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As filed with the Securities and Exchange Commission on February 3, 2014.

Registration No. 333-193335

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

CONCERT PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   20-4839882

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code No.)

 

(I.R.S. Employer

Identification No.)

99 Hayden Avenue, Suite 500

Lexington, MA 02421

(781) 860-0045

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

 

 

Roger D. Tung, Ph.D.

President and Chief Executive Officer

99 Hayden Avenue, Suite 500

Lexington, MA 02421

(781) 860-0045

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

 

 

Copies to:

 

David E. Redlick, Esq.

Lia Der Marderosian, Esq.

Wilmer Cutler Pickering Hale and Dorr LLP

60 State Street

Boston, MA 02109

(617) 526-6000

 

Glenn R. Pollner, Esq.

Gibson, Dunn & Crutcher LLP

200 Park Avenue

New York, NY 10166

(212) 351-4000

 

 

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

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, as amended (the “Securities Act”) please 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, 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(d) 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.  ¨

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 12b2 of the Exchange Act.

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   x    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed

maximum

aggregate

offering price (1)

 

Amount of

registration

fee (2)(3)

Common stock, par value $0.001 per share

  $80,500,000   $740.60

 

(1)   Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(o) under the Securities Act.
(2)   Calculated pursuant to Rule 457(o) based on a bona fide estimate of the maximum aggregate offering price.
(3)   A registration fee of $9,637.80, at the rate of $128.80 per $1,000,000, was previously paid in connection with this Registration Statement, based on a proposed maximum aggregate offering price of $74,750,000. Accordingly, the Registrant has paid an additional registration fee of $740.60, at the rate of $128.80 per $1,000,000, based on the $5,750,000 difference between the bona fide estimate of the maximum aggregate offering price of $80,500,000 and the previous proposed maximum aggregate offering price of $74,750,000.

 

 

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.

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS    Subject to Completion    February 3, 2014

 

5,000,000 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the 5,000,000 shares of common stock offered by this prospectus. We expect the public offering price to be between $12.00 and $14.00 per share.

We have applied to list our common stock on The NASDAQ Global Market under the symbol “CNCE.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be eligible for reduced public company disclosure requirements. See “Prospectus summary—Implications of being an emerging growth company.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “ Risk factors ” beginning on page 12 of this prospectus.

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

 

       Per share      Total  

Price to the public

   $                        $                    

Underwriting discounts and commissions (1)

   $                        $                    

Proceeds to us (before expenses)

   $                        $                    

 

(1)   See “Underwriting” for additional information regarding underwriter compensation.

Certain of our existing principal stockholders and their affiliated entities, as well as Celgene, one of our collaborators, have indicated an interest in purchasing an aggregate of up to $14.0 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering.

The underwriters may also purchase up to an additional 750,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $                 and our total proceeds, before expenses, will be $                .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2014.

 

UBS Investment Bank   Wells Fargo Securities

 

 

JMP Securities

Roth Capital Partners


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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus or any such free writing prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

TABLE OF CONTENTS

 

 

     Page  

Prospectus summary

     1   

Risk factors

     12   

Special note regarding forward-looking statements and industry data

     55   

Use of proceeds

     57   

Dividend policy

     58   

Capitalization

     59   

Dilution

     61   

Selected consolidated financial data

     63   

Management’s discussion and analysis of financial condition and results of operations

     65   

Business

     94   

Management

     140   
     Page  

Executive compensation

     147   

Transactions with related persons

     157   

Principal stockholders

     160   

Description of capital stock

     164   

Shares eligible for future sale

     168   

Material U.S. federal tax considerations for non-U.S. holders of common stock

     171   

Underwriting

     175   

Legal matters

     182   

Experts

     182   

Where you can find more information

     182   

Index to consolidated financial statements

     F-1   
 

 

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

 


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Prospectus summary

This summary highlights selected information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the “Risk factors” section beginning on page 12 and our consolidated financial statements and the related notes appearing at the end of this prospectus before making an investment decision. Unless the context otherwise requires, we use the terms “Concert,” “our company,” “we,” “us” and “our” in this prospectus to refer to Concert Pharmaceuticals, Inc. and its consolidated subsidiary, Concert Pharmaceuticals Securities Corporation.

OUR BUSINESS

We are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Our approach starts with approved drugs, advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. We believe our approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development.

We have a robust pipeline, including three clinical-stage candidates and a number of preclinical compounds that we are actively developing. Our clinical programs are CTP-354 for spasticity associated with multiple sclerosis and spinal cord injury, CTP-499 for diabetic kidney disease and AVP-786 for neurologic and psychiatric disorders under our collaboration with Avanir. We also have ongoing collaborations with Celgene, for deuterated compounds including CTP-730, which is in preclinical development for inflammatory diseases, and Jazz Pharmaceuticals, for JZP-386, a deuterated analog of sodium oxybate, the active ingredient in its marketed drug Xyrem ® , which is in preclinical development for narcolepsy. Between our wholly owned and collaboration programs, we expect to have up to five product candidates in clinical development by the end of 2014, including at least two product candidates in Phase 2 clinical trials.

We believe that our application of deuterium chemistry, which we refer to as deuteration, is an efficient way to build on existing knowledge to create important new medicines. Deuterium is similar to hydrogen in size and shape. However, deuterium differs from hydrogen in one pharmaceutically important respect – deuterium forms a more stable chemical bond with carbon. This increased stability has the potential, through the selective substitution of deuterium for hydrogen, to improve pharmacokinetic and metabolic properties without changing a compound’s intrinsic biological activity.

Our approach allows us to efficiently identify lead compounds for deuteration and, in some cases, shorten the amount of time necessary to initiate clinical trials as compared to conventional small molecule drug research and development. In clinical development, we believe that the U.S. Food and Drug Administration, or FDA, and comparable foreign regulatory authorities may allow some of our compounds that are deuterated analogs of approved products, or of compounds for which approval is pending, to follow an expedited development pathway by relying on previous clinical and preclinical data related to the non-deuterated compound. For example, in June 2013, Avanir reported that the FDA agreed to an expedited development pathway for AVP-786, permitting Avanir to reference data from its development of dextromethorphan and quinidine in its investigational new drug application, or IND, and any future New Drug Application, or NDA, for AVP-786.

Our senior management team has extensive experience in drug discovery and development. Collectively, our team has been involved in the research, development or approval of 12 drugs. Dr. Roger D. Tung, our Chief Executive Officer and one of our founders, is an accomplished leader in drug research and development. Prior to founding our company, Dr. Tung was the Vice President of Drug Discovery at Vertex Pharmaceuticals, Inc., or Vertex. At Vertex, he was a co-inventor of two drugs that were approved for the treatment of HIV, amprenavir and fosamprenavir, and oversaw the discovery of two other approved drugs, ivacaftor (Kalydeco ® ) for cystic fibrosis and telaprevir (Incivek ® ) for hepatitis C.

 

 

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Through September 30, 2013, we had received an aggregate of $105.4 million in upfront and milestone payments, equity investments and research and development funding from current and former collaborations. Under our current collaborations, we have the potential to receive up to $1.6 billion in future milestone payments, including over $1.2 billion in research, development and regulatory milestones, as well as royalties on any future net product sales.

OUR DCE PLATFORM

We believe we are the leader in applying deuterium chemistry in drug discovery and development. We have built a deuterated chemical entity platform, which we refer to as our DCE Platform ® . Our platform comprises the proprietary know-how, techniques and information that we have accumulated since our inception in 2006. Due to our significant experience in deuterium chemistry and pharmaceutical research and development, we believe we are well-positioned to efficiently identify compounds for deuteration and to design, evaluate, develop and manufacture deuterated compounds. Our DCE Platform includes the following capabilities, which we believe provide us with key competitive advantages:

 

Ø  

Selection of attractive compounds for deuteration . We identify candidate compounds for selective deuteration through the efforts of a team that integrates chemistry, biology, medical, regulatory, intellectual property and commercial expertise.

 

Ø  

Medicinal chemistry and chemical and biological testing of deuterated compounds . We have developed significant proprietary know-how in the design, synthesis, chemical analysis, bioanalytical assessment, preclinical evaluation and clinical development of deuterated compounds.

 

Ø  

Manufacturing of deuterated compounds . We apply our manufacturing and analytical know-how and capabilities to reproducibly manufacture deuterated compounds. We have also successfully transferred our methods to manufacturing vendors that can produce multi-kilogram quantities of clinical trial materials.

OUR PRODUCT CANDIDATES

We are utilizing our DCE Platform to discover and develop product candidates for a variety of indications. The following table summarizes key information about our priority programs:

LOGO

 

 

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CTP-354

CTP-354 is a novel, potentially first-in-class, non-sedating treatment for spasticity that we are initially developing for use in patients with multiple sclerosis and in patients with spinal cord injury. CTP-354 is a subtype selective GABA A receptor modulator. GABA A receptors are found in the nervous system and, when activated, reduce the transmission of certain nerve signals. Several classes of widely used drugs target GABA A receptors, including benzodiazepines and some sleep agents, none of which have the receptor subtype selectivity that we believe CTP-354 possesses. We hold issued U.S. and Japanese patents and allowed European claims covering the composition of matter of CTP-354 that expire in 2029.

Spasticity is a chronic condition characterized by involuntary tightness, stiffness or contraction of muscles and can range from mild muscle tightness to more severe symptoms, including crippling and painful inability to move limbs that can result in disability and diminished quality of life. Spasticity can result from a wide range of disorders, including multiple sclerosis, spinal cord injury, cerebral palsy, amyotrophic lateral sclerosis, stroke and hereditary spastic paraplegia.

While pharmacotherapy, physical therapy and surgical intervention treatments currently exist to treat spasticity, current therapies are frequently limited by inadequate relief of symptoms, severe sedative effects, toxicity, frequent dosing or invasiveness. For example, the strong sedative effects of benzodiazepines such as diazepam (Valium ® ) severely limit their therapeutic use in spasticity and certain other indications. We designed CTP-354 to provide therapeutic benefits associated with benzodiazepines, but with significantly reduced sedative effects. We believe, and our data to date support, that CTP-354 has the potential to be a non-sedating treatment that addresses a significant unmet medical need in the treatment of spasticity.

We have completed a 71-subject Phase 1 single ascending dose clinical trial of CTP-354 and are currently conducting a Phase 1 imaging study. Our initial Phase 1 clinical trial results indicate that CTP-354 has a favorable pharmacokinetic profile that supports once-daily dosing. The results also indicate that CTP-354 did not cause sedation at levels of GABA A receptor occupancy well above the levels achieved by benzodiazepines at doses that are typically prescribed. GABA A receptor occupancy is a measure of the percentage of GABA A receptors to which a compound binds, which in the case of CTP-354 we believe may correlate to therapeutic activity.

In January 2014, we initiated a multiple ascending dose Phase 1 clinical trial evaluating daily doses of 2 mg and 6 mg of CTP-354 in healthy volunteers. Assuming successful completion of the multiple ascending dose Phase 1 clinical trial, we plan to initiate a Phase 2 clinical program for CTP-354 in the second half of 2014. We expect that the Phase 2 clinical program will include one clinical trial for the treatment of spasticity associated with multiple sclerosis and one clinical trial for the treatment of spasticity associated with spinal cord injury. In our previous preclinical testing, minimal, if any, toxicity was observed for CTP-354, and a maximum feasible dose or a maximum tolerated dose was not determined. As a result, the FDA has informed us that we may not administer multiple doses of CTP-354 in excess of 6 mg per day in clinical trials without first conducting an additional higher dose preclinical toxicology study. We believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity; however, we intend to conduct the additional preclinical toxicology study to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications. Based on the well-known efficacy of benzodiazepines and other GABA A modulators, we believe CTP-354 has potential in a number of other indications, including anxiety, chronic pain, muscle tension and epilepsy.

CTP-499

CTP-499 is a novel, potentially first-in-class, treatment for type 2 diabetic kidney disease that we are developing as an additive treatment to the current standard of care. CTP-499 is a multi-subtype selective

 

 

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inhibitor of phosphodiesterases, or PDEs, which are enzymes that we believe play an important role in type 2 diabetic kidney disease. We hold issued U.S. and Japanese patents that cover the composition of matter of CTP-499 and have composition of matter patent applications in Europe. The U.S. patent expires in 2029, the Japanese patents expire in 2029 and 2030 and patents that issue from the European patent applications would expire in 2029 and 2030.

We are currently conducting a three-part Phase 2 clinical trial of CTP-499 in which we have enrolled patients with type 2 diabetic kidney disease and macroalbuminuria, which is high levels of the blood protein albumin in the urine, who were receiving standard-of-care treatment. In 2013, we completed the first part of this trial, a 24-week, double-blind, parallel, two-arm, placebo-controlled study in 182 patients. In addition, we have completed dosing in the second part of the trial, a blinded 24-week extension study, which, combined with the data from the first part of the trial, has provided 48 weeks of placebo-controlled data in 123 patients. We have conducted preliminary analyses of these 48 weeks of data, but have not yet completed a full analysis. We expect to report the final top line results for the first 48 weeks of the trial in the first half of 2014.

We believe that the preliminary data we have analyzed to date support the potential of CTP-499 to help protect kidney function in patients with rapidly progressing type 2 diabetic kidney disease. Although, as described below, we did not achieve statistical significance in the primary endpoint of the trial, key secondary endpoints showed potential benefits including a nearly statistically significant impact on serum creatinine levels and a positive trend in estimated glomerular filtration rate, or eGFR. Serum creatinine levels and eGFR are measures of renal function. Although our Phase 2 clinical trial was not intended to be powered for statistical significance with respect to serum creatinine or eGFR, and 48 weeks is a limited duration for measuring kidney function, the improvement in serum creatinine was nearly statistically significant after 48 weeks (p = 0.07). Furthermore, our preliminary analyses of our data at 48 weeks suggest that patients on placebo were more likely to experience a 30% or greater decline in eGFR over the 48 weeks of treatment as compared to patients receiving CTP-499, with an incidence of 14% among patients receiving placebo compared to 6% for patients receiving CTP-499 (p = 0.11). Declining eGFR is believed to indicate worsening of kidney function. We believe that the incidence of large declines in kidney function, measured as decreases in eGFR or increases in serum creatinine in drug-treated versus placebo-treated patients, may be an acceptable primary endpoint for Phase 3 clinical development of a drug candidate for the treatment of type 2 diabetic kidney disease. Our belief is based on the findings of a December 2012 scientific workshop sponsored by the National Kidney Foundation, or the NKF, and the FDA, and subsequent presentations by the NKF and the FDA. We intend to request in mid-2014 an end of Phase 2 meeting with the FDA to discuss endpoints for Phase 3 clinical development of CTP-499.

The primary endpoint of our Phase 2 clinical trial of CTP-499 was the change at 24 weeks in urinary albumin to creatinine ratio, or UACR. Albumin is a common protein in the blood, and urine creatinine is used to normalize measurements of albumin excretion. Urinary excretion of albumin is believed to indicate kidney damage if sustained for longer than three months. While CTP-499 was generally well tolerated over the 24 weeks of treatment, we did not achieve statistical significance in this primary endpoint of the trial. However, our preliminary analyses after 48 weeks of treatment suggested a favorable trend, which was not statistically significant, in UACR for patients receiving CTP-499 as compared to placebo. While UACR has been commonly used as an indicator of efficacy in Phase 2 trials in type 2 diabetic kidney disease, it is not accepted by the FDA as an endpoint for a Phase 3 clinical trial for the treatment of type 2 diabetic kidney disease.

We may seek one or more collaborators for future development of CTP-499 and we expect that we would conduct any large Phase 3 clinical trial of CTP-499 in type 2 diabetic kidney disease in collaboration with one or more partners.

 

 

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AVP-786

AVP-786 is a combination of a deuterium-substituted dextromethorphan analog and an ultra-low dose of quinidine. In February 2012, we granted Avanir Pharmaceuticals, Inc., or Avanir, an exclusive license to develop and commercialize deuterated dextromethorphan analogs, including the analog in AVP-786.

In February 2013, Avanir reported positive results from a Phase 1 clinical trial of AVP-786. In June 2013, Avanir reported that the FDA had agreed to an expedited development pathway for AVP-786, permitting Avanir to reference data from its development of dextromethorphan and quinidine in its IND, and any future NDA, for AVP-786. In October 2013, Avanir reported plans to advance AVP-786 into a Phase 2 clinical trial in the second half of 2014 for treatment-resistant major depressive disorder in patients with insufficient response to conventional anti-depressants.

Avanir has stated that it plans to develop AVP-786 for the treatment of neurologic and psychiatric disorders, including pain, behavioral disorders, mood disorders and movement disorders. Avanir has also reported that it plans to integrate its development of AVP-786 into its ongoing clinical development program for AVP-923, a dextromethorphan and quinidine combination product candidate. Avanir reported that AVP-786, which includes a lower dose of quinidine than AVP-923, provided approximately the same pharmacokinetic exposure as AVP-923 in a Phase 1 clinical trial.

We hold issued U.S., European and Japanese patents covering the composition of matter of the deuterated dextromethorphan analog in AVP-786. These patents have expirations from 2028 to 2030.

Our additional collaborations and product candidates

We have a collaboration with Celgene Corporation and Celgene International Sàrl, which we collectively refer to as Celgene, to research, develop and commercialize certain deuterated compounds for the treatment of cancer or inflammation. We are initially focusing on one program; however, the collaboration has the potential to encompass multiple programs. In the initial program, we have selected CTP-730, a product candidate for the treatment of inflammatory diseases, and expect to begin clinical trials in 2014.

In addition, we have entered into a development and license agreement with Jazz Pharmaceuticals Ireland Limited, or Jazz Pharmaceuticals, to research, develop and commercialize products containing deuterated sodium oxybate. Pursuant to the agreement, we have licensed Jazz Pharmaceuticals our rights to JZP- 386, a product candidate containing a deuterated analog of sodium oxybate. Sodium oxybate is approved by the FDA for use in patients with narcolepsy, which is a chronic neurologic disorder and a rare disease. The primary symptoms of narcolepsy include excessive daytime sleepiness and cataplexy, which is a sudden loss of muscle tone often triggered by emotions such as laughing or crying. Sodium oxybate is the active ingredient in the marketed drug Xyrem. In December 2013, an Investigational Medicinal Product Dossier, or IMPD, the basis for initiating clinical trials in the European Union, was filed for JZP-386. Jazz Pharmaceuticals has reported that, subject to approval of the IMPD, it expects a Phase 1 clinical trial of JZP-386 to commence in 2014, with completion of enrollment and reporting of initial data also expected in 2014.

We have a broad pipeline of additional product candidates, including C-10068, which is a novel oral deuterium-substituted analog of dextroethorphan, a compound with preclinical pharmacological activities qualitatively similar to those of dextromethorphan. We believe that C-10068 may be effective in the treatment of pain and seizure-generating diseases and injuries, such as epilepsy, ischemic stroke and traumatic brain injury. We are conducting further preclinical evaluation of C-10068.

 

 

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OUR STRATEGY

Our strategy is to apply our extensive knowledge of deuterium chemistry to discover, develop and commercialize novel small molecule drugs. Key components of our strategy include:

 

Ø  

rapidly advancing our deuterated product candidates;

 

Ø  

establishing collaborations to develop and commercialize deuterated product candidates;

 

Ø  

capitalizing on our DCE Platform to build a robust pipeline of additional deuterated product candidates;

 

Ø  

retaining commercialization rights on a selective basis and building a specialized commercialization capability in the United States; and

 

Ø  

expanding our broad patent estate covering deuterated compounds and related technology.

RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

Ø  

We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability. Our accumulated deficit was $107.7 million as of September 30, 2013.

 

Ø  

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

Ø  

Our approach to the discovery and development of product candidates based on selective deuteration is unproven, and we do not know whether we will be able to develop any products of commercial value.

 

Ø  

We are particularly dependent on the success of our product candidate, CTP-354, and our ability to develop, obtain marketing approval for and successfully commercialize CTP-354. CTP-354 is currently subject to a partial clinical hold that prevents us from administering doses in excess of 6 mg per day in multiple dose clinical trials without an additional preclinical study. If we are unable to develop, obtain marketing approval for or successfully commercialize CTP-354, either alone or through a collaboration, or experience significant delays in doing so, our business could be materially harmed.

 

Ø  

Clinical drug development involves a lengthy and expensive process with an uncertain outcome. In addition, while we believe our DCE Platform may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development, we may not be able to realize the advantages that we expect.

 

Ø  

We depend on collaborations with third parties for the development and commercialization of some of our product candidates and expect to continue to do so in the future. Our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.

 

Ø  

We believe we, or our collaborators, may in some instances be able to secure clearances from the FDA or comparable foreign regulatory authorities to use expedited development pathways. If unable to obtain such clearances, we, or they, may be required to conduct additional preclinical studies or clinical trials beyond those contemplated, which could increase the expense of obtaining, and delay the receipt of, necessary marketing approvals.

 

 

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Ø  

If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidates may be adversely affected.

OUR COMPANY

We were incorporated under the laws of the State of Delaware on April 12, 2006 under the name Concert Pharmaceuticals, Inc. Our principal executive offices are located at 99 Hayden Avenue, Suite 500, Lexington, Massachusetts 02421, and our telephone number is (781) 860-0045. Our website address is www.concertpharma.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

Concert ® , the Concert logo and DCE Platform ® are our registered trademarks. The other trademarks, trade names and service marks appearing in this prospectus are the property of the respective owners.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure and other requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

Ø  

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure;

 

Ø  

not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

Ø  

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

Ø  

reduced disclosure obligations regarding executive compensation; and

 

Ø  

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some or all of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The offering

 

Common stock offered by us

5,000,000 shares

 

Common stock to be outstanding after this offering

16,218,121 shares

 

Over-allotment option

The underwriters have an option for a period of 30 days to purchase up to 750,000 additional shares of our common stock to cover over-allotments.

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $57.4 million, or approximately $66.4 million if the underwriters exercise their over-allotment option to purchase additional shares from us in full, assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. We plan to use the net proceeds from this offering to fund our ongoing development of CTP-354, our research and development efforts to advance our pipeline of additional product candidates and for working capital and other general corporate purposes. See “Use of proceeds” for more information.

 

Risk factors

You should read the “Risk factors” section starting on page 12 of this prospectus and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

“CNCE”

The number of shares of our common stock to be outstanding after this offering is based on the 1,298,300 shares of our common stock outstanding as of December 31, 2013, and gives effect to the conversion of all outstanding shares of our preferred stock into 9,919,821 shares of common stock that will become effective upon the closing of this offering.

The number of shares of our common stock to be outstanding after this offering excludes:

 

Ø  

70,796 shares of our common stock issuable upon the exercise of a warrant outstanding as of December 31, 2013, at an exercise price of $14.13 per share;

 

Ø  

1,952,578 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2013, at a weighted average exercise price of $3.14 per share;

 

Ø  

168,584 shares of our common stock available for future issuance under our equity compensation plans as of December 31, 2013; and

 

Ø  

an additional 1,946,175 shares of our common stock that become available for future issuance under our 2014 Stock Incentive Plan, or the 2014 Plan, in connection with this offering.

 

 

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Except as otherwise noted, all information in this prospectus:

 

Ø  

gives effect to a 1-for-5.65 reverse split of our common stock effected on January 29, 2014

 

Ø  

assumes no exercise of the outstanding options or warrant described above;

 

Ø  

assumes no exercise by the underwriters of their over-allotment option to purchase up to 750,000 additional shares of common stock from us;

 

Ø  

gives effect to the automatic conversion of all outstanding shares of our preferred stock into 9,919,821 shares of our common stock upon the closing of this offering; and

 

Ø  

gives effect to the restatement of our certificate of incorporation and bylaws upon the closing of this offering.

Certain of our existing principal stockholders and their affiliated entities, as well as Celgene, one of our collaborators, have indicated an interest in purchasing an aggregate of up to $14.0 million of shares of common stock in this offering at the initial public offering price. Assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, these potential purchasers would purchase an aggregate of up to approximately 1,076,923 of the 5,000,000 shares in this offering based on these indications of interest. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering.

 

 

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Summary consolidated financial data

The following table summarizes our consolidated financial data. We have derived the following summary of our statements of operations data for the years ended December 31, 2011 and 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. The statements of operations data for the nine months ended September 30, 2012 and 2013 and the balance sheet data as of September 30, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present our financial position as of September 30, 2013 and results of operations for the nine months ended September 30, 2012 and 2013. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes to those statements, as well as “Management’s discussion and analysis of financial condition and results of operations,” appearing elsewhere in this prospectus.

 

     Year ended December 31,     Nine months ended September 30,  
Consolidated statements of operations data:                2011                 2012                 2012                 2013  
                 (unaudited)  
     (in thousands, except per share data)  

Revenue:

        

License and research and development revenue

   $ 13,967      $ 11,349      $ 11,126      $ 21,995   

Milestone revenue

     5,500        1,500        1,500        2,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     19,467        12,849        12,626        23,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     23,436        24,193        18,384        16,460   

General and administrative

     7,377        7,266        5,620        6,366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,813        31,459        24,004        22,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,346     (18,610     (11,378     1,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     44        22        17        17   

Interest and other expense

     (18     (1,856     (1,324     (1,327
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (20,444   $ (12,685   $ (141
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion on redeemable convertible preferred stock

     (1,069     (388     (290     (296
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders—basic and diluted

   $ (12,389   $ (20,832   $ (12,975   $ (437
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders—basic and diluted (1)

   $ (9.66   $ (16.15   $ (10.06   $ (0.34
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders—basic (1)

     1,283        1,290        1,290        1,291   

Weighted-average number of common shares used in net loss per share applicable to common stockholders—diluted (1)

     1,283        1,290        1,290        1,291   

Pro forma net loss per share applicable to common stockholders (1)(2) :

        

Basic:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Diluted:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Pro forma weighted average number of common shares outstanding (1)(2) :

        

Basic:

       11,210          11,211   

Diluted:

       11,210          11,211   

Footnotes on the following page

 

 

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     As of September 30, 2013  
Consolidated balance sheet data:    Actual     Pro forma (2)      Pro forma
As  adjusted (3)(4)
 
    

(unaudited)

(in thousands)

 

Cash and cash equivalents

   $ 18,612 (5)     $     18,612       $ 75,962   

Investments, available for sale

     23,961 (5)       23,961         23,961   

Working capital

     27,050        27,050         84,400   

Total assets

     48,969        48,969         106,319   

Current liabilities

     15,851        15,851         15,851   

Long-term liabilities

     27,282        26,793         26,793   

Redeemable convertible preferred stock

     112,144                  

Total stockholders’ (deficit) equity

   $ (106,308   $ 6,325       $ 63,675   

 

(1)   See Notes 2 and 15 within the notes to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share applicable to common stockholders and pro forma basic and diluted net loss per share applicable to common stockholders.

 

(2)   Pro forma to reflect the automatic conversion of all outstanding shares of our preferred stock into 9,919,821 shares of common stock, and the conversion of our outstanding warrant to purchase 400,000 shares of preferred stock into a warrant to purchase 70,796 shares of common stock, upon the closing of this offering.

 

(3)   Pro forma as adjusted to further reflect the sale of 5,000,000 shares of our common stock offered in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(4)   A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total stockholders’ (deficit) equity by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(5)   We are currently finalizing our financial results for the fiscal year ended December 31, 2013. While complete financial information and operating data are not available, based on information currently available, we estimate that as of December 31, 2013 we had approximately $9.6 million of cash and cash equivalents and $23.0 million of investments, available for sale. These preliminary estimates have been prepared by, and are the responsibility of, our management. Our independent registered public accounting firm, Ernst & Young LLP, has not audited or reviewed, and does not express an opinion with respect to, these estimates. Our actual cash and cash equivalents and investments, available for sale as of December 31, 2013 may differ from these estimates due to the completion of our closing procedures with respect to the fiscal year ended December 31, 2013, final adjustments and other developments that may arise between now and the time the financial results for the fiscal year are finalized. We expect to complete our closing procedures with respect to the fiscal year ended December 31, 2013 after this offering is consummated. Accordingly, our consolidated financial statements as of and for the fiscal year ended December 31, 2013 will not be available until after this offering is completed.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have incurred significant losses since inception, expect to incur losses for at least the next several years and may never sustain profitability.

We have incurred significant annual net operating losses in every year since our inception and expect to incur a net operating loss in 2013. Our net loss was $11.3 million for the year ended December 31, 2011 and $20.4 million for the year ended December 31, 2012. As of September 30, 2013, we had an accumulated deficit of $107.7 million. We have not generated any revenues from product sales and have financed our operations to date primarily through private placements of our preferred stock, debt financings and funding from collaborations. We have not completed development of any product candidate and have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical development programs. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity (deficit) and working capital.

We anticipate that our expenses will increase substantially if and as we:

 

Ø  

continue to develop and conduct clinical trials with respect to CTP-354;

 

Ø  

initiate and continue research, preclinical and clinical development efforts for our other product candidates and potential product candidates;

 

Ø  

seek to identify additional product candidates;

 

Ø  

seek marketing approvals for our product candidates that successfully complete clinical trials;

 

Ø  

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval;

 

Ø  

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

Ø  

maintain, expand and protect our intellectual property portfolio;

 

Ø  

hire additional personnel, such as clinical, quality control and scientific personnel;

 

Ø  

add operational, financial and management information systems and personnel, including personnel to support our product development and personnel and infrastructure necessary to help us comply with our obligations as a public company; and

 

Ø  

add equipment and physical infrastructure to support our research and development.

Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we are, or one of our collaborators is, able to obtain marketing approval for, and successfully commercialize, one or more of our product candidates. This will

 

 

 

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Risk factors

 

 

require success in a range of challenging activities, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or our collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. We, and our collaborators, may never succeed in these activities and, even if we do, or one of our collaborators does, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for our future viability.

We began operations in the second quarter of 2006. Our operations to date have been limited to financing and staffing our company, developing our technology and product candidates and establishing collaborations. We have not yet demonstrated an ability to successfully conduct a multi-center international clinical trial, conduct a large-scale pivotal clinical trial, obtain marketing approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of one of our collaborators. In particular, the costs that we may be required to incur for the manufacture of any product candidate that receives marketing approval may be substantial. To our knowledge, no deuterated drug has ever been successfully commercialized. Manufacturing a deuterated drug at commercial scale may require expensive and specialized facilities, processes and materials. Furthermore, upon the closing of this offering, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We plan to use the net proceeds of this offering primarily to fund our ongoing research and development efforts. We will be required to expend significant funds in order to advance the development of CTP-354 and our other product candidates. In addition, while may seek one or more collaborators for future development of CTP-499 and expect that we would conduct any large Phase 3 clinical trial of CTP-499 in type 2 diabetic kidney disease in collaboration with one or more partners that would pay most of the associated costs, we may not be able to enter into a collaboration for CTP-499 on suitable terms or at all. In any event, the net proceeds of this offering and our existing cash and cash equivalents and

 

 

 

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Risk factors

 

 

short-term investments will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our ability to obtain debt financing may be limited by covenants we have made under our loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules, and our pledge to Hercules of substantially all of our assets, other than our intellectual property, as collateral. The negative pledge in favor of Hercules with respect to our intellectual property under the loan and security agreement could further limit our ability to obtain additional debt financing. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and investments as of September 30, 2013, will enable us to fund our operating expenses, debt service and capital expenditure requirements for at least the next 24 months, without giving effect to potential milestone payments that we may receive under existing collaboration agreements. This estimate assumes we either enter into a collaboration agreement pursuant to which a partner funds further development of CTP-499 or we do not otherwise expend significant funds for further development of this product candidate. Our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents and investments, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

Ø  

the progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, our product candidates and potential product candidates, including current and future clinical trials;

 

Ø  

our ability to identify a collaborator for CTP-499 and the terms and timing of any collaboration agreement that we may establish for the development and commercialization of CTP-499;

 

Ø  

our current collaboration agreements remaining in effect and achievement of milestones under these agreements;

 

Ø  

our ability to enter into and the terms and timing of any additional collaborations, licensing or other arrangements that we may establish;

 

Ø  

the number of product candidates that we pursue and their development requirements;

 

Ø  

the outcome, timing and costs of seeking regulatory approvals;

 

Ø  

the costs of commercialization activities for any of our product candidates that receive marketing approval, to the extent such costs are not the responsibility of one of our collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

Ø  

subject to receipt of marketing approval, revenue, if any, received from commercial sales of our product candidates;

 

Ø  

our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;

 

Ø  

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

Ø  

the costs of operating as a public company.

 

 

 

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Risk factors

 

 

Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings and additional collaborations and licensing arrangements. We do not have any committed external source of funds, other than potential milestone payments and royalties under our collaborations with Celgene, Avanir and Jazz Pharmaceuticals, each of which is subject to the achievement of development, regulatory or sales-based milestones with respect to our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, your ownership interest may be materially diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a common stockholder. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. For example, our debt facility with Hercules contains restrictive covenants that, among other things and subject to certain exceptions, prohibit us from transferring any of our material assets, merging with or acquiring another entity, entering into a transaction that would result in a change of control, incurring additional indebtedness, creating any lien on our property, making investments in third parties or redeeming stock or paying dividends. Future debt securities or other financing arrangements could contain similar or more restrictive negative covenants. In addition, securing additional financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.

If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our existing and any future indebtedness could adversely affect our ability to operate our business.

As of September 30, 2013, we had $17.0 million of outstanding borrowings under our loan and security agreement with Hercules, which we are required to repay in monthly installments through October 2015. We do not intend to use the net proceeds of this offering to prepay any of these borrowings. We could in the future incur additional indebtedness beyond our borrowings from Hercules.

Our outstanding indebtedness combined with our other financial obligations and contractual commitments, including any additional indebtedness beyond our borrowings from Hercules, could have significant adverse consequences, including:

 

Ø  

requiring us to dedicate a portion of our cash resources to the payment of interest and principal, reducing money available to fund working capital, capital expenditures, product development and other general corporate purposes;

 

Ø  

increasing our vulnerability to adverse changes in general economic, industry and market conditions;

 

Ø  

subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;

 

 

 

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Risk factors

 

 

 

Ø  

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and

 

Ø  

placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

In addition, although the rate of interest that we are required to pay under the loan and security agreement is capped, our indebtedness under the loan and security agreement bears interest at a variable rate below that cap, making us vulnerable to increases in the market rate of interest. If the market rate of interest increases substantially, we will have to pay additional interest on this indebtedness, which would reduce cash available for our other business needs.

We intend to satisfy our current and future debt service obligations with our existing cash and cash equivalents and investments and funds from external sources. However, we may not have sufficient funds, and may be unable to arrange for additional financing, to pay the amounts due under our existing debt instruments. Failure to make payments or comply with other covenants under our existing debt instruments could result in an event of default and acceleration of amounts due. Under our loan and security agreement with Hercules, the occurrence of an event that would reasonably be expected to have a material adverse effect on our business, operations, assets or condition is an event of default. If an event of default occurs and the lender accelerates the amounts due, we may not be able to make accelerated payments, and the lender could seek to enforce security interests in the collateral securing such indebtedness, which includes substantially all of our assets other than our intellectual property. In addition, the covenants under our existing debt instruments, the pledge of our assets as collateral and the negative pledge with respect to our intellectual property could limit our ability to obtain additional debt financing.

RISKS RELATED TO THE DISCOVERY, DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES

Our approach to the discovery and development of product candidates based on selective deuteration is unproven, and we do not know whether we will be able to develop any products of commercial value.

We are focused on discovering and developing novel small molecule drugs that have improved metabolic or pharmacokinetic characteristics as a result of our selective substitution of deuterium for hydrogen. We apply our proprietary platform to systematically identify approved drugs, advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. To our knowledge, no deuterated drug has ever been approved for sale in the United States. While we believe that selective deuteration can produce compounds that possess favorable pharmaceutical properties, and preclinical studies and early-stage clinical trials have indicated that certain of our product candidates may possess these properties, we have not yet succeeded and may not succeed in demonstrating efficacy and safety for any of our product candidates in later stage clinical trials or in obtaining marketing approval thereafter. For example, although we have discovered and evaluated numerous deuterated compounds, we have not yet advanced a compound beyond Phase 2 clinical development. Moreover, the only compound that we have advanced into Phase 2 clinical development, CTP-499 for the potential treatment of type 2 diabetic kidney disease in patients with high levels of the blood protein albumin in the urine, or macroalbuminuria, failed to achieve statistical significance in the primary and some secondary efficacy endpoints for its Phase 2 clinical trial.

 

 

 

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Risk factors

 

 

We are particularly dependent on the success of our product candidate, CTP-354, and our ability to develop, obtain marketing approval for and successfully commercialize CTP-354. CTP-354 is currently subject to a partial clinical hold that prevents us from administering doses in excess of 60 mg per day in single dose clinical trials and 6 mg per day in multiple dose clinical trials without an additional preclinical study. If we are unable to develop, obtain marketing approval for or successfully commercialize CTP-354, either alone or through a collaboration, or experience significant delays in doing so, our business could be materially harmed.

We currently have no products approved for sale and are investing a significant portion of our efforts and financial resources in the development of CTP-354 for the treatment of spasticity. Our prospects are substantially dependent on our ability, or that of any future partner, to develop, obtain marketing approval for and successfully commercialize CTP-354.

In November 2013, we received notice from the FDA of a partial clinical hold on CTP-354 that prevents us from administering single doses in excess of 60 mg per day and multiple doses in excess of 6 mg per day and the FDA subsequently informed us that we may not administer multiple doses of CTP-354 in excess of 6 mg per day in clinical trials without first conducting an additional higher dose preclinical study. We do not intend to conduct single dose clinical trials of CTP-354 with doses in excess of 60 mg. While we believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity, we intend to conduct the additional preclinical toxicology study to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications. If we are required to perform additional preclinical studies to support the lifting of the partial clinical hold, it will increase our expected development costs and could delay the clinical development of CTP-354. If we are delayed in addressing, or unable to address, the FDA’s concerns, we could be delayed, or prevented, from studying higher doses of CTP-354, which higher doses may be necessary to show efficacy. If these higher doses are necessary to show efficacy, we could be delayed or prevented from obtaining marketing approval of CTP-354.

The success of CTP-354 will depend on several factors, including the following:

 

Ø  

successful completion of clinical trials, which could require lifting of the partial clinical hold on CTP-354 or agreement by the FDA that the dosing protocols necessary to support successful completion of clinical trials are not subject to the partial clinical hold;

 

Ø  

receipt of marketing approvals from applicable regulatory authorities;

 

Ø  

our ability to develop a solid dose formulation of CTP-354;

 

Ø  

the performance of our future collaborators for CTP-354, if any;

 

Ø  

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

 

Ø  

establishment of supply arrangements with third party raw materials suppliers and manufacturers;

 

Ø  

establishment of arrangements with third party manufacturers to obtain finished drug products that are appropriately packaged for sale;

 

Ø  

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

Ø  

protection of our rights in our intellectual property portfolio;

 

Ø  

launch of commercial sales if and when approved;

 

 

 

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Risk factors

 

 

 

Ø  

a continued acceptable safety profile of CTP-354 following any marketing approval;

 

Ø  

commercial acceptance, if and when approved, by patients, the medical community and third party payors; and

 

Ø  

competition with other therapies, including baclofen, tizanidine, benzodiazepines and injected botulinum toxin.

If we are unable to develop, receive marketing approval for, or successfully commercialize CTP-354, or experience delays as a result of any of these factors or otherwise, our business could be materially harmed.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome.

Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of drug development, including failure to demonstrate efficacy in a clinical trial or across a broad population of patients, the occurrence of severe or medically or commercially unacceptable adverse events, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a drug product is not approvable. It is possible that even if one or more of our product candidates has a beneficial effect, that effect will not be detected during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any. Similarly, in our clinical trials we may fail to detect toxicity of or intolerability caused by our product candidates, or mistakenly believe that our product candidates are toxic or not well tolerated when that is not in fact the case.

While we believe that our DCE Platform may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development, we may not be able to realize the advantages that we expect. In addition, while a key element of our drug discovery and development strategy involves utilizing existing information regarding non-deuterated compounds to assist the discovery and development of deuterated analogs of those compounds, not all of the product candidates that we develop are based on drugs or drug candidates that progressed into advanced clinical development. Particularly in these situations, existing information regarding the corresponding non-deuterated compound may not be sufficient to mitigate drug development risks. For example, we have pursued clinical development of CTP-499 for the potential treatment of type 2 diabetic kidney disease in patients with macroalbuminuria. CTP-499 is a deuterated analog of a metabolite of a drug that was not approved for this indication. CTP-499 failed to achieve statistical significance in the primary efficacy endpoint for a Phase 2 clinical trial that we are currently completing. CTP-354 is subject to development risks normally inherent in clinical development because no corresponding non-deuterated compound has been clinically evaluated. While Merck & Co. reported that the non-deuterated analog of CTP-354 activated the a 2, a 3 and a 5 GABA A receptors, which are associated with anti-spasticity, muscle relaxation, anti-anxiety, anti-seizure and, potentially, anti-pain activities, with approximately 40% of the in vitro activity of a benzodiazepine, we do not know if the pharmacological profile of CTP-354 will be clinically effective for treating spasticity at doses of CTP-354 that are well tolerated.

In addition to the risk of failure inherent in drug development, certain of the deuterated compounds that we, and our collaborators, are developing and may develop in the future may be particularly susceptible to failure to the extent they are based on compounds that others have previously studied or tested, but did not progress in development due to safety, tolerability or efficacy concerns or otherwise. Deuteration of these compounds may not be sufficient to overcome the problems experienced with the corresponding non-deuterated compound.

 

 

 

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The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial, such as the results of our preliminary analyses of data from our Phase 2 clinical trial of CTP-499 that are presented in this prospectus, do not necessarily predict final results. For example, although Phase 1 clinical trials of CTP-499 supported advancement into Phase 2 clinical trials, CTP-499 failed to achieve statistical significance in the primary efficacy endpoint for the Phase 2 clinical trial we are currently completing. In addition, we believe that the incidence of large declines in kidney function, measured as decreases in eGFR or increases in serum creatinine in drug-treated versus placebo-treated patients, could become the primary efficacy endpoint required by the FDA for Phase 3 clinical development of a drug candidate for the treatment of type 2 diabetic kidney disease. While incidence of large declines in eGFR was a secondary endpoint of our ongoing Phase 2 clinical trial, preliminary analyses of our current data from the trial indicate that we have not achieved a statistically significant result in this endpoint. Even if our Phase 2 clinical trial of CTP-499 ultimately demonstrates positive results with respect to this metric as a secondary endpoint, any such results may not be indicative of the results that we may achieve in Phase 3 clinical trials. Furthermore, the FDA has not yet approved incidence of large declines in eGFR as an acceptable endpoint for a Phase 3 clinical trial for the treatment of type 2 diabetic kidney disease. If the endpoints approved by the FDA for Phase 3 clinical trials in this indication differ from the endpoints of the clinical trials we have conducted of CTP-499, we may need to conduct additional clinical trials of CTP-499 to support entry into Phase 3 clinical evaluation.

