

  Print or Type Name of Investor
By:  

            /s/ Carol G. Ashe

  Name:         Carol G. Ashe
  Title:   Attorney in fact
Address:   One Franklin Plaza
  200 N. 16 th Street
  FP 2355
  Philadelphia, PA 19102
Fax: 215-751-5349
Amount of Investment:     US$ 50,000,000
Number of Shares:             6,793,478
Dated: August 25, 2008

[COUNTERPART SIGNATURE PAGE TO SERIES E PREFERRED STOCK SUBSCRIPTION AGREEMENT]


EXHIBIT A

Amended and Restated Certificate of Incorporation


EXHIBIT B

Amended and Restated Investors Rights Agreement


EXHIBIT C

Schedule of Exceptions


EXHIBIT D

Form of Opinion of Counsel

Exhibit 10.21

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of the Effective Date between SILICON VALLEY BANK , a California corporation (“ Bank ”), and CHEMOCENTRYX, INC. , a Delaware corporation (“ Borrower ”), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The parties agree as follows:

 

  1

ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

 

  2

LOAN AND TERMS OF PAYMENT

2.1          Promise to Pay .    Borrower hereby unconditionally promises to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

 

  2.1.1

Equipment Facility .

(a)         Equipment Advances .    Subject to the terms and conditions of this Agreement, Bank agrees to lend to Borrower, during the Draw Period, equipment advances (each an “ Equipment Advance ” and collectively the “ Equipment Advances ”) in an aggregate amount not to exceed the Equipment Line. The proceeds of the Equipment Advances shall be used solely to reimburse Borrower for the purchase of Eligible Equipment purchased within ninety (90) days (determined based upon the applicable invoice date of such Eligible Equipment) (other than the initial Equipment Advance of $1,000,000, which shall not be subject to such 90 day lookback) of the Equipment Advance and to purchase Eligible Equipment; provided however, the initial Equipment Advance of $1,000,000 funded on the Effective Date (the “ Initial Equipment Advance ”) shall not require invoice documentation. Other than the Initial Equipment Advance, no Equipment Advance may exceed 100% of the total invoice for Eligible Equipment. Unless otherwise agreed to by Bank, not more than 35% of the proceeds of the $1,500,000 of the Equipment Line remaining after the Initial Equipment Advance shall be used to finance Other Equipment. Each Equipment Advance must be in an amount equal to at least $100,000. Borrower may not request more than twelve (12) Equipment Advances hereunder. After repayment, no Equipment Advance may be reborrowed.

(b)         Repayment .    Borrower shall repay each Equipment Advance pursuant to the terms set forth in its corresponding Loan Supplement. For each Equipment Advance, Borrower shall make equal monthly payments of principal and interest, in advance, calculated by Bank based upon (i) the amount of the Equipment Advance, (ii) the Basic Rate (which shall be fixed at the time of each Funding Date), and (iii) an amortization schedule equal to the Repayment Period (individually, the “ Scheduled Payment ”, and collectively, “ Scheduled Payments ”), beginning on the first day of the month following the month in which the Funding Date occurs (or commencing on the Funding Date if the Funding Date is the first day of the month) with respect to such Equipment Advance and continuing thereafter during the Repayment Period on the first day of each successive calendar month (each a “ Payment Date ”). All outstanding principal and accrued and unpaid interest is due and payable in full on the last Payment Date with respect to such Equipment Advance. An Equipment Advance may only be prepaid, at Borrower’s option, in accordance with Sections 2.1.1(c), (d), (e) and (f).

(c)         Final Payment .    On the earliest of (i) the final Payment Date with respect to each Equipment Advance, (ii) any prepayment (to the extent permitted hereunder) of such Equipment Advance or (iii) the termination of the Equipment Line, Borrower shall pay, in addition to the outstanding principal, accrued and unpaid interest, all future Scheduled Payments (except that such future Scheduled Payments shall not be payable with respect to a prepayment made pursuant to Section 2.1.1(d) or (f) below), in each case on such Equipment Advance, and all other amounts due on such date with respect to such Equipment Advance, plus an amount equal to the Final Payment on such Equipment Advance.


(d)         Prepayment Upon an Event of Loss .    Borrower shall bear the risk of any loss, theft, destruction, or damage of or to the Financed Equipment. If during the term of this Agreement any item of Financed Equipment becomes obsolete or is lost, stolen, destroyed, damaged beyond repair, rendered permanently unfit for use, or seized by a governmental authority for any reason for a period equal to at least the remainder of the term of this Agreement (an “ Event of Loss ”), then if no Event of Default has occurred or is continuing, within ten (10) days following the Event of Loss, at Borrower’s option, Borrower shall (i) pay to Bank, with respect to the Equipment Advance made with respect to the Financed Equipment subject to the Event of Loss, all outstanding principal, all accrued and unpaid interest to the date of the prepayment, and the Final Payment; or (ii) repair or replace any Financed Equipment subject to the Event of Loss provided the repaired or replaced Financed Equipment is of equal or like value to the Financed Equipment subject to the Event of Loss and provided further that Bank has a first priority perfected security interest in such repaired or replaced Financed Equipment.

(e)         Prepayment .  If the Equipment Advances are voluntarily prepaid or accelerated following the occurrence of an Event of Default, Borrower shall immediately pay to Bank an amount equal to the sum of (i) all outstanding principal plus accrued and unpaid interest, (ii) all future Scheduled Payments, (iii) the Final Payment, and (iv) all other sums, if any, that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts, in each case with respect to the Equipment Advances being prepaid.