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we cannot be certain that we will not face similar setbacks. The design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. For example, while we have conducted Phase 1 clinical trials to evaluate the safety and tolerability of single doses of CTP-354, we have not yet evaluated the safety or efficacy of CTP-354 administered in multiple doses or in the intended patient population, each of which will be required for FDA approval, and the FDA has placed a partial clinical hold on CTP-354 that prevents us from administering doses in excess of 60 mg per day in single dose clinical trials and 6 mg per day in multiple dose clinical trials. Any Phase 2, Phase 3 or other clinical trials that we, or our collaborators, may conduct may not demonstrate the efficacy and safety necessary to obtain regulatory approval to market our product candidates.

If clinical trials of our product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA and other regulators, we, or our collaborators, may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of these product candidates.

We, and our collaborators, are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Comparable foreign

 

 

 

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regulatory authorities, such as the European Medicines Agency, or EMA, impose similar restrictions. We, and our collaborators, may never receive such approvals. We, and our collaborators, must complete extensive preclinical development and clinical trials to demonstrate the safety and efficacy of our product candidates in humans before we, or they, will be able to obtain these approvals. For example, as described above, the FDA has placed a partial clinical hold on CTP-354 that prevents us from administering doses in excess of 60 mg per day in single dose clinical trials and 6 mg per day in multiple dose clinical trials. If we are delayed in addressing, or unable to address, the FDA’s concerns, we could be delayed, or prevented, from studying higher doses of CTP-354, which higher doses may be necessary to show efficacy. If these higher doses are necessary to show efficacy, we could be delayed or prevented from obtaining marketing approval of CTP-354.

Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We, and our collaborators, have not previously submitted an NDA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates.

Any inability to successfully complete preclinical and clinical development could result in additional costs to us, or our collaborators, and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. In addition, if (1) we, or our collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we, or they contemplate, (2) we, or our collaborators, are unable to successfully complete clinical trials of our product candidates or other testing, (3) the results of these trials or tests are unfavorable, uncertain or are only modestly favorable, or (4) there are unacceptable safety concerns associated with our product candidates, we, or our collaborators, in addition to incurring additional costs, may:

 

Ø  

be delayed in obtaining marketing approval for our product candidates;

 

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not obtain marketing approval at all;

 

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obtain approval for indications or patient populations that are not as broad as intended or desired;

 

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obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings, including boxed warnings;

 

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be subject to additional post-marketing testing or other requirements; or

 

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be required to remove the product from the market after obtaining marketing approval.

If we, or our collaborators, experience any of a number of possible unforeseen events in connection with clinical trials of our product candidates, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

We, or our collaborators, may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent marketing approval of our product candidates, including:

 

Ø  

clinical trials of our product candidates may produce unfavorable or inconclusive results, such as with our Phase 2 clinical trial for CTP-499;

 

Ø  

we, or our collaborators, may decide, or regulators may require us or them, to conduct additional clinical trials or abandon product development programs;

 

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the number of patients required for clinical trials of our product candidates may be larger than we, or our collaborators, anticipate, patient enrollment in these clinical trials may be slower than we, or our

 

 

 

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collaborators, anticipate or participants may drop out of these clinical trials at a higher rate than we, or our collaborators, anticipate;

 

Ø  

our third party contractors or those of our collaborators, including those manufacturing our product candidates or components or ingredients thereof or conducting clinical trials on our behalf or on behalf of our collaborators, may fail to comply with regulatory requirements or meet their contractual obligations to us or our collaborators in a timely manner or at all;

 

Ø  

regulators or institutional review boards may not authorize us, our collaborators or our or their investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

Ø  

we, or our collaborators, may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

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patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size for the clinical trial or extend the clinical trial’s duration;

 

Ø  

we, or our collaborators, may have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate;

 

Ø  

regulators or institutional review boards may require that we, or our collaborators, or our or their investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar drug or drug candidate;

 

Ø  

the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ clinical trial design or our or their interpretation of data from preclinical studies and clinical trials;

 

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the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the manufacturing processes or facilities of third party manufacturers with which we, or our collaborators, enter into agreements for clinical and commercial supplies;

 

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the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and

 

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the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient to obtain marketing approval.

Product development costs for us, or our collaborators, will increase if we, or they, experience delays in testing or pursuing marketing approvals and we, or they, may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization of our product candidates. We, and our collaborators, do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we, or our collaborators, may have the exclusive right to commercialize our product candidates or allow our competitors, or the competitors of our collaborators, to bring products to market before we, or our collaborators, do and impair our ability, or the ability of our collaborators, to successfully commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that cause, or lead to, clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.

 

 

 

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If we, or our collaborators, experience delays or difficulties in the enrollment of patients in clinical trials, our, or their, receipt of necessary regulatory approvals could be delayed or prevented.

We, or our collaborators, may not be able to initiate or continue clinical trials for CTP-354 or any of our other product candidates if we, or they, are unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials as required by the FDA or comparable foreign regulatory authorities, such as the EMA. Patient enrollment is a significant factor in the timing of clinical trials, and is affected by many factors, including:

 

Ø  

the size and nature of the patient population;

 

Ø  

the severity of the disease under investigation;

 

Ø  

the proximity of patients to clinical sites;

 

Ø  

the eligibility criteria for the trial;

 

Ø  

the design of the clinical trial;

 

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efforts to facilitate timely enrollment;

 

Ø  

competing clinical trials; and

 

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clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.

Our inability, or the inability of our collaborators, to enroll a sufficient number of patients for our, or their, clinical trials could result in significant delays or may require us or them to abandon one or more clinical trials altogether. Enrollment delays in our, or their, clinical trials may result in increased development costs for our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our, or our collaborators’, ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline and limit our ability to obtain additional financing, if needed.

We believe we, or our collaborators, may in some instances be able to secure clearances from the FDA or comparable foreign regulatory authorities to use expedited development pathways. If unable to obtain such clearances, we, or they, may be required to conduct additional preclinical studies or clinical trials beyond those that we, or they, contemplate, which could increase the expense of obtaining, and delay the receipt of, necessary marketing approvals.

The deuterated compounds that we produce and seek to develop can have similar pharmacological properties as their corresponding non-deuterated compounds. Therefore, we believe that we, or our collaborators, may, in some instances, be able to obtain clearance from the FDA or comparable foreign regulatory authorities to follow expedited development programs for some deuterated compounds that reference and rely on findings previously obtained from prior preclinical studies or clinical trials of the corresponding non-deuterated compounds. For example, our collaborator Avanir reported in June 2013 that the FDA has agreed to an expedited development pathway for AVP-786, a product candidate Avanir is developing that includes our licensed deuterated dextromethorphan compound, permitting Avanir to reference data from its development of dextromethorphan and quinidine in its IND, and any future NDA, for AVP-786.

While we anticipate that following an expedited development pathway may be possible for some of our current and future product candidates, we cannot be certain that we, or our collaborators, will be able to

 

 

 

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secure clearance to follow such expedited development pathways from the FDA or comparable foreign regulatory authorities. In addition, if we follow, or one of our collaborators follows, such an expedited regulatory pathway and the FDA or comparable foreign regulatory authorities are not satisfied with the results of our having done so, such as might be the case if a deuterated compound is found to have undesirable side effects or other undesirable properties that were not anticipated based on the corresponding non-deuterated compound, the FDA or foreign regulatory authorities may be unwilling to grant clearance to follow expedited development pathways for other deuterated compounds.

Consequently, we, or our collaborators, may be required to pursue full development programs with respect to any product candidates that we, or they, previously anticipated would be able to follow an expedited development pathway, including conducting a full range of preclinical and clinical studies to attempt to establish the safety and efficacy of these product candidates. A need to conduct a full range of development activities would significantly increase the costs of development and length of time required before we, or our collaborators, could seek marketing approval of such a product candidate as compared to the costs and timing that we or they anticipate. While we have been able to reference, for purposes of some of our IND-enabling studies, data generated during development of the corresponding non-deuterated compound, we have not ourselves obtained clearance from the FDA or any comparable foreign regulatory authority to reference such data in connection with more advanced stages of development.

Serious adverse events or undesirable side effects or other unexpected properties of CTP-354 or any of our other product candidates, including those that we have licensed to collaborators, may be identified during development that could delay or prevent the product candidate’s marketing approval.

Serious adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, one of our collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. A dose of a deuterated compound could, in comparison to an equal dose of the corresponding non-deuterated compound, result in increased exposure levels, distribution and half-life in the body and alter the levels of particular metabolites that are present in the body. These changes may cause serious adverse events or undesirable side effects that we or our collaborators did not anticipate, whether based on the characteristics of the corresponding non-deuterated compound or otherwise. If any of our other product candidates is associated with serious adverse events or undesirable side effects or have properties that are unexpected, we, or our collaborators, may need to abandon development or limit development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.

For CTP-354, we are seeking to achieve GABA A receptor occupancy levels that are well above those attained by other GABA A modulators, such as benzodiazepines, and we do not know what adverse effects may be associated with such high GABA A receptor occupancy. In our clinical trials of CTP-354, moderate adverse events have been reported including dizziness, drowsiness and nausea at single doses. Additional or more serious adverse events, undesirable side effects or other unexpected properties of CTP-354 or any of our other product candidates could arise or become known either during further clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, clinical trials for our product candidates could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us or our collaborators to cease further development, require us to conduct additional clinical trials or other tests or studies or deny approval of the applicable product candidate.

 

 

 

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Even if one of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third party payors and others in the medical community necessary for commercial success and the market opportunity for the product candidate may be smaller than we estimate.

We have never commercialized a product. Even if CTP-354 or any of our other product candidates, including those licensed to our collaborators, is approved by the appropriate regulatory authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. For example, physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

Efforts to educate the medical community and third party payors on the benefits of our product candidates may require significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of CTP-354 or any of our other product candidates, including those licensed to our collaborators, if approved for commercial sale, will depend on a number of factors, including:

 

Ø  

the efficacy and safety of the product;

 

Ø  

the potential advantages of the product compared to alternative treatments;

 

Ø  

the prevalence and severity of any side effects;

 

Ø  

the clinical indications for which the product is approved;

 

Ø  

whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;

 

Ø  

limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;

 

Ø  

our ability, or the ability of our collaborators, to offer the product for sale at competitive prices;

 

Ø  

the product’s convenience and ease of administration compared to alternative treatments;

 

Ø  

the willingness of the target patient population to try, and of physicians to prescribe, the product;

 

Ø  

the strength of sales, marketing and distribution support;

 

Ø  

the approval of other new products for the same indications;

 

Ø  

changes in the standard of care for the targeted indications for the product;

 

Ø  

the timing of market introduction of our approved products as well as competitive products;

 

Ø  

availability and amount of reimbursement from government payors, managed care plans and other third party payors;

 

Ø  

adverse publicity about the product or favorable publicity about competitive products; and

 

Ø  

potential product liability claims.

The potential market opportunities for our product candidates are difficult to precisely estimate. Our estimates of the potential market opportunities are predicated on many assumptions including industry knowledge and publications, third party research reports and other surveys. While we believe that our

 

 

 

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internal assumptions are reasonable, these assumptions involve the exercise of significant judgment on the part of our management, are inherently uncertain and the reasonableness of these assumptions has not been assessed by an independent source. If any of the assumptions proves to be inaccurate, the actual markets for our product candidates could be smaller than our estimates of the potential market opportunities.

If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability to market the drug, or that of our collaborators, could be compromised.

Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following adverse events could occur:

 

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

 

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

 

Ø  

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

 

Ø  

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

 

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

 

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we, or our collaborators, may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for distribution to patients;

 

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we, or our collaborators, could be sued and held liable for harm caused to patients;

 

Ø  

the drug may become less competitive; and

 

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our reputation may suffer.

Any of these events could have a material and adverse effect on our operations and business and could adversely impact our stock price.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution arrangements with third parties, we may not be successful in commercializing any product candidates that we develop if and when those product candidates are approved.

We do not have a sales, marketing or distribution infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. We plan to use a combination of third party collaboration, licensing and distribution arrangements and a focused in-house commercialization capability to sell any products that receive marketing approval.

We generally plan to seek to retain full commercialization rights for the United States for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights for the

 

 

 

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United States when feasible in indications requiring a larger commercial infrastructure. The development of sales, marketing and distribution capabilities will require substantial resources, will be time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could have prematurely or unnecessarily incurred these commercialization costs. This may be costly, and our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to hire or retain a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we plan to target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and commercialize the product independently.

We plan to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We also plan to commercialize our product candidates outside the United States through collaboration, licensing and distribution arrangements with third parties. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues may be lower, perhaps substantially lower, than if we were to directly market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.

If we do not establish sales and marketing capabilities, either on our own or in collaboration with third parties, we will not be successful in commercializing any of our product candidates that receive marketing approval.

We face substantial competition from other pharmaceutical and biotechnology companies and our operating results may suffer if we fail to compete effectively.

The development and commercialization of new drug products is highly competitive. We expect that we, and our collaborators, will face significant competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to CTP-354 and any other of our product candidates that we, or they, may seek to develop or commercialize in the future. Specifically, there are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of the key indications of our priority programs, including spasticity, neurologic disorders, cancer and inflammation. Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, have fewer or more tolerable side effects or are less costly than any product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.

We are initially developing CTP-354 for the treatment of spasticity in multiple sclerosis and spinal cord injury. Current first-line treatment for spasticity includes oral and local agents and physical and occupational therapy. Four oral drugs have been approved in the United States for the treatment of spasticity: baclofen (Lioresal ® ), tizanidine (Zanaflex ® ), diazepam (Valium) and dantrolene (Dantrium ® ), each of which is available on a generic basis. Spasticity is also treated through localized injections of botulinum toxin. In addition, there are several potentially competitive product candidates in Phase 3 clinical development being pursued by pharmaceutical and biotechnology companies, including GW Pharmaceuticals plc and Osmotica Pharmaceuticals Corp.

 

 

 

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We are developing CTP-499 for the treatment of type 2 diabetic kidney disease in patients with macroalbuminuria. The current standard of care in this indication is angiotensin modulation, which is treatment with an angiotensin converting enzyme inhibitor, which we refer to as an ACEi, or an angiotensin receptor blocker, which we refer to as an ARB. Both of these types of drugs are available on a generic basis. We are developing CTP-499 for administration in combination with these drugs. These drugs are well established therapies that are widely accepted by physicians, patients and third party payors. Physicians, patients and third party payors may not accept the addition of CTP-499 to their current treatment regimens for a variety of potential reasons, including a desire not to incur the additional cost of CTP-499 or a perception that the addition of CTP-499 would be poorly tolerated or of limited benefit. If CTP-499 receives marketing approval, it may also face competition from a number of product candidates that are currently in clinical development including one potentially competitive product candidate in Phase 3 clinical development being pursued by AbbVie Inc.

Avanir has reported that it plans to develop AVP-786 for the treatment of neurologic and psychiatric disorders. There are a number of marketed drugs and product candidates in clinical development for these indications.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we, or our collaborators, may develop. Our competitors also may obtain FDA or other marketing approval for their products before we, or our collaborators, are able to obtain approval for ours, which could result in our competitors establishing a strong market position before we, or our collaborators, are able to enter the market.

Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

We also face competition in the development of deuterated compounds.

Several large pharmaceutical and biotechnology companies have begun to cover deuterated analogs of their product candidates in patent applications and may choose to develop these deuterated compounds. These large pharmaceutical and biotechnology companies may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining marketing approvals and marketing approved products than we do. In addition, we know of one biotechnology company, Auspex Pharmaceuticals, Inc., and possibly two others, DeutRx LLC and Berolina innovative Research and Development Services Pharma GmbH, that are developing product candidates based on deuterium substitution. These competitors may be more successful than us in developing deuterated compounds. In addition, these competitors may enter into collaborative arrangements or business combinations that result in their ability to research and develop deuterated compounds more effectively than us. Our potential competitors also include academic institutions, government agencies and other public and private research organizations.

If our competitors in the development of deuterated compounds are able to grow their intellectual property estates and create new and successful deuterated compounds more effectively than us, our ability to identify additional compounds for preclinical and clinical development and obtain product

 

 

 

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revenues in future periods could be compromised, which could result in significant harm to our operations and financial position.

If the FDA or comparable foreign regulatory authorities approve generic versions of any of our products that receive marketing approval, or such authorities do not grant our products appropriate periods of data exclusivity before approving generic versions of our products, the sales of our products could be adversely affected.

Once an NDA is approved, the product covered thereby becomes a “reference listed drug” in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations.” Manufacturers may seek approval of generic versions of reference listed drugs through submission of abbreviated new drug applications, or ANDAs, in the United States. In support of an ANDA, a generic manufacturer need not conduct clinical studies. Rather, the applicant generally must show that its product has the same active ingredient(s), dosage form, strength, route of administration and conditions of use or labeling as the reference listed drug and that the generic version is bioequivalent to the reference listed drug, meaning it is absorbed in the body at the same rate and to the same extent. Generic products may be significantly less costly to bring to market than the reference listed drug and companies that produce generic products are generally able to offer them at lower prices. Thus, following the introduction of a generic drug, a significant percentage of the sales of any branded product or reference listed drug may be typically lost to the generic product.

The FDA may not approve an ANDA for a generic product until any applicable period of non-patent exclusivity for the reference listed drug has expired. The Federal Food, Drug, and Cosmetic Act, or FDCA, provides a period of five years of non-patent exclusivity for a new drug containing a new chemical entity. Specifically, in cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification that a patent covering the reference listed drug is either invalid or will not be infringed by the generic product, in which case the applicant may submit its application four years following approval of the reference listed drug. While we believe that our product candidates contain active ingredients that would be treated as new chemical entities by the FDA and, therefore, if approved, should be afforded five years of data exclusivity, the FDA may disagree with that conclusion and may approve generic products after a period that is less than five years. Manufacturers may seek to launch these generic products following the expiration of the applicable marketing exclusivity period, even if we still have patent protection for our product.

Competition that our products may face from generic versions of our products could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

To the extent we, or our collaborators, market products that are deuterated analogs of generic drugs that are approved or will be approved while we market our products, our products will likely compete against these generic products and the sales of our products could be adversely affected.

We anticipate that some of the products that we, or our collaborators, may develop will be deuterated analogs of approved drugs that are or will then be available on a generic basis. In addition, if we develop a product that is a deuterated analog of a non-generic approved drug, the FDA or comparable foreign regulatory authorities may also approve generic versions of the corresponding non-deuterated drug. If approved, we expect that our deuterated products will compete against these generic non-deuterated compounds in the same indications. Efforts to educate the medical community and third party payors on the benefits of any product that we develop as compared to the corresponding non-deuterated

 

 

 

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compound, or generic versions of it, may require significant resources and may not be successful. If physicians, rightly or wrongly, do not believe that a product that we, or our collaborators, develop offers substantial advantages over the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, or that the advantages offered by our product as compared to the corresponding non-deuterated compound, or its generic versions, are not sufficient to merit the increased price over the corresponding non-deuterated compound, or its generic versions, that we, or our collaborators, would seek, physicians might not prescribe that product. In addition, third party payors may refuse to provide reimbursement for a product that we, or our collaborators, develop when the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, offer a cheaper alternative therapy in the same indication, or may otherwise encourage use of the corresponding non-deuterated compound, or generic versions of the corresponding non-deuterated compound, over our product, even if our product possesses favorable pharmaceutical properties.

Competition that our product candidates may face from any generic non-deuterated product on which our product candidate is based or a later-approved generic version of a branded non-deuterated product on which our product is based, could materially and adversely impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on the investments we have made in those product candidates.

Even if we, or our collaborators, are able to commercialize any product candidate that we, or they, develop, the product may become subject to unfavorable pricing regulations, third party payor reimbursement practices or healthcare reform initiatives that could harm our business.

The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third party payors. If reimbursement is not available, or is available only to limited levels, we, or our collaborators, may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us, or our collaborators, to establish or maintain pricing sufficient to realize a sufficient return on our or their investments.

There is significant uncertainty related to third party payor coverage and reimbursement of newly approved drugs. Marketing approvals, pricing and reimbursement for new drug products vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we, or our collaborators, might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability or the ability of our collaborators to recoup our or their investment in one or more product candidates, even if our product candidates obtain marketing approval.

Our ability, and the ability of our collaborators, to commercialize CTP-354 or any other product candidate will depend in part on the extent to which coverage and reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will cover and establish reimbursement

 

 

 

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levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere. Government authorities and third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications, which could affect our ability or that of our collaborators to sell our product candidates profitably. These payors may not view our products, if any, as cost-effective, and coverage and reimbursement may not be available to our customers, or those of our collaborators, or may not be sufficient to allow our products, if any, to be marketed on a competitive basis. Cost-control initiatives could cause us, or our collaborators, to decrease the price we, or they, might establish for products, which could result in lower than anticipated product revenues. If the prices for our products, if any, decrease or if governmental and other third party payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.

There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Reimbursement rates may vary, by way of example, according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for lower cost drugs or may be incorporated into existing payments for other services.

In addition, increasingly, third party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new technologies and are challenging the prices charged. We, and our collaborators, cannot be sure that coverage will be available for any product candidate that we, or they, commercialize and, if available, that the reimbursement rates will be adequate. Further, the net reimbursement for drug products may be subject to additional reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and private payors for any our product candidates for which we, or our collaborators, obtain marketing approval could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

We may not be successful in our efforts to identify or discover additional potential product candidates.

A significant portion of the research that we are conducting involves the development of new deuterated compounds using our DCE Platform. The drug discovery that we are conducting using our DCE Platform may not be successful in creating compounds that have commercial value or therapeutic utility beyond the corresponding non-deuterated compound, or at all. Our research programs may initially show promise in creating potential product candidates, yet fail to yield viable product candidates for clinical development for a number of reasons, including:

 

Ø  

deuterated analogs of existing non-deuterated compounds or newly designed deuterated compounds may not demonstrate satisfactory efficacy or other benefits, such as convenience of dosing, increased tolerability, enhanced formation of desirable active metabolites or reduced formation of toxic metabolites;

 

Ø  

potential product candidates may, on further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance; or

 

Ø  

pharmaceutical companies have begun to claim deuterated analogs of their compounds in patent filings, resulting in otherwise promising deuterated product candidates already being covered by patents or patent applications.

 

 

 

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Our research programs to identify new product candidates will require substantial technical, financial and human resources. We may be unsuccessful in our efforts to identify new potential product candidates. In addition, we may focus our efforts and resources on one or more potential product candidates that ultimately prove to be unsuccessful.

If we are unable to identify suitable additional compounds for preclinical and clinical development, our ability to develop product candidates and obtain product revenues in future periods could be compromised, which could result in significant harm to our financial position and adversely impact our stock price.

Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

We face an inherent risk of product liability claims as a result of the clinical testing of our product candidates despite obtaining appropriate informed consents from our clinical trial participants. We will face an even greater risk if we or our collaborators commercially sell any product that we may or they may develop. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

 

Ø  

decreased demand for our product candidates or products that we may develop;

 

Ø  

injury to our reputation and significant negative media attention;

 

Ø  

withdrawal of clinical trial participants;

 

Ø  

significant costs to defend resulting litigation;

 

Ø  

substantial monetary awards to trial participants or patients;

 

Ø  

loss of revenue;

 

Ø  

reduced resources of our management to pursue our business strategy; and

 

Ø  

the inability to commercialize any products that we may develop.

Although we maintain general liability insurance of $2 million in the aggregate and clinical trial liability insurance of $5 million in the aggregate, this insurance may not fully cover potential liabilities that we may incur. The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. We will need to increase our insurance coverage if and when we begin selling any product candidate that receives marketing approval. In addition, insurance coverage is becoming increasingly expensive. If we are unable to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims, it could prevent or inhibit the development and commercial production and sale of our product candidates, which could adversely affect our business, financial condition, results of operations and prospects.

 

 

 

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JZP-386 is a deuterated analog of a Schedule I controlled substance and will likely be classified as a Schedule I or Schedule III controlled substance, which could substantially limit our ability to obtain the quantities of JZP-386 needed to conduct clinical trials and the ability of our collaborator to market and sell JZP-386 if it receives marketing approval. We also expect CTP-354 to be classified as a Schedule IV controlled substance, which would result in restrictions on the sale and distribution of that product if it receives marketing approval.

The placement of drugs or other substances into schedules under the Controlled Substances Act of 1970, the CSA, is based upon the substance’s medical use, potential for abuse and safety or dependence liability. Under the CSA, every person who manufactures, distributes, dispenses, imports or exports any controlled substance must register with the U.S. Drug Enforcement Agency, or DEA, unless exempt. Our product candidate JZP-386, which we have licensed to Jazz Pharmaceuticals, is a deuterium-substituted analog of sodium oxybate. Sodium oxybate is regulated as a chemical by the DEA as a Schedule I controlled substance. Because of the Schedule I classification of sodium oxybate, JZP-386 is regulated by the DEA as a Schedule I controlled substance. As a result, we will be required to obtain a license to ship the chemical that we are using as the precursor to JZP-386, which may delay or prevent the manufacturing of JZP-386 for clinical trials.

Specifically, the DEA limits the quantity of certain Schedule I controlled substances that may be produced in the United States in any year through a quota system. If our contract manufacturers for JZP-386, or those for Jazz Pharmaceuticals, manufacture JZP-386 in the United States, they will be required to obtain separate DEA quotas to supply us or Jazz Pharmaceuticals with JZP-386 for the conduct of clinical trials. Different, but potentially no less burdensome regulations, may apply if we or Jazz Pharmaceuticals choose to contract for the manufacture of JZP-386 outside of the United States.

The process of obtaining the quotas needed to conduct the planned clinical trials of JZP-386 may involve lengthy legal and other efforts and we or Jazz Pharmaceuticals, or suppliers or manufacturers for us or Jazz Pharmaceuticals, may not be able to obtain sufficient quotas from the DEA. If we or Jazz Pharmaceuticals, or suppliers or manufacturers for us or Jazz Pharmaceuticals, cannot obtain the quotas that are needed on a timely basis, or at all, we and Jazz Pharmaceuticals may not be able to conduct, on a timely basis or at all, the clinical trials of JZP-386 that are planned, including the Phase 1 clinical trial that we will be responsible for conducting, and our business, financial condition, results of operations and growth prospects could be adversely affected.

If JZP-386 is approved for marketing in the United States, we believe that the commercial drug containing JZP-386 will remain subject to the CSA as a Schedule III controlled substance. Those restrictions could limit the marketing and distribution of the commercial drug containing JZP-386. We also expect our product candidate, CTP-354, to be classified as a Schedule IV controlled substance under the CSA. Although the CSA’s restrictions governing substances in Schedule IV are not as stringent as those for substances in Schedule III, they too could limit our ability to market and sell CTP-354, if it is approved for marketing.

In addition, failure to maintain compliance with applicable requirements under the CSA, particularly as manifested in loss or diversion of regulated substances, can result in enforcement action that could include civil penalties, refusal to renew registrations or quotas, revocation of registrations or quotas or criminal proceedings, any of which could have a material adverse effect on our business, results of operations and financial condition. Individual states also regulate controlled substances, and we and Jazz Pharmaceuticals, and contract manufacturers for us and Jazz Pharmaceuticals, will be subject to state regulation on distribution of these products.

 

 

 

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RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES

We depend on collaborations with third parties for the development and commercialization of some of our product candidates and expect to continue to do so in the future. Our prospects with respect to those product candidates will depend in significant part on the success of those collaborations.

We have entered into collaborations with Celgene, Avanir and Jazz Pharmaceuticals for the development and commercialization of certain of our product candidates and expect to enter into additional collaborations in the future. We have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms.

Collaborations involving our product candidates pose a number of risks, including the following:

 

Ø  

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;

 

Ø  

collaborators may not perform their obligations as expected;

 

Ø  

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs, based on clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities such as occurred in a prior collaboration we had with Glaxo Group Limited, or GSK;

 

Ø  

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

Ø  

product candidates developed in collaboration with us, including in particular product candidates based on deuteration of a collaborator’s marketed drugs or advanced clinical candidates, may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;

 

Ø  

a collaborator with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

Ø  

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;

 

Ø  

collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;

 

Ø  

collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and

 

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collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

 

 

 

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Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of ours is involved in a business combination, it could decide to delay, diminish or terminate the development or commercialization of any product candidate licensed to it by us.

We expect to seek to establish additional collaborations, and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.

Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. We may seek one or more collaborators for the development and commercialization of one or more of our product candidates. For example, conducting pivotal Phase 3 clinical trials of CTP-499 in patients with type 2 diabetic kidney disease with macroalbuminuria will likely involve significant cost and we expect that we would conduct any large Phase 3 clinical trial of CTP-499 in type 2 diabetic kidney disease in collaboration with one or more partners. A key element of our business strategy is the development of deuterated product candidates based on approved drugs, advanced clinical candidates or previously studied compounds. Our likely collaborators for these product candidates in many cases will include the pharmaceutical companies that developed the corresponding non-deuterated compounds. In addition, likely collaborators may include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies.

We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the potential differentiation of our product candidate from its corresponding non-deuterated analog, design or results of clinical trials, the likelihood of approval by the FDA or comparable foreign regulatory authorities and the regulatory pathway for any such approval, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product to patients and the potential of competing products. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such a collaboration could be more attractive than the one with us for our product candidate.

Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. We are also restricted under the terms of certain of our existing collaboration agreements from entering into collaborations regarding or otherwise developing specified compounds that are similar to the compounds that are subject to those agreements and collaboration agreements that we enter into in the future may contain further restrictions on our ability to enter into potential collaborations or to otherwise develop specified compounds.

We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue. In cases

 

 

 

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where we seek a collaborator for a product compound that is a deuterated analog of a compound that has been previously developed, failure to enter into a collaboration with the developer of the corresponding non-deuterated compound may result in a loss of the potential to obtain clearance from the FDA to follow expedited development programs that reference and rely on findings previously obtained from the developer’s prior preclinical or clinical studies of the corresponding non-deuterated compound.

We rely on third parties to conduct our clinical trials. If they do not perform satisfactorily, our business may be materially harmed.

We do not independently conduct clinical trials of any of our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to conduct these clinical trials and expect to rely on these third parties to conduct clinical trials of any other product candidate that we develop. Any of these third parties may terminate their engagements with us under certain circumstances. If we need to enter into alternative arrangements, it could delay our product development activities.

Our reliance on these third parties for clinical development activities limits our control over these activities but we remain responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards. For example, notwithstanding the obligations of a contract research organization for a trial of one of our product candidates, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as current Good Clinical Practices, or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, clinical trial sites and institutional review boards. If we or our third party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our product candidates, which would delay the marketing approval process. We cannot be certain that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. We are also required to register clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.

Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. In such an event, our financial results and the commercial prospects for any product candidates that we seek to develop could be harmed, our costs could increase and our ability to generate revenues could be delayed, impaired or foreclosed.

We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing

 

 

 

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approval of our product candidates or commercialization of any resulting products, producing additional losses and depriving us of potential product revenue.

Because there are limited sources of deuterium, we, and our collaborators, are exposed to a number of risks and uncertainties associated with our deuterium supply.

We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. For most of our deuterium supply we rely on bulk supplies of deuterium oxide, which we currently source from two suppliers, one located in the United States and one located abroad, which is affiliated with a foreign government. We may establish a deuterium oxide supply arrangement with an additional supplier, which is located outside of the United States and is affiliated with a foreign government. It is also possible that our current U.S. supplier of deuterium oxide relies on our current foreign supplier, as well as our potential future foreign supplier, for its supply of deuterium oxide, although we are not familiar with its procurement practices.

We estimate that our current source of deuterium oxide will be sufficient to meet our anticipated requirements through at least 2015. However, we do not have long-term agreements with our current suppliers. If we are not able to establish or maintain supply arrangements with the foreign government-affiliated suppliers from which we have purchased and believe we may be able to purchase additional deuterium oxide, or the relevant foreign governments decide to withhold any authorization for the export of deuterium oxide that we seek, we may be unable to secure alternative sources. If we are unable to obtain sufficient supplies of deuterium oxide from our current suppliers or our potential future foreign supplier, we would be forced to either seek alternative suppliers of deuterium oxide, likely in other countries, or alternative sources of deuterium. Such alternative supplies may not be available to us on acceptable terms or at all.

In order to internationally transport any deuterium oxide that we purchase from either of these two foreign suppliers, we, or our U.S. supplier, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate from the country of destination. We are also required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide from the United States to any contract manufacturer in another country. Each of these documents specifies the maximum amount of deuterium oxide that we, or our suppliers, are permitted to either import or export. In particular, in order to obtain additional supplies of deuterium oxide from the foreign-government affiliated supplier from which we have purchased deuterium oxide, we will be required to obtain an additional export license from the country of origin and a U.S. import certificate. While we have obtained similar licenses and certificates in the past, we may not be able to obtain them in the future in a timely manner or at all. We have not obtained an export license from the country in which our potential future foreign supplier is located and may not be able to do so in a timely fashion or at all. In addition, our current U.S. export licenses may be insufficient to meet our future requirements and we may not be able to obtain further licenses in a timely manner or at all.

Certain of our manufacturing processes for our product candidates incorporate deuterium by using deuterated chemical intermediates or reagents that are derived from deuterium oxide. For the deuterated chemical intermediates and reagents, we are not subject to the license requirements applicable to deuterium oxide; however the manufacturer of the deuterated chemical intermediate or reagent may themselves be required to obtain deuterium oxide under applicable licensing requirements. Most of the manufacturers of these deuterated chemical intermediates and reagents are not located in countries that produce bulk quantities of deuterium oxide. Therefore, our ability to source these deuterated chemical intermediates will depend on the ability of these manufacturers to obtain deuterium oxide from other countries. In the future we may arrange for supplies of deuterated chemical intermediates or reagents from manufacturers located in countries from which they can source deuterium oxide in bulk. However,

 

 

 

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contract manufacturers in these countries may not represent a viable alternative to our current suppliers. We do not have long-term agreements with our suppliers of deuterated chemical intermediates or reagents and we obtain some of these deuterated chemical intermediates or reagents from single sources, putting us at risk of uncontrolled cost increases or supply interruptions if we cannot establish alternative sourcing arrangements. Deuterated chemical intermediates may be expensive or difficult to obtain or may be produced by specialized techniques that are not widely practiced and we may not be able to enter into arrangements for larger scale supply of deuterated chemical intermediates on acceptable terms, or at all.

If we are unable to obtain sufficient supplies of deuterium, our ability to produce our product candidates would be impeded and our business, financial condition and prospects could be harmed. In particular, certain of our manufacturing processes, including those for CTP-499 and certain other of our product candidates, are projected to require particularly large quantities of deuterium for late-stage clinical trials and for commercialization. Consequently, any adverse impact on our ability to obtain deuterium oxide from our current suppliers, import deuterium oxide into the United States or export deuterium oxide to our contract manufacturers could have a particularly severe impact on our ability to develop or commercialize those product candidates.

Similarly, to develop and commercialize any of our licensed product candidates, our collaborators will need to obtain supplies of deuterium and will be subject to risks and requirements in connection with sourcing deuterium that are similar to the ones that we face. In addition, if any of our product candidates is approved by the FDA, then the FDA will also have regulatory jurisdiction over the manufacture and use of deuterium oxide and deuterated chemical intermediates or reagents in such products. Any adverse impact on our, or our collaborators’, ability to obtain deuterium could delay or prevent the development or commercialization of our product candidates, which could have a material adverse effect on our business.

We contract with third parties for the manufacture and distribution of our product candidates for clinical trials and expect to continue to do so in connection with our future development and commercialization efforts. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We currently have only very limited internal capabilities to manufacture our product candidates. We currently rely, and expect to continue to rely, on third party contractors to manufacture preclinical and clinical supplies of our product candidates and to package, label and ship these supplies. We expect to rely on third party contractors to manufacture, package, label and distribute commercial quantities of any product candidate that we commercialize following approval for marketing by applicable regulatory authorities. Reliance on such third party contractors entails risks, including:

 

Ø  

manufacturing delays if our third party contractors give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform according to the terms of the agreements between us and them;

 

Ø  

the possible termination or nonrenewal of agreements by our third party contractors at a time that is costly or inconvenient for us;

 

Ø  

the possible breach by the third party contractors of our agreements with them;

 

Ø  

the failure of third party contractors to comply with applicable regulatory requirements;

 

Ø  

the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not being properly identified;

 

 

 

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the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not being distributed to commercial vendors in a timely manner, resulting in lost sales; and

 

Ø  

the possible misappropriation of our proprietary information, including our trade secrets and know-how.

We currently rely on a small number of third party contract manufacturers to supply the majority of our required finished product for our preclinical studies and clinical trials. We do not have long-term agreements with any of these third parties. If any of our existing manufacturers should become unavailable to us for any reason, we may incur some delay in identifying or qualifying replacements.

If any of our product candidates are approved by any regulatory agency, we plan to enter into agreements with third party contract manufacturers for the commercial production and distribution of those products. It may be difficult for us to reach agreement with a contract manufacturer on satisfactory terms or in a timely manner, especially if the manufacturer believes it is uniquely suited to use our deuterium chemistry manufacturing processes or that our deuterium chemistry manufacturing processes bear greater production risks than manufacture of non-deuterated compounds. In addition, we may face competition for access to manufacturing facilities as there are a limited number of contract manufacturers operating under current good manufacturing practices, or cGMPs, that are capable of manufacturing our product candidates. Consequently, we may not be able to reach agreement with third party manufacturers on satisfactory terms, which could delay our commercialization efforts.

Third party manufacturers are required to comply with cGMPs and similar regulatory requirements outside the United States. Facilities used by our third party manufacturers must be approved by the FDA after we submit an NDA and before potential approval of the product candidate. Similar regulations apply to manufacturers of our product candidates for use or sale in foreign countries. We do not control the manufacturing process and are completely dependent on our third party manufacturers for compliance with the applicable regulatory requirements for the manufacture of our product candidates. If our manufacturers cannot successfully manufacture material that conforms to the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, they will not be able to secure the applicable approval for their manufacturing facilities. If these facilities are not approved for commercial manufacture, we may need to find alternative manufacturing facilities, which could result in delays in obtaining approval for the applicable product candidate.

In addition, our manufacturers are subject to ongoing periodic inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements both prior to and following the receipt of marketing approval for any of our product candidates. Some of these inspections may be unannounced. Failure by any of our manufacturers to comply with applicable cGMPs or other regulatory requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of approvals, operating restrictions, interruptions in supply and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and have a material adverse impact on our business, financial condition and results of operations.

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

 

 

 

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RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we are unable to obtain and maintain sufficient patent protection for our product candidates, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidates may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary product candidates. If we do not adequately protect our intellectual property, competitors may be able to erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we file patent applications in the United States and abroad related to our novel product candidates that are important to our business. The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Neither deuterium itself, nor the general concept of selective substitution of deuterium for hydrogen in existing compounds are patentable; therefore we usually seek patents on a compound-by-compound basis or on a relatively narrow genus of compounds. We are not guaranteed that patents will issue protecting any particular deuterated compound for which we seek patent protection.

Our ability to obtain and maintain patent protection for our product candidates may be limited if disclosures of non-deuterated compounds are held to anticipate or make obvious claims of deuterated analogs of the same or similar compounds. In addition, several large pharmaceutical and biotechnology companies have begun to pursue patent protection for deuterated analogs of their products and product candidates, and may in the future obtain patent protection that covers deuterated analogs of those product candidates. If patents directed primarily to non-deuterated compounds are deemed to protect deuterated analogs of those compounds or patent claims on deuterated analogs of compounds become common in the biotechnology and pharmaceutical industries, these factors may limit, in part or in whole, our ability to seek and obtain patent protection for new product candidates based on deuterium modification of compounds. It may also limit in part or in whole, our ability to develop new product candidates based on deuterium modification of such compounds without obtaining a license from those patent holders.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the determination of patent rights with respect to pharmaceutical compounds commonly involves complex legal and factual questions, which has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.

Assuming the other requirements for patentability are met, currently, the first to file a patent application is generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate,

 

 

 

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our patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third party patent rights.

Our pending and future patent applications may not result in patents being issued which protect our product candidates, in whole or in part, or which effectively prevent others from commercializing competitive products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. In addition, the laws of foreign countries may not protect our rights to the same extent or in the same manner as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does.

Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our competitors may seek to market generic versions of any approved products by submitting ANDAs to the FDA in which they claim that patents owned or licensed by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad, including challenges through the U.S. Patent and Trademark Office post-grant review procedures. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized.

If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.

While we have obtained composition of matter patents with respect to our most advanced product candidates, our DCE Platform is not patented. In seeking to develop and maintain a competitive position through our DCE Platform and as to other aspects of our business, we rely on trade secrets, including unpatented know-how, technology and other proprietary information. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators, outside scientific collaborators, contract manufacturers, suppliers and other third parties. We also enter into confidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, if any of our trade secrets were to be lawfully obtained or independently

 

 

 

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developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position could be harmed.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to assert our patents against those parties or other competitors, and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.

If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our product candidates.

Our commercial success depends, in part, on our ability to develop, manufacture, market and sell our product candidates and use our DCE Platform without infringing the intellectual property and other proprietary rights of third parties. Numerous third party U.S. and non-U.S. issued patents and pending applications exist for compounds and methods of use for the treatment of spasticity, kidney disease, neurologic disorders, cancer and inflammation, the key indications for our priority programs. In addition, some of the non-deuterated compounds on which our product candidates are, or future product candidates may be, based are covered by issued patents or patent applications, the holders of which may attempt to assert claims against us. To date, we are not aware of any judicial decision holding that a patent that covers a non-deuterated compound should be construed to also cover deuterated analogs thereof, absent specific claims with respect to the deuterated analogs. Any such judicial decision, or legal proceedings asserting

 

 

 

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such claims, could increase the likelihood of potential infringement claims being asserted against us. If any third party patents or patent applications are found to cover our product candidates or their methods of use, we may not be free to manufacture or market our product candidates as planned without obtaining a license, which may not be available on commercially reasonable terms, or at all.

There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our products candidates, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. We may also assert that a patent claim for a corresponding non-deuterated compound does not cover our product. However, we are not aware of any judicial proceedings addressing the question of whether our product would be outside the scope of such a patent claim. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.

If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

RISKS RELATED TO REGULATORY APPROVAL AND OTHER LEGAL COMPLIANCE MATTERS

Even if we complete the necessary preclinical and clinical studies, the marketing approval process is expensive, time consuming and uncertain and may prevent us or our collaborators from obtaining approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or our collaborators, will obtain marketing approval to commercialize a product candidate.

The research, testing, manufacturing, labeling, approval, selling, marketing, promotion and distribution of drug products are subject to extensive regulation by the FDA and comparable foreign regulatory authorities, which regulations differ from country to country. We, and our collaborators, are not permitted to market our product candidates in the United States or in other countries until we, or they,

 

 

 

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receive approval of an NDA from the FDA or marketing approval from applicable regulatory authorities outside the United States. Our product candidates are in various stages of development and are subject to the risks of failure inherent in drug development. We, and our collaborators, have not submitted an application for or received marketing approval for any of our product candidates in the United States or in any other jurisdiction. We have limited experience in conducting and managing the clinical trials necessary to obtain marketing approvals, including FDA approval of an NDA.

The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. This is the case even though the deuterated compounds that we produce and seek to develop can have similar pharmacological properties as their corresponding non-deuterated compounds. Even if, as a result of any such similarities, we, or our collaborators, obtain clearance from the FDA and other regulatory authorities to follow expedited development programs for some deuterated compounds that reference and rely on previous findings for non-deuterated compounds, the review and approval of our product candidates may still take a substantial period of time.

In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we, or our collaborators, ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability or that of our collaborators to generate revenue from the particular product candidate, which likely would result in significant harm to our financial position and adversely impact our stock price.

Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from being marketed abroad.

In order to market and sell our products in the European Union and many other jurisdictions, we, and our collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The marketing approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We, and our collaborators, may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA.

Even if we, or our collaborators, obtain marketing approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.

Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation. We, and our collaborators, must therefore comply

 

 

 

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with requirements concerning advertising and promotion for any of our product candidates for which we or they obtain marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we and our collaborators will not be able to promote any products we develop for indications or uses for which they are not approved.

In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, our contract manufacturers, our collaborators and their contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMPs.

Accordingly, assuming we, or our collaborators, receive marketing approval for one or more of our product candidates, we, and our collaborators, and our and their contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control.

If we, and our collaborators, are not able to comply with post-approval regulatory requirements, we, and our collaborators, could have the marketing approvals for our products withdrawn by regulatory authorities and our, or our collaborators’, ability to market any future products could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our operating results and financial condition.

Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future could be subject to post-marketing restrictions or withdrawal from the market and we, or our collaborators, may be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our products following approval.

Any of our product candidates for which we, or our collaborators, obtain marketing approval in the future, as well as the manufacturing processes, post-approval studies and measures, labeling, advertising and promotional activities for such product, among other things, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS.

The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of a product. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we, or our collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws.

 

 

 

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In addition, later discovery of previously unknown adverse events or other problems with our products or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

Ø  

restrictions on such products, manufacturers or manufacturing processes;

 

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restrictions on the labeling or marketing of a product;

 

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restrictions on product distribution or use;

 

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requirements to conduct post-marketing studies or clinical trials;

 

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warning letters or untitled letters;

 

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withdrawal of the products from the market;

 

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refusal to approve pending applications or supplements to approved applications that we submit;

 

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recall of products;

 

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fines, restitution or disgorgement of profits or revenues;

 

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suspension or withdrawal of marketing approvals;

 

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refusal to permit the import or export of products;

 

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product seizure; or

 

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injunctions or the imposition of civil or criminal penalties.

Recently enacted and future legislation may increase the difficulty and cost for us and our collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of our collaborators, to profitably sell any products for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or our collaborators, may receive for any approved products.

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products and could decrease the coverage and price that we, or our collaborators, may receive for any approved products. While the MMA only addresses drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

More recently, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the PPACA.

Among the provisions of the PPACA of potential importance to our product candidates are the following:

 

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an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;

 

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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

 

 

 

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expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for noncompliance;

 

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a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices;

 

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extension of manufacturers’ Medicaid rebate liability;

 

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expansion of eligibility criteria for Medicaid programs;

 

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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program new requirements to report financial arrangements with physicians and teaching hospitals;

 

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a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and our collaborators to more stringent product labeling and post-marketing testing and other requirements.

Our relationships with customers and third party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third party payors will play a primary role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with third party payors and customers, if any, will subject us to broadly applicable fraud and abuse and other healthcare laws and regulations. The laws and regulations may constrain the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. These include the following:

 

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Anti-Kickback Statute . The federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation or arranging of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;

 

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False Claims Act . The federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented false or fraudulent claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or

 

 

 

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avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability including mandatory treble damages and significant per-claim penalties, currently set at $5,500 to $11,000 per false claim;

 

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HIPAA . The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms and technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health information;

 

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Transparency Requirements . Federal laws require applicable manufacturers of covered drugs to report payments and other transfers of value to physicians and teaching hospitals;

 

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Controlled Substances Act . The CSA regulates the handling of controlled substances such as JZP-386 and, potentially, CTP-354; and

 

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Analogous State and Foreign Laws . Analogous state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws can apply to sales or marketing arrangements and claims involving healthcare items or services and are generally broad and are enforced by many different federal and state agencies as well as through private actions.

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous

 

 

 

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materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities. However, we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.

In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we, or our collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.

RISKS RELATED TO EMPLOYEE MATTERS AND MANAGING GROWTH

Our future success depends on our ability to retain our Chief Executive Officer and other key executives and to attract, retain and motivate qualified personnel.

Our industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on the pharmaceutical research and development and business development expertise of Roger D. Tung, our President and Chief Executive Officer, as well as the other principal members of our management, scientific and development team. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. In addition, although we maintain a key-man insurance policy with respect to Dr. Tung, we do not carry key-man insurance on any of our other executive officers or employees and may not carry any key-man insurance in the future.

If we lose one or more of our executive officers, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain marketing approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory

 

 

 

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contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to develop and commercialize product candidates will be limited.

We expect to grow our organization, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug manufacturing, regulatory affairs and sales, marketing and distribution. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities to devote time to managing these growth activities. To manage these growth activities, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. Our inability to effectively manage the expansion of our operations may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate revenues could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth.

RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING

If you purchase shares of common stock in this offering, you will suffer immediate dilution in the book value of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, you will experience immediate dilution of $9.07 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. Purchasers of common stock in this offering will have contributed approximately 36.5% of the aggregate price paid by all purchasers of our stock and will own approximately 30.8% of our common stock outstanding after this offering, excluding any shares of our common stock that they may have acquired prior to this offering. Furthermore, if the underwriters exercise their over-allotment option or our previously issued options and warrants to acquire common stock at prices below the assumed initial public offering price are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. Although we have applied to list our common stock on The NASDAQ Global Market, an active trading market for our shares may never develop or, if developed, be

 

 

 

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maintained following this offering. If an active market for our common stock does not develop or is not maintained, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The price of our common stock is likely to be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

Our stock price is likely to be volatile. The stock market in general and the market for smaller pharmaceutical and biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

Ø  

the success of existing or new competitive products or technologies;

 

Ø  

the timing and results of clinical trials of CTP-354 and any other product candidate;

 

Ø  

commencement or termination of collaborations for our development programs;

 

Ø  

failure or discontinuation of any of our development programs;

 

Ø  

results of clinical trials of product candidates of our competitors;

 

Ø  

regulatory or legal developments in the United States and other countries;

 

Ø  

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

Ø  

the recruitment or departure of key personnel;

 

Ø  

the level of expenses related to any of our product candidates or clinical development programs;

 

Ø  

the results of our efforts to develop additional product candidates or products;

 

Ø  

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

Ø  

announcement or expectation of additional financing efforts;

 

Ø  

sales of our common stock by us, our insiders or other stockholders;

 

Ø  

variations in our financial results or those of companies that are perceived to be similar to us;

 

Ø  

changes in estimates or recommendations by securities analysts, if any, that cover our stock;

 

Ø  

changes in the structure of healthcare payment systems;

 

Ø  

market conditions in the pharmaceutical and biotechnology sectors;

 

Ø  

general economic, industry and market conditions; and

 

Ø  

the other factors described in this “Risk factors” section.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common

 

 

 

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stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX Section 404, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We are currently evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in

 

 

 

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practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to SOX Section 404 we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the Securities and Exchange Commission, or the SEC, after we become a public company. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

A significant portion of our total outstanding shares is restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to decline significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. After this offering, we will have 16,218,121 shares of common stock outstanding based on the 11,218,121 shares outstanding as of December 31, 2013 after giving effect to the conversion of all outstanding shares of our preferred stock into 9,919,821 shares of our common stock upon the closing of this offering. Of these shares, the 5,000,000 shares sold by us in this offering may be resold in the public market immediately, unless purchased by our affiliates. The remaining 11,218,121 shares are currently restricted under securities laws or as a result of lock-up or other agreements, but will be able to be sold after this offering as described in the “Shares eligible for future sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of 9,919,821 shares of our common stock, will have rights, subject to conditions, to require us to file registration statements covering their shares or, along with the holder of a warrant to purchase 70,796 shares of common stock, to include their shares in registration statements that we may file for ourselves or other stockholders. We also plan to register all 4,067,337 shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. Any such shares purchased by these potential purchasers may not be able to be resold in the public market immediately following this offering as a result of restrictions under securities laws and lock-up agreements, but would be able to be sold following the expiration of these restrictions as described in the “Shares eligible for future sale” section of this prospectus. However, because indications of interest

 

 

 

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are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering, and the foregoing discussion does not reflect any potential purchases by these potential purchasers.

We do not anticipate paying any cash dividends on our capital stock in the foreseeable future, accordingly, stockholders must rely on capital appreciation, if any, for any return on their investment.

We have never declared or paid cash dividends on our capital stock. We currently plan to retain all of our future earnings, if any, to finance the operation, development and growth of our business. Furthermore, the terms of our debt facility with Hercules preclude us from paying dividends, and any future debt agreements may also preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.

Upon the closing, our executive officers and directors, combined with our stockholders who owned more than 5% of our outstanding common stock before this offering and their affiliates will, in the aggregate, beneficially own shares representing approximately 60.3% of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:

 

Ø  

delay, defer or prevent a change in control;

 

Ø  

entrench our management or the board of directors; or

 

Ø  

impede a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering, and the foregoing discussion does not reflect any potential purchases by these potential purchasers.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace

 

 

 

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or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

Ø  

establish a classified board of directors such that all members of the board are not elected at one time;

 

Ø  

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

Ø  

limit the manner in which stockholders can remove directors from the board;

 

Ø  

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at stockholder meetings;

 

Ø  

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

Ø  

limit who may call a special meeting of stockholder meetings;

 

Ø  

authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

Ø  

require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. This could discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by, or beneficial to, our stockholders.

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

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or change their opinion of our stock, our share price would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

 

 

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Special note regarding forward-looking statements and industry data

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

 

Ø  

our plans to identify, develop and commercialize novel small molecule drugs based on our knowledge of deuterium chemistry;

 

Ø  

our expectations with respect to lifting of the partial clinical hold on CTP-354 that prevents us from administering doses in excess of 60 mg per day in single dose clinical trials and 6 mg per day in multiple dose clinical trials;

 

Ø  

our plans to have up to five product candidates in clinical trials in 2014, including two in Phase 2 clinical trials;

 

Ø  

ongoing and planned clinical trials for our product candidates, whether conducted by us or by our collaborators, including the timing of initiation of these trials and of the anticipated results;

 

Ø  

our plans to enter into collaborations for the development and commercialization of product candidates;

 

Ø  

the potential benefits of any future collaboration;

 

Ø  

our ability to receive research and development funding and achieve anticipated milestones under our collaborations;

 

Ø  

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

 

Ø  

the rate and degree of market acceptance and clinical utility of our products;

 

Ø  

our commercialization, marketing and manufacturing capabilities and strategy;

 

Ø  

our intellectual property position and strategy;

 

Ø  

our ability to identify additional products or product candidates with significant commercial potential;

 

Ø  

our expectations related to the use of proceeds from this offering;

 

Ø  

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

Ø  

developments relating to our competitors and our industry; and

 

Ø  

the impact of government laws and regulations.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do

 

 

 

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not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

You should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third party research, surveys and studies are reliable, we have not independently verified such data.

 

 

 

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Use of proceeds

We estimate that the net proceeds from our issuance and sale of 5,000,000 shares of our common stock in this offering will be approximately $57.4 million, assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $66.4 million.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the net proceeds from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

As of September 30, 2013 we had cash and cash equivalents and investments of $42.6 million. We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents and investments, as follows:

 

Ø  

approximately $20 million to fund development of CTP-354;

 

Ø  

approximately $15 million to advance our other current clinical-stage product candidates and partnered programs;

 

Ø  

approximately $7 million to advance our current pipeline of non-partnered preclinical product candidates and to research and develop additional preclinical product candidates; and

 

Ø  

the remainder for working capital and other general corporate purposes.

The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Based on our planned use of the net proceeds from this offering and our existing cash and cash equivalents and investments described above, we estimate that such funds will be sufficient to enable us to conduct our ongoing CTP-354 Phase 1 imaging study and CTP-354 Phase 1 multiple ascending dose clinical trial, as well as two planned Phase 2 clinical trials of CTP-354. We do not expect that the net proceeds from this offering and our existing cash and cash equivalents and investments will be sufficient to enable us to fund the completion of development of any of our product candidates.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

 

 

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Dividend policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay any cash dividends to the holders of our common stock in the foreseeable future. Our ability to pay dividends on our common stock is prohibited by the covenants of our debt facility with Hercules and may be further restricted by the terms of any of our future indebtedness.

 

 

 

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Capitalization

The following table sets forth our cash and cash equivalents, investments and capitalization as of September 30, 2013 on:

 

Ø  

an actual basis;

 

Ø  

a pro forma basis giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into 9,919,821 shares of our common stock, the conversion of our outstanding warrant to purchase 400,000 shares of Series C redeemable convertible preferred stock to a warrant to purchase 70,796 shares of common stock and the filing and effectiveness of a restated certificate of incorporation, upon the closing of this offering; and

 

Ø  

a pro forma as adjusted basis giving additional effect to the sale of 5,000,000 shares of our common stock offered in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with our consolidated financial statements and related notes, “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus.

 

     As of September 30, 2013  
       Actual     Pro forma     Pro forma
as adjusted
 
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 18,612      $ 18,612      $ 75,962   

Investments, available for sale

     23,961        23,961        23,961   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents and investments

   $ 42,573      $ 42,573      $ 99,923   
  

 

 

   

 

 

   

 

 

 

Leasehold improvement loan, net of current portion

     332        332        332   

Loan payable, net of current portion

     9,316        9,316        9,316   

Warrant to purchase redeemable securities

     489                 

Redeemable convertible preferred stock, $0.001 par value per share:

      

Series A: 10,000,000 shares authorized, issued, and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     9,993                 

Series B: 24,250,000 shares authorized, issued, and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     48,487                 

Series C: 22,000,000 shares authorized, 15,130,400 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     37,806                 

Series D: 6,666,667 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     15,858                 
  

 

 

   

 

 

   

 

 

 

Total redeemable convertible preferred stock

     112,144                 
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 par value per share; no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.001 par value per share; 83,716,667 shares authorized, 1,295,191 shares issued and outstanding, actual; 100,000,000 shares authorized, 11,215,012 shares issued and outstanding, pro forma; 100,000,000 shares authorized, 16,215,012 shares issued and outstanding, pro forma as adjusted

     1        11        16   

Additional paid-in capital

     1,406        114,029        171,374   

Accumulated other comprehensive income

     7        7        7   

Accumulated deficit

     (107,722     (107,722     (107,722
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (106,308     6,325        63,675   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 15,973      $ 15,973      $ 73,323   
  

 

 

   

 

 

   

 

 

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of total cash and cash equivalents and investments and total stockholders’ (deficit) equity by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The table above does not include:

 

Ø  

70,796 shares of our common stock issuable upon the exercise of a warrant outstanding as of September 30, 2013, at an exercise price of $14.13 per share;

 

Ø  

2,008,864 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2013, at a weighted average exercise price of $3.16 per share;

 

Ø  

115,407 shares of our common stock available for future issuance under our equity compensation plans as of September 30, 2013; and

 

Ø  

an additional 1,946,175 shares of our common stock that become available for future issuance under the 2014 Plan in connection with this offering.

 

 

 

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Dilution

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of September 30, 2013 was $5.8 million, or $4.51 per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by 1,295,191 shares of our common stock outstanding as of September 30, 2013.

Our pro forma net tangible book value as of September 30, 2013 was $6.3 million, or $0.56 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding on September 30, 2013, after giving effect to the automatic conversion of all of our outstanding shares of preferred stock into shares of our common stock upon the closing of this offering and the reclassification of a warrant to purchase preferred stock into a warrant to purchase common stock.

After giving effect to our issuance and sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma net tangible book value as of September 30, 2013 would have been $63.7 million, or $3.93 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $3.37 per share. The initial public offering price per share will significantly exceed the pro forma net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $9.07 per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering without giving effect to the over-allotment option granted to the underwriters:

 

Assumed initial public offering price per share

     $ 13.00   

Historical net tangible book value per share as of September 30, 2013

   $ 4.51     

Decrease attributable to the conversion of outstanding preferred stock and warrant to purchase preferred stock

     (3.95  
  

 

 

   

Pro forma net tangible book value per share as of September 30, 2013

     0.56     

Increase per share attributable to sale of shares of common stock in this offering

     3.37     
  

 

 

   

Pro forma net tangible book value per share after this offering

     $ 3.93   
    

 

 

 

Dilution per share to new investors

     $ 9.07   
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the pro forma net tangible book value by $4.7 million, the pro forma net tangible book value per share after this offering by $0.28 per share and the dilution to investors in this offering by $0.72 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value will increase to $4.29 per share, representing an immediate increase to existing stockholders of $3.73 per share and an immediate dilution of $8.71 per share to new investors. If any shares are issued upon exercise of outstanding options or our outstanding warrant, you will experience further dilution.

 

 

 

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The following table summarizes, on a pro forma basis as of September 30, 2013, after giving effect to the conversion of all of our outstanding preferred stock into common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, before the deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares purchased     Total consideration     Average
price
per share
 
       Number      %     Amount     %          

Existing stockholders

     11,215,012         69.2   $ 113,086,899 (1)       63.5   $ 10.08   

New investors

     5,000,000         30.8        65,000,000        36.5      $ 13.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

Total

     16,215,012         100   $ 178,086,899        100   $ 10.98   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

(1)   Includes $3.9 million of the purchase price for shares of Series D redeemable convertible preferred stock that was allocated for financial reporting purposes to deferred revenue under our collaboration agreement with GSK.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $5.0 million and increase (decrease) the percentage of total consideration paid by new investors by approximately 1.7%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The number of shares purchased from us by existing stockholders is based on 1,295,191 shares of our common stock outstanding as of September 30, 2013, after giving effect to the automatic conversion of all of our outstanding shares of preferred stock into 9,919,821 shares of common stock upon the closing of this offering, and excludes:

 

Ø  

70,796 shares of our common stock issuable upon the exercise of a warrant outstanding as of September 30, 2013, at an exercise price of $14.13 per share;

 

Ø  

2,008,864 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2013, at a weighted average exercise price of $3.16 per share;

 

Ø  

115,407 shares of our common stock available for future issuance under our equity compensation plans as of September 30, 2013; and

 

Ø  

an additional 1,946,175 shares of our common stock that become available for future issuance under the 2014 Plan in connection with this offering.

If the underwriters exercise their option to purchase additional shares from us in full, the number of shares held by new investors will increase to 5,750,000, or 33.9% of the total number of shares of common stock outstanding after this offering and the percentage of shares held by existing stockholders will decrease to 66.1% of the total shares outstanding.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering. The foregoing discussion and tables do not reflect any potential purchases by these potential purchasers.

 

 

 

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Selected consolidated financial data

You should read the following selected consolidated financial data together with our consolidated financial statements and accompanying notes appearing at the end of this prospectus and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

The selected consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 2012 and 2013, and the selected consolidated balance sheet data as of September 30, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus and include, in our opinion, all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial information in those statements.

 

     Year ended December 31,     Nine months ended September 30,  
Consolidated statements of operations
data:
               2011                 2012                 2012                 2013  
     (in thousands, except per share data)  

Revenue:

        

License and research and development revenue

   $  13,967      $  11,349      $  11,126      $  21,995   

Milestone revenue

     5,500        1,500        1,500        2,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     19,467        12,849        12,626        23,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     23,436        24,193        18,384        16,460   

General and administrative

     7,377        7,266        5,620        6,366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,813        31,459        24,004        22,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,346     (18,610     (11,378     1,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     44        22        17        17   

Interest and other expense

     (18     (1,856     (1,324     (1,327
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (20,444   $ (12,685   $ (141
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretion on redeemable convertible preferred stock

     (1,069     (388     (290     (296
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders—basic and diluted

   $ (12,389   $ (20,832   $ (12,975   $ (437
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders—basic and diluted (1)

   $ (9.66   $ (16.15   $ (10.06   $ (0.34
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders—basic (1)

     1,283        1,290        1,290        1,291   

Weighted-average number of common shares used in net loss income per share applicable to common stockholders—diluted (1)

     1,283        1,290        1,290        1,291   

Pro forma net loss per share applicable to common stockholders (1)(2) :

        

Basic:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Diluted:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Pro forma weighted average number of common shares outstanding (1)(2) :

        

Basic:

       11,210          11,211   

Diluted:

       11,210          11,211   

 

 

 

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Selected consolidated financial data

 

 

 

     As of December 31,     As of September 30,  
Consolidated balance sheet data:    2011     2012     2013  
     (in thousands)  

Cash and cash equivalents

   $ 22,949      $ 7,490      $ 18,612   

Investments, available for sale

     19,705        20,067        23,961   

Total assets

     49,403        33,129        48,969   

Deferred revenue

     11,022        2,750        20,548   

Loan payable, net of discount

     7,135        19,731        16,771   

Redeemable convertible preferred stock

     111,460        111,848        112,144   

Total stockholders’ deficit

   $ (86,718   $ (106,687   $ (106,308

 

(1)   See Notes 2 and 15 within the notes to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net loss per share applicable to common stockholders and pro forma basic and diluted net loss per share applicable to common stockholders.

 

(2)   Pro forma to reflect the automatic conversion of all outstanding shares of our preferred stock into 9,919,821 shares of common stock, and the conversion of our outstanding warrant to purchase 400,000 shares of preferred stock into a warrant to purchase 70,796 shares of common stock, upon the closing of this offering.

 

 

 

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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 our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those factors set forth in the “Risk factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

We are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Our approach starts with approved drugs, advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution, a process we refer to as deuteration, to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. We believe this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development.

We are utilizing our DCE Platform to discover and develop product candidates for a variety of indications. CTP-354 and AVP-786 are advancing in clinical trials and we have multiple preclinical candidates, two of which we expect to move into clinical trials in 2014. Our priority programs include:

 

Ø  

CTP-354 for spasticity associated with multiple sclerosis and spinal cord injury, which is in Phase 1 clinical trials;

 

Ø  

CTP-499 for type 2 diabetic kidney disease, which is in a Phase 2 clinical trial;

 

Ø  

AVP-786 for neurologic and psychiatric disorders, which has completed a Phase 1 clinical trial under our collaboration with Avanir;

 

Ø  

CTP-730 for inflammatory diseases, which is in preclinical development under our collaboration with Celgene; and

 

Ø  

JZP-386 for narcolepsy, which is in preclinical development under our collaboration with Jazz Pharmaceuticals.

Through September 30, 2013, we had received an aggregate of $105.4 million in upfront and milestone payments, equity investments and research and development funding from current and former collaborations.

Since our inception in 2006, we have devoted substantially all of our resources to our research and development efforts relating to our product candidates, including activities to: develop our DCE Platform and our core capabilities in deuterium chemistry, identify potential product candidates, undertake preclinical studies and clinical trials, manufacture product in compliance with cGMPs, provide general and administrative support for these operations and establish our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through private placements of our preferred stock, debt financing and funding from collaborations. Since inception, we have raised an aggregate of $221.7 million to fund our operations, of which $88.7 million was through upfront license fees, milestone payments, reimbursement of research and development costs and other payments under our current and former collaborations,

 

 

 

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$113.0 million in gross proceeds from the sale of convertible preferred stock, which includes an equity premium of $3.9 million, and $20.0 million was from the gross proceeds of a secured debt financing and the related issuance of a warrant to purchase preferred stock.

We have incurred net losses in each year from our inception in 2006 through 2012. Our net losses were $11.3 million for the year ended December 31, 2011, $20.4 million for the year ended December 31, 2012, $12.7 million for the nine months ended September 30, 2012 and $0.1 million for the nine months ended September 30, 2013. We do not expect to be profitable for the year ending December 31, 2013. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

Ø  

continue to develop and conduct clinical trials and additional preclinical studies with respect to CTP-354;

 

Ø  

initiate and continue research, preclinical and clinical development efforts for our other product candidates and potential product candidates;

 

Ø  

seek to identify additional product candidates;

 

Ø  

seek marketing approvals for our product candidates that successfully complete clinical trials;

 

Ø  

establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize various products for which we may obtain marketing approval;

 

Ø  

require the manufacture of larger quantities of product candidates for clinical development and potentially commercialization;

 

Ø  

maintain, expand and protect our intellectual property portfolio;

 

Ø  

hire additional personnel, such as clinical, quality control and scientific personnel;

 

Ø  

add equipment and physical infrastructure to support our research and development; and

 

Ø  

add operational, financial and management information systems and personnel, including personnel to support our product development and personnel and infrastructure necessary to help us comply with our obligations as a public company.

We do not expect to generate revenue from product sales unless and until we, or our collaborators, successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. We have developed the internal capability to manufacture up to low kilogram quantities of deuterated active pharmaceutical ingredients for use in Phase 1 clinical trials. However, to date, almost all of our manufacturing activities have been performed by third parties. Additionally, we currently utilize third-party contract research organizations to carry out our clinical development activities and we do not yet have a sales organization. If we obtain or believe that we are likely to obtain, marketing approval for any of our product candidates for which we retain commercialization rights, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. We expect to seek to fund our operations through a combination of equity offerings, debt financings and additional collaborations and licensing arrangements for at least the next several years. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed

 

 

 

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would force us to delay, limit, reduce or terminate our research and development programs and could have a material adverse effect on our financial condition and our ability to develop our products. We will need to generate significant revenues to achieve sustained profitability and we may never do so.

COLLABORATIONS

We have entered into a number of collaborations for the research, development and commercialization of deuterated compounds. To date, our collaborations have provided us with significant funding for both our specific development programs and our DCE Platform. They also have provided us with access to the considerable scientific, development, regulatory and commercial capabilities of our collaborators. In addition, in some instances, where we develop and seek to collaborate with respect to deuterated analogs of marketed drugs or of drug candidates that are more advanced in clinical trials, our collaborators may be eligible to seek an expedited development or regulatory pathway by relying on previous clinical data regarding their corresponding non-deuterated compound. For example, our collaborator Avanir reported agreeing with the FDA to an expedited development pathway for AVP-786. We believe that our collaborations have contributed to our ability to progress our product candidates and build our DCE Platform. We have established the following key collaborations:

 

Ø  

Celgene . In April 2013, we entered into a master development and license agreement with Celgene, which is primarily focused on the research, development and commercialization of specified deuterated compounds targeting cancer or inflammation. The collaboration is initially focused on one program, but has the potential to encompass up to four programs. For the initial program, we granted Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated analogs of a selected non-deuterated compound and several close chemical derivatives thereof. We further granted Celgene licenses with respect to two additional programs and an option with respect to a third additional program. We and Celgene have agreed on the non-deuterated compound for each of the two additional license programs. For the option program, Celgene may select the non-deuterated compound at a later time, which, unless otherwise agreed by us, will be limited to a compound for which Celgene possesses exclusive rights. With respect to the two additional license programs, we granted Celgene an upfront exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the agreed upon non-deuterated compounds. Celgene is restricted from utilizing their research, development and commercialization rights under each of the upfront licenses, unless, within seven years after the effective date of the agreement, Celgene pays us a license exercise fee. If Celgene does not elect to pay the license exercise fee during the seven year period, the license will expire. With respect to the option program, once a compound is selected, Celgene may exercise its option by paying us an option exercise fee within seven years of the effective date of the agreement, and upon Celgene’s exercise of the option we will grant to Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the selected non-deuterated compound.

Under the Celgene agreement, we received a non-refundable upfront payment of $35.0 million in April 2013. During the nine months ended September 30, 2013, we recognized $17.0 million of revenue upon the delivery of a license for the initial program and $0.4 million of revenue related to research and development services performed on the initial program. In addition, we are eligible to earn up to $23.0 million in development milestone payments, including $8.0 million related to the completion of a Phase 1 clinical trial, up to $247.5 million in regulatory milestone payments and up to $50.0 million in sales-based milestone payments related to products within the initial program. If Celgene exercises its rights with respect to either of the two additional license programs, we will receive a license exercise fee for the applicable program of $30.0 million and will also be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments for that program. Additionally, with respect to one of the additional license programs we are eligible to receive

 

 

 

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up to $100.0 million in sales-based milestone payments based on net sales of products, and with respect to the other additional license program we are eligible to receive up to $50.0 million in sales-based milestone payments based on net sales of products. If Celgene exercises its option with respect to the option program in respect of a compound to be identified at a later time, we will receive an option exercise fee of $10.0 million and will be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments. In addition, with respect to each program, Celgene is required to pay us royalties on net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20%, on worldwide net product sales of licensed products. The royalty rate is reduced on a country-by-country basis during any period within the royalty term when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country.

Under the Celgene agreement, we are responsible for conducting and funding research and development activities for the initial program at our own expense pursuant to agreed upon development plans. These activities consist of the completion of single and multiple ascending dose Phase 1 clinical trials and any mutually agreed upon additional Phase 1 clinical trials. If Celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee, we are responsible for conducting research and development activities at our own expense pursuant to agreed upon development plans until the completion of the first Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis. In addition, if Celgene exercises its rights with respect to the option program and pays us the applicable exercise fee, we are responsible for seeking to generate a deuterated compound for clinical development in the selected option program at our own expense.

 

Ø  

Avanir . In February 2012, we entered into a development and license agreement with Avanir under which we granted Avanir an exclusive worldwide license to develop, manufacture and commercialize deuterated dextromethorphan containing products. Avanir is initially focused on developing AVP-786, which is a combination of a deuterated dextromethorphan analog and an ultra-low dose of quinidine, for the treatment of neurologic and psychiatric disorders.

Under the Avanir agreement, we received a non-refundable upfront payment of $2.0 million in February 2012 and a milestone payment of $2.0 million in April 2013. We are also eligible to receive, with respect to licensed products comprising a combination of deuterated dextromethorphan and quinidine, up to $4.0 million in development milestone payments, including $2.0 million related to initiation of dosing in a Phase 2 or Phase 3 clinical trial for AVP-786, up to $37.0 million in regulatory and commercial launch milestone payments and up to $125.0 million in sales-based milestone payments based on net product sales of licensed products. In addition, we are eligible for higher development milestones, up to an additional $43.0 million, for licensed products that do not require quinidine. Avanir is currently developing deuterated dextromethorphan only in combination with quinidine. Avanir also is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on worldwide net product sales of licensed products. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim covering the licensed product in the particular country.

Avanir is responsible for funding 100% of our research and development costs incurred under the development plan or for activities conducted at Avanir’s request, subject to limitations specified in the agreement. However, Avanir is currently conducting all research and development activities without our services.

 

Ø  

Jazz Pharmaceuticals . In February 2013, we entered into a development and license agreement with Jazz Pharmaceuticals to research, develop and commercialize products containing deuterated sodium oxybate, or D-SXB. We are initially focusing on one analog, designated as JZP-386. Under the terms

 

 

 

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of the agreement, we granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectual property controlled by us to develop, manufacture and commercialize D-SXB products including JZP-386.

Under the Jazz Pharmaceuticals agreement, we received a non-refundable upfront payment of $4.0 million in February 2013. We are also eligible to receive up to $8.0 million in development milestone payments, up to $35.0 million in regulatory milestone payments and up to $70.0 million in sales milestone payments based on net product sales of licensed products. In addition, Jazz Pharmaceuticals is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20%, on a country-by-country and licensed product-by-licensed product basis, on worldwide net product sales of licensed products. The royalty rate is lowered, on a country-by-country basis, under certain circumstances as specified in the agreement.

We are currently conducting certain development activities for a Phase 1 clinical trial with respect to JZP-386 pursuant to an agreed upon development plan, and we will be responsible for supplying a deuterated intermediate for making clinical trial material for a Phase 1 clinical trial. Thereafter, our obligations to conduct further development activities are subject to mutual agreement and we have agreed with Jazz Pharmaceuticals that Jazz Pharmaceuticals will assume all manufacturing responsibilities for Phase 2 development. Pursuant to the agreement, our costs for activities under the development plan, including pass-through costs and the costs of our employees’ time at a rate per full-time equivalent year of our employees’ time, which we mutually agreed to, are reimbursed by Jazz Pharmaceuticals. This reimbursement is subject to limitations in the agreement, including adherence within a particular percentage to the development budget.

Following termination of the agreement with respect to a country or countries, but not in its entirety, by Jazz Pharmaceuticals for Jazz Pharmaceuticals’ convenience, Jazz Pharmaceuticals may provide us written notice that it desires to continue or recommence development and commercialization of licensed products in such country or countries, in which event Jazz Pharmaceuticals’ license with respect to D-SXB products in such country or countries and corresponding payment obligations under the agreement will be reinstated except in specified circumstances in which we have previously notified Jazz Pharmaceuticals of our intent to develop or commercialize licensed products in such country or countries either directly or through a third party licensee.

In addition to these collaborations, in February 2012, we entered into a sponsored research agreement with Fast Forward LLC, or Fast Forward, a subsidiary of the National Multiple Sclerosis Society, to fund the preclinical advancement of CTP-354. Under the Fast Forward agreement, we received a non-refundable upfront payment of $0.2 million, as well as further non-refundable payments of $0.6 million for the achievement of the preclinical development milestones set forth in the agreement. We are obligated to make milestone payments to Fast Forward not in excess of a low-single digit multiple of the funding amount if we commercialize CTP-354 or license the development and commercialization of CTP-354 to a third party.

In May 2009, we entered into a research and development collaboration and license agreement with GSK to research, develop and commercialize multiple products containing deuterated compounds, including CTP-499 and, ultimately, CTP-298, which was developed pursuant to the agreement for the treatment of HIV. Our agreement with GSK, as subsequently amended, expired in May 2012 after GSK opted out of further development under the agreement. The rights to the product candidates developed under the agreement have reverted to us and we are free to pursue them without further obligation to GSK other than to repay GSK an amount of up to $2.75 million, if we commercialize CTP-499 or if, prior to a specified date in 2018, we re-license or transfer rights to CTP-499.

 

 

 

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FINANCIAL OPERATIONS OVERVIEW

Revenue

We have not generated any revenue from the sales of products. All of our revenue to date has been generated through collaboration, license and research arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates.

The terms of these agreements include one or more of the following types of payments: non-refundable license fees, payments for research and development activities, payments based upon the achievement of specified milestones, payment of license exercise or option fees relating to product candidates and royalties on any net product sales. To date, we have received non-refundable upfront payments, several milestone payments and certain research and development service revenues. However, we have not yet earned any license exercise or option fees, sales-based milestone payments or royalty revenue as a result of product sales.

In the future, we will seek to generate revenue from a combination of product sales, milestone payments and royalties on future product sales in connection with our current collaborations with Celgene, Avanir and Jazz Pharmaceuticals, or other collaborations we may enter into.

Research and development expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

 

Ø  

employee-related expenses, including salary, benefits, travel and stock-based compensation expense;

 

Ø  

expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;

 

Ø  

the cost of acquiring, developing and manufacturing clinical trial materials;

 

Ø  

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies;

 

Ø  

platform-related lab expenses, which consist of costs related to synthesis, analysis and in vitro and in vivo characterization of deuterated compounds to support the selection and progression of potential product candidates;

 

Ø  

expenses related to consultants and advisors; and

 

Ø  

costs associated with preclinical activities and regulatory operations.

Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.

The following summarizes our development programs.

 

Ø  

CTP-354 , a novel, potentially first-in-class, non-sedating treatment for spasticity that we are initially developing for use in patients with multiple sclerosis and patients with spinal cord injury to address a significant unmet medical need in these markets. We recently completed a 71-subject Phase 1 single ascending dose clinical trial of CTP-354 and are currently conducting a Phase 1 imaging study. In January 2014, we initiated a multiple ascending dose Phase 1 clinical trial evaluating daily doses of 2 mg and 6 mg of CTP-354 in healthy volunteers. Assuming successful completion of the multiple ascending dose Phase 1 clinical trial, we plan to initiate a Phase 2 clinical program for CTP-354 in the second half of 2014. We expect that the Phase 2 clinical program will include one clinical trial for the treatment of spasticity associated with multiple sclerosis and one clinical trial for the treatment of

 

 

 

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spasticity associated with spinal cord injury. Due to the fact that we did not determine a maximum tolerated dose in our preclinical testing, the FDA has informed us that we may not administer multiple doses of CTP-354 in excess of 6 mg per day in clinical trials without first conducting an additional higher dose preclinical toxicology study. We believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity; however we intend to conduct the additional preclinical toxicology study to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications.

 

Ø  

CTP-499 , a novel, potentially first-in-class, treatment for type 2 diabetic kidney disease that we are developing as an additive treatment to the current standard of care. We are currently conducting a three-part Phase 2 clinical trial of CTP-499 in which we have enrolled patients with type 2 diabetic kidney disease and macroalbuminuria. In 2013, we completed the first part of this trial, a 24-week, double-blind, parallel, two-arm, placebo-controlled study in 182 patients. We have also completed dosing in the second part of the trial, a blinded 24-week extension study, which, combined with the data from the first part of the trial, has provided 48 weeks of placebo-controlled data in 123 patients. We did not achieve statistical significance in the primary efficacy endpoint of this trial, which was measured at 24 weeks. However, we believe that the data we have analyzed to date from the first 48 weeks of treatment support the potential of CTP-499 to help protect kidney function in patients with rapidly progressing type 2 diabetic kidney disease. We have conducted preliminary analyses of these 48 weeks of data, but have not yet completed a full analysis. We expect to report the final top line results for the first 48 weeks of the trial in the first half of 2014.

 

Ø  

AVP-786 , a combination of a deuterium-substituted dextromethorphan analog and an ultra-low dose of quinidine. We have granted Avanir an exclusive license to develop and commercialize deuterated dextromethorphan analogs, including the analog in AVP-786. Avanir is developing AVP-786 for the treatment of neurologic and psychiatric disorders. In February 2013, Avanir reported positive results from a Phase 1 clinical trial of AVP-786. In October 2013, Avanir reported plans to advance AVP-786 into a Phase 2 clinical trial in the second half of 2014 for treatment-resistant major depressive disorder in patients with insufficient response to conventional anti-depressants.

 

Ø  

A collaboration with Celgene to research, develop and commercialize certain deuterated compounds for the treatment of cancer or inflammation, with an initial focus on a single program. In the initial program, we have selected CTP-730, a product candidate for the treatment of inflammatory diseases, and expect to begin clinical trials in 2014.

 

Ø  

A collaboration with Jazz Pharmaceuticals to research, develop and commercialize JZP-386, a product candidate containing a deuterated analog of sodium oxybate for potential use in patients with narcolepsy. Sodium oxybate is the active ingredient in the marketed drug Xyrem. In December 2013, an IMPD, the basis for initiating clinical trials in the European Union, was filed for JZP-386. Jazz Pharmaceuticals has reported that, subject to approval of the IMPD, it expects a Phase 1 clinical trial of JZP-386 to commence in 2014, with completion of enrollment and reporting of initial data also expected in 2014.

 

Ø  

C-10068 , a novel oral deuterium-substituted analog of dextroethorphan, a compound with preclinical pharmacological activities qualitatively similar to those of dextromethorphan, that we are investigating for the potential treatment of pain and seizures. We are conducting further preclinical evaluation of C-10068.

We are also conducting a number of other preclinical programs, including deuterated ivacaftor for the potential treatment of cystic fibrosis and chronic obstructive pulmonary disease.

We plan to continue to seek to identify compounds that can be improved through selective deuterium substitution and believe we are capable of identifying one to two novel deuterated compounds per year that we can advance into preclinical development while concurrently progressing our existing pipeline.

 

 

 

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A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis. These external costs include fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects under development.

The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and completion costs of the current or future clinical trials of any of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

Ø  

the scope and rate of progress of our ongoing as well as any additional clinical trials and other research and development activities;

 

Ø  

results from ongoing as well as any additional clinical trials and research and development activities;

 

Ø  

significant and changing government regulation;

 

Ø  

the terms and timing and receipt of any regulatory approvals;

 

Ø  

the performance of our collaborators;

 

Ø  

our ability to manufacture, market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future; and

 

Ø  

the expense and success of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other research and development activities beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, including as a result of the partial clinical hold on CTP-354 that prevents us from administering doses in excess of 6 mg per day in multiple dose clinical trials, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational,

 

 

 

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finance, legal, business development and human resource functions. Other general and administrative expenses include facility-related costs, depreciation and other expenses not allocated to research and development expense and professional fees for directors, accounting and legal services and expenses associated with obtaining and maintaining patents.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development of our product candidates. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums, and investor relations costs. Additionally, if and when we believe a regulatory approval of the first product candidate that we intend to commercialize on our own appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Investment income

Investment income consists of interest income earned on cash equivalents and short-term and long-term investments.

Interest and other expense

Interest and other expense consists primarily of interest expense on amounts outstanding under our debt facility with Hercules, amortization of debt discount and the re-measurement gain or loss associated with the change in the fair value of the preferred stock warrant liability.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates.

Revenue recognition

We have primarily generated revenue through arrangements with collaborators for the development and commercialization of product candidates.

Collaboration revenue

The terms of our collaboration and license agreements have typically contained multiple elements, or deliverables, which have included licenses, or options to obtain licenses, to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by us on behalf of the collaborator related to the licensed product candidates. Payments that we may receive under these

 

 

 

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agreements include non-refundable upfront license fees, payment for research and development activities, payments based upon achievement of specified milestones, payment upon exercise of license rights or options to license product candidates and royalties on any resulting product sales.

Multiple-Element Arrangements . Our collaborations primarily represent multiple-element arrangements. We analyze multiple-element arrangements based on the guidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 605-25, Revenue Recognition-Multiple-Element Arrangements , or ASC 605-25. Pursuant to the guidance in ASC 605-25, we evaluate multiple-element arrangements to determine the deliverables included in the arrangement and whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a standalone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In assessing whether a delivered item(s) has standalone value, we consider whether the collaboration partner can use the delivered item(s) for its intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s) and whether there are other vendors that can provide the undelivered element(s). In making these assessments, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The terms of our collaboration and licensing arrangements do not contain general rights of return that would preclude recognition of revenue.