(f)         Prepayment Upon Sale or Trade of Finance Equipment .  If, during the term of this Agreement, any item of Financed Equipment is sold or traded, then within ten (10) days following such sale or trade, Borrower shall (i) pay to Bank on account of the Obligations all accrued interest to the date of the prepayment, the Final Payment, and all outstanding principal owing with respect to the Equipment Advance made with respect to the Financed Equipment subject to such sale or trade; or (ii) provide other equipment in replacement of the sold or traded Financed Equipment, provided the replacement Financed Equipment is of equal or like value to the Financed Equipment sold or traded, is acceptable to Bank in its sole discretion, and provided further that Bank has a first priority perfected security interest in such replacement Financed Equipment

 

  2.2

Payment of Interest on the Credit Extensions .

(a)         Interest Rate .    Subject to Section 2.2(b), the principal amount outstanding for each Equipment Advance shall accrue interest at a per annum rate equal to the Basic Rate determined by Bank on the Funding Date for such Equipment Advance.

(b)         Default Rate .  Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is three percentage points above the rate effective immediately before the Event of Default (the “ Default Rate ”). Payment or acceptance of the increased interest rate provided in this Section 2.2(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.

(c)         360-Day Year .  Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

(d)         Debit of Accounts .  Bank may debit any of Borrower’s deposit accounts at Bank, if any, for principal and interest payments or any other amounts Borrower owes Bank when due. These debits shall not constitute a set-off.

(e)         Payments .  Unless otherwise provided, interest is payable monthly on the 1st calendar day of each month. Payments of principal and/or interest received after 12:00 p.m. Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue.

 

  2.3

Fees . Borrower shall pay to Bank:

(a)         Good Faith Deposit .  A good faith deposit equal to $50,000 on or prior to the Effective Date, receipt of which is hereby acknowledged by Bank. The amount of such good faith deposit, less Bank Expenses, will be refunded to Borrower on the Effective Date;

 

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(b)         Late Payment Fee .    A late payment fee equal to five percent (5%) of any Scheduled Payment or Final Payment not paid when due; and

(c)         Bank Expenses .  All Bank Expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due.

3             CONDITIONS OF LOANS

3.1           Conditions Precedent to Initial Credit Extension .  Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:

(a)        Borrower shall have delivered duly executed original signatures to the Loan Documents to which it is a party;

(b)        Borrower shall have delivered its Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the Effective Date;

(c)        Borrower shall have delivered duly executed original signatures to the completed Borrowing Resolutions for Borrower;

(d)        Bank shall have received certified copies, dated as of a recent date, of financing statement searches, as Bank shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

(e)        Borrower shall have delivered the Collateral Information Certificate(s) executed by Borrower;

(f)        Borrower shall have delivered a landlord’s consent executed by Portola Land Management in favor of Bank;

(g)        Borrower shall have delivered evidence satisfactory to Bank that the insurance policies required by Section 6.4 hereof are in full force and effect, together with appropriate evidence showing loss payable and/or additional insured clauses or endorsements in favor of Bank; and

(h)        Borrower shall have paid the fees and Bank Expenses then due as specified in Section 2.3 hereof.

3.2            Conditions Precedent to all Credit Extensions .    Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following:

(a)        timely receipt of an executed Loan Supplement;

(b)        the representations and warranties in Section 5 shall be true in all material respects on the date of the Loan Supplement and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in Section 5 remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

 

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(c)        in Bank’s good faith business judgment, there has not been a Material Adverse Change.

3.3         Covenant to Deliver .

Borrower agrees to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition to any Credit Extension. Borrower expressly agrees that the extension of a Credit Extension prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrower’s obligation to deliver such item, and any such extension in the absence of a required item shall be in Bank’s sole discretion.

3.4           Procedures for Borrowing .  Subject to the prior satisfaction of all other applicable conditions to the making of an Equipment Advance set forth in this Agreement, to obtain an Equipment Advance following the Initial Equipment Advance, Borrower shall deliver to Bank by electronic mail or facsimile a completed Loan Supplement, executed by a Responsible Officer or his or her designee, together with copies of invoices for the Financed Equipment and such additional information as Bank may reasonably request at least five (5) Business Days before the proposed Funding Date. On each Funding Date, Bank shall specify in the Loan Supplement for each Equipment Advance, the Basic Rate, and the Payment Dates. At Bank’s discretion, Bank shall have the opportunity to confirm that, upon filing the UCC-1 financing statement covering the Equipment described on the Loan Supplement, Bank shall have a first priority perfected security interest in such Equipment. If Borrower satisfies the conditions of each Equipment Advance, Bank shall disburse such Equipment Advance by transfer to the deposit account designated by Borrower.

4             CREATION OF SECURITY INTEREST

4.1           Grant of Security Interest .    Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral.

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations) and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at Borrower’s sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrower.

4.2           Authorization to File Financing Statements .  Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code except as permitted hereunder.

5             REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1           Due Organization and Authorization .  Borrower and each of its Subsidiaries are duly existing and in good standing as Registered Organizations in their respective jurisdictions of formation and are qualified and licensed to do business and are in good standing in any jurisdiction in which the conduct of their business or their ownership of property requires that they be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower’s business. In connection with this Agreement, Borrower has delivered to Bank a completed certificate in a form satisfactory to Bank signed by Borrower, entitled “Collateral Information Certificate”. Borrower represents and warrants to Bank that (a) Borrower’s exact legal name is that indicated on the Collateral Information Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Collateral Information Certificate; (c) the Collateral Information Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Collateral Information Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) Borrower (and each of its predecessors) has not, in the past five (5) years, changed its

 

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jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Collateral Information Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete in all material respects. If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational identification number.

The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s organizational documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to have a material adverse effect on Borrower’s business.

5.2          Collateral .  Borrower has good title to, has rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens.

The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Collateral Information Certificate. None of the components of the Collateral (other than laptop computers used by employees outside of Borrower’s offices) shall be maintained at locations other than as provided in the Collateral Information Certificate or as Borrower has given Bank notice pursuant to Section 7.2. In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then Borrower will first receive the written consent of Bank and such bailee must execute and deliver a bailee agreement in form and substance reasonably satisfactory to Bank in its sole discretion.

5.3          Litigation .  There are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than $500,000.

5.4          No Material Deviation in Financial Statements .    All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations as of the date of such financial statements. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

5.5          Solvency .    The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.6          Regulatory Compliance .  Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to have a material adverse effect on its business. None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted except where the failure to do so could not reasonably be expected to have a material adverse effect on its business.

5.7          Subsidiaries; Investments .  Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8          Tax Returns and Payments; Pension Contributions .    Except as otherwise provided in the Collateral Information Certificate, Borrower has timely filed or obtained extensions for filing of all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower. Borrower may defer payment of any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank in writing of the commencement of, and any material development in, the

 

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proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

5.9          Use of Proceeds .  Borrower shall use the proceeds of the Credit Extensions solely to purchase or finance Eligible Equipment.

5.10        Full Disclosure .    No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank, as of the date such representations, warranties, or other statements were made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading in light of the circumstances under which they were made (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

6              AFFIRMATIVE COVENANTS

So long as any Obligations (other than inchoate indemnity obligations) are outstanding, Borrower shall do all of the following:

6.1          Government Compliance .    Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations. Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business.

6.2          Financial Statements, Reports, Certificates .

(a)        Deliver to Bank: (i) as soon as available, but no later than forty-five (45) days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than two hundred ten (210) days after the last day of Borrower’s fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Bank in its reasonable discretion; (iii) within five (5) days of delivery, copies of all statements, reports and notices made available to Borrower’s security holders or to any holders of Subordinated Debt (iv) a prompt report of any legal actions pending or threatened against Borrower or any of its Subsidiaries that would reasonably be expected to result in damages or costs to Borrower or any of its Subsidiaries of $1,000,000 or more; (v) annually, financial projections for Borrower’s fiscal year as approved by Borrower’s Board of Directors; and (vi) other year end budgets, sales projections, operating plans and other financial information reasonably requested by Bank.

(b)        Within thirty (30) days after the last day of each month, deliver to Bank a duly completed Compliance Certificate signed by a Responsible Officer showing cash and pre-closing estimated cash burn.

(c)        Within forty-five (45) days after the last day of each month, deliver to Bank with the monthly financial statements, a duly completed Compliance Certificate signed by a Responsible Officer.

(d)        Allow Bank to audit Borrower’s Collateral at Borrower’s expense. Such audits shall be conducted no more often than once per year, and Borrower’s expenses for each such audit shall be limited to a maximum of $2,500, unless a Default or an Event of Default has occurred and is continuing. Each audit shall be

 

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conducted during regular business hours and upon reasonable (in no event less than five (5) Business Days’) prior notice, unless an Event of Default has occurred and is continuing.

6.3          Taxes; Pensions .  Make, and cause each of its Subsidiaries to make, timely payment or request extensions of payment, of all foreign, federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting pursuant to the terms of Section 5.8 hereof) and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.4          Insurance .  Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as lender loss payee and waive subrogation against Bank, and all liability policies shall show, or have endorsements showing, Bank as an additional insured. All policies (or the loss payable and additional insured endorsements) shall provide that the insurer must give Bank at least twenty (20) days notice before canceling, amending, or declining to renew its policy. At Bank’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Except as otherwise provided in Section 2.1.1(d), proceeds payable under any policy shall, at Bank’s option, be payable to Bank on account of the Obligations. If Borrower fails to obtain insurance as required under this Section 6.4 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.4, and take any action under the policies Bank deems prudent.

6.5          Operating Accounts .  Maintain at least 60% of the dollar value of Borrower’s securities accounts at all financial institutions with SVB Asset Management.

6.6          INTENTIONALLY BLANK.

6.7          Litigation Cooperation .  From the date hereof and continuing through the termination of this Agreement, make available to Bank, without expense to Bank, Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to Borrower.

6.8          Further Assurances .  Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement.

7              NEGATIVE COVENANTS

So long as any Obligations (other than inchoate indemnity obligations) are outstanding, Borrower shall not do any of the following without Bank’s prior written consent:

7.1          Dispositions .  Convey, sell, lease, transfer or otherwise dispose of (collectively, “ Transfer ”), or permit any of its Subsidiaries to Transfer, all or any part of the Collateral, except for (a) the sale or trade of Financed Equipment (subject to compliance with Section 2.1.1(f), (b) the sale or other disposition of Financed Equipment subject to an Event of Loss, subject to compliance with Section 2.1.1(d), and; (c) licenses of Borrower’s intellectual property.

7.2          Changes in Business, Control, or Business Locations .    (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or dissolve; or (c) permit or suffer any Change in Control. Borrower shall not, without at least thirty (30) days prior written notice to Bank: (1) add, without Bank’s written consent, any new offices or business locations, including warehouses, where Financed Equipment is located unless a landlord consent and/or waiver reasonable to Bank has been obtained, (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization.

 

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7.3          Mergers or Acquisitions .  Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except where (a) no Event of Default has occurred and is continuing or would exist after giving effect to the transactions; and (b) Borrower is the surviving legal entity. A Subsidiary may merge or consolidate into another Subsidiary.

7.4          INTENTIONALLY BLANK.

7.5          Encumbrance .    Create, incur, or allow any Lien on any of Collateral or permit any of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject to the first priority security interest granted herein.

7.6          Maintenance of Collateral Accounts .  Maintain any Collateral Account except pursuant to the terms of Section 6.5 hereof.