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. We determine the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence of selling price, if available, third-party evidence of selling price if vendor-specific objective evidence is not available, or best estimate of selling price if neither vendor-specific objective evidence nor third-party evidence is available. We typically use best estimate of selling price to estimate the selling price for exclusive licenses and research and development services, since we generally do not have vendor-specific objective evidence or third-party evidence of selling price for these items. Determining the best estimate of selling price for a unit of accounting requires significant judgment. In developing the best estimate of selling price for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the best estimate of selling price for units of accounting by evaluating whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration between multiple units of accounting.

Our multiple-element revenue arrangements may include the following:

 

Ø  

Option Arrangements . An option to obtain an exclusive license is considered substantive if, at the inception of the arrangement, we are at risk as to whether the collaboration partner will choose to exercise the option. Factors that we consider in evaluating whether an option is substantive include the overall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option, the cost to exercise the option and the likelihood that the option will be exercised. For arrangements under which an option is considered substantive, we do not consider the item underlying the option to be a deliverable at the inception of the arrangement and the associated option fees are not included in allocable arrangement consideration, assuming the option is not priced at a significant and incremental discount. Conversely, for arrangements under which an option is not

 

 

 

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considered substantive, we would consider the item underlying the option to be a deliverable at the inception of the arrangement and a corresponding amount would be included in the allocable arrangement consideration. A significant and incremental discount included in an otherwise substantive option is considered to be a separate deliverable at the inception of the arrangement.

 

Ø  

Exclusive Licenses . We recognize arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria included in ASC Topic 605 Revenue Recognition are satisfied for that particular unit of accounting. We will recognize as revenue arrangement consideration attributed to exclusive licenses that have standalone value from the other deliverables to be provided in an arrangement upon delivery. We will recognize as revenue arrangement consideration attributed to exclusive licenses that do not have standalone value from the other deliverables to be provided in an arrangement over our estimated performance period as the arrangement would be accounted for as a single, combined unit of accounting.

 

Ø  

Research and Development Services . We recognize revenue associated with research and development services ratably over the associated period of performance. If there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, then we recognize revenue on a straight-line basis over the period we are expected to complete our performance obligations. Conversely, if the pattern of performance in which the service is provided to the customer can be determined and objectively measurable performance measures exist, then we recognize revenue under the arrangement using the proportional performance method. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned as of the period ending date.

Milestone Revenue . At the inception of an arrangement that includes milestone payments, we evaluate whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether:

 

Ø  

the consideration is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from our performance to achieve the milestone;

 

Ø  

the consideration relates solely to past performance; and

 

Ø  

the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

We evaluate factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. We have concluded that all of the development and regulatory milestones included in our current collaboration arrangements are substantive. Accordingly, in accordance with FASB ASC Topic 605-28, Revenue Recognition-Milestone Method , revenue from development and regulatory milestone payments will be recognized in their entirety upon successful accomplishment of the milestone, assuming all other revenue recognition criteria are met. Milestones that are not considered substantive would be recognized as revenue over the remaining period of performance, assuming all other revenue recognition criteria are met. Revenue from sales-based milestone payments will be accounted for as royalties and recognized as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

Royalty Revenue . We will recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and we have no remaining performance obligations, assuming all other revenue recognition criteria are met.

 

 

 

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Accrued research and development expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

Ø  

contract research organizations in connection with clinical trials;

 

Ø  

investigative sites in connection with clinical trials;

 

Ø  

vendors in connection with preclinical development activities; and

 

Ø  

vendors related to product manufacturing, development and distribution of clinical supplies.

We generally accrue expenses related to research and development activities based on the services received and efforts expended pursuant to contracts with multiple contract research organizations that conduct and manage clinical trials on our behalf as well as other vendors that provide research and development services. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there has been no material differences from our estimates to the amount actually incurred.

Stock-based awards

We issue stock-based awards to employees and non-employees, generally in the form of stock options. We account for our stock-based awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation , or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of employee stock options and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. We account for stock-based awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees , which requires the fair value of the award to be remeasured at each reporting period as the award vests. We recognize the compensation cost of stock-based awards to employees on a straight-line basis over the vesting period of the award and use an accelerated attribution model for awards to non-employees. Described below is the methodology we have utilized in measuring stock-based compensation expense. Following the consummation of this offering, stock option values will be determined based on the

 

 

 

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quoted market price of our common stock. Our assumptions may differ from those used in prior periods, and changes in the assumptions may have a significant impact on the fair value of future equity awards, which could have a material impact on our consolidated financial statements.

We estimate the fair value of our stock options granted to employees and non-employees using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including:

 

Ø  

the expected volatility of our stock;

 

Ø  

the expected term of the award;

 

Ø  

the risk-free interest rate;

 

Ø  

expected dividends; and

 

Ø  

the fair value of our common stock on the date of grant.

Due to the lack of a public market for the trading of our common stock and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of our stock-based awards. We compute the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We have estimated the expected life of our employee stock options using the “simplified” method, whereby, the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. We assumed an expected dividend yield of 0% based on consideration of our historical dividend experience and future dividend expectations. We have not historically declared or paid dividends to stockholders.

We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. To the extent that actual forfeitures differ from our estimates, the difference is recognized as a cumulative adjustment in the period the estimates are revised.

We have computed the fair value of employee stock options at the date of grant using the following weighted-average assumptions:

 

     Year ended
December 31,
    Nine months
ended September 30,
 
       2011     2012     2012     2013  

Expected volatility

     78.1     72.8     72.8     70.3

Expected term (in years)

     6.0        6.0        6.0        6.0   

Risk-free interest rate

     1.09     0.95     0.95     1.69

Expected dividend yield

                

 

 

 

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The following table presents the grant dates, numbers of underlying shares of common stock and the per share exercise prices of stock options granted between January 1, 2012 and the date of this prospectus, along with the fair value per share utilized to calculate stock-based compensation expense:

 

Date of grant   

Number of
shares of common

stock underlying

options granted

     Option exercise price      Estimated
common stock fair
value per share
on grant date
 

1/26/2012

     884       $ 3.50       $ 3.50   

3/22/2012

     4,955         3.50         3.50   

11/12/2012

     32,650         2.88         8.76 (1)  

5/3/2013

     15,572         3.73         13.00 (1)  

5/28/2013

     65,485         3.73         16.89 (1)  

 

(1)   The common stock fair value per share on grant date was adjusted in connection with a retrospective fair value assessment for financial reporting purposes, as described below.

We have not granted any other equity incentive awards between January 1, 2012 and the date of this prospectus and do not expect to make any significant equity incentive award grants prior to the closing of our initial public offering.

Determination of fair value of common stock on grant dates

We have historically granted stock options at exercise prices not less than the estimated fair value of our common stock. As there has been no public market for our common stock to date, we have periodically determined for financial reporting purposes the estimated fair value per share of our common stock using valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , or the Practice Aid. We performed valuations of our common stock as of June 30, 2011, December 31, 2012, April 30, 2013 and June 30, 2013 based on a number of objective and subjective factors, including:

 

Ø  

the prices of our preferred stock sold to outside investors in arm’s length transactions, and the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock;

 

Ø  

our results of operations, financial position and the status of research and development efforts;

 

Ø  

the composition of, and changes to, our management team and board of directors;

 

Ø  

the lack of liquidity of our common stock as a private company;

 

Ø  

our stage of development and business strategy and the material risks related to our business and industry;

 

Ø  

the achievement of enterprise milestones, including entering into collaboration and license agreements;

 

Ø  

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

 

Ø  

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

Ø  

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering or a sale of our company, given prevailing market conditions; and

 

Ø  

the state of the initial public offering market for similarly situated privately held biotechnology companies.

 

 

 

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The dates of our valuations have not always coincided with the dates of our stock-based compensation grants. In determining the exercise prices of the options set forth in the table above, our board of directors considered, among other things, the most recent contemporaneous valuations of our common stock and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included, when available, the prices paid in recent transactions involving our equity securities, as well as our stage of development, our operating and financial performance and current business conditions.

There are significant judgments and estimates inherent in the determination of fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event and the determinations of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net (loss) income and net (loss) income per common share could have been significantly different.

Common stock valuation methodologies . Our valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. We generally used the market approach, in particular the guideline company and precedent transaction methodologies, based on inputs from comparable public companies’ equity valuations and comparable acquisition transactions, to estimate the enterprise value of our company.

Methods used to allocate our enterprise value to classes of securities . In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date. The methods we considered consisted of the following:

 

Ø  

Option Pricing Method.  Under the option pricing method, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options.

 

Ø  

Probability-Weighted Expected Return Method, or PWERM.  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 economic and control rights of each share class.

 

Ø  

Hybrid Method. The hybrid method is a PWERM where the value in one of the scenarios in the PWERM is calculated using an option pricing method.

For each of the valuations described below, we used the PWERM or the hybrid method to determine the estimated fair value of our common stock. We modeled future outcomes for an initial public offering, sale and sale below the preferred stock liquidation preference.

June 30, 2011 valuation

For the June 30, 2011 valuation, we utilized the PWERM to determine the estimated fair value of our common stock using the following probability-weighted scenarios:

 

Liquidity scenario weighting         

Initial Public Offering- High Case

     10

Initial Public Offering- Base Case

     15

Sale- High Case

     10

Sale- Base Case

     25

Sale Below the Liquidation Preference

     40

 

 

 

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For each future exit scenario, we considered the rights and preferences of each class of our capital stock in order to determine the appropriate allocation of our future exit value to the shares of our common stock. We considered the possibility of a potential high case initial public offering in 2015 assuming GSK elected to exercise its option to license our CTP-298 program targeting the treatment of HIV and we received positive data from two then-anticipated Phase 2 clinical trials for CTP-499. We also considered the possibility of a potential base case initial public offering in 2014 assuming that we received positive data for CTP-499 from the first of these Phase 2 clinical trials and GSK elected to exercise its option to license CTP-298. We contemplated different projected pre-money enterprise values in each of the initial public offering scenarios based on the estimated timing of the initial public offering and estimated status of the our pipeline at such a time. We estimated the initial public offering exit values based on comparable transactions of guideline companies, specifically recent biotechology initial public offerings for companies at a similar stage of development. In the sale scenarios, we contemplated similar timing to the initial public offering scenarios and we estimated our sale values based on comparable sales of guideline companies at a similar stage of development. In the liquidation scenario, we contemplated circumstances in which we did not achieve significant clinical trial success. Therefore, the liquidation scenario had a liquidity event below the full liquidation preference leaving no value to the common stock.

We then discounted the common stock value under each of the future scenarios back to the present value using an assumed cost of capital for the sales and liquidation preference scenarios of 20% for the preferred stock and 35% for the common stock, and for the initial public offering scenarios of 25% for the preferred and common stock. The cost of capital utilized for the PWERM scenario is a risk-adjusted cost of capital, indicating that at the time of an exit event, the risk associated with a company is anticipated to decrease commensurate with its progress toward commercialization. For the June 30, 2011 valuation, we used a cost of capital for companies in the bridge/initial public offering stage of development, as contemplated by the Practice Aid, which we considered to be the most appropriate given our stage of development. For the sales and liquidation preference scenarios, we applied different discount rates to the preferred and common stock to reflect the incremental volatility in common stock returns relative to those of the preferred stock. Specifically, the preferred stock has economic and control rights superior to those of the common stock, which include preferred dividends and liquidation preferences, redemption rights, conversion rights, voting rights and board composition rights, among others. As such, the discount rate applied to the proceeds allocable to the preferred stock was less than the discount rate applied to the proceeds allocable to the common stock because of the incremental volatility associated with common stock returns, as well as certain economic and control rights.

Since we were valuing a minority interest in our company as a closely held, non-public company with no liquid market for its shares, we determined that a discount for lack of marketability is applicable. Our estimate of the appropriate discount for lack of marketability took into consideration put option methodologies consistent with the Practice Aid. Put option models indicated discounts of 44% to 51%. We selected a smaller discount taking into account empirical studies of restricted stock issued by publicly traded companies. We applied a discount for lack of marketability of 15% in all scenarios.

Based on these assumptions, we concluded that our common stock had a fair value of $3.50 per share as of June 30, 2011.

Stock option grants from January 2012 to March 2012

Our board of directors granted options to purchase common stock on January 26, 2012 and March 22, 2012, with each option having an exercise price of $3.50 per share. In establishing this exercise price, our board of directors considered input from management, including the valuation we conducted of our common stock as of June 30, 2011, as well as the objective and subjective factors outlined above. At

 

 

 

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each such date, our board of directors considered the events and circumstances most likely to affect the value of our common stock that occurred between June 30, 2011 and the grant date. Our board of directors determined that, other than the continued progression of our CTP-298 and CTP-499 programs that was contemplated in the assumptions used for the June 30, 2011 valuation, there were no events that occurred between June 30, 2011 and March 2012 that were indicative of a significant change in the fair value of our common stock since June 30, 2011. Moreover, between the June 30, 2011 valuation and the dates of the January 2012 and March 2012 awards, we did not believe that an initial public offering had become more likely. In addition, during the period from June 30, 2011 to the date of the March 2012 awards, overall market conditions, and particularly the market for biopharmaceutical initial public offerings, were not promising. Based on these factors, our board of directors determined that the fair value of our common stock at January 26, 2012 and March 22, 2012 was $3.50 per share.

Retrospective valuations

In late June 2013, based on our board of directors’ review of overall market conditions, the improving market for biopharmaceutical initial public offerings and the progress of our clinical trials, including the expectation that data with respect to these clinical trials would become available in the second half of 2013, our board of directors determined that a significant shift was occurring with respect to the valuation we could achieve in an initial public offering and authorized us to begin preparing a Form S-1 registration statement for confidential submission to the SEC prior to our receipt of clinical trial data.

We selected underwriters and held an organizational meeting in mid-July 2013. We believe these events increased the probability of an early initial public offering scenario and, therefore, we performed retrospective valuations for our common stock as of December 31, 2012, April 30, 2013 and June 30, 2013.

Based on the factors described below, we concluded that our common stock had a fair value of $8.76 per share as of December 31, 2012, $13.00 per share as of April 30, 2013 and $16.89 per share as of June 30, 2013. For financial reporting purposes, we have applied these values retrospectively to our option grants made on November 12, 2012, May 3, 2013 and May 28, 2013.

December 31, 2012 retrospective valuation . For the retrospective valuation as of December 31, 2012, we used the hybrid of PWERM and the option pricing method. For our December 31, 2012 valuation, we considered two possible outcomes: an initial public offering scenario and a later unspecified liquidity event or option pricing method scenario. For the December 31, 2012 valuation, we estimated the value of our common stock by assigning a 60% weighting to the estimated value using the option pricing method and a 40% weighting to the estimated fair value under the initial public offering scenario. We deemed the 40% weighting of our initial public offering scenario appropriate because we believed that positive clinical trial data would be necessary to complete an initial public offering transaction.

As an indicator of value for the initial public offering scenario, we considered guideline public company information under the market approach. The guideline public companies included recent biopharmaceutical initial public offerings for companies at a similar stage of development. We estimated the time to an initial public offering date as 1.1 years based on the expected timing of our clinical trial data, our board of directors’ assessment of our prospects and market conditions. We allocated the future equity value at the expected initial public offering date to each class of preferred stock and the common stock assuming conversion of all preferred classes to common. We then discounted the values of each class of equity in the initial public offering scenarios at an appropriate risk-adjusted rate. We assumed risk-adjusted rates of 25% for the common shares and preferred shares. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the Practice Aid.

In the option pricing method scenario, we assumed an equity value equal to the present value of our equity in a future unspecified liquidity event. Significant assumptions for the option pricing method

 

 

 

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included volatility, the risk-free rate and the time to liquidity. We calculated annual rates of volatility based on weekly historical trading data for a group of guideline public companies at a similar stage of development. For the option pricing method scenario, the estimated time to liquidity was 3.2 years. The anticipated timing of a liquidity event was management’s estimate in the event our planned initial public offering did not occur. We interpolated a risk-free rate commensurate with the time to liquidity based on the observed yields for three-year U.S. Treasuries. We applied a discount for lack of marketability to the value indicated for our common stock. We estimated the discount for lack of marketability to be 30% in the option pricing method scenario and 10% in the initial public offering scenario. We decreased the discount for lack of marketability in the initial public offering scenario as compared to that used for the initial public offering scenario for the June 30, 2011 valuation because we believed that we were moving closer to a potential initial public offering.

The following table summarizes the significant assumptions we used in the hybrid method to determine the fair value of our common stock as of December 31, 2012:

 

December 31, 2012 retrospective valuation    Initial public
offering
    Option pricing
method
 

Probability weighting

     40     60

Estimated time to liquidity

     1.1        3.2   

Weighted-average cost of capital

     25     25

Annual volatility

            77.0

Risk-free interest rate

            0.35

Discount for lack of marketability

     10     30

Estimated per share present value of marketable common stock (before discount for lack of marketability and probability weighting)

   $   17.01      $   6.22   

Based on the factors above, we determined that our common stock had a fair value of $8.76 per share as of December 31, 2012. The estimated per share fair value of our common stock calculated in our valuation as of December 31, 2012 increased from the June 30, 2011 valuation of $3.50 per share due primarily to the following factors, which were incorporated into the December 31, 2012 valuation:

 

Ø  

increased probability of an initial public offering;

 

Ø  

pending collaborations with Jazz Pharmaceuticals and Celgene, which were in advanced stages of negotiation;

 

Ø  

continued progression of the CTP-499 Phase 2 clinical trial and achievement of full enrollment; and

 

Ø  

our determination to progress an additional program, CTP-354, into a Phase 1 clinical trial on our own.

We used the retrospective valuation as of December 31, 2012 to value the stock option grants in November 2012 for accounting purposes.

April 30, 2013 retrospective valuation . For the retrospective valuation as of April 30, 2013, we used the hybrid method. For our April 30, 2013 valuation, we considered two possible outcomes: an initial public offering scenario and a later unspecified liquidity event or option pricing method scenario. Based on the occurrence of several biopharmaceutical initial public offerings in early 2013 and an overall improvement in market conditions for biopharmaceutical initial public offerings, we assumed that our probability of an initial public offering had increased from 40% as of December 31, 2012 to 60% as of April 30, 2013.

As an indicator of value for the initial public offering scenario, we considered guideline public company information under the market approach. The guideline companies included recent biopharmaceutical

 

 

 

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initial public offerings for companies at a similar stage of development. In addition, based on an assessment of our prospects and market conditions, our board of directors had advised us at this time to begin internal preparations so that an initial public offering could occur shortly following our receipt of our clinical trial data. As a result, we shortened the estimated time to an initial public offering to 0.6 years as compared to 1.1 years as of December 31, 2012. We allocated the future equity value at the expected initial public offering date to each class of preferred stock and the common stock assuming conversion of all preferred classes to common. We then discounted the values of each class of equity in the initial public offering scenario at an appropriate risk-adjusted rate. We assumed risk-adjusted rates of 25% for the common shares and preferred shares. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the Practice Aid.

In the option pricing method scenario, we assumed an equity value equal to the present value of our equity in a future unspecified liquidity event. Significant assumptions for the option pricing method included volatility, the risk-free rate and the time to liquidity. We calculated annual rates of volatility based on weekly historical trading data for a group of guideline public companies in a similar stage of development. For the option pricing method scenario, the estimated time to liquidity was 2.8 years. The anticipated timing of a liquidity event was management’s estimate in the event our planned initial public offering did not occur. We interpolated a risk-free rate commensurate with the time to liquidity based on the observed yields for two-year and three-year U.S. Treasuries. We applied a discount for lack of marketability to the value indicated for our common stock. We estimated the discount for lack of marketability to be 30% in the option pricing method scenario and 7.5% in the initial public offering scenario. We decreased the discount for lack of marketability in the initial public offering scenario as compared to that used for the initial public offering scenario for the December 31, 2012 retrospective valuation because we believed that we were moving closer to a potential initial public offering.

The following table summarizes the significant assumptions we used in the hybrid method to determine the fair value of our common stock as of April 30, 2013:

 

April 30, 2013 retrospective valuation    Initial public
offering
    Option pricing
method
 

Probability weighting

     60     40

Estimated time to liquidity

     0.6        2.8   

Weighted-average cost of capital

     25     25

Annual volatility

            83.8

Risk-free interest rate

            0.31

Discount for lack of marketability

     7.5     30

Estimated per share present value of marketable common stock (before discount for lack of marketability and probability weighting)

   $ 19.66      $ 7.40   

Based on the factors above, we determined that our common stock had a fair value of $13.00 per share as of April 30, 2013. The estimated per share fair value of our common stock calculated in our retrospective valuation as of April 30, 2013 increased from the December 31, 2012 retrospective valuation of $8.76 per share due primarily to the following factors, which were incorporated into the April 30, 2013 retrospective valuation:

 

Ø  

increased probability and accelerated timing of our possible initial public offering;

 

Ø  

announcement by Avanir of positive data from its AVP-786 Phase 1 clinical trial, as a result of which we earned a $2.0 million milestone;

 

Ø  

our entry into collaborations with Jazz Pharmaceuticals and Celgene; and

 

 

 

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Ø  

improved capital market conditions for companies in our industry, as evidenced by a recent increase in the number of public offerings by such companies and the recent stock market performance of publicly traded companies in our industry.

We used the retrospective valuation as of April 30, 2013 to value the stock option grants on May 3, 2013 for accounting purposes.

June 30, 2013 retrospective valuation. For the retrospective valuation as of June 30, 2013, we used the hybrid method with an initial public offering scenario and a later unspecified liquidity event or option pricing method scenario. We increased the probability of an initial public offering from 60% determined as of April 30, 2013 to 70% because in June 2013, our board of directors authorized us to begin preparing a Form S-1 registration statement for confidential submission to the SEC prior to our receipt of our clinical trial data.

As an indicator of value for the initial public offering scenario, we considered guideline public company information under the market approach. The guideline companies included recent biopharmaceutical initial public offerings for companies at a similar stage of development. We also considered an increase in value, or step-up, from the last preferred stock financing round to the initial public offering price based on discussion with the underwriters for our possible initial public offering. We allocated the future equity value at the expected initial public offering date to each class of preferred stock and the common stock assuming conversion of all preferred classes to common. We then discounted the values of each class of equity in the initial public offering scenarios at an appropriate risk-adjusted rate. We assumed risk-adjusted rates of 25% for the common shares and preferred shares. We selected these risk-adjusted rates based on studies of the rates of return expected by venture capital investors, as presented in the Practice Aid.

In the option pricing method scenario, we assumed an equity value equal to the present value of our equity in a future unspecified liquidity event. Significant assumptions for the option pricing method included volatility, the risk-free rate and the time to liquidity. We calculated annual rates of volatility based on weekly historical trading data for a group of guideline public companies in a similar stage of development. For the option pricing method scenario, the estimated time to liquidity was 2.7 years. The anticipated timing of a liquidity event was management’s estimate in the event our planned initial public offering did not occur. We interpolated a risk-free rate commensurate with the time to liquidity based on the observed yields for two-year and three-year U.S. Treasuries. We applied a discount for lack of marketability to the value indicated for our common stock. We estimated the discount for lack of marketability to be 30% in the option pricing method scenario and 5% in the initial public offering scenario. We decreased the discount for lack of marketability in the initial public offering scenario as compared to that used for the initial public offering scenario for the April 30, 2013 retrospective valuation because we believed that we were moving closer to a potential initial public offering.

The following table summarizes the significant assumptions we used in the hybrid method to determine the fair value of our common stock as of June 30, 2013:

 

June 30, 2013 retrospective valuation    Initial public
offering
    Option pricing
method
 

Probability weighting

     70     30

Estimated time to liquidity

     0.4        2.7   

Weighted-average cost of capital

     25     25

Annual volatility

            84.5

Risk-free interest rate

            0.56

Discount for lack of marketability

     5     30

Estimated per share present value of marketable common stock (before discount for lack of marketability and probability weighting)

   $ 22.88      $ 7.97   

 

 

 

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Based on the factors above, we determined that our common stock had a fair value of $16.89 per share as of June 30, 2013. The estimated per share fair value of our common stock calculated in our retrospective valuation as of June 30, 2013 increased from the April 30, 2013 retrospective valuation of $13.00 per share due primarily to the following factors, which were incorporated into the June 30, 2013 retrospective valuation:

 

Ø  

increased probability of our initial public offering;

 

Ø  

improved capital market conditions for companies in our industry, as evidenced by a recent increase in the number of public offerings by such companies and the recent stock market performance of publicly traded companies in our industry;

 

Ø  

our initiation of a Phase 1 single ascending dose clinical trial for CTP-354; and

 

Ø  

Avanir reporting that the FDA had agreed to an expedited development pathway for AVP-786.

We used the retrospective valuation as of June 30, 2013 to value the stock option grants on May 28, 2013 for accounting purposes.

On January 24, 2014, our board of directors approved, subject to the closing of this offering, the grant of a stock option on the date of the closing of this offering to purchase 123,893 shares of common stock at a purchase price equal to the closing price of our common stock on the NASDAQ Global Market on such date of grant, which our board determined to be the estimated fair market value of our common stock on such date of grant.

There are significant judgments and estimates inherent in the determination of the valuations of our common stock described above. These judgments and estimates include assumptions regarding our future performance, including the successful enrollment and completion of our clinical trials as well as the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot make assurances as to any particular valuation for our common stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

EMERGING GROWTH COMPANY STATUS

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material effect on our financial position or results of operations upon adoption.

 

 

 

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RESULTS OF OPERATIONS

Comparison of the nine months ended September 30, 2012 and 2013

The following table summarizes our results of operations for the nine months ended September 30, 2012 and 2013, together with the changes in those items in dollars.

Revenue

 

      Nine months ended September 30,    

Increase

(Decrease)

 
(in thousands)            2012             2013    

Revenue:

      

License and research and development revenue

   $ 11,126      $ 21,995      $ 10,869   

Milestone revenue

     1,500        2,000        500   
  

 

 

   

 

 

   

 

 

 

Total revenue

     12,626        23,995        11,369   

Operating expenses:

      

Research and development

     18,384        16,460        (1,924

General and administrative

     5,620        6,366        746   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     24,004        22,826        (1,178
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,378     1,169        12,547   

Investment income

     17        17          

Interest and other expense

     (1,324     (1,327     3   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,685   $ (141   $ (12,544
  

 

 

   

 

 

   

 

 

 

Revenue was $24.0 million for the nine months ended September 30, 2013, compared to $12.6 million for the nine months ended September 30, 2012, an increase of $11.4 million. The increase in revenue was primarily due to license revenue recognized for the nine months ended September 30, 2013 of $17.0 million under our collaboration with Celgene and $3.7 million under our collaboration with Jazz Pharmaceuticals, in connection with our grant of licenses under these collaborations, as well as $2.0 million of milestone revenue recognized for the nine months ended September 30, 2013 based on positive data from Avanir’s Phase 1 clinical trial of AVP-786. In comparison, we recognized revenue for the nine months ended September 30, 2012 comprised primarily of $8.3 million of research and development revenue and $1.5 million of milestone revenue under our collaboration with GSK, which ended in 2012. We recognized license revenue of $2.0 million in the nine months ended September 30, 2012 relating to the license grant to Avanir for deuterated dextromethorphan. In addition, an increase of $0.3 million in revenue recognized for services performed under our collaborations contributed to the overall increase in revenue for the nine months ended September 30, 2013 as compared to the prior year period.

As of September 30, 2013, we had deferred revenue of:

 

Ø  

$17.6 million related to our collaboration with Celgene, $3.9 million of which is classified as current and $13.7 million of which is classified as long-term, on our consolidated balance sheet;

 

Ø  

$0.2 million related to our collaboration with Jazz Pharmaceuticals and associated with research and development services to be performed and recognized as revenue over the estimated remaining performance period of 39 months; and

 

Ø  

$2.8 million related to a payment received from GSK that we will not recognize as revenue until all repayment obligations lapse.

 

 

 

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Research and development expenses

The following table summarizes our external research and development expenses, by program, for the nine months ended September 30, 2012 and 2013, with our internal research expenses separately classified by category. Because Avanir is conducting the clinical development of AVP-786 at its expense, we made minimal investment in the program during these periods.

 

     Nine months ended
September 30,
 
(in thousands)    2012      2013  

Direct research and development expenses:

     

CTP-499

   $ 4,165       $ 3,334   

CTP-354

     890         1,316   

CTP-298 (1)

     1,462         3   
  

 

 

    

 

 

 

Total direct research and development expenses

     6,517         4,653   
  

 

 

    

 

 

 

Employee and contractor-related expenses

     6,853         8,063   

Platform-related lab expenses

     2,481         1,297   

Facility expenses

     2,165         2,074   

Other expenses

     368         374   
  

 

 

    

 

 

 

Personnel and other expenses

     11,867         11,807   
  

 

 

    

 

 

 

Total research and development expenses

   $ 18,384       $ 16,460   
  

 

 

    

 

 

 

 

(1)   We were developing CTP-298 for the treatment of HIV prior to the termination of our collaboration with GSK.

Research and development expenses were $16.5 million for the nine months ended September 30, 2013, compared to $18.4 million for the nine months ended September 30, 2012, a decrease of $1.9 million. The decrease was primarily due to a $1.5 million decrease in CTP-298 expenses due to the completion of a Phase 1 clinical trial in May 2012, a $0.8 million decrease in CTP-499 expenses due to the completion of a preclinical toxicology study in August 2012 and subjects completing the Phase 2 clinical trial during the nine months ended September 30, 2013 and a $1.2 million decrease in platform-related laboratory expenses. These decreases were partially offset by a $1.2 million increase in employee and contractor-related expenses that were a result of employee bonuses earned during the nine months ended September 30, 2013 and a $0.4 million increase in CTP-354 expenses upon the initiation of Phase 1 clinical trials during the nine months ended September 30, 2013.

From our inception through September 30, 2013, we incurred external research and development expenses of $20.8 million for CTP-499, $3.2 million for CTP-354 and $3.6 million for CTP-298.

We expect to incur increased research and development costs in future periods relating to:

 

Ø  

continued development of CTP-354 through two Phase 2 clinical trials;

 

Ø  

our Celgene collaboration, as we expect to initiate Phase 1 clinical trials in 2014; and

 

Ø  

hiring of additional research and development personnel and initiation and continuation of other programs.

We expect that our research and development expenses relating to CTP-499 will decrease significantly in the first quarter of 2014, when we conclude the first of the two extension studies in our Phase 2 clinical trial. We may seek one or more collaborators for future development of CTP-499.

 

 

 

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General and administrative expenses

General and administrative expenses were $6.4 million for the nine months ended September 30, 2013, compared to $5.6 million for the nine months ended September 30, 2012, an increase of $0.8 million. The increase was primarily due to an increase in market research expenditures of $0.3 million and an increase in compensation expense of $0.6 million relating to employee bonuses earned during the nine months ended September 30, 2013, partially offset by a $0.1 million decrease in legal and patent fees.

We expect that our general and administrative expenses will increase in future periods as we expand our operations and incur additional costs in connection with being a public company. These increases will likely include legal, auditing and filing fees, additional insurance premiums and general compliance and consulting expenses.

Interest and other expense

Interest and other expense was an expense of $1.3 million for both the nine months ended September 30, 2013 and the nine months ended September 30, 2012. Expense recognized in connection with re-measurement of the fair value of the redeemable convertible preferred stock warrant that we issued to Hercules in connection with draws under our debt facility decreased by $0.2 million for the nine months ended September 30, 2013 as compared to the prior year period. This decrease was offset by an increase of $0.2 million in interest expense associated with $12.5 million of principal that we drew under our debt facility with Hercules in March 2012.

Comparison of the years ended December 31, 2011 and 2012

The following table summarizes our results of operations for the years ended December 31, 2011 and 2012, together with the changes in those items in dollars.

 

     Year ended December 31,     Increase
(Decrease)
 
(in thousands)                2011                 2012    

Revenue:

      

License and research and development revenue

   $ 13,967      $ 11,349      $ (2,618

Milestone revenue

     5,500        1,500        (4,000
  

 

 

   

 

 

   

 

 

 

Total revenue

     19,467        12,849        (6,618

Operating expenses:

      

Research and development

     23,436        24,193        757   

General and administrative

     7,377        7,266        (111
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,813        31,459        646   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,346     (18,610     7,264   

Investment income

     44        22        (22

Interest and other expense

     (18     (1,856     1,838   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (20,444   $ 9,124   
  

 

 

   

 

 

   

 

 

 

Revenue

Revenue was $12.8 million for the year ended December 31, 2012 compared to $19.5 million for the year ended December 31, 2011, a decrease of $6.6 million. The decrease in revenue was primarily due to decreases of $5.7 million in research and development revenue and $4.0 million in milestone revenue under our collaboration with GSK, which were partially offset by $2.0 million of license revenue relating to the license grant to Avanir for deuterated dextromethorphan analogs and $0.4 million of research and development revenue under our Avanir collaboration as well as $0.7 million of research and development revenue relating to our sponsored research agreement with Fast Forward. Revenue under our collaboration with GSK constituted substantially all of our revenue for the year ended December 31, 2011 and related to CTP-298.

 

 

 

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Research and development expenses

The following table summarizes our external research and development expenses, by program, for the years ended December 31, 2011 and 2012, with our internal research expenses separately classified by category. Because Avanir is conducting the clinical development of AVP-786 at its expense, we made minimal investment in the program during these periods.

 

     Year ended December 31,  
(in thousands)                2011                  2012  

Direct research and development expenses:

     

CTP-499

   $ 5,942       $ 5,967   

CTP-354

     359         1,091   

CTP-298 (1)

     2,778         1,478   
  

 

 

    

 

 

 

Total direct research and development expenses

     9,079         8,536   
  

 

 

    

 

 

 

Employee and contractor-related expenses

     9,411         9,031   

Platform-related lab expenses

     1,564         3,270   

Facility expenses

     2,911         2,833   

Other expenses

     471         523   
  

 

 

    

 

 

 

Personnel and other expenses

     14,357         15,657   
  

 

 

    

 

 

 

Total research and development expenses

   $ 23,436       $ 24,193   
  

 

 

    

 

 

 

 

(1)   We were developing CTP-298 for the treatment of HIV prior to the termination of our collaboration with GSK.

Research and development expenses were $24.2 million for the year ended December 31, 2012, compared to $23.4 million for the year ended December 31, 2011, an increase of $0.8 million. The increase was primarily due to $1.7 million of increased expenses relating to preclinical programs that are now covered by our collaboration with Celgene and $0.7 million of increased expenses relating to our CTP-354 program associated with IND-enabling toxicology studies. These increases were partially offset by $1.3 million of decreased expenses with respect to CTP-298 and a $0.3 million decrease in employee compensation expense.

General and administrative expenses

General and administrative expenses were $7.3 million for the year ended December 31, 2012, which was comparable to general and administrative expenses of $7.4 million for the year ended December 31, 2011.

Interest and other expense

Interest and other expense was an expense of $1.9 million for the year ended December 31, 2012, compared to an expense of $18 thousand for the year ended December 31, 2011, an increase in expense of $1.9 million. The increase was primarily due to interest expense on $7.5 million of principal that we drew under our debt facility with Hercules in December 2011 and $12.5 million of principal that we drew under our debt facility with Hercules in March 2012.

LIQUIDITY AND CAPITAL RESOURCES

We have incurred cumulative losses and negative cash flows from operations since our inception in April 2006, and as of September 30, 2013, we had an accumulated deficit of $107.7 million. We anticipate that we will continue to incur losses for at least the next several years. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings and additional collaborations and licensing arrangements.

 

 

 

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We have financed our operations to date primarily through private placements of our preferred stock, debt financing and funding from collaborations. As of September 30, 2013, we had cash and cash equivalents and investments of $42.6 million.

Cash flows

The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

     Year ended December 31,     Nine months ended September 30,  
(in thousands)                2011                 2012                 2012                 2013  

Net cash provided by (used in):

        

Operating activities

   $ (18,085   $ (26,427   $ (19,088   $ 18,640   

Investing activities

     22,901        (1,200     (8,851     (4,256

Financing activities

     6,985        12,168        12,251        (3,262
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 11,801      $ (15,459   $ (15,688   $ 11,122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating activities.  Net cash provided by operating activities was $18.6 million during the nine months ended September 30, 2013 compared to net cash used in operating activities of $19.1 million during the nine months ended September 30, 2012. The increase in cash provided by operating activities was primarily due to receipt in the nine months ended September 30, 2013 of a non-refundable upfront payment of $35.0 million related to our collaboration with Celgene and a non-refundable upfront payment of $4.0 million related to our collaboration with Jazz Pharmaceuticals. Net cash used in operating activities was $26.4 million for the year ended December 31, 2012 compared to $18.1 million for the year ended December 31, 2011. The increase in cash used in operating activities in 2012 was driven by a $4.0 million decrease in milestone revenue from collaborations, an increase of $1.3 million in interest payments relating to indebtedness incurred in December 2011 and March 2012 under our debt facility with Hercules and a $1.2 million decrease in accounts payable.

Investing activities.  Net cash provided by (used in) investing activities consisted of purchases of fixed assets, purchases of short-term and long-term investments, and proceeds from the maturity of short-term and long-term investments. Net cash used in investing activities for the nine months ended September 30, 2013 was $4.3 million compared to net cash used in investing activities of $8.9 million for the nine months ended September 30, 2012. The decrease in net cash used in investing activities was primarily due to a decrease in purchases of investments of $5.5 million, partially offset by a decrease in maturities of investments of $1.0 million. Net cash used in investing activities for the year ended December 31, 2012 was $1.2 million compared to net cash provided by investing activities of $22.9 million for the year ended December 31, 2011. The decrease in net cash provided by investing activities was primarily due to decreased maturities of investments of $26.4 million, partially offset by a decrease in purchase of investments of $2.5 million.

Financing activities.  Net cash used in financing activities for the nine months ended September 30, 2013 was $3.3 million compared to net cash provided by financing activities of $12.3 million for the nine months ended September 30, 2012. The decrease in net cash provided by financing activities was primarily due to our receipt during the nine months ended September 30, 2012 of proceeds of $12.5 million under our debt facility with Hercules, combined with an increase in principal payments under our debt facility with Hercules of $3.0 million for the nine months ended September 30, 2013 as compared to the prior year period. Net cash provided by financing activities for the year ended December 31, 2012 was $12.2 million compared to $7.0 million for the year ended December 31, 2011. The increase in net cash provided by financing activities was primarily due to an increase of $5.2 million in proceeds under our debt facility with Hercules.

 

 

 

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Operating capital requirements

To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we, or our collaborators, obtain marketing approval of and commercialize one of our current or future product candidates. Because our product candidates are in various stages of development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete development and commercialization of our product candidates or whether or when we will achieve profitability. We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek marketing approvals for, our product candidates, and begin to commercialize any approved products for which we retain commercialization rights. We are subject to all of the risks incident in the development of new drug products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, as well as additional risks stemming from the unproven nature of deuterated drugs. Upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need to obtain substantial additional funding in connection with our continuing operations.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and investments as of September 30, 2013, will enable us to fund our operating expenses, debt service and capital expenditure requirements for at least the next 24 months, without giving effect to potential milestone payments that we may receive under existing collaboration agreements. This estimate assumes we either enter into a collaboration agreement pursuant to which a partner funds further development of CTP-499 or we do not otherwise expend significant funds for further development of this product candidate. However, we may require additional capital for the further development of our existing product candidates and may also need to raise additional funds sooner to pursue other development activities related to additional product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and additional collaborations, strategic alliances and licensing arrangements. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, upon completion of this offering, we will not have any committed external sources of funds. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and these securities may have rights senior to those of our common stock. We are subject to covenants under our existing loan and security agreement with Hercules, and may become subject to covenants under any future indebtedness, that could limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, which could adversely impact our ability to conduct our business. In addition, the pledge of substantially all of our assets with the exception of our intellectual property as collateral, and the negative pledge with respect to our intellectual property, under our debt facility with Hercules limit our ability to obtain additional debt financing.

Our expectation with respect to the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including those discussed in the “Risk factors” section of this prospectus. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If we cannot

 

 

 

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expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition and results of operations could be materially adversely affected.

Contractual obligations

The following table summarizes our contractual obligations at December 31, 2012:

 

(in thousands)    Total      Less than
1 year
     1 to 3
years
     3 to 5
years
     More than
5 years
 

Long-term debt obligations (1)

   $ 22,880       $ 6,510       $ 16,370       $  —       $  —   

Operating lease obligations (2)

     4,978         1,762         3,216                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 27,858       $ 8,272       $ 19,586       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Consists of payment obligations for principal and interest under our debt facility with Hercules. As of December 31, 2012, we had $20.0 million in outstanding borrowings under the debt facility, bearing interest at a variable rate of the greater of 8.5% and an amount equal to 8.5% plus the prime rate of interest minus 5.25%, subject to a cap of 11%. Under the terms of the loan and security agreement governing the debt facility, we were required to pay interest only through April 30, 2013, which from January 1, 2013 to April 30, 2013 consisted of monthly payments of $0.1 million. Following April 30, 2013, we are required to repay this indebtedness in equal monthly payments of $0.7 million through October 15, 2015. The loans under the debt facility are collateralized by a lien on substantially all of our corporate assets, excluding intellectual property, which is subject to a negative pledge under the loan and security agreement. The loan and security agreement contains default provisions that include the occurrence of a material adverse effect, as defined therein, that would entitle the lender to declare all principal, interest and other amounts owed by us under the loan and security agreement immediately due and payable.

 

(2)   Consists of future lease payments and repayment obligations with respect to leasehold improvements under the operating lease for our office and laboratory space at 99 Hayden Avenue, Lexington, Massachusetts. The operating lease expires on September 30, 2015.

We also have obligations to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones, such as the start of a clinical trial, filing of an NDA, approval by the FDA or product launch. We have not included these commitments on our balance sheet or in the table above because the achievement and timing of these milestones is not fixed and determinable. These commitments include:

 

Ø  

An obligation to make a payment to GSK of up to $2.8 million if we commercialize CTP-499 or if, prior to a specified date in 2018, we re-license or transfer rights to our CTP-499 program prior to a specified date in 2018.

 

Ø  

Obligations to make milestone payments to Fast Forward not in excess of a low-single digit multiple of the $0.8 million Fast Forward funding amount if we commercialize CTP-354 or license the development and commercialization of CTP-354 to a third party.

We enter into contracts in the normal course of business with contract research organizations 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 did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term available-for-sale securities and interest on our debt facility accrues at a variable rate that references the prime rate.

 

 

 

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We had cash and cash equivalents and investments of $42.6 million as of September 30, 2013 and $27.6 million as of December 31, 2012, in each case primarily money market mutual funds consisting of U.S. government-backed securities. Our available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio.