7.7          Investments; Distributions .  (a) Directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or make any distribution or payment or redeem, retire or purchase any of its capital stock provided that as to (a) and (b), (i) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof, (ii) Borrower may pay dividends solely in common stock; (iii) Borrower may repurchase the stock of former employees or consultants pursuant to stock repurchase agreements so long as an Event of Default does not exist at the time of such repurchase and would not exist after giving effect to such repurchase, provided such repurchase does not exceed in the aggregate of $250,000 per fiscal year; and (iv) as permitted by Section 7.3.

7.8          Transactions with Affiliates .  Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for (i) transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person; and (ii) transactions otherwise permitted pursuant to subsections (a) or (g) of the definition of “Permitted Investments.”.

7.9          INTENTIONALLY BLANK .

7.10        Compliance .  Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

8              EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1          Payment Default .  Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable. During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period);

8.2          Covenant Default .

 

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(a) Borrower fails or neglects to perform any obligation in Sections 6.1 (as to legal existence), 6.2, 6.4, 6.5, 6.8 or violates any covenant in Section 7; or

(b) Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement, any Loan Documents, and as to any default (other than those specified in Sections 8.3 through 8.8 below) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days after the end of such 10 day period) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this section shall not apply, among other things, to financial covenants or any other covenants set forth in subsection (a) above;

8.3          Attachment .  (a) Any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in thirty (30) days; (b) the service of process upon Borrower seeking to attach, by trustee or similar process, any funds of Borrower on deposit with Bank, or any entity under control of Bank (including a subsidiary); (c) Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business; (d) a judgment or other claim in excess of $500,000 becomes a Lien on any of Borrower’s assets; or (e) a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency and not paid or released within thirty (30) days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions shall be made during the cure period);

8.4          Insolvency .  Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within sixty (60) days (but no Credit Extensions shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);

8.5          Other Agreements .    There is a default in any agreement governing Indebtedness to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of such Indebtedness in an amount in excess of $500,000;

8.6          Judgments .  A judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least $500,000 (not covered by independent third-party insurance) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment);

8.7          Misrepresentations .  Borrower or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made; or

8.8          Subordinated Debt .  A default or breach by Borrower occurs under any agreement between Borrower and any creditor of Borrower that signed a subordination, intercreditor, or other similar agreement with Bank.

9              BANK’S RIGHTS AND REMEDIES

9.1          Rights and Remedies .  While an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following:

(a)        declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.4 occurs all Obligations are immediately due and payable without any action by Bank);

 

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(b)        stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

(c)        make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

(d)        apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

(e)        ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral;

(f)        demand and receive possession of Borrower’s Books; and

(g)        exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

9.2          Power of Attorney .  Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) make, settle, and adjust all claims under Borrower’s insurance policies; (c) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (d) transfer the Collateral into the name of Bank or a third party as the Code permits. Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity obligations) have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations) have been fully repaid and performed and Bank’s obligation to provide Credit Extensions terminates.

9.3          Protective Payments .  If Borrower fails to obtain the insurance called for by Section 6.4 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest applicable rate, and secured by the Collateral. Bank will make reasonable efforts to provide Borrower with notice of Bank obtaining such insurance or making such payment at the time it is obtained or made or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.

9.4          Application of Payments and Proceeds .    Unless an Event of Default has occurred and is continuing, Bank shall apply any funds in its possession, whether from Borrower account balances, payments, or proceeds realized as the result of any disposition of the Collateral, first, to Bank Expenses, including without limitation, the reasonable costs, expenses, liabilities, obligations and reasonable attorneys’ fees incurred by Bank in the exercise of its rights under this Agreement; second, to the interest due upon any of the Obligations; and third, to the principal of the Obligations and, in such order as Bank shall determine in its sole discretion, any applicable fees and other charges. Any surplus shall be paid to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If an Event of Default has occurred and is continuing, Bank may apply any funds in its possession, whether from Borrower account balances, payments, or proceeds realized as the result of any disposition of the Collateral, or otherwise, to the Obligations in such order as Bank shall determine in its sole discretion. Any surplus shall be paid to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Bank shall have the option,

 

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exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Bank of cash therefore.

9.5          Bank’s Liability for Collateral .  So long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral.

9.6          No Waiver; Remedies Cumulative .    Bank’s failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it is given. Bank’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7          Demand Waiver .  Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

10            NOTICES

All notices, consents, requests, approvals, demands, or other communication (collectively, “ Communication ”) by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by electronic mail or facsimile transmission; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Bank or Borrower may change its address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

 

If to Borrower:   

ChemoCentryx, Inc.

850 Maude Avenue

Mountain View, CA 94043

Attn:  Susan Kanaya, CFO

Fax:  skanaya@chemocentryx.com

Email:    650-210-2910

If to Bank:   

Silicon Valley Bank

185 Berry Street, Suite 3000

San Francisco, CA 94107

Attn:  Peter Scott, Senior Vice President

Fax:  415-856-0810

Email:    pscott@svb.com

11            CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby

 

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waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens. Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL .

 

  12

GENERAL PROVISIONS

12.1          Successors and Assigns .    This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Bank’s prior written consent (which may be granted or withheld in Bank’s discretion). Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights, and benefits under this Agreement and the other Loan Documents.

12.2        Indemnification .  Borrower agrees to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or arising from transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except, as to (a) and (b), for Claims and/or losses directly caused by Bank’s gross negligence or willful misconduct.

12.3        Reserved .

12.4          Time of Essence .    Time is of the essence for the performance of all Obligations in this Agreement.

12.5          Severability of Provisions .    Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6          Amendments in Writing; Integration .  All amendments to this Agreement must be in writing signed by both Bank and Borrower. This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.

12.7          Counterparts .  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.8          Survival .  All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.9          Confidentiality .  In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any interest in the Credit Extensions

 

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(provided, however, Bank shall use commercially reasonable efforts to obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise required in connection with Bank’s examination or audit; and (e) as Bank considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either: (i) is in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

12.10        Attorneys’ Fees, Costs and Expenses .  In any action or proceeding between Borrower and Bank arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

13            DEFINITIONS

13.1          Definitions .  As used in this Agreement, the following terms have the following meanings:

Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Affiliate ” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

Agreement ” is defined in the preamble hereof.

Bank ” is defined in the preamble hereof.

Bank Expenses ” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

Basic Rate ” is the per annum rate of interest (based on a year of 360 days) equal to the sum of (a) U.S. Treasury note yield to maturity for a term equal to three years as quoted in The Wall Street Journal on the Funding Date, plus (b) the Loan Margin.

Borrower ” is defined in the preamble hereof

Borrower’s Books ” are all Borrower’s books and records including ledgers, federal and state tax returns, and records regarding Borrower’s assets or liabilities, business operations or financial condition, or the Collateral.

Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate.

Business Day ” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

 

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“Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., (c) Bank’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.

Change in Control ” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “ Exchange Act ”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing fifty percent (50%) or more of the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Borrower (together with any new directors whose election by the Board of Directors of Borrower was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office.

Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “ Code ” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral ” is any and all properties, rights and assets of Borrower described on Exhibit A .

Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

Collateral Information Certificate ” is defined in Section 5.1.

Commodity Account ” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

Communication ” is defined in Section 10.

Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit C .

Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement ” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower

 

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maintains a Securities Account or a Commodity account, Borrower, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

Credit Extension ” is any Equipment Advance or any other extension of credit by Bank for Borrower’s benefit.

Default ” means any event which with notice or passage of time or both, would constitute an Event of Default.

Default Rate ” is defined in Section 2.2(b).

Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

Dollars ,” “ dollars ” and “ $ ” each mean lawful money of the United States.

Domestic Subsidiary ” means a Subsidiary organized under the laws of the United States or any state or territory thereof or the District of Columbia.

Draw Period ” is the period of time from the Effective Date through the earlier to occur of (a) December 31, 2007, or (b) an Event of Default.

Effective Date ” is the date Bank executes this Agreement and as indicated on the signature page hereof.

Eligible Equipment” is (a) general purpose laboratory equipment, computer equipment, office equipment and furnishings, new or used, and (b) Other Equipment, new or used, that complies with all of Borrower’s representations and warranties contained herein and in which Bank has a first priority Lien.

Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

Equipment Advance ” is defined in Section 2.1.1(a).

Equipment Line ” is an Equipment Advance or Equipment Advances in an aggregate amount of up to $2,500,000.

ERISA ” is the Employment Retirement Income Security Act of 1974, and its regulations.

Event of Default ” is defined in Section 8.

Event of Loss ” is defined in Section 2.1.1(d).

Final Payment ” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due on the earlier of (a) the final Payment Date for such Equipment Advance or (b) the acceleration of such Equipment Advance, equal to the Loan Amount for such Equipment Advance multiplied by the Final Payment Percentage.

Final Payment Percentage ” is, for each Equipment Advance, five percent (5%).

Financed Equipment ” is all present and future Eligible Equipment in which Borrower has any interest, the purchase of which is financed by an Equipment Advance.

Funding Date ” is any date on which a Credit Extension is made to or on account of Borrower which shall be a Business Day.

 

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GAAP ” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

Insolvency Proceeding ” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

Lien ” is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

Loan Amount ” in respect of each Equipment Advance is the original principal amount of such Equipment Advance.

Loan Documents ” are, collectively, this Agreement, the Collateral Information Certificate, any note, or notes executed by Borrower, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise modified.

“Loan Margin ” is 165 basis points.

“Loan Supplement ” is attached as Exhibit B .

“Material Adverse Change” is (a) a material impairment in the perfection or priority of Bank’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; or (c) a material impairment of the prospect of repayment of any portion of the Obligations .

Obligations ” are Borrower’s obligation to pay when due any debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, whether under this Agreement, the Loan Documents, or otherwise, including, without limitation, all interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank, and the performance of Borrower’s duties under the Loan Documents.

 

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“Operating Documents” are, for any Person, such Person’s formation documents, as certified with the Secretary of State of such Person’s state of formation on a date that is no earlier than 30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

Other Equipment ” is leasehold improvements, intangible property such as computer software and software licenses, equipment specifically designed or manufactured for Borrower, other intangible property, limited use property and other similar property and soft costs approved by Bank, including taxes, shipping, warranty charges, freight discounts and installation expenses.

Payment Date ” is defined in Section 2.1.1(b).

Permitted Investments ” are:

(a)        Investments shown on the Collateral Information Certificate and existing on the Effective Date;

(b)        (i) Cash Equivalents and (ii) any Investment permitted by Borrower’s investment policy, as amended from time to time, provided that such investment policy (an any such amendment thereto) has been approved by Bank;

(c)        Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

(d)        Investments consisting of deposit accounts;

(e)        Investments accepted in connection with Transfers permitted by Section 7.1;

(f)        Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed $500,000 in the aggregate in any fiscal year;

(g)        Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directors;

(h)        Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;

(i)        Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments of Borrower in any Subsidiary;

(j)        joint ventures or strategic alliances consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash investments by Borrower do not exceed $500,000 in the aggregate in any fiscal year; and

(k)        other Investments not otherwise permitted by Section 7.7 not exceeding $500,000 in the aggregate outstanding at any time.