We had outstanding borrowings under our debt facility with Hercules of $17.0 million as of September 30, 2013 and $20.0 million as of December 31, 2012. Interest is payable at a variable rate of the greater of 8.5% and an amount equal to 8.5% plus the prime rate of interest minus 5.25%, provided however, that the per annum interest rate shall not exceed 11%. As a result of the 11% maximum annual interest rate and interest rate protection until prime exceeds 5.25%, we have limited exposure to changes in interest rates on borrowings under this facility. An immediate 10% change in the prime rate as of September 30, 2013 would have no effect on the amount of our required interest payments under the debt facility over the next twelve-month period.

We contract with suppliers of raw materials and contract manufacturers internationally. Transactions with these providers are predominantly settled in U.S. dollars and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks.

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the year ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013.

 

 

 

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Business

OVERVIEW

We are a clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. Our approach starts with approved drugs, advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. We believe our approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development.

We have a robust pipeline, including three clinical-stage candidates and a number of preclinical compounds that we are actively developing. Our clinical programs are CTP-354 for spasticity associated with multiple sclerosis and spinal cord injury, CTP-499 for diabetic kidney disease and AVP-786 for neurologic and psychiatric disorders under our collaboration with Avanir. We also have ongoing collaborations with Celgene, for deuterated compounds including CTP-730, which is in preclinical development for inflammatory diseases, and Jazz Pharmaceuticals, for JZP-386, a deuterated analog of sodium oxybate, the active ingredient in its marketed drug Xyrem ® , which is in preclinical development for narcolepsy. Between our wholly owned and collaboration programs, we expect to have up to five product candidates in clinical development by the end of 2014, including at least two product candidates in Phase 2 clinical trials.

We believe we are the leader in applying deuterium chemistry in drug discovery and development. Deuterium is similar to hydrogen in size and shape. However, deuterium differs from hydrogen in one pharmaceutically important respect—deuterium forms a more stable chemical bond with carbon. This increased stability has the potential, through the selective substitution of deuterium for hydrogen, to improve pharmacokinetic and metabolic properties without changing a compound’s intrinsic biological activity. We believe that our application of deuterium chemistry, which we refer to as deuteration, is an efficient way to build on existing knowledge to create important new medicines.

We have built a deuterated chemical entity platform, which we refer to as our DCE Platform. Our platform comprises the proprietary know-how, techniques and information that we have accumulated since our inception in 2006. Our DCE Platform allows us to efficiently identify compounds for deuteration and to design, evaluate, develop and manufacture deuterated compounds.

In our drug discovery and development processes, we build on the significant existing information regarding the corresponding non-deuterated compound. This allows us to efficiently identify lead compounds and, in some cases, shorten the amount of time necessary to initiate clinical trials as compared to conventional small molecule drug research and development. In clinical development, we believe that the FDA and comparable foreign regulatory authorities may allow some of our compounds that are deuterated analogs of approved products, or of compounds for which approval is pending, to follow an expedited development pathway by relying on previous clinical and preclinical data related to the non-deuterated compound. For example, in June 2013, Avanir reported that the FDA agreed to an expedited development pathway for AVP-786, permitting Avanir to reference data from its development of dextromethorphan and quinidine in its IND, and any future NDA, for AVP-786.

We are utilizing our DCE Platform to discover and develop product candidates for a variety of indications. CTP-354, CTP-499 and AVP-786 are advancing in clinical trials and we have multiple preclinical candidates, two of which we expect to move into clinical trials in 2014. Our priority programs include:

 

Ø  

CTP-354, a novel, potentially first-in-class, non-sedating treatment for spasticity that we are initially developing for use in patients with multiple sclerosis and patients with spinal cord injury to address a significant unmet medical need in these markets. CTP-354 is a subtype selective GABA A receptor modulator. GABA A receptors are found in the nervous system and, when activated, reduce the

 

 

 

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transmission of certain nerve signals. Several classes of widely used drugs target GABA A receptors, including benzodiazepines and some sleep agents, none of which have the receptor subtype selectivity that we believe CTP-354 possesses. We designed CTP-354 to provide therapeutic benefits without the severe side effects and dosing burden that can limit or prevent the use of existing agents in treating spasticity. For example, the strong sedative effects of benzodiazepines severely limit their therapeutic use in spasticity and certain other indications. We recently completed a 71-subject Phase 1 single ascending dose clinical trial of CTP-354 and are currently conducting a Phase 1 imaging study. The results from our Phase 1 single ascending dose trial indicate that CTP-354 has a favorable pharmacokinetic profile that supports once-daily dosing. The results also indicate that CTP-354 did not cause sedation at levels of GABA A receptor occupancy well above the levels achieved by benzodiazepines at doses that are typically prescribed. GABA A receptor occupancy is a measure of the extent to which CTP-354 binds to GABA A receptors that we believe may correlate to therapeutic activity. In January 2014, we initiated a multiple ascending dose Phase 1 clinical trial evaluating daily doses of 2 mg and 6 mg of CTP-354 in healthy volunteers. Assuming successful completion of the multiple ascending dose Phase 1 clinical trial, we plan to initiate a Phase 2 clinical program for CTP-354 in the second half of 2014. We expect that the Phase 2 clinical program will include one clinical trial for the treatment of spasticity associated with multiple sclerosis and one clinical trial for the treatment of spasticity associated with spinal cord injury. Due to the fact that we did not determine a maximum tolerated dose in our preclinical testing, the FDA has informed us that we may not administer multiple doses of CTP-354 in excess of 6 mg per day in clinical trials without first conducting an additional higher dose preclinical toxicology study. We believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity; however we intend to conduct the additional preclinical toxicology study to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications.

 

Ø  

CTP-499, a novel oral multi-subtype selective inhibitor of PDEs, which are enzymes that we believe play an important role in type 2 diabetic kidney disease. According to a 2009 article in the American Diabetes Association journal Diabetes Care, type 2 diabetes is the leading cause of chronic kidney disease. Type 2 diabetic kidney disease can result in the need for dialysis and renal transplantation. Many patients with this disease continue to experience a decline in renal function despite treatment with standard of care therapies. We are developing CTP-499 as an additive treatment to the current standard of care to further slow progression towards kidney failure. We are currently conducting a three-part Phase 2 clinical trial of CTP-499 in which we have enrolled patients with type 2 diabetic kidney disease and macroalbuminuria. In 2013, we completed the first part of this trial, a 24-week, double-blind, parallel, two-arm, placebo-controlled study in 182 patients. We have also completed dosing in the second part of the trial, a blinded 24-week extension study, which, combined with the data from the first part of the trial, has provided 48 weeks of placebo-controlled data in 123 patients. We did not achieve statistical significance in the primary efficacy endpoint of this trial, which was measured at 24 weeks. However, we believe that the data we have analyzed to date from the first 48 weeks of treatment support the potential of CTP-499 to help protect kidney function in patients with rapidly progressing type 2 diabetic kidney disease. We have conducted preliminary analyses of these 48 weeks of data, but have not yet completed a full analysis. We expect to report the final top line results for the first 48 weeks of the trial in the first half of 2014.

 

Ø  

AVP-786, a combination of a deuterium-substituted dextromethorphan analog and an ultra-low dose of quinidine. We have granted Avanir an exclusive license to develop and commercialize deuterated dextromethorphan analogs, including the analog in AVP-786. Avanir is developing AVP-786 for the treatment of neurologic and psychiatric disorders. In February 2013, Avanir reported positive results from a Phase 1 clinical trial of AVP-786. In October 2013, Avanir reported plans to advance AVP-786 into a Phase 2 clinical trial in the second half of 2014 for treatment-resistant major depressive disorder in patients with insufficient response to conventional anti-depressants.

 

 

 

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Ø  

A collaboration with Celgene to research, develop and commercialize certain deuterated compounds for the treatment of cancer or inflammation, with an initial focus on a single program. In the initial program, we have selected CTP-730, a product candidate for the treatment of inflammatory diseases, and expect to begin Phase 1 clinical trials in 2014.

 

Ø  

A collaboration with Jazz Pharmaceuticals to research, develop and commercialize JZP-386, a product candidate containing a deuterated analog of sodium oxybate for potential use in patients with narcolepsy. Sodium oxybate is the active ingredient in the marketed drug Xyrem. In December 2013, an IMPD, the basis for initiating clinical trials in the European Union, was filed for JZP-386. Jazz Pharmaceuticals has reported that, subject to approval of the IMPD, it expects a Phase 1 clinical trial of JZP-386 to commence in 2014, with completion of enrollment and reporting of initial data also expected in 2014.

Through September 30, 2013, we had received an aggregate of $105.4 million in upfront and milestone payments, equity investments and research and development funding from current and former collaborations. Under our current collaborations, we have the potential to receive up to $1.6 billion in future milestone payments, including over $1.2 billion in research, development and regulatory milestones, as well as royalties on any future net product sales.

Our senior management team has extensive experience in drug discovery and development. Collectively, our team has been involved in the research, development or approval of 12 drugs. Dr. Roger D. Tung, our Chief Executive Officer and one of our founders, is an accomplished leader in drug research and development. Prior to founding our company, Dr. Tung was the Vice President of Drug Discovery at Vertex Pharmaceuticals, Inc. At Vertex, he was a co-inventor of two drugs that were approved for the treatment of HIV, amprenavir and fosamprenavir, and oversaw the discovery of two other approved drugs, ivacaftor (Kalydeco) for cystic fibrosis and telaprevir (Incivek) for hepatitis C. Dr. Tung conceptualized our DCE Platform approach as a means to accelerate pharmaceutical research and development and create important new medicines. He has invented or co-invented many of the compounds in our pipeline.

OUR STRATEGY

Our strategy is to apply our extensive knowledge of deuterium chemistry to discover, develop and commercialize novel small molecule drugs. Key components of our strategy include:

 

Ø  

Rapidly advancing our deuterated product candidates . We seek to reduce the time and cost associated with conventional small molecule drug research and development by capitalizing on the known activity, safety, efficacy or development history of the non-deuterated analogs of our product candidates. Leveraging this knowledge, we have been able in a number of our programs, including CTP-499, to advance compounds from initial synthesis to clinical evaluation in less than two years. We also seek to develop product candidates that may be eligible for an expedited development or regulatory pathway, such as reported by Avanir for AVP-786.

 

Ø  

Establishing collaborations to develop and commercialize deuterated product candidates. Our current collaborations are focused on deuterated analogs of one or more of our collaborators’ proprietary compounds. In these situations, we benefit from our collaborators’ knowledge and experience with, and rights of reference to regulatory filings for, their corresponding non-deuterated compounds. We may establish similar collaborations in the future and also plan to enter into other collaborations to access the resources of larger biopharmaceutical companies.

 

Ø  

Capitalizing on our DCE Platform to build a robust pipeline of additional deuterated product candidates. Our DCE Platform consists of the proprietary know-how, techniques and information that we have developed over the past seven years. We broadly apply our DCE Platform to approved drugs,

 

 

 

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advanced clinical candidates or previously studied compounds. We particularly look to initiate development programs in areas of significant medical need and commercial opportunity. We believe we are capable of identifying one to two novel deuterated compounds per year that we can advance into preclinical development while concurrently progressing our existing pipeline.

 

Ø  

Retaining commercialization rights on a selective basis and building a specialized commercialization capability in the United States. We plan to use a combination of third party collaboration, licensing and distribution arrangements and a focused in-house commercialization capability to sell any of our products that receive marketing approval. For the United States, we plan to seek to retain full commercialization rights for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights, when feasible, in indications requiring a larger commercial infrastructure. We plan to collaborate with other parties for commercialization outside the United States.

 

Ø  

Expanding our broad patent estate covering deuterated compounds and related technology. Since our inception in 2006, we have systematically sought, and continue to seek, to identify compounds that can be improved through selective deuterium substitution and to obtain patent protection for deuterated analogs of these compounds with the goal of establishing a broad proprietary position in this field. We hold issued U.S. patents covering the composition of matter of each of our most advanced product candidates. In addition, we own issued patents or patent applications that claim the deuterated analogs of more than 90 non-deuterated compounds.

DEUTERIUM: IMPLICATIONS FOR DRUG RESEARCH AND DEVELOPMENT

The average adult human body contains approximately two grams of deuterium. While essentially identical to hydrogen in size and shape, deuterium differs from hydrogen in that it contains an additional neutron. As a result, deuterium forms a more stable chemical bond with carbon than does hydrogen. The deuterium-carbon bond is typically six to nine times more stable than the hydrogen-carbon bond. This has important implications for drug development because drug metabolism often involves the breaking of hydrogen-carbon bonds.

 

LOGO

Because deuterium forms more stable bonds with carbon, deuterium substitution can in some cases alter drug metabolism, including through improved metabolic stability, reduced formation of toxic metabolites, increased formation of desired active metabolites, or a combination of these effects. At the same time, because deuterium closely resembles hydrogen, the substitution of deuterium for hydrogen has generally been found not to materially alter the intrinsic biological activity of a compound. Deuterated compounds can generally be expected to retain biochemical potency and selectivity similar to

 

 

 

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their hydrogen analogs. The effects, if any, of deuterium substitution on metabolic properties are highly dependent on the specific molecular positions at which deuterium is substituted for hydrogen. In addition, the metabolic effects of deuterium substitution, if any, are unpredictable, even in compounds that have similar chemical structures.

OUR DCE PLATFORM

Our DCE Platform consists of the proprietary know-how, techniques and information that we have developed over the past seven years. Deuterated compounds can have an increased half-life in the body and increased systemic exposure as compared to their corresponding non-deuterated analogs, which we believe can lead to benefits such as improved safety, efficacy, tolerability and convenience. Due to our significant experience in deuterium chemistry and pharmaceutical research and development, we believe we are well-positioned to efficiently identify compounds that can benefit from deuterium substitution and create optimally deuterated product candidates.

We believe that our DCE Platform can enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development. Conventional drug discovery and development are lengthy processes with high failure rates. Relatively few molecules identified in drug discovery possess the beneficial pharmacological activity and acceptable tolerability and toxicity required to become clinically useful medicines that address commercially important needs. We believe that our product candidates may have a higher likelihood of becoming useful medicines because we selectively deuterate molecules that are already known to be pharmacologically active in vivo and have either been studied in humans or are closely chemically related to such molecules. We believe that our likelihood of success may be even greater in cases in which we have selectively deuterated analogs of approved drugs.

Our DCE Platform includes the following capabilities, which we believe provide us with key competitive advantages:

Selection of attractive compounds for deuteration. We identify candidate compounds for selective deuteration through the efforts of a team that integrates chemistry, biology, medical, regulatory, intellectual property and commercial expertise. We believe our ability to choose appropriate candidate molecules for selective deuteration is an important competitive advantage. We apply our experience and know-how to identify approved drugs, advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. We prioritize candidate compounds based on medical need, commercial opportunity, competitive and patent landscapes and internal strategic fit. We believe that we are capable of identifying one to two novel deuterated compounds per year that we can advance into preclinical development while concurrently progressing our existing pipeline.

Medicinal chemistry and chemical and biological testing of deuterated compounds. We have developed significant proprietary know-how in the design, synthesis, chemical analysis, bioanalytical assessment, preclinical evaluation and clinical development of deuterated compounds. Our know-how includes the ability to:

 

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synthesize a wide range of chemical compounds that incorporate deuterium selectively at specific positions and accurately analyze deuterium content at those positions;

 

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identify, through an efficient, iterative process, the deuterated compounds that possess improved in vitro or in vivo metabolic or pharmacokinetic properties relative to the corresponding non-deuterated compound;

 

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develop and apply bioanalytical methods to identify and measure metabolites formed by the in vitro and in vivo metabolism of deuterated compounds; and

 

 

 

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understand how the effects of selective deuterium substitution may translate from in vitro to in vivo systems and from non-human models to humans.

Manufacturing of deuterated compounds. By applying our manufacturing and analytical know-how and capabilities, we are able to reproducibly manufacture deuterated compounds. Our manufacturing capabilities include the ability to:

 

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manufacture, analyze and formulate deuterated compounds that can be used in early stage clinical trials;

 

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manufacture low kilogram quantities of deuterated active pharmaceutical ingredients and product candidates suitable for clinical trials;

 

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transfer our methods to manufacturing vendors that can produce multi-kilogram quantities of clinical trial materials; and

 

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utilize a supply chain that we have built with multiple vendors that can provide deuterium reagents and intermediates in commercial scale quantities.

Development opportunities using our DCE Platform

We apply our DCE Platform to create deuterated analogs of:

 

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marketed drugs for their approved indications or compounds in clinical development for their targeted indications;

 

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marketed drugs for non-approved indications or compounds in clinical development for indications that were not previously targeted; and

 

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previously studied compounds, or close analogs thereof, that were not, or are no longer being, developed.

Potential advantages of product candidates based on our DCE Platform

We apply our DCE Platform to systematically identify approved drugs, advanced clinical candidates or previously studied compounds for which we believe we can improve or create clinical benefit through deuterium substitution. Potential advantages of our selective deuteration include:

 

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Improved metabolic profile. We have selectively deuterated compounds and compounds produced by metabolism of other compounds, which are called metabolites, to improve their metabolic profiles by reducing the formation of toxic or reactive metabolites or by increasing the formation of desired, active metabolites relative to the corresponding non-deuterated compound. The improved metabolic profile may potentially reduce or eliminate unwanted side effects or undesirable drug interactions. For example, Avanir has reported that, compared to dextromethorphan, the deuterated dextromethorphan in AVP-786 required less quinidine, a metabolic inhibitor, to achieve desired clinical blood levels in a Phase 1 clinical trial.

 

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Improved oral bioavailability. We have selectively deuterated compounds to reduce the extent of undesired metabolism in the wall of the intestines and in the liver, referred to as first-pass metabolism. This resulted in a larger percentage of unmetabolized drug reaching the target site of action. Deuterated compounds with improved bioavailability may be active at lower doses. For example, CTP-354 achieved substantially higher blood levels in in vivo preclinical tests than did the corresponding non-deuterated compound at an equivalent dose.

 

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Increased half-life. We have selectively deuterated compounds to prolong their pharamacokinetic profile, which is an increase in the half-life of the compound in the body. This may decrease the number of doses that a patient is required to take per day or provide more consistent exposure of the

 

 

 

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compound in comparison to the corresponding non-deuterated compound. For example, in preclinical in vivo testing, JZP-386 demonstrated a prolonged pharmacokinetic profile and reduced variability relative to sodium oxybate.

Potential for expedited discovery and development of deuterated product candidates

We believe our approach of applying selective deuteration using our DCE Platform has the potential to provide a more efficient and less expensive approach to developing new chemical entity drugs as compared to conventional small molecule drug research and development. Key reasons include:

 

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By building on the known activity, safety or efficacy of approved drugs, advanced clinical candidates or previously studied compounds, we believe we can progress our product candidates through discovery and into clinical development more quickly than in conventional small molecule drug research and development. In a number of cases, including CTP-499, we have advanced compounds from initial synthesis to clinical evaluation in less than two years.

 

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We believe the FDA and comparable foreign regulatory authorities may allow some of our compounds that are deuterated analogs of approved products, or of compounds for which approval is pending, to follow an expedited development pathway by relying on previous clinical data regarding the corresponding non-deuterated compound. For example, our collaborator Avanir reported agreeing with the FDA to an expedited development pathway for AVP-786 that would permit Avanir to reference data from its development of dextromethorphan and quinidine in its IND, and any future NDA, for AVP-786.

OUR PRODUCT CANDIDATES

The following table summarizes key information about our priority programs. All of these product candidates are small molecules designed for oral administration.

 

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CTP-354

Overview

CTP-354 is a novel, potentially first-in-class, non-sedating treatment for spasticity that we are initially developing for use in patients with multiple sclerosis and patients with spinal cord injury. CTP-354 is a subtype selective GABA A receptor modulator. GABA A receptors are found in the nervous system and, when activated, reduce the transmission of certain nerve signals.

GABA A receptors can possess one of a number of a subunits, including a 1, a 2, a 3 and a 5. The pharmacological effects of activating a GABA A receptor in the nervous system are believed to depend mainly on which type of a subunit the receptor contains. Several classes of widely used drugs target GABA A receptors, including benzodiazepines such as diazepam (Valium). Benzodiazepines are used for the treatment of anxiety, spasticity, muscle tension, insomnia, acute alcohol withdrawal and seizures. Activation of a 1 GABA A receptors is believed to be mainly responsible for sedation and ataxia, which is a lack of muscle control during voluntary movements, associated with benzodiazepine use, and may also contribute to their amnesiac and habituating effects. Activation of a 2, a 3 and a 5 GABA A receptors is believed to cause other therapeutic effects of benzodiazepines, including anti-spasticity, muscle relaxation, anti-anxiety, anti-seizure and potentially anti-pain activities. Some sleep agents, such as zolpidem (Ambien ® ) and zaleplon (Sonata ® ), also target GABA A receptors, but activate a 1 GABA A receptors significantly more potently than the other a subtypes, which is believed to cause their pronounced sedative properties. Based on this clinical precedent as well as a variety of preclinical models, we believe that a compound that activates a 2, a 3 and a 5 GABA A receptors but does not significantly activate a 1 GABA A receptors will have clinical effects similar in a number of important respects to benzodiazepines, including anti-spasticity, muscle relaxant, anti-seizure and potentially anti-pain effects, but without the strong sedative effects of benzodiazepines.

We submitted an IND to the FDA in January 2013 for the development of CTP-354 for spasticity in patients with multiple sclerosis or spinal cord injury. We have completed a single ascending dose Phase 1 clinical trial to evaluate the safety, tolerability and pharmacokinetics of CTP-354 in healthy volunteers. We have also conducted a Phase 1 positron emission tomography, or PET, imaging study to assess the brain GABA A receptor occupancy of CTP-354 following a single dose of the compound in healthy volunteers and plan to continue the study with multiple doses of CTP-354 in the first half of 2014.

In January 2014, we initiated a multiple ascending dose Phase 1 clinical trial evaluating daily doses of 2 mg and 6 mg of CTP-354 in healthy volunteers. Assuming successful completion of the multiple ascending dose Phase 1 clinical trial, we plan to initiate a Phase 2 clinical program for CTP-354 in the second half of 2014. We expect that the Phase 2 clinical program will include one clinical trial for the treatment of spasticity associated with multiple sclerosis and one clinical trial for the treatment of spasticity associated with spinal cord injury. In our previous preclinical testing, minimal, if any, toxicity was observed for CTP-354, and a maximum feasible dose or a maximum tolerated dose was not determined. As a result, the FDA has informed us that we may not administer multiple doses of CTP-354 in excess of 6 mg per day in clinical trials without first conducting an additional higher dose preclinical toxicology study. We believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity; however, we intend to conduct the additional preclinical toxicology study to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications. Based on the well-known efficacy of benzodiazepines and other GABA A modulators, we believe CTP-354 has potential in a number of other indications, including anxiety, chronic pain, muscle tension and epilepsy.

 

 

 

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Background

CTP-354 is a deuterated analog of a compound discovered by Merck & Co. referred to as L-838417. L-838417 was found in preclinical animal studies to possess certain therapeutic benefits of the benzodiazepine class of drugs, but without their predominantly sedative effect. Merck reported that, in in vitro testing, L-838417 activated the a 2, a 3 and a 5 GABA A receptors, which are associated with anti-spasticity, muscle relaxation, anti-anxiety, anti-seizure and, potentially, anti-pain activities, with approximately 40% of the in vitro activity of a benzodiazepine, with no significant activity at the a 1 GABA A receptors. Moreover, in a number of in vivo animal studies, L-838417 provided potent muscle relaxant, anti-anxiety, anti-convulsant and anti-pain activity, without causing apparent sedation or ataxia . In preclinical animal testing, Merck identified pharmacokinetic limitations of L-838417 relating to bioavailability and variability and did not progress the compound into clinical development. We designed CTP-354 to overcome the pharmacokinetic limitations of L-838417 while retaining its attractive pharmacological profile.

Spasticity

Spasticity is a chronic condition characterized by involuntary tightness, stiffness or contraction of muscles that occurs in patients who have damage to the brain or spinal cord. Spasticity can result from a wide range of disorders, including multiple sclerosis, spinal cord injury, cerebral palsy, amyotrophic lateral sclerosis, stroke and hereditary spastic paraplegia. Symptoms can range from mild muscle tightness to more severe symptoms, including crippling and painful inability to move limbs that can result in disability and diminished quality of life. The American Association of Neurological Surgeons estimated in 2006 that there were 12 million patients suffering from spasticity worldwide.

Market

Spasticity in Multiple Sclerosis. Multiple sclerosis is the most common disabling neurological condition affecting young adults, typically developing between the ages of 20 to 40 years. According to a 2008 World Health Organization report, multiple sclerosis affects more than 1.3 million people worldwide, including an estimated 400,000 people in the United States. Spasticity is one of the more common symptoms of multiple sclerosis and can be among the most painful, damaging and debilitating symptoms of multiple sclerosis. According to American Association of Neurological Surgeons, about 80% of people with multiple sclerosis suffer from some degree of spasticity. Of the estimated 400,000 patients diagnosed with multiple sclerosis in the United States, we estimate that at least 34%, or 140,000 patients, suffer from moderate to severe spasticity that impacts daily function in a meaningful way. Spasticity in multiple sclerosis may be as mild as the feeling of tightness of muscles or may be so severe as to produce painful, uncontrollable spasms of extremities, usually of the legs. Spasticity may also produce pain or tightness in and around joints, and can cause low back pain. Although spasticity in multiple sclerosis can occur in the arms and legs, it is much more common in the legs.

Spasticity in spinal cord injury . Spasticity is a significant health issue for many people with spinal cord injury. According to the National Spinal Cord Injury Statistics Center, in 2012, there were approximately 270,000 people in the United States suffering from spinal cord injury with approximately 12,000 new incidences per year. According to a 2011 report of the University of Washington Model Systems Knowledge Translation Center, 65% to 78% of spinal cord injury patients experience some degree of spasticity. Based on articles published in Archives of Physical Medicine and Rehabilitation in 1990 and 1999, we estimate that 28% to 46% of spinal cord injury patients suffer from problematic spasticity that could result in treatment. The most common muscles to be affected by spasticity in connection with spinal cord injury are the flexors, muscles that contract joints such as hips, knees or elbows, or the extensors, muscles that extend such joints. Spasms can occur as an automatic response to painful sensations.

 

 

 

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Limitations of Current Treatments

Spasticity is typically treated with a combination of pharmacotherapy, physical therapy, occupational therapy and, in some severe cases, surgical intervention to sever affected nerves or muscles. The available pharmaceutical treatments for spasticity are frequently limited by either inadequate relief of symptoms or dose-limiting side effects, such as sedation, and based on a 2009 report of WE MOVE, a not-for-profit organization dedicated to improving awareness of movement disorders, we estimate that over 40% of people with spasticity are not satisfied with the management of their disorder or the state of their overall health. First-line treatments for adult use in the United States typically include:

 

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Oral baclofen, the most commonly prescribed agent for spasticity, which is approved by the FDA for treatment of spasticity resulting from multiple sclerosis and spinal cord injury or spinal cord disease. It is also used extensively, although not approved, for treatment of spasticity in post-stroke and cerebral palsy patients. Baclofen has dose-limiting side effects, including drowsiness, dizziness and ataxia. Sedation resulting from baclofen is particularly problematic and many patients are maintained on sub-therapeutic doses due to lack of more attractive options. In addition, baclofen has a short half-life in the body and, as a result, it is typically dosed three times a day, which is an inconvenience for patients. Moreover, baclofen can result in severe withdrawal symptoms if abruptly discontinued, including hallucinations, seizures and rebound spasticity.

 

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Tizanidine, which is approved by the FDA for the general management of spasticity. Oral tizanidine is marketed as Zanaflex ® . Tizanidine can be highly sedating, has a short half-life in the body and is not as widely used as baclofen for the treatment of spasticity. It is typically reserved for daily activities and times when relief of spasticity is most important. Use of tizanidine can also result in liver injury and the recommended monitoring of liver function imposes a burden on both the patient and the physician.

 

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Injected botulinum toxin, which is approved by the FDA for treatment of upper limb spasticity in adults, among other indications. Botulinum toxin, which is marketed as Botox ® , is also used, although not approved for, treatment of children with cerebral palsy. It is currently in Phase 3 trials for that indication. Botulinum toxin can be very effective for treatment of spasticity in small muscle groups and localized injections of botulinum toxin are commonly used to treat spasticity as a monotherapy or in combination with other therapies. However, more extensive injections of botulinum toxin can result in systemic toxicity that is characterized by swallowing and breathing difficulties that can lead to death.

Other less commonly used treatments include:

 

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Diazepam, which is approved by the FDA as an oral agent for the treatment of spasticity related to upper motor neuron disorders, including cerebral palsy and paraplegia. Diazepam is marketed as Valium. Diazepam is a benzodiazepine and, like other benzodiazepines, its therapeutic efficacy is limited by side effects and concerns about abuse potential. The most commonly reported side effects of diazepam are drowsiness, fatigue, muscle weakness and ataxia. As a result of these side effects, use of diazepam for the treatment of spasticity is typically reserved for use in small doses at night for patients who have difficulty sleeping.

 

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Dantrolene, which is approved by the FDA as an oral agent for the treatment of spasticity resulting from upper motor neuron disorders such as spinal cord injury, stroke, cerebral palsy or multiple sclerosis, but which is rarely used as it causes severe muscle weakness and can cause liver damage.

 

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Abdominal implantation of a pump that injects baclofen around the spinal cord, referred to as intrathecal administration. Intrathecal administration of baclofen can provide effective relief of spasticity, particularly in lower limbs, but its use is limited by its invasiveness and potentially dangerous complications resulting from spinal fluid leaks, hemorrhage, infection, catheter dislodgement or blockage and pump failure. Abrupt discontinuation, whether as a result of catheter

 

 

 

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dislodgement, pump failure or another cause, can result in high fever, altered mental status, exaggerated rebound spasticity and, in rare cases, multiple organ-system failure and death.

 

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Surgical intervention, to sever sensory nerves or, more rarely, muscles. The use of surgical intervention is limited due its invasiveness and irreversibility.

Potential Advantages of CTP-354 for Spasticity

We believe that CTP-354 has the potential to provide therapeutic benefits without the limitations of existing spasticity therapies, which can include severe sedative effects, toxicity, frequent dosing or invasiveness. In our Phase 1 clinical trials, CTP-354 demonstrated highly favorable pharmacokinetics with low variability, dose-proportional exposure, a long half-life in the body and high levels of GABA A receptor occupancy. We believe these results support once-daily dosing, which would provide a substantial improvement on the three-times-daily dosing required by current standard-of-care oral spasticity medicines. In our Phase 1 clinical trials, CTP-354 provided much higher levels of GABA A receptor occupancy without causing sedation than benzodiazepines at doses that are typically prescribed, which we believe supports the potential of CTP-354 to be a non-sedating treatment for spasticity.

CTP-354 Clinical Development

Phase 1 Single Ascending Dose Clinical Trial. In August 2013, we completed a randomized, double-blind, placebo-controlled, single ascending dose Phase 1 clinical trial in 71 healthy adult volunteers at a single center in the United States to assess the safety, tolerability and pharmacokinetics of CTP-354. Volunteers were randomized to receive CTP-354 or placebo in a three to one ratio with eight cohorts of eight volunteers each and one cohort of seven volunteers. Six volunteers in each cohort received a single dose of CTP-354 and the remaining subjects received placebo. Doses were administered in oral liquid suspensions ranging from 0.15 mg up to 60 mg.

In the clinical trial, CTP-354 was well-tolerated up to 60 mg, the highest dose tested. We did not test higher doses after our concurrently conducted Phase 1 imaging study indicated that high levels of GABA A receptor occupancy could be achieved at doses lower than 60 mg. In future studies, we anticipate testing doses of CTP-354 that are below 40 mg.

Pharmacokinetic data from our single ascending dose trial indicated that CTP-354 was well-absorbed with low inter-subject variability and a long plasma half-life, potentially supporting once-daily dosing of the compound. The following graph shows the mean plasma concentration over time following administration of single ascending doses of CTP-354 in the six subjects in each cohort of the trial who received CTP-354. As illustrated in the graph, doses of CTP-354 of 20 mg and higher resulted in plasma concentrations in excess of 100 ng/mL, maintained for 24 hours following dosing. Our Phase 1 imaging study indicated that these plasma concentrations corresponded to brain GABA A receptor occupancy of greater than 50%. We believe that the high GABA A receptor occupancy of CTP-354 at well-tolerated doses supports its potential as a non-sedating oral treatment for spasticity.

 

 

 

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CTP-354 Mean Plasma Concentration vs. Time

 

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CTP-354 was generally well tolerated in our Phase 1 single ascending dose trial. No serious adverse events were reported in the trial. The most common adverse events observed in the trial were:

 

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dizziness, which was experienced by nine of the 54 subjects treated with CTP-354;

 

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drowsiness, which was experienced by seven of the 54 subjects treated with CTP-354;

 

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prolonged QTc, an indicator of potential cardiac arrhythmias, which was experienced by four of the 54 subjects treated with CTP-354; and

 

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pain or muscle tightness, which was experienced by three of the 54 subjects treated with CTP-354 and two of the 17 subjects receiving placebo.

Neurologic adverse effects were more common at higher doses of CTP-354, particularly 40 mg and 60 mg, whereas prolonged QTc and muscular adverse effects did not appear to be dose-dependent. In the clinical judgments of the principal study investigator and an independent medical monitor, no incident of QTc prolongation was considered to have posed a health risk to the subjects in the trial. All adverse events were considered mild with the exception of two incidents of dizziness and drowsiness in the 40 mg group, and one incident of nausea in the 60 mg group, each of which was considered moderate. Each incident of muscular pain or tightness with CTP-354 occurred at least one day after dosing.

Phase 1 Imaging Study. We are currently conducting a Phase 1 imaging clinical trial using PET scanning to measure the extent to which CTP-354 binds to GABA A receptors in the brain in healthy adult volunteers. For the first part of this imaging study, we evaluated single doses of CTP-354 of 4 mg, 20 mg, 40 mg and 60 mg in a total of nine healthy volunteers. We selected these doses because they did not produce dose-limiting side effects in our single ascending dose clinical trial and with the goal of providing a wide range of GABA A receptor occupancy. Our objectives in this study were to assess whether CTP-354 could provide similar or higher brain GABA A receptor occupancy levels than those typically provided by benzodiazepines at doses that do not cause dose-limiting sedation; and to compare the relationship between CTP-354 plasma levels and GABA A brain receptor occupancy.

In the first part of the imaging study, we observed average GABA A receptor occupancies of between 34% and 82% in subjects five hours after they received a single dose of either 4 mg, 20 mg, 40 mg or 60 mg of

 

 

 

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CTP-354. For each subject, we conducted a baseline scan in which a small amount of flumazenil, a radiolabeled, positron emitting benzodiazepine, was injected intravenously and the brain was subsequently imaged to show flumazenil binding to the GABA A receptors. The subject was given a single oral dose of CTP-354 within two weeks of the baseline scan. Five hours after CTP-354 dosing, the subject received another injection of radiolabeled flumazenil and the imaging was repeated to provide a second scan. Twenty-four hours after CTP-354 dosing, the subject received another injection of radiolabeled flumazenil and the imaging was repeated to provide a third scan.

The images below were obtained from the two subjects who received a single 20 mg dose of CTP-354. In the images:

 

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the baseline, or first, scans appear bright due to the presence of radiolabeled flumazenil bound to the GABA A receptors;

 

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the second and third scans are not as bright as the first scan due to the binding of CTP-354 to the subjects’ GABA A brain receptors, which prevents the radiolabeled flumazenil from binding; and

 

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the third scan is somewhat brighter than the second scan, showing that less CTP-354 is bound to the GABA A receptors after 24 hours than after five hours.

Phase 1 Imaging Study: 20 mg of CTP-354

 

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The scans we obtained from the seven other patients in the first part of the imaging study were consistent with these scans from the subjects receiving the 20 mg dose, with GABA A receptor occupancy levels increasing with dosing levels between 4 mg and 40 mg, but appearing not to increase significantly between 40 mg and 60 mg.

In the first part of the imaging study, we obtained quantitative measures of GABA A receptor occupancy for the single doses of CTP-354 that were administered. A single 20 mg dose of CTP-354, a dose at which no sedative or other adverse events were reported in the study, provided GABA A receptor occupancy levels, at both five hours and 24 hours following dosing, substantially in excess of the 10% to 25% occupancy levels at which benzodiazepines and GABA A receptor-binding sleep drugs become highly sedative.

 

 

 

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The table below shows the average GABA A receptor occupancy at five hours and 24 hours after dosing in the first part of the imaging study.

 

CTP-354 Dose   

Number of

Subjects

  

Average GABA A  Receptor

Occupancy at 5 Hours

After Dosing

   

Average GABA A  Receptor

Occupancy at 24 Hours

After Dosing

4 mg    2      34%      13%

 

20 mg

   2      63%      60%

 

40 mg

   3      79% (1)     71%

 

60 mg

   2      82%      76%

 

 

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Reflects data from two of the three subjects. We could not calculate GABA A receptor occupancy at five hours for the first subject due to a computer error.

 

The graph below shows the relationship between plasma concentration and brain GABA A receptor occupancy for CTP-354 in the first part of the imaging study. The 17 data points on the graph below each represent a single reading in a single subject. These include two readings for each subject, one at five hours and one at 24 hours following dosing, with the exception of one subject for whom we could not calculate GABA A receptor occupancy at five hours due to a computer error. The graph below shows how GABA A receptor occupancy increases with increasing plasma concentration. As illustrated in the graph, we observed that plasma concentrations in excess of 100 ng/mL correlated with GABA A receptor occupancies greater than 50%.

CTP-354 GABA A Receptor Occupancy vs. Plasma Concentration in Healthy Volunteers

 

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In the Phase 1 imaging study, no adverse events were reported in volunteers receiving 4 mg or 20 mg of CTP-354. At 40 mg, two of three subjects reported mild to moderate dizziness, mild drowsiness and nausea and one subject each reported mild euphoria, loss of balance and lightheadedness. At 60 mg, adverse events included sedation and ataxia, both mild in one subject and both moderate in the other. One subject receiving 60 mg of CTP-354 reported mild lightheadedness, restlessness and irritability and the other reported mild dizziness. All adverse effects had resolved by the following day.

Based on clinical studies of diazepam and other benzodiazepines, we believe that the high and sustained brain GABA A receptor occupancy levels achieved by CTP-354, at doses that were well-tolerated in our Phase 1 clinical trials, provide evidence of its therapeutic potential. For instance, in our Phase 1 imaging study, a single 20 mg dose of CTP-354 did not cause sedation or ataxia while producing GABA A receptor

 

 

 

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occupancy of greater than 50% sustained for 24 hours, which is much higher than the receptor occupancies at which benzodiazepines typically cause sedation. Therefore, we believe that CTP-354 may provide clinical benefit against spasticity similar to that of benzodiazepines without the dose-limiting effects of benzodiazepines. However, while the data we have obtained to date in our Phase 1 imaging study have generally been consistent, due to the relatively small scale of the study we cannot be certain that these data are representative of the data that would be obtained from a larger-scale clinical trial.

We plan to continue this Phase 1 imaging study to evaluate GABA A receptor occupancy after repeated dosing of CTP-354. We expect that repeated dosing will enable us to determine GABA A receptor occupancy levels after CTP-354 plasma levels are at steady state. We expect that this imaging study will support selection of therapeutically relevant doses for Phase 2 clinical trials.

Partial Clinical Hold

In November 2013, we received notice from the FDA of a partial clinical hold on CTP-354 that prevents us from administering single doses in excess of 60 mg per day and multiple doses in excess of 6 mg per day. In January 2014, we initiated a multiple ascending dose Phase 1 clinical trial evaluating daily doses of 2 mg and 6 mg of CTP-354 in healthy volunteers. We do not intend to conduct single dose clinical trials of CTP-354 with doses in excess of 60 mg.

In our previous preclinical testing, CTP-354 was associated with minimal, if any, toxicity. However, the FDA notice stated that, since a maximum tolerated dose was not achieved in those studies, preclinical testing at doses higher than those tested in our preclinical studies to date would be needed before we can clinically evaluate multiple doses that exceed 6 mg per day. In December 2013, we had a phone conference with the FDA to discuss the partial clinical hold notice. During the phone conference, the FDA confirmed that we could dose CTP-354 up to 6 mg per day in multiple doses for 28 days. They also stated that to administer CTP-354 in a Phase 2 clinical trial at multiple doses greater than 6 mg per day, the required additional testing could be conducted in only one animal species to determine a maximum tolerated dose or a maximum feasible dose. We estimate that administration of 6 mg per day of CTP-354 in multiple doses may provide brain GABA A receptor occupancy of about 60%, which is significantly higher than that achieved by typical clinical doses of benzodiazepines. Based on this estimated receptor occupancy level, we believe that multiple doses of 6 mg per day would be sufficient for the treatment of spasticity, the first indication for which we plan to conduct clinical trials. However, we intend to conduct the additional preclinical toxicology study in the first half of 2014 to enable us to evaluate higher doses of CTP-354, if needed in our spasticity trials, as well as to support clinical development in other disease indications. Based on our dialog with the FDA, we do not believe that the partial clinical hold will affect the timelines of our previously planned Phase 2 clinical trial of CTP-354.

Additional Phase 1 Clinical Trial

In January 2014, we commenced a Phase 1 multiple ascending dose clinical trial to evaluate safety, tolerability and pharmacokinetics of CTP-354 in up to 62 healthy volunteers. We expect to report initial data from this planned Phase 1 clinical trial in the second half of 2014. We designed this clinical trial to assess multiple doses and formulations of CTP-354 as well as the effects of taking CTP-354 with food as compared to following fasting. As a result of the long half-life of CTP-354, we believe that plasma concentrations of CTP-354 will increase over the course of a number of days when it is administered once daily. Accordingly, in this clinical trial we are evaluating doses of CTP-354 lower than those that resulted in saturation of GABA A receptor occupancy following a single dose. We currently plan to evaluate daily doses of 2 mg and 6 mg of CTP-354 over 10-day periods, with dosing in a liquid suspension formulation. We may also incorporate into this clinical trial a cross-over to a solid dose formulation for subjects receiving 6 mg. If we are able to lift the partial clinical hold on

 

 

 

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CTP-354, we plan to evaluate daily doses of CTP-354 that are higher than 6 mg over 10-day periods, with dosing that may be in a liquid suspension or a solid dose formulation.

Planned Phase 2 Clinical Development

Subject to successful completion of our ongoing Phase 1 multiple ascending dose clinical trial and Phase 1 imaging study, we plan to advance CTP-354 into two Phase 2 clinical trials. We expect to commence the Phase 2 clinical development in the second half of 2014. We plan to determine dosing levels following completion of the Phase 1 multiple ascending dose clinical trial. We expect that the Phase 2 clinical trials will evaluate the safety and efficacy of CTP-354 for the potential treatment of spasticity associated with both multiple sclerosis and spinal cord injury and will feature two-way cross-over between dosing with CTP-354 and placebo.

CTP-354 Preclinical Development

Our preclinical program included testing of CTP-354 in a neuropathic pain rat model, in which CTP-354 was effective with no apparent sedation or ataxia at the therapeutic doses. Specifically, the effectiveness of CTP-354 in the neuropathic pain rat model at oral doses of between 10 and 100 mg/kg was similar to that of gabapentin, a standard positive control in this model, dosed at 100 mg/kg. In this preclinical test, 30 and 100 mg/kg doses of CTP-354 also demonstrated a longer duration of action than gabapentin. Our preclinical program also included studies in rat models in which CTP-354 demonstrated an improved pharmacokinetic profile compared to L-838417. We also conducted a GABA A receptor occupancy study in rats evaluating doses ranging from 1 mg to 30 mg. The minimally effective dose of CTP-354 in the rat neuropathic pain model was 1 mg/kg, a dose that provided rat brain GABA A receptor occupancy of about 25%. Higher doses resulted in greater occupancy, with 30 mg/kg resulting in brain GABA A receptor occupancy of about 80% to 85%.

Our preclinical program also included pharmacokinetic studies in rats comparing CTP-354 to L-838417. CTP-354 and L-838417 were orally dosed at 1 mg/kg in eight male Sprague-Dawley rats. The plasma levels of CTP-354 were significantly greater than those of L-838417. The maximum observed peak plasma concentration for CTP-354 was 4.8 times higher than that of L-838417 and the total exposure to CTP-354 was three times higher as compared to L-838417. Based on this study, we were encouraged to further develop CTP-354. The Phase 1 study that we later conducted showed that CTP-354 has a longer half-life in humans than it does in rats. The graph below shows the comparison of CTP-354 and L-838417 in this rat pharmacokinetic study.

CTP-354 vs. L-838417 Oral Pharmacokinetics in Rats

 

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Fast Forward Sponsored Research Agreement

In February 2012, we entered into a sponsored research agreement with Fast Forward LLC, a subsidiary of the National Multiple Sclerosis Society, to fund the preclinical advancement of CTP-354. Under the Fast Forward agreement, we received a non-refundable upfront payment of $0.2 million, as well as further non-refundable payments of $0.6 million for the achievement of the preclinical development milestones set forth in the agreement. We are obligated to make milestone payments to Fast Forward not in excess of a low-single digit multiple of the funding amount if we commercialize CTP-354 or license the development and commercialization of CTP-354 to a third party.

Potential Additional Indications

Based on the well-known efficacy of benzodiazepines and other GABA A modulators, we believe CTP-354 has potential in a number of other indications, including anxiety, chronic pain, muscle tension and epilepsy.

CTP-499

Overview

CTP-499 is a novel oral multi-subtype selective inhibitor of PDEs that we are developing to slow the progression of type 2 diabetic kidney disease in patients with macroalbuminuria. We use the term type 2 diabetic kidney disease to refer to chronic kidney disease in patients with type 2 diabetes. We are developing CTP-499 as an additive treatment to the current standard of care for type 2 diabetic kidney disease, angiotensin modulation, which is treatment with an ACEi or an ARB. We are currently conducting a three-part Phase 2 clinical trial of CTP-499 in which we have enrolled patients with type 2 diabetic kidney disease and macroalbuminuria who were receiving standard-of-care treatment. We believe that CTP-499, if approved in this indication, will address a substantial commercial market, as despite the protective effect of angiotensin modulators in type 2 diabetic kidney disease, we estimate that each year over 40,000 patients with type 2 diabetes progress to end-stage kidney failure in the United States. We expect that we would conduct any large Phase 3 clinical trial of CTP-499 in type 2 diabetic kidney disease in collaboration with one or more partners.

CTP-499 is a deuterated analog of 1-(S)-5-hydroxyhexyl-3,7-dimethylxanthine, or HDX, an active metabolite of pentoxifylline. Pentoxifylline was approved over three decades ago for the treatment of intermittent claudication, or lower limb pain resulting from obstructed arteries, and has a well-established safety profile. Investigator-sponsored, single site clinical studies have evaluated pentoxifylline in chronic kidney disease patients, including in patients with diabetes, who were also simultaneously treated with an angiotensin modulator. In most of these studies, the investigator reported that patients experienced a reduction in albuminuria. In some of these studies, which were conducted for at least 12 months, the investigator also reported a slowing in decline of kidney function in patients receiving pentoxifylline compared to the decline in patients receiving placebo. We chose to develop CTP-499 because our preclinical research, combined with literature data, indicated that HDX, rather than pentoxifylline, may be responsible for the majority of these observed beneficial effects of pentoxifylline in humans.

Type 2 Diabetic Kidney Disease

Type 2 diabetic kidney disease is a condition in which the kidneys’ ability to filter blood is impaired and is typically chronic and progressive. The filtering ability of the kidney is measured as glomerular filtration rate, or GFR. Direct measurement of GFR is cumbersome. As a result, it is typically estimated by measuring blood levels of certain waste products, creatinine or cystatin C or both, and then applying

 

 

 

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a mathematical formula that accounts for additional variables, including age, race and gender, to derive the eGFR. GFR and eGFR are measured in units of milliliters per minute per 1.73 meters squared, which is a typical adult body surface area. An eGFR of 60 to 89 is mild or early stage type 2 diabetic kidney disease, 30 to 59 is moderate or mid-stage, 15 to 29 is advanced or severe type 2 diabetic kidney disease and below 15 indicates kidney failure urgently requiring dialysis or kidney transplantation to avoid death.

Urinary excretion of albumin, a common protein in the blood, is believed to indicate kidney damage if sustained for longer than three months. Albumin excretion is typically measured in terms of UACR, a ratio that helps to correct for variability in urine concentrations. UACR is expressed as milligrams of albumin per gram of creatinine. A UACR greater than 300 mg/g is referred to as macroalbuminuria and, when sustained for three months or longer, generally indicates substantial kidney damage. Macroalbuminuria and reduced eGFR are independent indicators of kidney disease. Patients who have both macroalbuminuria and reduced eGFR are at high risk for rapidly advancing disease, death or progression to kidney failure.

Type 2 diabetic kidney disease is a highly complex, multifactorial disease involving inflammatory, oxidative and fibrotic processes. PDEs are a family of enzymes that regulate diverse pathways involved in these processes. Different PDEs, including several which CTP-499 inhibits, have been shown to contribute to kidney damage in preclinical animal models.

Market

According to the Centers for Disease Control, in 2011, approximately 26 million people in the United States had diabetes, with 90% to 95% suffering from type 2 diabetes, commonly referred to as adult-onset diabetes. According to a 2009 article in the American Diabetes Association journal Diabetes Care , type 2 diabetes is the leading cause of chronic kidney disease. The United States Renal Data Survey, a national data system that collects, analyzes and distributes information about end-stage renal disease, the most severe stage of chronic kidney disease, in the United States, indicates that diabetes is the leading cause of end-stage renal disease in the United States. Patients with type 2 diabetes and chronic kidney disease have a markedly increased mortality rate compared to type 2 diabetics without chronic kidney disease.

Patients with end stage renal disease resulting from chronic kidney disease and other causes impose a significant economic burden on the United States, constituting approximately 1.3% of Medicare beneficiaries but accounting for approximately 8.0% of Medicare expenditures, or $33 billion, according to the 2012 annual report of the United States Renal Data Survey. According to the United States Renal Data Survey, in 2010 in the United States, it cost approximately $60,000 more per year to treat a patient undergoing hemodialysis, treatment in which a machine filters wastes, salts and fluid from the blood, than a patient with chronic kidney disease who did not require hemodialysis. Consequently, we believe that a drug that would delay or prevent the progression of renal disease and the onset of end stage renal disease would have significant pharmacoeconomic benefits.

Limitations of Current Therapies

Current standard of care for type 2 diabetic kidney disease is treatment with angiotensin modulators. These are antihypertensive agents that also have the effect of reducing albuminuria and slowing the decline of renal function. However, despite treatment with these drugs, many type 2 diabetic kidney disease patients continue to experience loss in renal function at a rate that is significantly faster than normal age-related decline. No new disease modifying treatments for type 2 diabetic kidney disease have been approved by the FDA in the last decade and we believe that an agent with a novel mechanism, such as CTP-499, that can complement the effects of angiotensin modulation and further slow the progression toward kidney failure would offer an important medical benefit and present a substantial commercial opportunity.

 

 

 

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CTP-499 Phase 2 Clinical Trial

We are conducting a Phase 2 placebo-controlled clinical trial of CTP-499 in patients with type 2 diabetic kidney disease and macroalbuminuria. All patients enrolled in the clinical trial are being concurrently treated with angiotensin modulators. The clinical trial consists of three parts:

 

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Part 1 —a double-blind, parallel, two-arm, placebo-controlled study evaluating the safety and efficacy of 600 mg of CTP-499 twice daily for 24 weeks. We enrolled 182 patients in this first part of the trial, which we completed in 2013.

 

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Part 2 —a blinded 24-week extension study in which all patients who completed Part 1 were eligible to continue receiving 600 mg of CTP-499 or placebo twice daily. We enrolled 143 patients in this part of the clinical trial and have completed dosing. 124 of the 143 patients that we enrolled in Part 2 of the clinical trial completed Part 2. We have conducted preliminary analyses of the combined 48 weeks of data from Parts 1 and 2 of the clinical trial with respect to 123 of the 124 patients that completed Part 2 of the trial, but have not yet completed a full analysis of the data from Part 2. We expect to report the final top line results for the first 48 weeks of the trial in the first half of 2014.

 

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Part 3 —all patients who complete Part 2 are eligible to receive 600 mg of CTP-499 twice daily in a 48 week open-label extension study. As of December 31, 2013, we had enrolled 102 patients in this part of the trial and commenced dosing.

The primary objective of the trial was to evaluate the safety and efficacy of treatment with CTP-499 administered in twice daily oral doses of 600 mg in a controlled release formulation for a minimum of 24 weeks. The primary endpoint was measurement of changes in UACR. Key secondary endpoints were:

 

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changes in serum creatinine and eGFR and

 

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safety, including incidence of adverse events.

The key criteria for inclusion of patients in the trial included the following characteristics:

 

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eGFR from 23 to 89 mL/min/1.73 m 2 , which indicates mild to moderately severe type 2 diabetic kidney disease;

 

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having been on a stable angiotensin modulation regimen for a minimum of four weeks prior to initiating screening and nine weeks prior to initiating dosing;

 

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blood pressure less than or equal to 145/90 mm Hg;

 

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glycosylated hemoglobin A1c (HbA1c) less than or equal to 10.5%, for the purposes of excluding patients with poorly controlled blood glucose; and

 

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UACR greater than or equal to 200 mg/g in male patients and 300 mg/g in female patients, ratios of albumin to creatinine that are indicative of substantial kidney damage in men and women, but not more than 5,000 mg/g, a ratio indicative of severe kidney disease.

Phase 2 Clinical Trial Results

We believe that the preliminary data we have analyzed to date from the first 48 weeks of treatment support the potential of CTP-499 to help protect kidney function in patients with rapidly progressing type 2 diabetic kidney disease. As described below, we did not achieve statistical significance in the primary endpoint of the trial at 24 weeks. However, while our Phase 2 clinical trial was not intended to be powered for statistical significance with respect to serum creatinine or eGFR, and 48 weeks is a limited duration for measuring kidney function, our preliminary analyses of these key secondary endpoints at 48 weeks showed potential benefits including a nearly statistically significant impact on serum creatinine levels and a positive trend in eGFR.

 

 

 

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Our preliminary 48 week analyses suggest that the serum creatinine levels of patients who received CTP-499 rose less than those of patients who received placebo. Serum creatinine is waste product that is cleared by the kidneys and increasing serum creatinine levels are believed to indicate worsening of kidney function. Our preliminary analyses indicate that the mean serum creatinine level in the 65 patients receiving CTP-499 increased by 0.13 mg/dL over the 48 weeks of treatment, as compared to an increase of 0.21 mg/dL in the 58 patients receiving placebo. The lower value in the case of CTP-499 represents a 38% improvement as compared to placebo (p = 0.06 using a two-tailed statistical analysis) at 48 weeks and may indicate a slower decline of kidney function in patients treated with CTP-499 than those who received placebo. A two-tailed analysis is a rigorous statistical test that assesses whether a study drug performs better or worse than placebo, as opposed to a one-tailed analysis that only tests if it is better. The statistical analysis plan for our Phase 2 trial was based on a two-tailed analysis. However, many Phase 2 trials use a one-tailed analysis. If analyzed by a one-tailed analysis, the serum creatinine results would be statistically significant (p < 0.05).

Our preliminary analyses of mean eGFR levels in the 65 patients receiving CTP-499 compared to the 58 patients receiving placebo at 48 weeks did not indicate a meaningful difference. However, our preliminary analyses indicated a favorable trend, which was not statistically significant, at 48 weeks in reduced incidence of large eGFR declines in patients receiving CTP-499 as compared to placebo. Declining eGFR is believed to indicate worsening of kidney function. In this pre-specified analysis, we compared the number of patients who experienced eGFR declines of at least 30% and 40% after 48 weeks in the CTP-499 group and the placebo group. Our preliminary analyses indicated the following:

 

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Eight out of the 58 patients receiving placebo, or 14%, experienced a 30% or greater decline in eGFR, compared with four out of the 65 patients receiving CTP-499, or 6.2% (p = 0.11).

 

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Three out of the 58 patients receiving placebo, or 5.2%, experienced a 40% or greater decline in eGFR, compared with one out of the 65 patients receiving CTP-499, or 1.5% (p = 0.23).

In addition, a preliminary post-hoc analysis we conducted also indicated a statistically significant effect, at 48 weeks, in reduced incidence of large increases in serum creatinine levels in patients receiving CTP-499 as compared to placebo. After 48 weeks, five out of the 58 patients receiving placebo, or 8.6%, experienced a 50% or greater increase in serum creatinine levels, compared with one out of the 65 patients receiving CTP-499, or 1.5% (p < 0.05). A 50% increase in serum creatinine levels corresponds mathematically to between a 30% and a 40% decline in eGFR.

We believe that the incidence of large declines in kidney function, measured as decreases in eGFR or increases in serum creatinine, in drug-treated versus placebo-treated patients, may be an acceptable primary endpoint for Phase 3 clinical development of a drug candidate for the treatment of type 2 diabetic kidney disease. Our belief is based on the findings of a December 2012 scientific workshop sponsored by the NKF and the FDA, and subsequent presentations by the NKF and the FDA. We intend to request in mid-2014 an end of Phase 2 meeting with the FDA to discuss endpoints for Phase 3 clinical development of CTP-499.

We have also conducted a preliminary post-hoc analysis of our data at 48 weeks in which we determined that all but one of the incidents of 30% or greater declines in eGFR occurred in patients with initial baseline UACR levels above the trial enrollment median, which was about 850 mg/g. This suggests that we may be able to conduct a subsequent clinical trial designed to measure an eGFR decline of at least 30% with a substantially enriched patient population by enrolling only patients with baseline UACR levels that are substantially higher than the minimum that was required for our Phase 2 clinical trial of CTP-499. A trial with such an enriched patient population would have the potential to provide the same statistical power to detect a difference between placebo and drug treatment as a trial enrolling macroalbuminuric patients with a wider range of UACR levels, but with a considerably smaller number of patients.

 

 

 

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We did not observe a meaningful difference between patients receiving CTP-499 and patients receiving placebo in change in UACR at 24 weeks, the primary endpoint of the Phase 2 clinical trial. However, our preliminary analyses after 48 weeks of treatment suggested a favorable trend, which was not statistically significant, in UACR for patients receiving CTP-499 as compared to placebo. These preliminary analyses indicated that the mean rise in UACR for the CTP-499 group was 24 mg/g (2.2%) from a baseline mean of 1089 mg/g, compared to a mean rise of 222 mg/g for the placebo group from a baseline mean of 1066 mg/g (20.8%) (p = 0.13). While UACR has been commonly used as an indicator of efficacy in Phase 2 trials in type 2 diabetic kidney disease, it is not accepted by the FDA as an endpoint for a Phase 3 clinical trial for the treatment of type 2 diabetic kidney disease.

Treatment with CTP-499 was generally well tolerated in Part 1 of our Phase 2 clinical trial. Data collection and monitoring remain ongoing with respect to safety and tolerability of CTP-499 in Part 2 of the trial. Overall, incidence of serious adverse events in Part 1 of the trial was balanced between the placebo (15.9%) and CTP-499 (15.7%) groups. None of the serious adverse events were attributed by trial investigators to drug treatment and there were numerically more serious adverse cardiac events in placebo-treated patients (5.7%) than in patients who received CTP-499 (3.4%). Two deaths occurred during Part 1 of the trial. Both deaths occurred in patients in the CTP-499 group; however, neither was attributed by trial investigators to drug treatment. Discontinuations due to adverse events were comparable in the placebo (10.2%) and CTP-499 (10.1%) groups. Adverse events with at least 10% incidence in either treatment group were gastrointestinal disorders (22.7% for placebo and 29.2% for CTP-499); infections (15.9% for placebo and 27.0% for CTP-499); vascular disorders (15.9% for placebo and 9.0% for CTP-499); peripheral edema, fatigue and fever (12.5% for placebo and 11.2% for CTP-499); nervous system disorders (9.1% for placebo and 11.2% for CTP-499); musculoskeletal and connective tissue disorders (6.8% for placebo and 11.2% for CTP-499); respiratory and thoracic disorders (6.8% for placebo and 10.1% for CTP-499); endocrine disorders (4.5% for placebo and 10.1% for CTP-499); and metabolism and nutritional disorders (10.2% for placebo and 3.4% for CTP-499). Our preliminary analyses after 48 weeks of treatment also suggest that levels of serum potassium in patients who received CTP-499 were similar to baseline levels. Elevated levels of serum potassium are considered unsafe and have the potential to limit dosing.

A summary of the serious adverse events in Part 1 of our Phase 2 clinical trial is shown in the table below.

 

       Placebo      CTP-499  
     n = 88      n = 89  

Serious Adverse Events

     

Total serious adverse events

     14(15.9%)         14(15.7%)   

Cardiac disorders

     5(5.7%)         3(3.4%)   

Infections

     3(3.4%)         5(5.6%)   

Vascular disorders

     4(4.5%)         1(1.1%)   

Neoplasms

             2(2.2%)   

Psychiatric disorders

             2(2.2%)   

Blood and lymphatic system disorders

             1(1.1%)   

Gastrointestinal disorders

     1(1.1%)           

Nervous system disorders

     1(1.1%)           

AVP-786

Overview

In February 2012, we granted Avanir an exclusive license to develop and commercialize deuterated dextromethorphan analogs. Avanir is developing AVP-786, which is a combination of a deuterated

 

 

 

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dextromethorphan analog and an ultra-low dose of quinidine, for the treatment of neurologic and psychiatric disorders. In February 2013, Avanir reported positive results from a Phase 1 clinical trial of AVP-786. In June 2013, Avanir reported that the FDA had agreed to an expedited development pathway for AVP-786. In October 2013, Avanir reported plans to advance AVP-786 into a Phase 2 clinical trial in the second half of 2014 for treatment-resistant major depressive disorder in patients with insufficient response to conventional anti-depressants.

Avanir currently markets a combination of dextromethorphan and quinidine, Nuedexta ® , for pseudobulbar affect, which is a neurological condition characterized by involuntary, sudden and sometimes frequent episodes of laughing or crying. The quinidine in Nuedexta inhibits the metabolism of dextromethorphan. Without a metabolic inhibitor such as quinidine, dextromethorphan is rapidly metabolized by most humans, limiting its effectiveness and resulting in the production of metabolites that are harmful in large amounts. However, quinidine can cause heart rhythm changes. As a result, it is preferable to minimize dosing of quinidine.

Planned Development by Avanir

Avanir has stated that it plans to develop AVP-786 for the treatment of neurologic and psychiatric disorders, including pain, behavioral disorders, mood disorders and movement disorders. Avanir has also reported that it plans to integrate its development of AVP-786 into its ongoing clinical development program for AVP-923, a dextromethorphan and quinidine combination product candidate. Avanir reported that AVP-786, which includes a lower dose of quinidine than AVP-923, provided approximately the same pharmacokinetic exposure as AVP-923 in a Phase 1 clinical trial. Avanir has announced conducting Phase 2 or Phase 3 clinical trials of AVP-923 in the following areas:

 

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agitation in Alzheimer’s disease;

 

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central neuropathic pain in multiple sclerosis;

 

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levodopa-induced dyskinesia, a movement disorder caused by the use of levodopa to treat Parkinson’s disease; and

 

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diabetic peripheral neuropathic pain.

AVP-786 Clinical Development

Phase 1 Clinical Trial. In February 2013, Avanir reported the results of a randomized, double-blind, two-way crossover Phase 1 clinical trial of AVP-786 at a single center in Australia to assess the pharmacokinetic profile, safety and tolerability of single and multiple doses of AVP-786 both with and without quinidine. In this Phase 1 clinical trial, Avanir used AVP-923 as a control. The first stage of this study included 36 healthy subjects. Twelve additional subjects were enrolled in the second stage of the study. Avanir reported results indicating that AVP-786 with a reduced dose of quinidine relative to AVP-923 demonstrated a pharmacokinetic profile comparable to AVP-923 with comparable safety and tolerability.

Planned Phase 2 Clinical Trial. In October 2013, Avanir reported that it expects to file its IND for AVP-786 in the second half of 2014. Avanir was not required to file an IND prior to commencement of its Phase 1 clinical trial of AVP-786 because that trial was conducted in Australia. Avanir reported that, subject to the acceptance of this IND, it plans to initiate a Phase 2 randomized, placebo-controlled clinical trial in the second half of 2014 to evaluate the safety and efficacy of AVP-786 in patients with treatment-resistant major depressive disorder. Avanir reported that it expects to enroll patients with major depressive disorder who have insufficient response to conventional anti-depressants. Avanir further reported that treatment with AVP-786 or placebo in the trial is expected to be adjunctive to treatment with other anti-depressants.

 

 

 

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Expedited Development Path. Avanir has reported conducting Phase 2 and Phase 3 clinical trials to evaluate AVP-923 and has reported plans to expedite the completion of one of its ongoing AVP-923 clinical trials to guide development of AVP-786. Avanir has stated that it intends to replace AVP-923 with AVP-786 in future clinical evaluation and that the FDA has agreed to an expedited development pathway for AVP-786 that would permit Avanir to reference data generated during its clinical testing of AVP-923 in its IND, and any future NDA, for AVP-786.

CTP-730

In April 2013, we entered into a strategic collaboration with Celgene related to deuterium-substituted compounds for the treatment of cancer or inflammation. We are initially focusing on one program; however, the collaboration has the potential to encompass multiple programs. In the initial program, we have selected CTP-730, a product candidate for the treatment of inflammatory diseases, and expect to begin Phase 1 clinical trials in 2014. We are responsible for development, at our expense, through the completion of single and multiple ascending dose Phase 1 clinical trials.

JZP-386

In February 2013, we licensed to Jazz Pharmaceuticals the commercial rights to deuterated analogs of sodium oxybate, including JZP-386, under an exclusive worldwide license agreement. Sodium oxybate is the active ingredient in Xyrem, a prescription medicine marketed in the United States by Jazz Pharmaceuticals to treat two of the key symptoms of narcolepsy, excessive daytime sleepiness and cataplexy. For 2012, Jazz Pharmaceuticals reported Xyrem annual net sales of $378.7 million. For the nine months ended September 30, 2013, Jazz Pharmaceuticals reported Xyrem net sales of $404.9 million as compared to net Xyrem sales of $265.1 million for the nine months ended September 30, 2012.

In preclinical in vivo testing, JZP-386 demonstrated a prolonged pharmacokinetic profile and reduced variability relative to sodium oxybate. We are responsible for conducting specified preclinical and clinical activities for JZP-386 through and including Phase 1 clinical trials. We are also responsible for supplying a deuterated intermediate for making clinical trial material for a Phase 1 clinical trial and a subsequent Phase 2 clinical trial. Jazz Pharmaceuticals is responsible for reimbursing us for all costs associated with our program-related activities, subject to limitations specified in the agreement, including adherence within a particular percentage to a development budget. Jazz Pharmaceuticals is also responsible for conducting and funding all further development and commercialization of JZP-386.

In December 2013, an IMPD, the basis for initiating clinical trials in the European Union, was filed for JZP-386. Jazz Pharmaceuticals has reported that, subject to approval of the IMPD, it expects a Phase 1 clinical trial of JZP-386 to commence in 2014, with completion of enrollment and reporting of initial data also expected in 2014. JZP-386 is being treated as a Schedule I Controlled Substance by the DEA and being regulated accordingly. See “—Government Regulations—Regulation of Controlled Substances” for additional information.

C-10068

C-10068 is a novel oral deuterium-substituted analog of dextroethorphan, a compound with preclinical pharmacological activities qualitatively similar to those of dextromethorphan. Dextroethorphan was identified in a collaboration between the National Institutes of Health, or NIH, and Walter Reed Army Institute of Research, or WRAIR, to identify analogs of dextromethorphan with improved therapeutic properties. Similar to dextromethorphan, dextroethorphan forms the undesirable metabolite dextrorphan, but to a lesser degree.

 

 

 

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We believe that C-10068 has the potential to treat pain and seizure-generating diseases and injuries, such as epilepsy, ischemic stroke and traumatic brain injury. C-10068 has demonstrated anti-seizure activity in in vivo preclinical studies in animals. C-10068 has also shown therapeutic potential for the treatment of pain in in vivo models. In addition, we have found that C-10068 forms less dextrorphan than either dextromethorphan or dextroethorphan in vitro in human liver microsomes, which are small particles isolated in the laboratory to study metabolism. We have conducted a portion of our preclinical program for C-10068 in collaboration with the National Institute of Neurological Disorders and Stroke and WRAIR. We are conducting further preclinical evaluation of C-10068.

OTHER PRECLINICAL PROGRAMS AND PIPELINE OPPORTUNITIES

We are also conducting a number of other preclinical programs, including deuterated ivacaftor for the treatment of cystic fibrosis and chronic obstructive pulmonary disease and deuterated praziquantel in collaboration with the Therapeutics for Rare and Neglected Diseases division of the NIH for the treatment of schistosomiasis and other parasitic diseases.

We have discovered a significant number of additional compounds utilizing our DCE Platform that have potential application in many different therapeutic areas, including oncology, central nervous system disorders, inflammation and antivirals. We are evaluating these programs for possible further development, either by us alone or in collaboration with another party.

COLLABORATIONS

We are party to a number of collaborations for the research, development and commercialization of deuterated compounds. Through September 30, 2013, we had received an aggregate of $105.4 million in upfront and milestone payments, equity investments and research and development funding from current and former collaborations. Under our current collaborations, which are described below, we have the potential to receive up to $1.6 billion in future milestone payments, including over $1.2 billion in research, development and regulatory milestones, as well as royalties on any future net product sales.

Celgene

Overview. In April 2013, we entered into a master development and license agreement with Celgene, which is primarily focused on the research, development and commercialization of specified deuterated compounds targeting cancer or inflammation. The collaboration is initially focused on one program, but has the potential to encompass up to four programs. For the initial program, we granted Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated analogs of a selected non-deuterated compound and certain close chemical derivatives thereof. We further granted Celgene licenses with respect to two additional programs and an option with respect to a third additional program. We and Celgene have agreed on the non-deuterated compounds for each of the two additional license programs. For the option program, Celgene may select the non-deuterated compound at a later time, which, unless otherwise agreed by us, will be limited to a compound for which Celgene possesses exclusive rights. With respect to the two additional license programs, we granted Celgene an upfront exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the agreed non-deuterated compounds. Celgene is restricted from utilizing their research, development and commercialization rights under each of the upfront licenses, unless, within seven years after the effective date of the agreement, Celgene pays us a license exercise fee. If Celgene does not elect to pay the license exercise fee during the seven year period, the license will expire. With respect to the option program, once a compound is selected, Celgene may exercise its option by paying us an option exercise fee within seven years of the effective date of the agreement, and upon Celgene’s exercise of the option we will grant to Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the selected non-deuterated compound.

 

 

 

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Research Obligations. We are responsible for conducting and funding research and early development activities for the initial program at our own expense pursuant to agreed upon development plans. This includes the completion of single and multiple ascending dose Phase 1 clinical trials and any mutually agreed upon additional Phase 1 clinical trials, as set forth in the development plan and approved by the joint steering committee for the collaboration.

We do not have any obligation to conduct any research or development activities for any of the additional programs unless and until Celgene exercises its rights with respect to such program and pays us the applicable exercise fee. If Celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee, we are responsible for conducting research and development activities at our own expense pursuant to agreed upon development plans until the completion of the first Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis. In addition, if Celgene exercises its rights with respect to the option program and pays us the applicable exercise fee, we are responsible for seeking to generate a deuterated compound for clinical development in the selected option program at our own expense.

Celgene is responsible for all development costs with respect to the initial program beyond the Phase 1 clinical trials that we conduct. If Celgene exercises its rights with respect to any additional program, Celgene will be solely responsible for all research, development and commercialization costs for such program following the completion of the first Phase 1 clinical trial for such program.

Following its assumption of responsibility for development costs of a product candidate, Celgene is required to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize the product candidate until such time, if any, as Celgene determines in its reasonable discretion based on comparative metrics that that product candidate does not represent a substantial improvement over the corresponding non-deuterated compound.

Governance. Oversight of the development program for each category of licensed products under the agreement is guided by separate joint steering committees. There is likewise a joint patent committee to discuss and guide all matters for any patents owned by or licensed to us relating to the licensed products.

Payments. Under the terms of the agreement, we received a non-refundable upfront payment of $35.0 million. In addition, we are eligible to earn up to $23.0 million in development milestone payments, including $8.0 million related to the completion of a Phase 1 clinical trial, up to $247.5 million in regulatory milestone payments and up to $50.0 million in sales-based milestone payments related to products within the initial program. If Celgene exercises its rights with respect to either of the two additional license programs, we will receive a license exercise fee for the applicable program of $30.0 million and will also be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments for that program. Additionally, with respect to one of the additional license programs we are eligible to receive up to $100.0 million in sales-based milestone payments based on net sales of products, and with respect to the other additional license program we are eligible to receive up to $50.0 million in sales-based milestone payments based on net sales of products. If Celgene exercises its option with respect to the option program in respect of a compound to be identified at a later time, we will receive an option exercise fee of $10.0 million and will be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments.

In addition, with respect to each program, Celgene is required to pay us royalties on net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20%, on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the latest of expiration of specified patent coverage, expiration of

 

 

 

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regulatory exclusivity or 10 years following commercial launch. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country.

Exclusivity Restrictions. During the term of the agreement, we may not research, develop or commercialize, or grant or offer to grant a third party a license to research, develop or commercialize, any licensed product, and with respect to the option program, certain products that Celgene has the right to select as an option product, other than pursuant to the agreement.

Term and Termination. The agreement will expire upon the later of the seventh anniversary of the effective date of the agreement and the expiration of all royalty terms with respect to each licensed product in each country. Celgene has the right to terminate the agreement, in whole or only with respect to a particular licensed product, upon 60 days prior written notice to us. The agreement may also be terminated by us in the event of an uncured material breach by Celgene. If the agreement is terminated for any reason, the licenses granted by us to Celgene will terminate and specified rights to licensed products will revert to us.

Avanir

Overview. In February 2012, we entered into a development and license agreement with Avanir under which we granted Avanir an exclusive worldwide license to develop, manufacture and commercialize deuterated dextromethorphan containing products. Avanir is initially focused on developing AVP-786, which is a combination of a deuterated dextromethorphan analog and an ultra-low dose of quinidine, for the treatment of neurologic and psychiatric disorders.

Research Obligations. Under the agreement, upon Avanir’s request we are obligated to provide research and development services with respect to licensed products pursuant to an agreed upon research and development plan until the first acceptance of an IND for any licensed product filed by Avanir or its affiliates or sublicensees in the United States, European Union or Japan. We are obligated to use commercially reasonable efforts to conduct and complete the activities assigned to us under the agreement. Avanir is required to use commercially reasonable efforts to develop and commercialize licensed product candidates for specified numbers of indications in the United States, European Union and Japan. Avanir is responsible for funding 100% of our research and development costs incurred under the development plan or for activities conducted at Avanir’s request, including pass-through costs and a rate per full-time equivalent, or FTE, year of our employees’ time, which we mutually agreed to, subject to limitations specified in the agreement. However, Avanir is currently conducting all research and development activities without our services.

Governance. Our collaboration with Avanir is guided by a joint steering committee. There is likewise a joint patent committee to discuss and guide all matters for any patents owned by or licensed to us relating to the licensed products or otherwise filed with respect to certain inventions within the scope of the collaboration.

Payments. Under the agreement, we received a non-refundable upfront payment of $2.0 million and a milestone payment of $2.0 million in 2013. We are also eligible to receive, with respect to licensed products comprising a combination of deuterated dextromethorphan and quinidine, up to $4.0 million in development milestone payments, including $2.0 million related to initiation of dosing in a Phase 2 or Phase 3 clinical trial for AVP-786, up to $37.0 million in regulatory and commercial launch milestone payments and up to $125.0 million in sales-based milestone payments based on net product sales of licensed products. In addition, we are eligible for higher development milestones, up to an additional $43.0 million, for licensed products that do not require quinidine. Avanir is currently developing deuterated dextromethorphan only in combination with quinidine. Avanir also is required to pay us

 

 

 

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royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the later of expiration of specified patent coverage or 10 years following commercial launch. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim covering the licensed product in the particular country.

Exclusivity Restrictions. During the term of the agreement, neither we nor Avanir may research, develop or commercialize any product that contains deuterated dextromethorphan or grant or offer a license under any deuterated dextromethorphan specific intellectual property, other than pursuant to the agreement. We are also subject to certain additional exclusivity restrictions as set forth in the agreement, including certain restrictions on the development, commercialization and licensing of deuterated dextromethorphan analogs, such as C-10068, for the treatment of pseudobulbar affect or behavioral symptoms in dementia patients.

Term and Termination. The agreement will expire on a licensed product-by-licensed product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country. Following the earlier of the completion of a specified Phase 2 clinical trial milestone or the second anniversary of the effective date of the agreement, Avanir has the right to terminate the agreement upon 90 days prior written notice to us. We may terminate the agreement if Avanir ceases to develop or commercialize licensed products and does not recommence development or commercialization efforts following our notice to Avanir. The agreement may also be terminated by either Avanir or us in the event of an uncured material breach by the other party.

If the agreement is terminated for any reason, the licenses granted by us to Avanir will terminate. Further, if the agreement is terminated, other than by Avanir as a result of our material breach of the agreement, specified rights to licensed products will revert to us and Avanir will be required, following our request, to grant us a license under specified intellectual property controlled by Avanir and related to licensed products. If the termination takes place after the completion of a Phase 2 clinical trial for a licensed product, we are required to pay a royalty on our net product sales of licensed products until such time as Avanir has recovered a multiple of the out-of-pocket expenses paid by Avanir to develop the licensed product prior to termination of the agreement. If the termination takes place after Avanir has generated Phase 3 clinical data, we are generally restricted for a specified period of time following termination from marketing any licensed product that is approved by the applicable regulatory authority based on the Phase 3 clinical data generated by Avanir.

Jazz Pharmaceuticals

Overview. In February 2013, we entered into a development and license agreement with Jazz Pharmaceuticals to research, develop and commercialize products containing D-SXB. We are initially focusing on one analog, designated as JZP-386. Under the terms of the agreement, we granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectual property controlled by us to develop, manufacture and commercialize D-SXB products including, but not limited to, JZP-386.

Research Obligations. We, together with Jazz Pharmaceuticals, are conducting certain development activities for a Phase 1 clinical trial with respect to JZP-386 pursuant to an agreed upon development plan. Our current responsibilities under the development plan are conducting a Phase 1 clinical trial with respect to JZP-386 and supplying a deuterated intermediate for making clinical trial material for a Phase 1 clinical trial. Thereafter, our obligations to conduct further development activities are subject to mutual agreement and we have agreed with Jazz Pharmaceuticals that Jazz Pharmaceuticals will assume all manufacturing responsibilities for Phase 2 development. Pursuant to the agreement, our costs for

 

 

 

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activities under the development plan, including pass-through costs and the costs of our employees’ time at a rate per full-time equivalent year of our employees’ time, which we mutually agreed to, are reimbursed by Jazz Pharmaceuticals. This reimbursement is subject to limitations specified in the agreement, including adherence within a particular percentage to the development budget. Under the agreement, Jazz Pharmaceuticals is subject to specified diligence obligations regarding the development and commercialization of licensed products.

Governance. Our collaboration with Jazz Pharmaceuticals is guided by a joint steering committee and a joint patent committee.

Payments. Under the agreement, we received a non-refundable upfront payment of $4.0 million and we are eligible to receive an aggregate of up to $8.0 million in development milestone payments, up to $35.0 million in regulatory milestone payments and up to $70.0 million in sales milestone payments based on net product sales of licensed products. In addition, Jazz Pharmaceuticals is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20%, on a country-by-country and licensed product-by-licensed product basis, on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the later of the expiration of specified patent coverage or 10 years following commercial launch. The royalty rate is lowered, on a country by country basis, under certain circumstances as specified in the agreement.

Exclusivity Restrictions. During the term of the agreement, subject to exceptions specified in the agreement, we may not grant or offer a license or other rights to a third party with respect to, or research, develop, manufacture or commercialize, D-SXB compounds, licensed products, sodium oxybate or any compounds that are structurally similar to and have substantially similar biological activity to D-SXB.

Term and Termination. The agreement will expire on a licensed product-by-licensed product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country. Jazz Pharmaceuticals may terminate the agreement, on a country-by-country basis or in its entirety, upon 90 days prior written notice to us. We may terminate the agreement upon written notice to Jazz Pharmaceuticals if Jazz Pharmaceuticals decides to permanently cease development and commercialization of all licensed products. We may also terminate the agreement if Jazz Pharmaceuticals has abandoned development or commercialization activities for licensed products and following notice from us does not resume development or commercialization activities. The agreement may also be terminated by either party in the event of an uncured material breach by the other party.

If the agreement is terminated for any reason, the licenses granted by us to Jazz Pharmaceuticals with respect to D-SXB products will terminate and specified rights to licensed products will revert to us. In addition, at our request, both parties will enter into good faith negotiations to agree upon commercially reasonable royalties payable by us for a non-exclusive license under intellectual property controlled by Jazz Pharmaceuticals, and made in the course of developing licensed products, to develop, manufacture and commercialize licensed products.

Following termination of the agreement with respect to a country or countries, but not in its entirety, by Jazz Pharmaceuticals for Jazz Pharmaceuticals’ convenience, Jazz Pharmaceuticals may provide us written notice that it desires to continue or recommence development and commercialization of licensed products in such country or countries, in which event Jazz Pharmaceuticals’ license with respect to D-SXB products in such country or countries and corresponding payment obligations under the agreement will be reinstated except in specified circumstances in which we have previously notified Jazz Pharmaceuticals of our intent to develop or commercialize licensed products in such country or countries either directly or through a third party licensee.

 

 

 

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INTELLECTUAL PROPERTY

We protect our product candidates through the use of patents, trade secrets and careful monitoring of our proprietary know-how. As of December 31, 2013, we held 100 issued patents worldwide, including 50 issued patents in the United States. Our patents and patent applications, if they issue as patents, for our lead programs expire between 2028 and 2034.

CTP-354

We hold U.S. patents covering the composition of matter of CTP-354 and related compounds. These patents expire in 2029. We also have a pending U.S. patent application claiming compositions and methods covering CTP-354. We have corresponding issued patents in Europe and Japan that expire in 2029. We have retained all of the CTP-354 patent rights.

CTP-499

We hold a U.S. patent that covers the composition of matter of CTP-499 and related compounds. This patent expires in 2029. We also have pending U.S. patent applications that cover CTP-499 and related compounds. We have two patent applications for CTP-499 in Europe and two issued patents in Japan that cover the composition of matter of CTP-499. Patents that issue from the European patent applications would expire in 2029 and 2030. The issued Japanese patents expire in 2029 and 2030. We have retained all of the CTP-499 patent rights.

AVP-786

We hold U.S. patents covering the composition of matter and methods of use of the deuterated dextromethorphan analog that comprises AVP-786. These patents have expirations from 2028 to 2030. We also have a pending U.S. patent application covering methods of use of certain other dextromethorphan compounds. We have corresponding issued patents in Europe and Japan that expire in 2028. We have granted exclusive licenses under these patent rights to Avanir.

Celgene Collaboration

We hold U.S. patents and a U.S. patent application covering the composition of matter of deuterated analogs of one of the compounds that we have exclusively licensed to Celgene and U.S. patent applications covering other compounds that we have exclusively licensed to Celgene. The patents expire in 2030 and the patent applications, if issued as patents, would expire between 2029 and 2034. We also have provisional U.S. patent applications for compounds that we have exclusively licensed to Celgene. We have an issued patent and an allowed patent application in Europe for compounds that we have exclusively licensed to Celgene and patent applications in Japan for these two compounds. These patent applications, if issued as patents, would expire between 2029 and 2034.

JZP-386

We hold a U.S. patent covering the composition of matter of deuterated analogs of sodium oxybate, including JZP-386, and their methods of use for treating certain diseases and disorders, including narcolepsy, as well as a corresponding U.S. continuing application. The expiration of this patent and this application occur in 2030. We hold a corresponding European patent that expires in 2030. We also have patent applications in the United States, Europe and Japan that cover JZP-386 and related compounds and their methods of use for treating certain diseases and disorders, including narcolepsy that, if issued, would expire in 2032. We have granted exclusive licenses under these patent rights to Jazz Pharmaceuticals.

 

 

 

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C-10068

We have U.S. patent applications for the composition of matter of C-10068, and methods of use for treating certain diseases and disorders. The expiration of a patent issuing from these patent applications would be in 2029. We have a corresponding issued patent in Europe expiring in 2029 and a patent application in Japan that, if issued as a patent, would expire in 2029. We have retained all of the C-10068 patent rights.

Other Product Candidates

We also have patent portfolios that are related to a number of other programs. These patent portfolios are wholly owned by us. These include issued patents or patent applications that claim deuterated analogs of more than 90 non-deuterated drugs and drug candidates.

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In the United States and other countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application.

Under U.S. patent law, the patent term may be extended by patent term adjustment due to certain failures of the U.S. Patent and Trademark Office to act in a timely manner. The patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patents that we believe are eligible for such extension. We also intend to seek patent term extensions in other jurisdictions where these are available. However, there is no guarantee that the applicable authorities, including the FDA, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.