Permitted Liens ” are:

 

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(a)        Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank’s Liens; and

(b)        Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.3 or 8.6.

(c)        Liens existing on the Effective Date and shown on the Collateral Information Certificate or arising under this Agreement and the other Loan Documents;

(d)        statutory Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other Persons imposed without action of such parties, provided, they have no priority over any of Bank's Lien and the aggregate amount of such Liens does not at any time exceed $250,000;

(e)        Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business, provided, they have no priority over any of Bank’s Liens and the aggregate amount of the Indebtedness secured by such Liens does not at any time exceed $250,000;

(f)        licenses of intellectual property granted to third parties in the ordinary course of business and licenses from third parties of intellectual property entered into the ordinary course of business; and

(g)        Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens in (c) but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase.

Person ” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

Registered Organization ” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made

Repayment Period ” as to each Equipment Advance, is a period of time equal to forty-two (42) consecutive months commencing on the first day of the month following the month in which the Funding Date occurs (or commencing on the Funding Date if the Funding Date is the first day of the month).

Responsible Officer ” is any of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower.

Scheduled Payment ” is defined in Section 2.1.1(b).

Securities Account ” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

Subordinated Debt ” is indebtedness incurred by Borrower subordinated to all of Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance reasonably satisfactory to Bank entered into between Bank and the other creditor), on terms reasonably acceptable to Bank.

Subsidiary ” means, with respect to any Person, any Person of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. Unless otherwise indicated, the term “Subsidiary” refers to a subsidiary of Borrower.

Transfer ” is defined in Section 7.1.

 

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed as of the Effective Date.

 

BORROWER:

CHEMOCENTRYX, INC.

By:

 

/s/ Thomas J. Schall

Name:

 

Thomas J. Schall

Title:

 

 President and C.E.O.

BANK:

SILICON VALLEY BANK

By:

 

/s/ Peter Scott

Name:

 

 Peter Scott

Title:

 

 SVP

Effective Date:      February      , 2007

[Signature page to Loan and Security Agreement]

Exhibit 10.22

AMENDMENT NO. 2

TO LOAN AND SECURITY AGREEMENT

T HIS A MENDMENT N O . 2 TO L OAN A GREEMENT (this “ Amendment ”) is entered into this 19 th day of April, 2010, by and between C HEMO C ENTRYX , I NC . , a Delaware corporation (“ Borrower ”), and S ILICON V ALLEY B ANK (“ Bank ”). Capitalized terms used herein without definition shall have the same meanings given them in the Loan Agreement (as defined below).

R ECITALS

A.      Borrower and Bank have entered into that certain Loan and Security Agreement dated as of February 20, 2007 (as the same may be amended, restated, or otherwise modified, the “ Loan Agreement ”), pursuant to which the Bank has agreed to extend and make available to Borrower certain advances of money.

B.      Borrower desires that Bank amend the Loan Agreement to add a new equipment facility upon the terms and conditions more fully set forth herein.

C.      Subject to the representations and warranties of Borrower herein and upon the terms and conditions set forth in this Amendment, Bank is willing to so amend the Loan Agreement.

A GREEMENT

NOW, THEREFORE , in consideration of the foregoing Recitals and intending to be legally bound, the parties hereto agree as follows:

1.       A MENDMENTS TO L OAN A GREEMENT .

1.1       Section 2 of the Loan Agreement .   Section 2 of the Loan Agreement is amended to add the following new section 2.1.2:

“2.1.2  Equipment Facility B .

(a)         Equipment B Advances .   Subject to the terms and conditions of this Agreement, Bank agrees to lend to Borrower, during Draw Period B, equipment advances (each an “ Equipment B Advance ” and collectively the “ Equipment B Advances ”) in an aggregate amount not to exceed Equipment Line B. The proceeds of the Equipment B Advances shall be used solely to reimburse Borrower for the purchase of Eligible Equipment purchased within ninety (90) days (determined based upon the applicable invoice date of such Eligible Equipment) (other than the initial Equipment B Advance of $1,000,000, which shall not be subject to such 90 day lookback) of the Equipment B Advance and to purchase Eligible Equipment; provided however, the initial Equipment B Advance of $1,000,000 funded on the Second Amendment Effective Date (the “ Initial Equipment B Advance ”) shall not require invoice documentation. Other than the Initial Equipment B Advance, no Equipment B Advance may exceed 100% of the total invoice for Eligible Equipment. Unless otherwise agreed to by Bank, not more than 35% of the proceeds of the $3,000,000 of Equipment Line B remaining after the Initial Equipment B Advance shall be used to finance Other Equipment. Each Equipment B Advance must be in an


amount equal to at least $100,000. Borrower may not request more than twelve (12) Equipment B Advances hereunder. After repayment, no Equipment B Advance may be reborrowed.

(b)         Repayment . Borrower shall repay each Equipment B Advance pursuant to the terms set forth in its corresponding Loan Supplement. For each Equipment B Advance, Borrower shall make equal monthly payments of principal and interest, in advance, calculated by Bank based upon (i) the amount of the Equipment B Advance, (ii) the Basic Rate (which shall be fixed at the time of each Funding Date), and (iii) an amortization schedule equal to the Repayment Period, beginning on the first day of the month following the month in which the Funding Date occurs (or commencing on the Funding Date if the Funding Date is the first day of the month) with respect to such Equipment B Advance and continuing thereafter during the Repayment Period on each Payment Date. All outstanding principal and accrued and unpaid interest is due and payable in full on the last Payment Date with respect to such Equipment B Advance. An Equipment B Advance may only be prepaid, at Borrower’s option, in accordance with Sections 2.1.2(c), (d), (e) and (f).