We also rely on trade secrets and careful monitoring of our proprietary know-how to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection, including our DCE Platform, such as:

 

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our methods of evaluating candidate compounds for deuteration;

 

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our bioanalytical methods for identifying and measuring metabolites formed by the in vitro and in vivo metabolism of deuterated compounds;

 

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our analytical methods for evaluating how selective deuterium substitution affects different pharmacokinetic and metabolic parameters in in vitro and in vivo systems; and

 

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our methods to determine the degree of deuterium substitution in compounds we manufacture.

MANUFACTURING AND SUPPLY

We have developed the internal capability to manufacture up to low kilogram quantities of deuterated active pharmaceutical ingredients for use in Phase 1 clinical trials. Our manufacturing facility occupies approximately 700 square feet at our facility in Lexington, Massachusetts.

 

 

 

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While our manufacturing capabilities can support Phase 1 clinical trials, we currently rely, and expect to continue to rely, on third parties for the manufacture of product candidates for our clinical trials, including the ongoing clinical trials of CTP-354. We obtain these manufacturing services, including both the manufacture of the active pharmaceutical ingredients and finished drug product, on a purchase order basis and have not entered into long-term contracts with any of these third party manufacturers. We expect to rely on third parties for commercial manufacturing for any of our product candidates that receive marketing approval.

We have successfully transferred the methods we use in our internal manufacturing to our third party manufacturers, allowing them to produce multi-kilogram quantities of clinical trial materials with similar efficiency as we manufacture compounds internally. If any of our third party manufacturers should become unavailable to us for any reason, we believe that there are a number of potential replacements, although we might incur some delay in identifying and qualifying such replacements.

We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. For most of our deuterium supply we rely on bulk supplies of deuterium oxide, which we currently source from two suppliers, one located in the United States and one located abroad, which is affiliated with a foreign government. We may establish deuterium oxide supply arrangements with an additional supplier, which is located outside of the United States and is affiliated with a foreign government. It is also possible that our current U.S. supplier of deuterium oxide relies on our current foreign supplier, as well as our potential future foreign supplier, for its supply of deuterium oxide, although we are not familiar with its procurement processes. In order to internationally transport any deuterium oxide that we purchase from either of these two foreign suppliers, we, or our U.S. supplier, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate from the country of destination. We are also required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide from the United States to any contract manufacturer in another country. Each of these documents specifies the maximum amount of deuterium oxide that we, or our suppliers, are permitted to either import or export. In particular, in order to obtain additional supplies of deuterium oxide from the foreign-government affiliated supplier from which we have purchased deuterium oxide, we will be required to obtain an additional export license from the country of origin and a U.S. import certificate. While we have obtained similar licenses and certificates in the past, we may not be able to obtain them in the future in a timely manner or at all.

Certain of our manufacturing processes for our product candidates incorporate deuterium by using deuterated chemical intermediates or reagents that are derived from deuterium oxide. For the deuterated chemical intermediates and reagents, we are not subject to the license requirements applicable to deuterium oxide. However, the manufacturer of the deuterated chemical intermediate or reagent may themselves be required to obtain deuterium oxide under applicable licensing requirements. Most of the manufacturers of these deuterated chemical intermediates and reagents are not located in countries that produce bulk quantities of deuterium oxide. Therefore, our ability to source these deuterated chemical intermediates or reagents will depend on the ability of these manufacturers to obtain deuterium oxide from other countries.

We purchase our raw materials on a purchase order basis and have not entered into long-term contracts with any of these third party suppliers. We believe that the raw materials for our product candidates are readily available and that the cost of manufacturing for our product candidates will not preclude us from selling them profitably, if approved for sale.

 

 

 

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COMMERCIALIZATION

We have not yet established a sales, marketing or product distribution infrastructure. We plan to use a combination of third party collaboration, licensing and distribution arrangements and a focused in-house commercialization capability to sell any of our products that receive marketing approval. With respect to the United States, we plan to seek to retain full commercialization rights for products that we can commercialize with a specialized sales force and to retain co-promotion or similar rights when feasible in indications requiring a larger commercial infrastructure. We plan to collaborate with third parties for commercialization in the United States of any products that require a large sales, marketing and product distribution infrastructure. We also plan to collaborate with third parties for commercialization outside the United States.

We plan to build a marketing and sales management organization to create and implement marketing strategies for any products that we market through our own sales organization and to oversee and support our sales force. We expect the responsibilities of the marketing organization would include developing educational initiatives with respect to approved products and establishing relationships with thought leaders in relevant fields of medicine.

COMPETITION

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of spasticity, kidney disease, neurologic disorders, cancer and inflammation, the key indications for our priority programs. Several large pharmaceutical and biotechnology companies have also begun to cover deuterated analogs of their product candidates in patent applications and may choose to develop these deuterated compounds. In addition, we know of one small biotechnology company, Auspex Pharmaceuticals, Inc., and possibly two others, DeutRx LLC and Berolina innovative Research and Development Services Pharma GmbH, that are developing product candidates based on deuterium substitution. Potential competitors also include academic institutions, government agencies and other public and private research organizations.

Many of our existing and potential future competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, product labeling, side effect profiles, safety, convenience, price, particularly if there is generic competition, differentiation from their corresponding non-deuterated compounds when applicable, and the availability of reimbursement from government and other third party payors.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we or our collaborators may develop. Our

 

 

 

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competitors also may obtain FDA or other regulatory approval for their products sooner than we or our collaborators may obtain approval for ours, which could result in our competitors establishing a strong market position before we or our collaborators are able to enter the market.

In addition, we anticipate that some of the product candidates that we or our collaborators may develop will be deuterated analogs of approved drugs, some of which are or will then be available on a generic basis. If such deuterated analogs are approved, we expect that they will compete against branded and generic non-deuterated compounds in the same indications based on enhanced efficacy, safety or convenience of dosing. If physicians do not believe that a product that we or our collaborators develop offers substantial advantages over the corresponding non-deuterated compound, or that the advantages offered by our product as compared to the corresponding non-deuterated compound are not sufficient to merit the increased price over the corresponding non-deuterated compound that we or our collaborators would seek, physicians might not prescribe our product.

If the product candidates for our priority programs are approved for the indications for which we or our collaborators are currently undertaking clinical trials, they will compete with the therapies discussed below and will likely compete with other therapies that are currently in development.

CTP-354

We are initially developing CTP-354 for the treatment of spasticity associated with multiple sclerosis and spinal cord injury. Current first-line treatment for spasticity includes oral and local agents and physical and occupational therapy. Four oral drugs have been approved in the United States for the treatment of spasticity: baclofen (Lioresal), tizanidine (Zanaflex), diazepam (Valium) and dantrolene (Dantrium), each of which is available on a generic basis. Spasticity is also treated through localized injections of botulinum toxin. In addition, there are several potentially competitive product candidates in Phase 3 clinical development being pursued by pharmaceutical and biotechnology companies, including GW Pharmaceuticals plc and Osmotica Pharmaceuticals Corp.

CTP-499

The current standard of care for type 2 diabetic kidney disease in patients with macroalbuminuria is treatment with angiotensin modulators. Angiotensin modulators are available on a generic basis. We are developing CTP-499 as an additive treatment to this current standard of care. If CTP-499 receives marketing approval, it may also face competition from a number of product candidates that are currently in clinical development, including one potentially competitive product candidate in Phase 3 clinical development being pursued by AbbVie Inc.

AVP-786

Avanir is developing AVP-786 for the treatment of neurologic and psychiatric disorders. There are a number of marketed drugs and product candidates in clinical development for these indications.

GOVERNMENT REGULATIONS

Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, sales, distribution, marketing, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.

 

 

 

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Review and Approval of Drugs in the United States

In the United States, the FDA regulates drugs under the FDCA and implementing regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice or other governmental entities.

An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:

 

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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations;

 

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submission to the FDA of an IND, which allows human clinical trials to begin unless the FDA objects within 30 days;

 

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approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;

 

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performance of adequate and well-controlled human clinical trials in accordance with the FDA’s cGCPs to establish the safety and efficacy of the proposed drug product for each indication;

 

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preparation and submission to the FDA of an NDA;

 

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satisfactory review of the NDA by an FDA advisory committee, where appropriate or if applicable;

 

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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the drug product, and the active pharmaceutical ingredient or ingredients thereof, are produced to assess compliance with cGMPs and to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality and purity;

 

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payment of user fees and securing FDA approval of the NDA; and

 

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compliance with any post-approval requirements, including REMS and post-approval studies required by the FDA.

Preclinical Studies and an IND

Preclinical studies can include in vitro and animal studies to assess the potential for adverse events and, in some cases, to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. Other studies include laboratory evaluation of the purity, stability and physical form of the manufactured drug substance or active pharmaceutical ingredient and the physical properties, stability and reproducibility of the formulated drug or drug product. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, to the FDA as part of an IND. Some preclinical testing, such as longer-term toxicity testing, animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the

 

 

 

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trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.

Following commencement of a clinical trial under an IND, the FDA may place a clinical hold on that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed.

Human Clinical Studies in Support of an NDA

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with cGCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within specific timeframes to the NIH for public dissemination on their ClinicalTrials.gov website.

Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:

 

Phase 1:

   The product candidate is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.

Phase 2:

   The product candidate is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

Phase 3:

   The product candidate is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the product.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or

 

 

 

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terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. The FDA will typically inspect one or more clinical sites in late-stage clinical trials to assure compliance with cGCP and the integrity of the clinical data submitted.

Section 505(b)(2) NDAs

NDAs for most new drug products are based on two adequate and well-controlled clinical trials which must contain substantial evidence of the safety and efficacy of the proposed new product. These applications are submitted under Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)(2) of the FDCA. This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety and efficacy for a similar product, or published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the applicant relies, as part of its application, on investigations made to show whether or not the drug is safe and effective for use “that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.”

Thus, Section 505(b)(2) authorizes the FDA to approve an NDA based on safety and effectiveness data that were not developed by the applicant. NDAs filed under Section 505(b)(2) may provide an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations or new uses of previously approved products. If the 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new drug candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

If our partners submit NDAs for approval of deuterated analogs of marketed compounds for which they are the NDA holder, we believe that in certain cases the FDA may allow referencing of data from the non-deuterated compound in support of the application for approval of the deuterated product. Since this referencing by our partners would involve use of their own data and not require the use of another party’s data, it would constitute a Section 505(b)(1) application.

Submission of an NDA to the FDA

Assuming successful completion of required clinical testing and other requirements, the results of the preclinical and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law, the submission of most NDAs is additionally subject to an application user fee, currently exceeding $2.1 million, and the sponsor of an approved NDA is also subject to annual product and establishment user fees, currently exceeding $104,000 per product and $554,600 per establishment. These fees are typically increased annually.

Under certain circumstances, the FDA will waive the application fee for the first human drug application that a small business, defined as a company with less than 500 employees, or its affiliate submits for review. An affiliate is defined as a business entity that has a relationship with a second business entity if one business entity controls, or has the power to control, the other business entity, or a third party controls, or has the power to control, both entities.

The FDA conducts a preliminary review of an NDA within 60 days of its receipt and informs the sponsor by the 74 th day after the FDA’s receipt of the submission to determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather

 

 

 

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than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review process of NDAs. Most such applications are meant to be reviewed within ten months from the date of filing, and most applications for “priority review” products are meant to be reviewed within six months of filing. The review process may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.

Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with cGCP.

The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to mitigate any identified or suspected serious risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

The FDA is required to refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

The FDA’s Decision on an NDA

On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.

The product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is

 

 

 

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subject to official release, the manufacturer must submit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety and effectiveness of drug products.

Post-Approval Requirements

Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events or problems with manufacturing processes of unanticipated severity or frequency, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

 

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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

 

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fines, warning letters or holds on post-approval clinical trials;

 

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refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;

 

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product seizure or detention, or refusal to permit the import or export of products; or

 

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injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level,

 

 

 

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and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.

Abbreviated New Drug Applications for Generic Drugs

In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an ANDA to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously approved under an NDA, known as the reference listed drug, or RLD. To reference that information, however, the ANDA applicant must demonstrate, and the FDA must conclude, that the generic drug does, in fact, perform in the same way as the RLD it purports to copy.

Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the generic drug do not show a significant difference from the rate and extent of absorption of the reference listed drug. . . .”

Upon approval of an ANDA, the FDA indicates that the generic product is “therapeutically equivalent” to the RLD and it assigns a therapeutic equivalence rating to the approved generic drug in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider the therapeutic equivalence rating to mean that a generic drug is fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of a therapeutic equivalence rating often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.

Under the Hatch Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has expired. The FDCA provides a period of five years of data exclusivity for new drug containing a new chemical entity. In cases where such exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product approval. The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication.

Hatch-Waxman Patent Certification and the 30 Month Stay

Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s product or a method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval.

Specifically, the applicant must certify with respect to each patent that:

 

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the required patent information has not been filed;

 

 

 

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the listed patent has expired;

 

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the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or

 

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the listed patent is invalid, unenforceable or will not be infringed by the new product.

A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicate that it is not seeking approval of a patented method of use, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.

If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.

To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would. As a result, approval of a 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant.

Pediatric Studies and Exclusivity

Under the Pediatric Research Equity Act of 2003, a NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food and Drug Administration Safety and Innovation Act, or FDASIA, in 2012, sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.

The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in FDASIA. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.

Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written

 

 

 

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request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot accept or approve another application.

Patent Term Restoration and Extension

A patent claiming a new drug product may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly referred to as the Hatch-Waxman Amendments). Those Amendments permit a patent restoration of up to five years for patent term lost during product development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and the submission date of a NDA, plus the time between the submission date of a NDA and ultimate approval. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. The U.S. Patent and Trademark Office reviews and approves the application for any patent term extension or restoration in consultation with the FDA.

Regulation of Controlled Substances

We handle a product that is treated as a “controlled substance” under the CSA. The CSA authorizes the DEA to regulate the registration, procurement, manufacturing, production, possession, labeling and distribution of controlled substances. Controlled substances are classified as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk.

Our product candidate JZP-386, which we have licensed to Jazz Pharmaceuticals, is a deuterium substituted analog of sodium oxybate. Sodium oxybate is regulated as a chemical by the DEA as a Schedule I controlled substance. However, when formulated into Xyrem, the drug product is regulated as a Schedule III substance. Because of the Schedule I classification of sodium oxybate, JZP-386 is regulated by the DEA as a Schedule I controlled substance. If JZP-386 becomes approved as the active pharmaceutical ingredient in a drug product, the DEA may decide to regulate the drug product as a Schedule III controlled substance, similar to Xyrem.

The manufacture, shipment, storage, sale and use of Schedule I substances are subject to a high degree of regulation. Every person who manufactures, distributes, dispenses, imports or exports any controlled substance must register with the DEA, unless they are exempt. Moreover, for Schedule I substances, the CSA authorizes the DEA to establish aggregate production quotas for all manufacturers, individual production quotas for specific registered manufactures and individual production quotas for registrants who have not manufactured controlled substances during one or more proceeding years.

We expect our product candidate CTP-354 to be classified as a Schedule IV substance under the CSA. The CSA also places significant restrictions on substances which have been classified in Schedules III and IV. While these restrictions are not as severe as those governing substances in Schedules I and II, they nonetheless establish strict limitations on the manufacture, sale and distribution of Schedule III and IV substances. For example, prescriptions for controlled substances that are prescription drugs in such schedules may only be filled or refilled by pharmacists up to five times within six months after the date on which the prescription was issued, unless the prescribing practitioner renews the prescription.

 

 

 

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The failure to maintain compliance with applicable requirements under the CSA can result in enforcement action that could have a material adverse effect on our business, results of operations and financial condition. The DEA may inspect facilities, seek civil penalties, refuse to renew necessary registrations or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal proceedings. Individual states also regulate controlled substances, and we and our contract manufacturers are subject to state regulation on distribution of these products.

Review and Approval of Drug Products in the European Union

In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.

Pursuant to the European Clinical Trials Directive, a system for the approval of clinical trials in the European Union has been implemented through national legislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of a European Union member state in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial after a competent ethics committee has issued a favorable opinion. Clinical trial applications must be accompanied by an investigational medicinal product dossier with supporting information prescribed by the European Clinical Trials Directive and corresponding national laws of the member states and further detailed in applicable guidance documents.

To obtain marketing approval of a drug under European Union regulatory systems, an applicant must submit a marketing authorization application, or MAA, either under a centralized or decentralized procedure.

The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all European Union member states. The centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional.

Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the EMA is responsible for conducting the initial assessment of a drug. The CHMP is also responsible for several post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. In this circumstance, the EMA ensures that the opinion of the CHMP is given within 150 days.

 

 

 

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The decentralized procedure is available to applicants who wish to market a product in various European Union member states where such product has not received marketing approval in any European Union member states before. The decentralized procedure provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state designated by the applicant, known as the reference member state. Under this procedure, an applicant submits an application based on identical dossiers and related materials, including a draft summary of product characteristics, and draft labeling and package leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment report and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report and related materials, each concerned member state must decide whether to approve the assessment report and related materials.

If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points are subject to a dispute resolution mechanism and may eventually be referred to the European Commission, whose decision is binding on all member states.

Data and Market Exclusivity in the European Union

In the European Union, new chemical entities qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic (abbreviated) application for eight years, after which generic marketing authorization can be submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity and the sponsor is able to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the drug if such company can complete a full MAA with a complete database of pharmaceutical test, preclinical tests and clinical trials and obtain marketing approval of its product.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of products will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication.

In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to maintain price levels high enough to realize an appropriate return on our investment in product development.

 

 

 

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The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus in this effort. Third-party payors are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payors do not consider a product to be cost-effective compared to other available therapies, they may not cover the product after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals.

As a result, the marketability of any product which receives regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. In particular, the PPACA contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. Even if favorable coverage and reimbursement status is attained for one or more products that receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements for any of our products.

Healthcare Law and Regulation

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

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the federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or

 

 

 

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in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;

 

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the federal False Claims Act imposes civil penalties, and provides for civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

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HIPAA imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

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the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

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the federal transparency requirements under the Health Care Reform Law will require manufacturers of drugs, devices, drugs and medical supplies to report to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teaching hospitals and physician ownership and investment interests; and

 

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analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.

Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Regulation of Deuterium Oxide

We believe that all of the deuterium that we use in manufacturing our product candidates is currently derived, directly or indirectly, from deuterium oxide. For most of our deuterium supply we rely on bulk supplies of deuterium oxide, which we currently source from two suppliers, one located in the United States and one located abroad, which is affiliated with a foreign government. We may establish deuterium oxide supply arrangements with an additional supplier, which is located outside of the United States and is affiliated with a foreign government. In order to internationally transport any deuterium oxide that we purchase from either of these two foreign suppliers, we, or our U.S. supplier, may be required to obtain an export license from the country of origin and we may be required to obtain an International Import Certificate from the country of destination. We are also required to obtain an export license from the Nuclear Regulatory Commission before shipping deuterium oxide from the United States to any contract manufacturer in another country. Each of these documents specifies the maximum amount of deuterium oxide that we, or our suppliers, are permitted to either import or export. We have obtained two export licenses from the Nuclear Regulatory Commission, each for the export of 20,000 kilograms of heavy water over the life of the license, which are valid until December 2015 and

 

 

 

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January 2019, respectively. However, in order to obtain additional supplies of deuterium oxide from the foreign-government affiliated supplier from which we have purchased deuterium oxide, we will be required to obtain an additional export license from the country of origin and a U.S. import certificate. While we have obtained similar licenses and certificates in the past, we may not be able to obtain them in the future in a timely manner or at all. We have not obtained an export license from the country in which our potential future foreign supplier is located. In addition, if any our product candidates is approved by the FDA, then the FDA will also have regulatory jurisdiction over the manufacture and use of deuterium oxide in such product.

EMPLOYEES

As of December 31, 2013, we had 43 employees, 25 of whom were primarily engaged in research and product development activities. A total of 16 employees have Ph.D. degrees. None of our employees are represented by a labor union and we believe our relations with our employees are good.

FACILITIES

Our offices are located in Lexington, Massachusetts, consisting of approximately 45,000 square feet of leased office and laboratory space. The term of the lease expires in September 2015.

LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

 

 

 

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Management

The following table sets forth the name, age and positions of each of our executive officers and directors as of January 31, 2014.

 

Name    Age    Position(s)

Executive Officers

     

Roger D. Tung, Ph.D.

   54    President and Chief Executive Officer, Director

Nancy Stuart

   55    Chief Operating Officer

Ryan Daws

   39    Chief Financial Officer

Ian Robert Silverman, J.D., Ph.D.

   61    Senior Vice President and General Counsel

Non-Employee Directors

     

Richard H. Aldrich (2)(3)

   59    Director, Chairman of the Board of Directors

Ronald W. Barrett, Ph.D (2)

   58    Director

John G. Freund, M.D. (1)

   60    Director

Peter Barton Hutt (3)

   79    Director

Wilfred E. Jaeger, M.D (1)(2)

   57    Director

Helmut M. Schühsler, Ph.D (1)

   54    Director

 

(1)   Member of audit committee.

 

(2)   Member of compensation committee.

 

(3)   Member of the nominating and corporate governance committee.

EXECUTIVE OFFICERS

Roger D. Tung, Ph.D. is our co-founder and has served as our President and Chief Executive Officer and as a member of our board of directors since April 2006. Before Concert, Dr. Tung was a founding scientist at Vertex, a pharmaceutical company, where he was employed from 1989 to 2005, most recently as its Vice President of Drug Discovery. Prior to Vertex, he held various positions at Merck, Sharp & Dohme Research Laboratories, a global healthcare provider, and The Squibb Institute for Medicinal Chemistry. Dr. Tung received a B.A. in Chemistry from Reed College and a Ph.D. in Medicinal Chemistry at the University of Wisconsin-Madison. We believe that Dr. Tung’s detailed knowledge of our company and his 28 year career in the global pharmaceutical and biotechnology industries, including his roles at Vertex, provide a critical contribution to our board of directors.

Nancy Stuart has served as our Chief Operating Officer since October 2007 and was our Senior Vice President, Corporate Strategy and Operations from July 2006 to October 2007. Prior to joining Concert Ms. Stuart held various business operations and business development positions at Amgen Inc., a biopharmaceutical company, Kinetix Pharmaceuticals, Inc., a pharmaceutical company subsequently acquired by Amgen, Scion Pharmaceuticals, Inc., a pharmaceutical company, Vertex and Genzyme Corporation, a biotechnology company subsequently acquired by Sanofi S.A. Ms. Stuart holds a B.S. from the University of Michigan, and an M.B.A. from the Simmons College Graduate School of Management.

Ryan Daws has served as our Chief Financial Officer since January 2014. Prior to joining Concert, Mr. Daws served as an independent consultant from June 2013 to January 2014, including an engagement with Concert from September 2013 to January 2014. Mr. Daws served as a Director in the Healthcare Investment Banking Group at Stifel, Nicolaus & Company, Inc., a financial services company, from September 2010 to June 2013. From March 1999 to June 2010, he served in positions of increasing responsibility within the Healthcare Investment Banking Group of Cowen and Company, LLC, a financial services firm. Mr. Daws holds a B.S. in Finance and Organizational Management from the University of South Carolina and an International M.B.A. from the University of South Carolina’s Moore School of Business.

 

 

 

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Ian Robert Silverman, J.D., Ph.D. has served as our Senior Vice President and General Counsel since December 2010 and prior to that was our Vice President and General Counsel from January 2007 to December 2010. Prior to joining Concert, he served in various legal related roles at Millennium Pharmaceuticals, Inc., a pharmaceutical company, Vertex and FMC Corporation, a chemical manufacturing company. Dr. Silverman received his J.D. from Rutgers-Camden Law School, a Ph.D. in organic chemistry from the University of New Mexico and a B.A. from Lehigh University.

NON-EMPLOYEE DIRECTORS

Richard H. Aldrich is our co-founder and has served as a member of our board of directors and as Chairman of our board of directors since May 2006. Mr. Aldrich is a Founder and has been Partner of Longwood Fund, a venture capital firm, since February 2010. Mr. Aldrich founded RA Capital Management LLC, a hedge fund, in 2004 and served as a Managing Member from 2004 to 2008 and as a Co-Founding Member from 2008 until 2011. Mr. Aldrich has co-founded several biotechnology companies including Sirtris Pharmaceuticals, Inc., which was acquired by GlaxoSmithKline in 2008, and Alnara Pharmaceuticals, Inc., which was acquired by Eli Lilly in 2011. He has also held management positions at Vertex, where he was a co-founding employee, and Biogen Corporation (now Biogen Idec Inc., a biotechnology company). Mr. Aldrich co-founded and serves on the board of directors of Verastem, Inc., a public biopharmaceutical company and also serves on the boards of directors of OvaScience, Inc., a public life sciences company of which he serves as chairman of the board, and PTC Therapeutics, Inc., a public biopharmaceutical company. Mr. Aldrich received his undergraduate degree from Boston College, and an M.B.A. from the Amos Tuck School at Dartmouth College. We believe Mr. Aldrich’s broad-based experience in business, including his leadership and board experience at life science companies, and his familiarity with our business as a co-founder of our company allows him to be a key contributor to our board of directors.

Ronald W. Barrett, Ph.D. has served as a member of our board of directors since December 2007. Dr. Barrett is a founder of XenoPort, Inc., a public biopharmaceutical company, and has served as its Chief Executive Officer since 2001, its Chief Scientific Officer from 1999 to 2001 and as a member of its board of directors since 1999. Prior to XenoPort he held various positions at Affymax Research Institute, a drug discovery company now owned by GlaxoSmithKline plc, and Abbott Laboratories, a healthcare company. Dr. Barrett received a B.S. from Bucknell University and a Ph.D. in pharmacology from Rutgers University. We believe that Dr. Barrett’s industry and board experience, including his experience as the chief executive officer of a publically traded biopharmaceutical company, makes him a key contributor to our board of directors.

John G. Freund, M.D. has served as a member of our board of directors since December 2013. Dr. Freund co-founded Skyline Ventures in 1997 and has served as a partner at Skyline since its founding. Prior to joining Skyline, Dr. Freund served as managing director in the private equity group of Chancellor Capital Management, a private capital investment firm. In 1995, he co-founded Intuitive Surgical, a medical device company, and served on its board of directors until 2000. From 1988 to 1994, Dr. Freund served in various positions at Acuson Corporation, a maker of ultrasound equipment that is now part of Siemens, most recently as Executive Vice President. Prior to joining Acuson, Dr. Freund was a general partner of Morgan Stanley Venture Partners from 1987 to 1988. From 1982 to 1988, Dr. Freund was a general partner at Morgan Stanley & Co., an investment banking company, where he co-founded the Healthcare Group in the Corporate Finance Department in 1983. He has served on the board of directors of XenoPort, Inc., a publicly traded biopharmaceutical company, since 1999, and Tetraphase Pharmaceuticals, Inc., a publicly traded biopharmaceutical company, since 2012. Dr. Freund also serves on the board of directors of two privately held companies, Advion and DiscoverX, and three U.S. registered investment funds managed by Capital Research and Management. He also previously served on the board of directors of four publicly traded companies, Map Pharmaceuticals, a

 

 

 

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biopharmaceutical company, Hansen Medical, a biotechnology company, Sirtris Pharmaceuticals, a biopharmaceutical company, and Mako Surgical Corp., a medical device company. Dr. Freund is a member of the Advisory Board for the Harvard Business School Healthcare Initiative, and is a member of the Therapeutics Advisory Council of Harvard Medical School. Dr. Freund received a B.A. in history from Harvard College, an M.D. from Harvard Medical School and an M.B.A. from Harvard Business School. We believe that Dr. Freund’s extensive finance and investment experience, his experience as an executive and his service on the board of directors of numerous public and privately held companies allows him to be a key contributor to our board of directors.

Peter Barton Hutt has served as a member of our board of directors since December 2006. Mr. Hutt has practiced law at Covington & Burling LLP, specializing in food and drug law, since 1960 (except for the period from 1971 to 1975) and currently serves as senior counsel. From 1971 to 1975 he was Chief Counsel for the Food and Drug Administration. Mr. Hutt is a member of the board of directors of Momenta Pharmaceuticals, Inc., a public pharmaceutical company, DBV Technologies SA, Q Therapeutics, Inc. and Xoma Ltd., each of which is a public biotechnology company, as well as numerous private companies. During the last five years, Mr. Hutt also served as a member of the board of directors of Celera Genomics, a public biotechnology company that was acquired by Quest Diagnostics, Inc. in 2011, CV Therapeutics, Inc., a public biotechnology company that was acquired by Gilead Sciences, Inc. in 2009, and Ista Pharmaceuticals, Inc., a public pharmaceuticals company that was acquired by Bausch & Lomb Inc. in 2012. Mr. Hutt received a B.A. from Yale University, an LL.B. from Harvard Law School and an LL.M. from New York University School of Law. We believe Mr. Hutt’s extensive knowledge of regulatory and legal issues related to drug development and his service on numerous boards of directors allows him to be a key contributor to our board of directors.

Wilfred E. Jaeger, M.D. has served as a member of our board of directors since May 2006. Dr. Jaeger co-founded Three Arch Partners, a venture capital firm, in 1993 and has served as a Partner since that time. Prior to co-founding Three Arch Partners, Dr. Jaeger was a general partner at Schroder Ventures. He is also a member of the board of directors of Threshold Pharmaceuticals, Inc., a public pharmaceutical company, as well as numerous private companies. Dr. Jaeger received a B.S. in Biology from the University of British Columbia, his M.D. from the University of British Columbia School of Medicine and an M.B.A. from Stanford University. In addition to representing one of our principal stockholders, we believe that that Dr. Jaeger’s financial and medical knowledge and experience allows him to be a key contributor to our board of directors.

Helmut M. Schühsler, Ph.D. has served as a member of our board of directors since September 2011. Dr. Schühsler has worked for TVM Capital, a group of life science venture capital and healthcare private equity firms, since 1990 and currently serves as its Chairman and Managing Partner. During 2007 and 2008, Dr. Schühsler also served as Chairman of the European Private Equity and Venture Capital Association. Dr. Schühsler currently serves as a member of the board of Enanta Pharmaceuticals, Inc., a public pharmaceutical company, several other healthcare growth companies and Max Planck Innovation, the technology transfer organization of the German Max Planck Society. For several years he was a member of the Selection Committee for the Technology Pioneers program. Prior to joining TVM Capital, Dr. Schühsler worked for Horizonte Venture Management, a venture capital firm, and was an assistant professor for corporate finance at the Institute for Advanced Studies in Vienna. Dr. Schühsler received a Ph.D. in the Social and Economic Sciences from the University of Economics in Vienna. In addition to representing one of our principal stockholders, we believe that Dr. Schühsler’s business and financial experience as a director and investor in several companies in our industry allows him to be a key contributor to our board of directors.

FAMILY RELATIONSHIPS

There are no family relationships among any of our directors or executive officers.

 

 

 

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BOARD COMPOSITION

Our board of directors currently consists of seven members, all of whom were elected as directors pursuant to a voting agreement that we have entered into with the holders of our preferred stock and certain of our founders. The voting agreement will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering provide that the authorized number of directors may be changed only by resolution of the board of directors. Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the closing of this offering also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.

In accordance with the terms of our certificate of incorporation and bylaws that will become effective upon the closing of this offering, our board of directors will be divided into three classes, class I, class II and class III, with members of each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:

 

Ø  

the class I directors will be Peter Barton Hutt, Wilfred E. Jaeger and Roger D. Tung, and their term will expire at the annual meeting of stockholders to be held in 2015;

 

Ø  

the class II directors will be Ronald W. Barrett and John G. Freund, and their term will expire at the annual meeting of stockholders to be held in 2016; and

 

Ø  

the class III directors will be Richard H. Aldrich and Helmut M. Schühsler, and their term will expire at the annual meeting of stockholders to be held in 2017.

Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

DIRECTOR INDEPENDENCE

Rule 5605 of the NASDAQ Listing Rules requires a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the NASDAQ Listing Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.

 

 

 

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In December 2013 and January 2014, our board of directors undertook a review of the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of our directors, with the exception of Dr. Tung, is an “independent director” as defined under Rule 5605(a)(2) of the NASDAQ Listing Rules. Our board of directors also determined that John G. Freund, Wilfred E. Jaeger and Helmut M. Schühsler, who will comprise our audit committee following this offering, and Richard H. Aldrich, Ronald W. Barrett and Wilfred E. Jaeger, who will comprise our compensation committee following this offering, satisfy the independence standards for such committees established by the SEC and the NASDAQ Listing Rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.

BOARD COMMITTEES

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each of these committees will operate under a charter that has been approved by our board of directors.

Audit committee

Effective at the time of this offering, the members of our audit committee will be John G. Freund, Wilfred E. Jaeger and Helmut M. Schühsler. Dr. Schühsler will be the chair of the audit committee. Our board of directors has determined that each of these directors is independent within the meaning of Rule 10A-3 under the Exchange Act. In addition, our board of directors has determined that each of Dr. Schühsler and Dr. Jaeger qualifies as an audit committee financial expert within the meaning of SEC regulations and the NASDAQ Listing Rules. In making this determination, our board has considered the formal education and nature and scope of his previous experience, coupled with past and present service on various audit committees. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements. Following this offering, our audit committee’s responsibilities will include:

 

Ø  

appointing, approving the compensation of, and assessing the independence of the our registered public accounting firm;

 

Ø  

overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;

 

Ø  

reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

Ø  

monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;

 

Ø  

overseeing our internal audit function, if any;

 

Ø  

discussing our risk management policies;

 

Ø  

establishing policies regarding hiring employees from our independent registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;

 

Ø  

meeting independently with our internal auditing staff, our independent registered public accounting firm and management;

 

Ø  

reviewing and approving or ratifying any related person transactions; and

 

 

 

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Ø  

preparing the audit committee report required by SEC rules. All audit services to be provided to us and all non-audit services, other than de minimis non-audit services, to be provided to us by our registered public accounting firm must be approved in advance by our audit committee.

Compensation committee

Effective at the time of this offering, the members of our compensation committee will be Richard H. Aldrich, Ronald W. Barrett and Wilfred E. Jaeger. Dr. Barrett will be the chair of the compensation committee. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. Following this offering, the compensation committee’s responsibilities will include:

 

Ø  

reviewing and approving, or making recommendations to our board with respect to, the compensation of our Chief Executive Officer and other executive officers;

 

Ø  

overseeing the evaluation of our senior executives;

 

Ø  

reviewing and making recommendations to our board of directors with respect to our incentive-compensation and equity-based compensation plans;

 

Ø  

overseeing and administering our equity-based plans;

 

Ø  

reviewing and making recommendations to our board with respect to director compensation;

 

Ø  

reviewing and discussing with management our “Compensation Discussion and Analysis” disclosure to the extent such disclosure is required by SEC rules; and

 

Ø  

preparing the compensation committee report required by SEC rules.

Nominating and corporate governance committee

Effective at the time of this offering, the members of our nominating and corporate governance committee will be Richard H. Aldrich and Peter Barton Hutt. Mr. Aldrich will be the chair of the nominating and corporate governance committee. Upon the completion of this offering, the nominating and corporate governance committee’s responsibilities will include:

 

Ø  

identifying individuals qualified to become members of our board;

 

Ø  

recommending to our board the persons to be nominated for election as directors and to each of our board’s committees;

 

Ø  

developing and recommending to our board corporate governance principles; and

 

Ø  

overseeing an annual evaluation of our board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor have they ever been an officer or employee of our company.

 

 

 

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CODE OF BUSINESS CONDUCT AND ETHICS

We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following this offering, a copy of the code will be posted on the Corporate Governance section of our website, which is located at www.concertpharma.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

 

 

 

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Executive compensation

This section discusses the material elements of our executive compensation policies for our “named executive officers” and the most important factors relevant to an analysis of these policies. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers named in the “Summary compensation table” below, or our “named executive officers,” and is intended to place in perspective the data presented in the following tables and the corresponding narrative.

In preparing to become a public company, we have begun a thorough review of all elements of our executive compensation program, including the function and design of our equity incentive programs. We have begun, and we expect to continue in the coming months, to evaluate the need for revisions to our executive compensation program to ensure our program is competitive with the companies with which we compete for executive talent and is appropriate for a public company.

SUMMARY COMPENSATION TABLE

The following table sets forth information regarding compensation earned by our President and Chief Executive Officer, our next two highest paid executive officers during the year ended December 31, 2013 and one individual who would have been one of our next two highest paid executive officers during the year ended December 31, 2013 but for the fact that this individual was not serving as one of our executive officers as of December 31, 2013. We refer to these individuals as our named executive officers.

 

Name    Year    

Salary

($)

    Non-equity
incentive plan
compensation
($)
    All other
compensation
($)
    Total ($)  

Roger D. Tung, Ph.D.

     2013        373,171        212,211 (1)       8,178 (2)       593,560   

President and Chief Executive Officer

     2012        365,863        31,025 (3)       8,028 (4)       404,916   

Nancy Stuart

     2013        300,054        127,901 (1)       8,178 (2)       436,133   

Chief Operating Officer

     2012        294,180        18,699 (3)       8,028 (4)       320,907   

Ian Robert Silverman, J.D., Ph.D.

     2013        295,399        125,911 (1)       8,178 (2)       429,488   

Senior Vice President and General Counsel

          

James Shipley, M.D. (5)

     2013        261,627        60,013 (6)       365,188 (7)       686,828   

Former Chief Medical Officer

     2012        324,038        20,005 (3)       8,028 (4)       352,071   

 

(1)   Consists of a cash bonus paid under our 2013 executive bonus program that was earned as of the end of 2013 and a cash bonus under our 2012 executive bonus program that became payable during 2013 as the result of the satisfaction of a contingency during 2013. See the “—Narrative disclosure to summary compensation table” described below for a description of these programs.

 

(2)   Consists of $7,650 that we matched pursuant to our 401(k) plan and $528 in life insurance premiums.

 

(3)   Consists of a cash bonus paid under our 2012 executive bonus program that was earned and no longer remained subject to contingencies at the end of 2012. See the “—Narrative disclosure to summary compensation table” described below for a description of this program.

 

(4)   Consists of $7,500 that we matched pursuant to our 401(k) plan and $528 in life insurance premiums.

 

(5)   Dr. Shipley served as our Chief Medical Officer until his departure from our company effective October 15, 2013.

 

(6)   Consists of a cash bonus under our 2012 executive bonus program that became payable during 2013 as the result of the satisfaction of a contingency during 2013. See the “—Narrative disclosure to summary compensation table” described below for a description of this program.

 

(7)   Consists of $7,650 that we matched pursuant to our 401(k) plan, $440 in life insurance premiums and $357,098 in severance, accrued vacation and continuation of medical and dental benefits payable in connection with Dr. Shipley’s termination.

 

 

 

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Narrative disclosure to summary compensation table

Base salary. In 2013, we paid base salaries of $373,171 to Dr. Tung, $300,054 to Ms. Stuart, $295,399 to Dr. Silverman and, prior to his departure from our company effective October 15, 2013, $261,627 to Dr. Shipley. We use base salaries to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. None of our named executive officers is currently party to an employment agreement or other agreement or arrangement that provides for automatic or scheduled increases in base salary.

Annual bonus. Our board of directors may, in its discretion, award bonuses to our named executive officers from time to time. We typically establish annual bonus targets based around a set of specified corporate goals for our named executive officers and conduct an annual performance review to determine the attainment of such goals. Our management may propose bonus awards to the compensation committee of the board or the board primarily based on such review process. Our board of directors makes the final determination of the eligibility requirements for and the amount of such bonus awards. With respect to 2013, we awarded and paid bonuses of $119,136 to Dr. Tung, $71,804 to Ms. Stuart and $70,687 to Dr. Silverman, in each case as determined by our board of directors based on our achievement of company goals, with such amounts representing 80% of their respective bonus targets. With respect to 2012, we awarded and paid bonuses of $124,100 to Dr. Tung, $74,796 to Ms. Stuart, $73,632 to Dr. Silverman and $80,018 to Dr. Shipley, in each case as determined by our board of directors based on our achievement of company goals, with such amounts representing 85% of their respective bonus targets. Of these amounts, 25% was awarded and paid on December 31, 2012 as reflected in the summary compensation table above, while the remaining amounts remained contingent on the closing of a licensing transaction with Celgene, which occurred on April 4, 2013. These remaining amounts were subsequently paid on April 30, 2013.

Equity incentives. Although we do not have a formal policy with respect to the grant of equity incentive awards to our executive officers, or any formal equity ownership guidelines applicable to them, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. In addition, we believe that equity grants with a time-based vesting feature promote executive retention because this feature incentivizes our executive officers to remain in our employment during the vesting period. Accordingly our compensation committee and board of directors periodically review the equity incentive compensation of our named executive officers and from time to time may grant equity incentive awards to them in the form of stock options.

We typically grant stock option awards at the start of employment to each executive and our other employees. Through 2013, we have not maintained a practice of granting additional equity on an annual basis, but we have retained discretion to provide additional targeted grants in certain circumstances.

We award our stock options on the date our board of directors or compensation committee approves the grant. We set the option exercise price and grant date fair value based on our per-share estimated valuation on the date of grant. For grants in connection with initial employment, vesting begins on the initial date of employment. Time vested stock option grants to our executives and other employees typically vest 25% on the first anniversary of grant or, if earlier, the initial employment date and 6.25% per quarter thereafter, through the fourth anniversary of the vesting commencement date, and have a term of 10 years from the grant date. In 2013, we did not grant equity awards to any of our named executive officers.

 

 

 

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OUTSTANDING EQUITY AWARDS AT YEAR END

The following table sets forth information regarding outstanding stock options held by our named executive officers as of December 31, 2013.

 

    Option awards  
Name   Number of securities
underlying unexercised
options (#) exercisable
    Number of securities
underlying unexercised
options (#)  unexercisable
     Option
exercise
price ($)
    

Option
expiration

date

 

Roger D. Tung, Ph.D.

    88,495                1.13         12/11/2017   
    53,097                4.58         12/19/2018   
    38,052                4.41         12/10/2019   
    21,902 (1)       7,300         3.79         12/14/2020   
    19,911 (2)       19,911         3.51         12/15/2021   

Nancy Stuart

    79,646                0.57         8/30/2016   
    35,398                1.13         12/11/2017   
    53,097                4.58         12/19/2018   
    34,512                4.41         12/10/2019   
    15,929 (1)       5,309         3.79         12/14/2020   
    11,061 (2)       11,061         3.51         12/15/2021   

Ian Robert Silverman, J.D., Ph.D

    53,097                1.13         6/4/2017   
    19,469                1.13         12/11/2017   
    14,159                4.58         12/19/2018   
    30,973                4.41         12/10/2019   
    15,929 (1)       5,309         3.79         12/14/2020   
    11,062 (2)       11,061         3.51         12/15/2021   

James Shipley, M.D

    79,093 (3)               3.79         3/24/2021   
    9,679 (4)               3.51         12/15/2021   

 

(1)   This option vested as to 6.25% of the shares on March 14, 2011 and vests as to an additional 6.25% of the shares at the end of each successive three-month period through and including December 14, 2014.