(c)         Final Payment . On the earliest of (i) the final Payment Date with respect to each Equipment B Advance, (ii) any prepayment (to the extent permitted hereunder) of such Equipment B Advance or (iii) the termination of Equipment Line B, Borrower shall pay, in addition to the outstanding principal, accrued and unpaid interest, all future Scheduled Payments (except that such future Scheduled Payments shall not be payable with respect to a prepayment made pursuant to Section 2.1.2(d) or (f) below), in each case on such Equipment B Advance, and all other amounts due on such date with respect to such Equipment B Advance, plus an amount equal to the Final Payment on such Equipment B Advance.

(d)         Prepayment Upon an Event of Loss . Borrower shall bear the risk of any loss, theft, destruction, or damage of or to the Financed Equipment. If during the term of this Agreement an Event of Loss occurs, then if no Event of Default has occurred or is continuing, within ten (10) days following the Event of Loss, at Borrower’s option, Borrower shall (i) pay to Bank, with respect to the Equipment B Advance made with respect to the Financed Equipment subject to the Event of Loss, all outstanding principal, all accrued and unpaid interest to the date of the prepayment, and the Final Payment; or (ii) repair or replace any Financed Equipment subject to the Event of Loss provided the repaired or replaced Financed Equipment is of equal or like value to the Financed Equipment subject to the Event of Loss and provided further that Bank has a first priority perfected security interest in such repaired or replaced Financed Equipment.

(e)         Prepayment .    If the Equipment B Advances are voluntarily prepaid or accelerated following the occurrence of an Event of Default, Borrower shall immediately pay to Bank an amount equal to the sum of (i) all outstanding principal plus accrued and unpaid interest, (ii) all future Scheduled Payments, (iii) the Final Payment, and (iv) all other sums, if any, that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts, in each case with respect to the Equipment B Advances being prepaid.

(f)         Prepayment Upon Sale or Trade of Finance Equipment . If, during the term of this Agreement, any item of Financed Equipment is sold or traded, then within ten (10) days following such sale or trade, Borrower shall (i) pay to Bank on account of the Obligations all accrued interest to the date of the prepayment, the Final Payment, and all outstanding principal owing with respect to the Equipment B Advance made with respect to the Financed Equipment


subject to such sale or trade; or (ii) provide other equipment in replacement of the sold or traded Financed Equipment, provided the replacement Financed Equipment is of equal or like value to the Financed Equipment sold or traded, is acceptable to Bank in its sole discretion, and provided further that Bank has a first priority perfected security interest in such replacement Financed Equipment.”

1.2       Section 2.2(a) (Payment of Interest on the Credit Extensions) of the Loan Agreement . Section 2.2(a) of the Loan Agreement is amended and restated in its entirety to read as follows:

“(a)       Interest Rate . Subject to Section 2.2(b), the principal amount outstanding for each Equipment Advance shall accrue interest at a per annum rate equal to the Basic Rate determined by Bank on the Funding Date for such Equipment Advance. Subject to Section 2.2(b), the principal amount outstanding for each Equipment B Advance shall accrue interest at a per annum rate equal to the Basic Rate determined by Bank on the Funding Date for such Equipment B Advance.”

1.3       Section 3.4 (Procedures for Borrowing) of the Loan Agreement . Section 3.4 of the Loan Agreement is amended and restated in its entirety to read as follows:

3.4     Procedures for Borrowing . Subject to the prior satisfaction of all other applicable conditions to the making of an Equipment Advance or Equipment B Advance set forth in this Agreement, to obtain an Equipment Advance following the Initial Equipment Advance or an Equipment B Advance following the Initial Equipment B Advance, Borrower shall deliver to Bank by electronic mail or facsimile a completed Loan Supplement, executed by a Responsible Officer or his or her designee, together with copies of invoices for the Financed Equipment and such additional information as Bank may reasonably request at least five (5) Business Days before the proposed Funding Date. On each Funding Date, Bank shall specify in the Loan Supplement for each Equipment Advance or Equipment B Advance, as the case may be, the Basic Rate, and the Payment Dates. At Bank’s discretion, Bank shall have the opportunity to confirm that, upon filing the UCC-1 financing statement covering the Equipment described on the Loan Supplement, Bank shall have a first priority perfected security interest in such Equipment. If Borrower satisfies the conditions of each Equipment Advance or each Equipment B Advance, as the case may be, Bank shall disburse such Equipment Advance or Equipment B Advance by transfer to the deposit account designated by Borrower.

1.4       Section 6.4 (Insurance) of the Loan Agreement . Section 6.4 of the Loan Agreement is amended to replace “Section 2.1.1(d)” with “Sections 2.1.1(d) and 2.1.2(d)”.

1.5       Section 7.1 (Dispositions) of the Loan Agreement . Section 7.1 of the Loan Agreement is amended to replace “Section 2.1.1(f)” with “Sections 2.1.1(f) and 2.1.2(f)” and to replace “Section 2.1.1(d)” with “Sections 2.1.1(d) and 2.1.2(d)”.

1.6       Section 13 (Definitions) of the Loan Agreement . Section 13 of the Loan Agreement is amended to add the following definitions in the appropriate order to preserve the alphabetical listing of the terms in such section:


““ Draw Period B ” is the period of time from the Second Amendment Effective Date through the earlier to occur of (a) March 31, 2011, or an Event of Default.”

““ Equipment B Advance ” is defined in Section 2.1.2(a).”

““ Equipment Line B ” is an Equipment B Advance or Equipment B Advances in an aggregate amount of $4,000,000.”

““ Initial Equipment Advance ” is defined in Section 2.1.1(a).

““ Initial Equipment B Advance ” is defined in Section 2.1.2(a).

““ Second Amendment Effective Date ” is April 19, 2010.”

Section 13 of the Loan Agreement is further amended by amending and restating the following definitions:

““ Credit Extension ” is any Equipment Advance or Equipment B Advance or any other extension of credit by Bank for Borrower’s benefit.”

““ Final Payment ” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due on the earlier of (a) the final Payment Date for such Equipment Advance or such Equipment B Advance, as the case may be, or (b) the acceleration of such Equipment Advance or such Equipment B Advance, as the case may be, equal to the Loan Amount for such Equipment Advance or such Equipment B Advance, multiplied by the Final Payment Percentage.”

““ Final Payment Percentage ” is, for each Equipment Advance, five percent (5.00%) and, for each Equipment B Advance, six percent (6.00%).”

““ Financed Equipment ” is all present and future Eligible Equipment in which Borrower has any interest, the purchase of which is financed by an Equipment Advance or Equipment B Advance.”

““ Loan Amount ” in respect of each Equipment Advance is the original principal amount of such Equipment Advance and in respect of each Equipment B Advance is the original principal amount of such Equipment B Advance.”

““ Loan Margin ” is 165 basis points for Equipment Advances and 285 basis points for Equipment B Advances.”

““ Repayment Period ” as to each Equipment Advance, is a period of time equal to forty-two (42) consecutive months, and as to each Equipment B Advance, is a period of time equal to forty-eight (48) consecutive months, in either case, commencing on the first day of the month following the month in which the Funding Date occurs (or commencing on the Funding Date if the Funding Date is the first day of the month).”


1.7         Exhibit B (Loan Agreement Supplement) to the Loan Agreement . The form of Loan Agreement Supplement (Exhibit B to the Loan Agreement) is replaced in its entirety by the form of Loan Agreement Supplement attached to this Amendment as Exhibit B.

2.         B ORROWER S R EPRESENTATIONS A ND W ARRANTIES .   Borrower represents and warrants that:

(a)     immediately upon giving effect to this Amendment (i) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (ii) no Event of Default has occurred and is continuing;

(b)     Borrower has the corporate power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

(c)     the Amended and Restated Certificate of Incorporation dated May 29, 2009 and delivered to Bank on April 2, 2010, together with the bylaws and other organizational documents of Borrower delivered to Bank on the Effective Date, remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

(d)     the execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized by all necessary corporate action on the part of Borrower;

(e)     this Amendment has been duly executed and delivered by the Borrower and is the binding obligation of Borrower, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights; and

(f)     as of the date hereof, it has no defenses against the obligations to pay any amounts under the Obligations. Borrower acknowledges that Bank has acted in good faith and has conducted in a commercially reasonable manner its relationships with Borrower in connection with this Amendment and in connection with the Loan Documents.

Borrower understands and acknowledges that Bank is entering into this Amendment in reliance upon, and in partial consideration for, the above representations and warranties, and agrees that such reliance is reasonable and appropriate.

3.         L IMITATION . The amendments set forth in this Amendment shall be limited precisely as written and shall not be deemed (a) to be a waiver or modification of any other term or condition of the Loan Agreement or of any other instrument or agreement referred to therein, or an agreement to forbear with respect to any other breach or Event of Default thereunder, or to prejudice any right or remedy which Bank may now have or may have in the future under or in


connection with the Loan Agreement or any instrument or agreement referred to therein; or (b) to be a consent to any future amendment or modification or waiver of any term or condition of any Loan Document. Except as expressly amended hereby, the Loan Agreement shall continue in full force and effect.

4.     E FFECTIVENESS .   This Amendment shall become effective upon the satisfaction of all the following conditions precedent:

4.1       Amendment .  Borrower and Bank shall have duly executed and delivered this Amendment to Bank.

4.2       Board Resolutions .   Borrower shall have delivered to Bank a copy of resolutions duly adopted by Borrower’s Board of Directors authorizing and ratifying the execution, delivery, and performance by Borrower of this Amendment and approving the transactions contemplated hereby, together with a certification by Borrower’s secretary that such copy is true, correct, and complete and that such resolutions are in full force and effect.

4.3       Payment of Bank Expenses .    Borrower shall have paid all Bank Expenses (including all reasonable attorneys’ fees and reasonable expenses) incurred through the date of this Amendment.

5.     C OUNTERPARTS .      This Amendment may be signed in any number of counterparts, and by different parties hereto in separate counterparts, with the same effect as if the signatures to each such counterpart were upon a single instrument. All counterparts shall be deemed an original of this Amendment.

6.     I NTEGRATION .    This Amendment and any documents executed in connection herewith or pursuant hereto contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Amendment; except that any financing statements or other agreements or instruments filed by Bank with respect to Borrowers shall remain in full force and effect.

7.     G OVERNING L AW ; V ENUE .   THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California.

[Signature page follows]


IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

 

    B ORROWER :   
  
  
  

C HEMO C ENTRYX , I NC .

a Delaware corporation

By

  

    /s/ Thomas J. Schall

Printed Name:

  

Thomas J. Schall

Title:

  

President and Chief Executive Officer

 

 

    B ANK :   
  
  
  
S ILICON V ALLEY B ANK

By

  

/s/ James Taylor

Printed Name:

  

James Taylor

Title:

  

Relationship Manager

 

 

Amendment No. 2 to Loan and Security Agreement

Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

 

Subsidiary

  

Jurisdiction of Incorporation

ChemoCentryx Limited    United Kingdom

Exhibit 23.1

Consent of Independent Registered Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated October 14, 2011, in the Registration Statement (Form S-1) and related Prospectus of ChemoCentryx, Inc. for the registration of its common stock.

/s/ Ernst & Young LLP

Redwood City, California

October 14, 2011