 

(2)   This option vested as to 6.25% of the shares on March 15, 2012 and vests as to an additional 6.25% of the shares at the end of each successive three-month period through and including December 15, 2015.

 

(3)   This option provided for vesting as to 25% of the shares on January 1, 2012 and as to an additional 6.25% of the shares at the end of each successive three-month period through and including January 1, 2015. All vesting under this option ceased upon Dr. Shipley’s departure from our company on October 15, 2013, after which this option remained exercisable for a period of one year.

 

(4)   This option provided for vesting as to 6.25% of the shares on March 15, 2012 and as to an additional 6.25% of the shares at the end of each successive three-month period through and including December 15, 2015. All vesting under this option ceased upon Dr. Shipley’s departure from our company on October 15, 2013, after which this option remains exercisable for a period of one year.

EMPLOYMENT AGREEMENTS, SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS

Employment agreements

We have entered into employment agreements with each of Dr. Tung, Ms. Stuart, Mr. Daws and Dr. Silverman. The employment agreements confirm the executive officers’ titles, compensation arrangements, eligibility for benefits made available to employees generally and also provide for certain benefits upon termination of employment under specified conditions. Each named executive officer’s employment is at will.

 

 

 

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Because we entered into Mr. Daws’ agreement in connection with his joining us as chief financial officer, his agreement also provides that he receive:

 

Ø  

a one-time signing bonus of $97,000, repayable by him if his employment with us ends within the first 12 months because of a voluntary resignation other than for good reason or a termination for cause, each as defined in the agreement, and

 

Ø  

an option to purchase 123,893 shares of our common stock, with the grant being made and priced in connection with the closing of this offering, and such option to vest, assuming he remains employed with us, as to 25% on January 20, 2015 and thereafter ratably over the next 12 quarters as of the last day of each quarter.

Benefits provided upon termination without cause

Under the terms of the employment agreements we have entered into with each of Dr. Tung, Ms. Stuart, Mr. Daws and Dr. Silverman, if an executive’s employment is terminated by us without cause and other than as a result of death or disability or by such executive officer for good reason, each as defined in such employment agreement, prior to a change of control, as defined in such employment agreement, and subject to the executive’s execution of a general release of potential claims against us, we will be obligated to (1) pay an amount equal to his or her then-current monthly base salary for a period of 12 months (six months for Mr. Daws), any bonus that has been awarded to and earned by him or her but that has not been paid before termination, any base salary earned but not paid through the date of termination and any vacation time accrued but unused on the date of termination and (2) continue to provide medical and dental benefits to the extent that he or she was receiving them at the time of termination for up to 12 months, subject to certain legal restrictions.

In connection with Dr. Shipley’s departure from our company effective October 15, 2013, we entered into a separation agreement with Dr. Shipley under which we agreed to (1) make severance payments to Dr. Shipley in the amount of his then-current base salary for 12 months following his termination and (2) continue to provide medical and dental benefits to the extent that he was receiving them at the time of termination for 12 months.

Benefits provided upon a change of control

Under the terms of the employment agreements we have entered into with each of Dr. Tung, Ms. Stuart, Mr. Daws and Dr. Silverman, if the executive’s employment is terminated by us or our successor without cause or by such executive officer for good reason, as defined in such employment agreement, within one year following a change of control, as defined in such employment agreement, and subject to the executive’s execution of a general release of potential claims against us, in lieu of the severance benefits described above:

 

Ø  

If the change of control constituted a change in our ownership or effective control, or a change in the ownership of a substantial portion of our assets, each within the meaning of Treasury Regulation Section 409A, or a 409A change of control event, we will be obligated to pay the executive, in a lump sum payment, an amount equal to his or her then-current monthly base salary for a period of 12 months (six months for Mr. Daws).

 

Ø  

If the change of control is not a 409A change of control event, we will be obligated to pay the executive an amount equal to his or her then-current monthly base salary for a period of 12 months (six months for Mr. Daws) over the course of one year in installments in accordance with our normal payroll practices.

 

 

 

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Ø  

We will be obligated to pay the executive any bonus that has been awarded to and earned by him or her but that has not been paid before termination, any base salary earned but not paid through the date of termination and any vacation time accrued but unused on the date of termination.

 

Ø  

The executive will be entitled to medical and dental benefits, to the extent that he or she was receiving them at the time of such termination, for up to 12 months, subject to certain legal restrictions.

In addition, if a change of control, as defined in such employment agreement, occurs and within one year following such change of control we or our successor terminate the executive’s employment other than for cause, as defined in such employment agreement, or the executive’s employment ends on death or disability, or the executive terminates his or her employment for good reason, as defined in such employment agreement, all stock options held by the executive will immediately vest in full.

Other agreements

We have also entered into employee confidentiality, non-competition and proprietary information agreements with each of our named executive officers. Under the employee confidentiality, non-competition and proprietary information agreements, each named executive officer has agreed (1) not to compete with us during his or her employment and for a period of one year after the termination of his or her employment, (2) not to solicit our employees during his employment and for a period of one year after the termination of his or her employment, (3) to protect our confidential and proprietary information and (4) to assign to us related intellectual property developed during the course of his or her employment.

STOCK OPTION AND OTHER COMPENSATION PLANS

Amended and Restated 2006 Stock Option and Grant Plan

Our Amended and Restated 2006 Stock Option and Grant Plan, which we refer to as the 2006 Plan, was first adopted by our board of directors and first approved by our stockholders in May 2006 and was amended in November 2006, February 2008 and April 2009. The 2006 Plan was amended and restated in April 2009 and further amended in April 2010. The 2006 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock and other stock-based awards. Our employees, officers, directors, consultants and advisors are eligible to receive awards under the 2006 Plan; however, incentive stock options may only be granted to employees. In accordance with the terms of the 2006 Plan, our board of directors, or a committee appointed by our board, administers the 2006 Plan and, subject to any limitations in the 2006 Plan, selects the recipients of awards and determines:

 

Ø  

the number of shares of common stock covered by options and the dates upon which those options become exercisable;

 

Ø  

the exercise prices of options;

 

Ø  

the duration of options;

 

Ø  

the methods of payment of the exercise price of options; and

 

Ø  

the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the issue price, conditions for repurchase and repurchase price.

In the event of a reorganization event, as defined in the 2006 Plan, our board, or the compensation committee, has the discretion to take one or more of the following actions:

 

Ø  

arrange for or provide that each outstanding award will be assumed or a substantially similar award will be substituted by the acquiring or succeeding corporation (or an affiliate thereof), provided, however, that unless the board determines otherwise such award shall be deemed vested and

 

 

 

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exercisable upon the date on which the employment or service relationship of the participant terminates, if such termination occurs within 18 months of the reorganization event and such termination is without cause;

 

Ø  

provide, upon notice to the participant, that all unexercised awards will terminate immediately prior to the consummation of such transaction unless exercised within a specified period of time;

 

Ø  

provide that all or any outstanding awards will become vested or exercisable, or restrictions applicable to such awards will lapse, in full or in part, at or immediately prior to such event;

 

Ø  

in the event of a reorganization event under the terms of which holders of our common stock will receive a cash payment per share surrendered in the transaction, make or provide for an equivalent cash payment in exchange for the termination of such equity awards; or

 

Ø  

provide that in the event of a liquidation or dissolution, awards will convert into the right to receive liquidation proceeds.

As of December 31, 2013, there were options to purchase an aggregate of 1,952,578 shares of common stock outstanding under the 2006 Plan at a weighted-average exercise price of $3.14 per share and an aggregate of 92,487 shares of common stock had been issued upon the exercise of options granted under the 2006 Plan, of which 1,260 shares have been repurchased. As of December 31, 2013, there were 168,584 shares of common stock reserved for future issuance under the 2006 Plan. Effective as of immediately prior to the closing of this offering, we will grant no further stock options or other awards under the 2006 Plan.

2014 Stock Incentive Plan

In January 2014, our board of directors and our stockholders approved the 2014 Plan, which will become effective on the date immediately prior to the date of effectiveness of the registration statement of which this prospectus is a part. The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards. Upon effectiveness of the 2014 Plan, the number of shares of our common stock that will be reserved for issuance under the 2014 Plan will equal 1,946,175 shares, assuming 5,000,000 shares of our common stock are issued and sold in this offering. Upon and following the closing of this offering, the number of shares reserved for issuance under the 2014 Plan will increase by (1) the number of shares of our common stock reserved for issuance under the 2006 Plan that remain available for issuance under the 2006 Plan immediately prior to the closing of this offering, (2) the number of shares of our common stock subject to outstanding awards under the 2006 Plan upon the closing of this offering that expire, terminate or are otherwise surrendered, cancelled or forfeited and (3) an annual increase, to be added on January 1 of each year, from and after 2015 through 2024, equal to the lowest of (a) 2,000,000 shares of our common stock, (b) 4% of the number of our outstanding shares on January 1 of each such fiscal year and (c) an amount determined by our board of directors.

Our employees, officers, directors, consultants and advisors will be eligible to receive awards under the 2014 Plan; however, incentive stock options may only be granted to our employees.

Pursuant to the terms of the 2014 Plan, our board of directors will select the recipients of awards and determine:

 

Ø  

the number of shares of common stock covered by options and the dates upon which those options become exercisable;

 

Ø  

the exercise price of options;

 

Ø  

the duration of options;

 

 

 

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Ø  

the methods of payment of the exercise price of options; and

 

Ø  

the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including the issue price, conditions for repurchase, repurchase price and performance conditions, if any.

If our board of directors delegates authority to an executive officer to grant awards under the 2014 Plan, the executive officer will have the power to make awards to all of our employees, except executive officers. Our board of directors will fix the terms of the awards to be granted by such executive officer, including the exercise price of such awards, and the maximum number of shares subject to awards that such executive officer may make.

Upon a merger or other reorganization event, our board of directors, may, in its sole discretion, take any one or more of the following actions pursuant to the 2014 Plan, as to some or all outstanding awards, other than restricted stock awards:

 

Ø  

provide that all outstanding awards will be assumed or substituted by the successor corporation;

 

Ø  

upon written notice to a participant, provide that the participant’s unexercised options or awards will terminate immediately prior to the consummation of such transaction unless exercised by the participant;

 

Ø  

provide that outstanding awards will become exercisable, realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon the reorganization event;

 

Ø  

in the event of a reorganization event pursuant to which holders of our common stock will receive a cash payment for each share surrendered in the reorganization event, make or provide for a cash payment to the participants equal to the excess, if any, of the acquisition price times the number of shares of our common stock subject to such outstanding awards (to the extent then exercisable at prices not in excess of the acquisition price), over the aggregate exercise price of all such outstanding awards and any applicable tax withholdings, in exchange for the termination of such awards; and

 

Ø  

provide that, in connection with a liquidation or dissolution, awards convert into the right to receive liquidation proceeds.

Upon the occurrence of a reorganization event other than a liquidation or dissolution, the repurchase and other rights under each outstanding restricted stock award will continue for the benefit of the successor company and will, unless our board of directors may otherwise determine, apply to the cash, securities or other property into which our common stock is converted pursuant to the reorganization event. Upon the occurrence of a reorganization event involving a liquidation or dissolution, all restrictions and conditions on each outstanding restricted stock award will automatically be deemed terminated or satisfied, unless otherwise provided in the agreement evidencing the restricted stock award.

No award may be granted under the 2014 Plan after the expiration of 10 years from the effective date of the 2014 Plan. Our board of directors may amend, suspend or terminate the 2014 Plan at any time, except that stockholder approval will be required to comply with applicable law or stock market requirements.

401(k) retirement plan

We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. In general, all of our employees are eligible to participate, beginning on the first day of the month following commencement of their employment. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to $17,500 in 2014, and have

 

 

 

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the amount of the reduction contributed to the 401(k) plan. Currently, we match 50% of employee contributions up to 6% of the employee’s salary, subject to the statutorily prescribed limit, equal to $7,800 in 2014. The match immediately vests in full.

LIMITATION OF LIABILITY AND INDEMNIFICATION

As permitted by Delaware law, we have adopted provisions in our certificate of incorporation, which will be effective as of the closing date of this offering, that limit or eliminate the personal liability of our directors. Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:

 

Ø  

any breach of the director’s duty of loyalty to us or our stockholders;

 

Ø  

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

Ø  

any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

 

Ø  

any transaction from which the director derived an improper personal benefit.

These limitations do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission. If Delaware law is amended to authorize the further elimination or limiting of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended.

As permitted by Delaware law, our certificate of incorporation that will be effective as of the closing date of this offering will also provide that:

 

Ø  

we will indemnify our directors and officers to the fullest extent permitted by law;

 

Ø  

we may indemnify our other employees and other agents to the same extent that we indemnify our officers and directors, unless otherwise determined by our board of directors; and

 

Ø  

we will advance expenses to our directors and officers in connection with legal proceedings in connection with a legal proceeding to the fullest extent permitted by law.

The indemnification provisions contained in our certificate of incorporation that will be effective as of the closing date of this offering are not exclusive. In addition, we have entered into indemnification agreements with our directors and executive officers. These indemnification agreements require us, among other things, to indemnify each such director and executive officer for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by him or her in any action or proceeding arising out of his or her service as one of our directors or executive officers.

We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933, which we refer to as the Securities Act, may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we understand that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

In addition, we maintain standard policies of insurance under which coverage is provided to our directors and officers against losses arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law.

 

 

 

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DIRECTOR COMPENSATION

Prior to this offering, we did not have a formal non-employee director compensation policy. However, we have provided compensation for board service to Richard H. Aldrich, Ronald W. Barrett and Peter Barton Hutt in the form of an annual cash retainer and an equity stock option grant. Mr. Hutt received additional cash compensation for his service on board committees. None of our other non-employee directors receives any compensation. We reimburse our non-employee directors for reasonable travel and out-of-pocket expenses incurred in connection with attending board of director and committee meetings.

We did not grant stock options or other equity-based awards to any of our non-employee directors during 2013.

The compensation of our non-employee directors was established through arm’s length negotiation, taking into account the responsibilities of each director and the director’s qualifications and prior experience and industry data for such positions. This compensation was approved by our compensation committee. We have not paid any compensation to our President and Chief Executive Officer in connection with his service on our board of directors. However, as described below, following this offering our President and Chief Executive Officer will be eligible to receive annual stock option grants as compensation for his service on our board of directors. The compensation that we paid to our President and Chief Executive Officer in 2013 is discussed in the “Executive compensation” section of this prospectus.

In December 2013, our board of directors approved a director compensation program to be effective at the time of this offering. Under this director compensation program, we will pay our non-employee directors retainers in cash. Each non-employee director will receive a cash retainer for service on the board of directors and for service on each committee of which the director is a member. The chairmen of the board and of each committee will receive higher retainers for such service. These fees are payable quarterly in arrears. The fees paid to non-employee directors for service on the board of directors and for service on each committee of the board of directors of which the director is a member are as follows:

 

       Member
Annual
Fee
     Chairman
Annual
Fee
 

Board of Directors

   $ 30,000       $ 60,000   

Audit Committee

   $ 7,500       $ 15,000   

Compensation Committee

   $ 5,000       $ 10,000   

Nominating and Corporate Governance Committee

   $ 3,000       $ 7,000   

We will also continue to reimburse our non-employee directors for reasonable travel and out-of-pocket expenses incurred in connection with attending board of director and committee meetings.

In addition, under our director compensation program, each director elected to our board of directors after the closing of this offering will receive an option to purchase 25,000 shares of our common stock. Each of these options will vest in equal quarterly installments over a three-year period measured from the date of grant, subject to the director’s continued service as a director, and will become exercisable in full upon a change in control of our company. Further, on the date of the first board meeting held after each annual meeting of stockholders, each director that has served on our board of directors for at least six months will receive an option to purchase 10,000 shares of our common stock. Each of these options will vest in equal quarterly installments over a one-year period measured from the date of grant, subject to the director’s continued service as a director, and will become exercisable in full upon a change in control of our company. The exercise price of these options will equal the fair market value of our common stock on the date of grant.

 

 

 

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This policy is intended to provide a total compensation package that enables us to attract and retain qualified and experienced individuals to serve as directors and to align our directors’ interests with those of our stockholders.

The following table sets forth information regarding compensation earned by our non-employee directors during 2013.

 

Name    Fees earned or paid
in cash ($)
     Option awards  ($) (1)      Total ($)  

Richard H. Aldrich

     60,000                 60,000   

Ronald W. Barrett, Ph.D.

     30,000                 30,000   

Douglas G. Cole, M.D. (2)

                       

John G. Freund, M.D.

                       

Peter Barton Hutt

     30,000                 30,000   

Wilfred E. Jaeger, M.D.

                       

Helmut M. Schühsler, Ph.D.

                       

 

(1)   We did not grant stock options or other equity-based awards to any of our non-employee directors during 2013. As of December 31, 2013:

 

  Ø  

Mr. Aldrich held stock options to purchase 21,236 shares of common stock in the aggregate, which were vested in full;

 

  Ø  

Dr. Barrett held stock options to purchase 31,855 shares of common stock in the aggregate, which were vested in full; and

 

  Ø  

Mr. Hutt held stock options to purchase 36,279 shares of common stock in the aggregate, which were vested in full.

 

(2)   Dr. Cole resigned from our board of directors effective January 9, 2014.

 

 

 

 

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Transactions with related persons

The following is a description of transactions since January 1, 2010 to which we have been a party, and in which any of our directors, executive officers or beneficial owners of more than 5% of our voting securities, or affiliates or immediate family members of any of our directors, executive officers or beneficial owners of more than 5% of our voting securities, 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 unrelated third parties.

AGREEMENT WITH GLAXOSMITHKLINE

In May 2009, we entered into a research and development collaboration and license agreement with GSK a wholly owned subsidiary of GlaxoSmithKline plc, to research, develop and commercialize multiple products containing deuterated compounds, including CTP-499 and, ultimately, CTP-298, which was developed pursuant to the agreement. Our agreement with GSK, as subsequently amended, expired in 2012. The rights to the products developed under the agreement have reverted to us and we are free to pursue them without further obligation to GSK other than to repay GSK an amount of up to $2.75 million, if we commercialize CTP-499 or if, prior to a specified date in 2018, we re-license or transfer the rights to our CTP-499 program prior to a specified date in 2018.

REGISTRATION RIGHTS AGREEMENT

In connection with our Series D preferred stock financing in June 2009, we entered into a registration rights agreement with GSK, the purchaser of Series D preferred stock in the financing, and existing holders of our preferred stock. In connection with the issuance of a warrant to purchase shares of our Series C preferred stock to Hercules, in December 2011, we amended the registration rights agreement to add Hercules as a party. The registration rights agreement provides holders of registrable shares with the right to demand that we file a registration statement, subject to certain limitations, and to request that such registrable shares be covered by a registration statement that we are otherwise filing. See “Description of capital stock—Registration rights” for additional information.

SEVERANCE AND CHANGE IN CONTROL AGREEMENTS

See the “Management—Employment agreements, severance and change in control arrangements” section of this prospectus for a further discussion of these arrangements.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our certificate of incorporation that will be effective as of the closing date of this offering provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with each of our directors and executive officers that may be broader in scope than the specific indemnification provisions contained in the Delaware General Corporation Law. See the “Executive compensation—Limitation of liability and indemnification” section of this prospectus for a further discussion of these arrangements.

PARTICIPATION IN OFFERING

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. Assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, these stockholders would purchase an

 

 

 

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aggregate of up to approximately 700,000 of the 5,000,000 shares offered in this offering. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing principal stockholders could determine to purchase more, less or no shares in this offering.

POLICIES AND PROCEDURES FOR RELATED PERSON TRANSACTIONS

Our board of directors has adopted a written related person transaction policy, which will become effective at the time of this offering, to set forth policies and procedures for the review and approval or ratification of related person transactions. This policy will cover any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, the amount involved exceeds $120,000, and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person.

Our related person transaction policy contains exceptions for any transaction or interest that is not considered a related person transaction under SEC rules as in effect from time to time. In addition, the policy provides that an interest arising solely from a related person’s position as an executive officer of another entity that is a participant in a transaction with us will not be subject to the policy if each of the following conditions is met:

 

Ø  

the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity;

 

Ø  

the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction with us and do not receive any special benefits as a result of the transaction; and

 

Ø  

the amount involved in the transaction equals less than the greater of $200,000 or 5% of the annual gross revenue of the company receiving payment under the transaction.

The policy provides that any related person transaction proposed to be entered into by us must be reported to our General Counsel and will be reviewed and approved by our audit committee in accordance with the terms of the policy, prior to effectiveness or consummation of the transaction whenever practicable. The policy provides that if our chief financial officer determines that advance approval of a related person transaction is not practicable under the circumstances, our audit committee will review and, in its discretion, may ratify the related person transaction at the next meeting of the audit committee. The policy also provides that alternatively, our chief financial officer may present a related person transaction arising in the time period between meetings of the audit committee to the chair of and audit committee, who will review and may approve the related person transaction, subject to ratification by the audit committee at the next meeting of the audit committee.

In addition, the policy provides that any related person transaction previously approved by the audit committee or otherwise already existing that is ongoing in nature will be reviewed by the audit committee annually to ensure that such related person transaction has been conducted in accordance with the previous approval granted by the audit committee, if any, and that all required disclosures regarding the related person transaction are made.

The policy provides that transactions involving compensation of executive officers will be reviewed and approved by our compensation committee in the manner to be specified in the charter of the compensation committee.

A related person transaction reviewed under this policy will be considered approved or ratified if it is authorized by the audit committee in accordance with the standards set forth in the policy after full

 

 

 

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disclosure of the related person’s interests in the transaction. As appropriate for the circumstances, the policy provides that the audit committee will review and consider:

 

Ø  

the related person’s interest in the related person transaction;

 

Ø  

the approximate dollar value of the amount involved in the related person transaction;

 

Ø  

the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss;

 

Ø  

whether the transaction was undertaken in the ordinary course of business of our company;

 

Ø  

whether the transaction with the related person is proposed to be, or was, entered into on terms no less favorable to us than the terms that could have been reached with an unrelated third party;

 

Ø  

the purpose of, and the potential benefits to us of, the transaction; and

 

Ø  

any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.

The policy provides that the audit committee will review all relevant information available to it about the related person transaction. The policy provides that the audit committee may approve or ratify the related person transaction only if the audit committee determines that, under all of the circumstances, the transaction is in, or is not inconsistent with, our best interests. The policy provides that the audit committee may, in its sole discretion, impose such conditions as it deems appropriate on us or the related person in connection with approval of the related person transaction.

 

 

 

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Principal stockholders

The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2013 by:

 

Ø  

each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock;

 

Ø  

each of our named executive officers;

 

Ø  

each of our directors; and

 

Ø  

all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after December 31, 2013. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to community property laws, where applicable. The information is not necessarily indicative of beneficial ownership for any other purpose.

The number of shares beneficially owned in the following table assumes the automatic conversion of all outstanding shares of our preferred stock into shares of common stock upon closing of this offering. The percentage ownership calculations for beneficial ownership prior to this offering are based on 11,218,121 shares outstanding as of December 31, 2013, assuming the automatic conversion of all outstanding shares of our preferred stock into shares of common stock upon closing of this offering. Percentage ownership calculations for beneficial ownership after this offering also include the shares we are offering hereby. Except as otherwise indicated in the table below, addresses of named beneficial owners are in care of Concert Pharmaceuticals, Inc., 99 Hayden Avenue, Suite 500, Lexington, Massachusetts 02421.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days after December 31, 2013. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these existing principal stockholders and any of these existing principal stockholders could determine to purchase more, less or no shares in this offering. The following table does not reflect any potential purchases by these existing principal stockholders or their affiliated entities. If any shares are purchased by these stockholders, the number and percentage of shares of our common stock beneficially owned by them after this offering will differ from those set forth in the following table.

 

 

 

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Name of beneficial owner    Number of
shares
beneficially
owned
     Percentage
of shares
beneficially
owned before
offering
    Percentage
of shares
beneficially
owned after
offering
 

5% Stockholders

       

Entities affiliated with Three Arch Partners (1)

     1,431,854         12.8     8.8

Entities affiliated with TVM Capital (2)

     1,394,672         12.4     8.6

Entities affiliated with GlaxoSmithKline (3)

     1,321,533         11.8     8.1

Brookside Capital Partners Fund, L.P. (4)

     1,147,833         10.2     7.1

Skyline Venture Partners Qualified Purchaser Fund IV, L.P. (5)

     1,058,920         9.4     6.5

Entities affiliated with Fidelity Investments (6)

     740,919         6.6     4.6

Entities affiliated with Greylock Partners (7)

     707,963         6.3     4.4

Flagship Ventures Fund 2004, L.P. (8)

     656,490         5.9     4.0

Executive Officers and Directors

       

Roger D. Tung, Ph.D. (9)

     783,401         6.8     4.8

Nancy Stuart (10)

     229,641         2.0     1.4

James Shipley, M.D. (11)

     88,771         0.8     0.5

Ian Robert Silverman, J.D., Ph.D. (12)

     144,688         1.3     0.9

Richard H. Aldrich (13)

     472,562         4.2     2.9

Ronald W. Barrett, Ph.D. (14)

     31,855         0.3     0.2

John G. Freund, M.D. (15)

     1,058,920         9.4     6.5

Peter Barton Hutt (16)

     40,703         0.4     0.3

Wilfred E. Jaeger, M.D. (17)

     1,431,854         12.8     8.8

Helmut M. Schühsler, Ph.D. (18)

     1,394,672         12.4     8.6

All current executive officers and directors as a group (10 persons) (19)

     5,677,067         47.3     33.4

 

*   Represents beneficial ownership of less than 1% of our outstanding stock.

 

(1)   Consists of 700,462 shares of common stock held by Three Arch Partners IV, L.P., 679,401 shares of common stock held by Three Arch Partners III, L.P., 35,526 shares of common stock held by Three Arch Associates III, L.P. and 15,465 shares of common stock held by Three Arch Associates IV, L.P. The voting and dispositive decisions with respect to the shares held by Three Arch Associates III, L.P. and Three Arch Partners III, L.P., are made by the following managing members of their general partner, Three Arch Management III, L.L.C.: Mark Wan and Wilfred Jaeger, each of whom disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. The voting and dispositive decisions with respect to the shares held by Three Arch Partners IV, L.P. and Three Arch Associates IV, L.P. are made by the following managing members of their general partner, Three Arch Management IV, L.L.C.: Mark Wan and Wilfred Jaeger, each of whom disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. The address for the funds affiliated with Three Arch Partners is 3200 Alpine Road, Portola Valley, CA 94028.

 

(2)   Consists of 1,038,682 shares of common stock held by TVM Life Science Ventures VI GMBH & Co. KG and 355,990 shares of common stock held by TVM Life Science Ventures VI LP. Alexandra Goll, Helmut Schühsler, Hubert Birner, Stefan Fischer and Axel Polack are members of the investment committee of TVM Life Science Ventures VI Management Limited Partnership, a special limited partner of TVM Life Science Ventures VI GMBH & Co. KG and TVM Life Science Ventures VI LP with voting and dispositive power over the shares held by those entities. TVM Life Science Venture VI Management Limited Partnership and these individuals each disclaim beneficial ownership of such shares except to the extent of any pecuniary interest therein. The address for each of the individuals and entities listed above is c/o TVM Capital GmbH, Maximilianstrasse 35, Entrance C, 80539 Munich, Germany.

 

(3)   Consists of 1,179,941 shares of common stock held by Glaxo Group Limited and 141,592 shares of common stock held by S.R. One, Limited, each of whom are wholly owned subsidiaries of GlaxoSmithKline plc. The address of these entities is 980 Great West Road, Brentford, Middlesex, United Kingdom TW8 9GS.

 

(4)   Brookside Capital, LLC is the investment advisor to Brookside Capital Partners Fund, L.P. Dr. Adam Koppel is the managing director of Brookside Capital, LLC and each of Dr. Koppel and Brookside Capital, LLC disclaims beneficial ownership except to the extent of any pecuniary interest therein. The address for Brookside Capital Partners Fund, L.P. and Dr. Koppel is John Hancock Tower, 200 Clarendon Street, Boston, MA 02116.

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(5)   John G. Freund and Yasunori Kaneko are the Managing Members of Skyline Venture Management IV, LLC, which is the sole general partner of Skyline Venture Partners Qualified Purchaser Fund IV, L.P., and as such Drs. Freund and Kaneko may be deemed to share voting and dispositive power with respect to all shares held by Skyline Venture Partners Qualified Purchaser Fund IV, L.P. Each of Drs. Freund and Kaneko disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. The address for each of the individuals and entities listed above is 525 University Ave, Suite 610, Palo Alto, California 94301.

 

(6)   Consists of 707,964 shares of common stock held by Ball & Co fbo Fidelity Mt. Vernon Street Trust: Fidelity Growth Company Fund and 32,955 shares of common stock held by Fidelity Mt. Vernon Street Trust: Fidelity Growth Company Fund. Each of these entities is a registered investment fund (the “Funds”) advised by Fidelity Management & Research Company (“Fidelity”) a wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940. Edward C. Johnson 3d and FMR LLC, through its control of Fidelity and the Funds, each has sole power to dispose of the shares owned by the Funds. Members of the family of Edward C. Johnson 3d, chairman of FMR LLC, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Edward C. Johnson 3d, chairman of FMR LLC, has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds’ Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds’ Boards of Trustees. The address for Fidelity is 82 Devonshire Street, Boston, MA 02109.

 

(7)   Consists of 605,309 shares of common stock held by Greylock XII Limited Partnership, 67,256 shares of common stock held by Greylock XII-A Limited Partnership and 35,398 shares of common stock held by Greylock XII Principals LLC. William W. Helman and Aneel Bhussri are the Senior Managing Members of Greylock XII GP Limited Liability Company, the sole general partner of Greylock XII Limited Partnership and Greylock XII-A Limited Partnership and as such, each of them may be deemed to share voting power and investment control over the shares held by these entities. The shares held by Greylock XII Principals LLC are held in nominee form only and as a result, Greylock XII Principals LLC does not have voting power or investment control over these shares. Each of these entities and individuals disclaims beneficial ownership of shares other than those reflective of his or its pecuniary interest. The address for Greylock Partners is 2550 Sand Hill Road, Menlo Park, CA 94025.

 

(8)   Flagship Ventures General Partner LLC is the general partner of Flagship Ventures Fund 2004, L.P. Noubar B. Afeyan Ph.D. and Edwin M. Kania, Jr. are the managers of Flagship Ventures General Partner LLC and may be deemed to share voting and investment power with respect to all shares held by Flagship Ventures General Partner LLC and Flagship Ventures Fund 2004, L.P. Each of the individuals and entities listed above expressly disclaims beneficial ownership of the securities listed above except to the extent of any pecuniary interest therein. The address for each of the individuals and entities listed above is One Memorial Drive, 7th Floor, Cambridge, Massachusetts 02140.

 

(9)   In addition to shares of common stock held directly, includes 134,761 shares of common stock held by the Roger D. Tung 2011 GRAT, for which Dr. Tung is the sole trustee, 12,389 shares of common stock held by the RD Tung Irrevocable Trust, for which Dr. Tung’s wife is a co-trustee, and 13,274 shares of common stock held by the Tung Family Investment Trust, for which Dr. Tung is a co-trustee. Includes 221,455 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

(10)   Consists of 229,641 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

(11)   Consists of 88,771 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013. Dr. Shipley departed our company effective October 15, 2013 upon which date all vesting of Dr. Shipley options ceased. Accordingly this number of shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013 includes vesting of such options only through October 15, 2013.

 

(12)   Consists of 144,688 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

(13)   In addition to shares of common stock held directly, includes 61,946 shares of common stock held by RA Capital Associates, Inc. and 102,417 shares of common stock held by the Richard H. Aldrich 2011 GRAT. Mr. Aldrich is the sole stockholder of RA Capital Associates, Inc. and is the sole trustee of the Richard H Aldrich 2011 GRAT. Includes 21,236 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

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(14)   Consists of 31,855 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

(15)   Consists of the shares described in note (5) above. Dr. Freund is a Managing Member of Skyline Venture Management IV, LLC, which is the sole general partner of Skyline Venture Partners Qualified Purchaser Fund IV, L.P., and as such may be deemed to share voting and dispositive power with respect to all shares held by Skyline Venture Partners Qualified Purchaser Fund IV, L.P. Dr. Freund disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. Dr. Freund’s address is 525 University Ave, Suite 610, Palo Alto, California 94301.

 

(16)   Includes 36,279 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

(17)   Consists of the shares described in note (1) above. Dr. Jaeger is a managing member of Three Arch Management III, L.L.C, the general partner of Three Arch Associates III, L.P. and Three Arch Partners III, L.P. and Three Arch Management IV, L.L.C, the general partner of Three Arch Partners IV, L.P. and Three Arch Associates IV, L.P. Dr. Jaeger disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. Dr. Jaeger’s address is 3200 Alpine Road, Portola Valley, CA 94028.

 

(18)   Consists of the shares described in note (2) above. Dr. Schühsler is a member of the investment committee of TVM Life Science Ventures VI Management Limited Partnership, the general partner of TVM Life Science Ventures VI GMBH & Co. KG and TVM Life Science Ventures VI LP, and as such Dr. Schühsler may be deemed to share voting and dispositive power with respect to all shares held by these entities Dr. Schühsler disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. Dr. Schühsler’s address is c/o TVM Capital GmbH, Maximilianstrasse 35, Entrance C, 80539 Munich, Germany.

 

(19)   Includes 773,925 shares of common stock issuable upon the exercise of options exercisable within 60 days after December 31, 2013.

 

 

 

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Description of capital stock

GENERAL

Following the closing of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share, all of which preferred stock will be undesignated. The following description of our capital stock and provisions of our restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to the certificate of incorporation and the bylaws that will be in effect upon the closing of this offering. We have filed copies of these documents with the SEC as exhibits to our registration statement of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

COMMON STOCK

As of December 31, 2013, we had outstanding 11,218,121 shares of common stock, held of record by 54 stockholders, assuming the automatic conversion of all outstanding shares of our preferred stock into common stock upon the closing of this offering.

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Other matters shall be decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter, except as otherwise disclosed below. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.

In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of 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 that we may designate and issue in the future.

PREFERRED STOCK

Under the terms of our certificate of incorporation that will become effective upon the closing of this offering, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Upon the closing of this offering, there will be no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.

 

 

 

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STOCK OPTIONS

As of December 31, 2013, options to purchase 1,952,578 shares of our common stock at a weighted average exercise price of $3.14 per share were outstanding, of which options to purchase 1,673,432 shares of our common stock were exercisable, at a weighted average exercise price of $3.06 per share.

WARRANTS

As of December 31, 2013, we had outstanding a warrant to purchase shares of our Series C preferred stock that upon the closing of this offering will be exercisable for an aggregate of 70,796 shares of our common stock at an exercise price of $14.13 per share.

REGISTRATION RIGHTS

We have entered into a third amended and restated registration rights agreement, dated as of June 1, 2009, as amended on December 22, 2011, which we refer to as the Registration Rights Agreement, with certain of our stockholders and Hercules. Upon the closing of this offering, holders of a total of 9,990,617 shares of our common stock as of December 31, 2013, consisting of 9,919,821 shares of our common stock issuable upon conversion of our preferred stock upon the closing of this offering and 70,796 shares, which we refer to as the warrant shares, issuable upon exercise of an outstanding warrant to purchase shares of our Series C preferred stock that will convert into a warrant to purchase common stock upon the closing of this offering will have the right to require us to register these shares under the Securities Act under specified circumstances as described below. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act.

Demand registration rights

Beginning six months after the closing of this offering, subject to specified limitations set forth in the Registration Rights Agreement, at any time the holders of at least one-third of the then outstanding registrable shares, as defined in the Registration Rights Agreement, excluding the warrant shares, acting together, may demand in writing that we register their registrable securities under the Securities Act so long as the total amount of registrable shares requested to be registered represents at least one-third of the then-outstanding registrable shares other than the warrant shares or has an aggregate expected price to the public of at least $5.0 million. We are not obligated to file a registration statement pursuant to this demand provision on more than two occasions, subject to specified exceptions.

In addition, at any time after we become eligible to file a registration statement on Form S-3 under the Securities Act, subject to specified limitations, the holders of registrable shares may demand in writing that we register on Form S-3 registrable shares held by them so long as the total amount of registrable shares requested to be registered has an aggregate expected price to the public of at least $1.0 million. We are not obligated to file a registration statement pursuant to this demand provision on more than four occasions, subject to specified exceptions.

Incidental registration rights

If, at any time after the closing of this offering, we propose to file a registration statement to register any of our securities under the Securities Act, either for our own account or for the account of any of our stockholders that are not holders or registrable shares, solely for cash and on a form that would also permit the registration of registrable shares, the holders of our registrable shares are entitled to notice of registration and, subject to specified exceptions, we will be required to register the registrable shares then held by them that they request that we register.

 

 

 

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Expenses

Pursuant to the Registration Rights Agreement, we are required to pay all registration expenses, including registration fees, printing expenses, fees and disbursements of our counsel and accountants and reasonable fees and disbursements of one counsel representing the selling stockholders, other than any underwriting discounts and commissions, related to any demand or incidental registration. The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which we are obligated to indemnify the selling stockholders in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions in the registration statement attributable to them.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS

Delaware law contains, and upon the completion of this offering our certificate of incorporation and our bylaws will contain, provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are 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.

Staggered board; removal of directors

Upon the completion of this offering, our certificate of incorporation and bylaws will divide our board of directors into three classes with staggered three-year terms. In addition, a director will only be able to be removed for cause and only by the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in an annual election of directors. Any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, will only be able to be filled by vote of a majority of our directors then in office. The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of our company.

Stockholder action by written consent; special meetings

Upon the completion of this offering, our certificate of incorporation will provide that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Upon the completion of this offering, our certificate of incorporation and bylaws will also provide that, except as otherwise required by law, special meetings of our stockholders can only be called by our chairman of the board, our Chief Executive Officer or our board of directors.

Advance notice requirements for stockholder proposals

Upon the completion of this offering, our bylaws will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board of directors or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities.

 

 

 

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Delaware business combination statute

Upon the completion of this offering, we will be subject to Section 203 of the Delaware General Corporation Law. Subject to certain exceptions, Section 203 prevents a publicly-held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

Amendment of certificate of incorporation and bylaws

The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Effective upon the completion of this offering, our bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of directors. In addition, the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our certificate of incorporation described above under “—Staggered board; removal of directors” and “—Stockholder action by written consent; special meetings.”

LISTING ON THE NASDAQ GLOBAL MARKET

We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “CNCE.”

AUTHORIZED BUT UNISSUED SHARES

The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the NASDAQ Listing Rules. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock will be Computershare Trust Company, N.A.

 

 

 

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Shares eligible for future sale

Prior to this offering, there has been no public market for our common stock, and a liquid public trading market for our common stock may not develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market, including shares issued upon exercise of outstanding options or warrants or in the public market after this offering, or the anticipation of those sales, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “CNCE.”

Upon the closing of this offering, we will have outstanding 16,218,121 shares of our common stock, after giving effect to the issuance of the 5,000,000 shares of our common stock in this offering and the conversion of all outstanding shares of our preferred stock into 9,919,821 shares of common stock upon the closing of this offering, and assuming no exercise of outstanding options or our outstanding warrant after December 31, 2013. Of the shares to be outstanding immediately after the closing of this offering, the 5,000,000 shares sold in this offering (assuming that the underwriters do not exercise their over-allotment option), will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement.

The remaining 11,218,121 shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act and will further be subject to either restrictions on transfer under the lock-up agreements described below or restrictions on transfer for a period of 180 days from the effectiveness of the registration statement of which this prospectus forms a part under stock option agreements entered into between us and the holders of those shares. Following the expiration of these restrictions, these shares will become eligible for public sale if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.

In addition, of the 1,952,578 shares of common stock that were issuable pursuant to stock options outstanding as of December 31, 2013, options to purchase 1,673,432 shares of common stock had vested and were exercisable as of December 31, 2013. Upon exercise, these shares will be eligible for sale, subject to the lock-up agreements and securities laws described below. All of the 70,796 shares of common stock that were issuable pursuant to our warrant outstanding as of December 31, 2013 were exercisable as of December 31, 2013 and upon issuance these shares will be eligible for sale, subject to the lock-up agreements and securities laws described below.

RULE 144

Affiliate resales of restricted securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within any three-month period that does not exceed the greater of:

 

Ø  

1% of the number of shares of our common stock then outstanding, which will equal approximately 162,181 shares immediately after this offering; or

 

Ø  

the average weekly trading volume in 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.

 

 

 

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Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and The NASDAQ Stock Market concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.

Non-affiliate resales of restricted securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.

Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.

LOCK-UP AGREEMENTS

We, and each of our executive officers and directors and the holders of substantially all of our outstanding stock have agreed that, without the prior written consent of UBS Securities LLC and Wells Fargo Securities, LLC, we and they will not, subject to limited exceptions, during the period ending 180 days after the date of this prospectus:

 

Ø  

sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock, or publicly announce an intention to do the same;

 

Ø  

establish or increase a put equivalent position or liquidate or decrease a call equivalent position with respect to any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock, or publicly announce an intention to do the same;

 

Ø  

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock, whether any such transaction is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise, or publicly announce an intention to do the same; or

 

Ø  

make any demand for, or exercise any right with respect to, the registration of any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock.

REGISTRATION RIGHTS

Subject to the lock-up agreements described above, upon the closing of this offering, the holders of an aggregate of 9,919,821 shares of our common stock, along with the holder of a warrant to purchase 70,796 shares of common stock, will have the right to require us to register these shares under the Securities Act under specified circumstances. After registration pursuant to these rights and expiration of the lock-up agreement, these shares will become freely tradable without restriction under the Securities Act. See “Description of capital stock—Registration rights” for additional information regarding these registration rights.

 

 

 

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STOCK OPTIONS AND WARRANTS

As of December 31, 2013, we had outstanding options to purchase 1,952,578 shares of common stock, of which options to purchase 1,673,432 shares of common stock were vested and exercisable. Following this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock subject to outstanding options and options and other awards issuable pursuant to the 2006 Plan and 2014 Plan.

As of December 31, 2013, we also had outstanding and exercisable a warrant to purchase 70,796 shares of common stock (calculated on an as-converted basis). Any shares purchased by our non-affiliates pursuant to the cashless exercise features of our warrants will be freely tradable under Rule 144(b)(1), subject to a 180-day lock-up period. Any shares purchased through the exercise of these warrants for cash will be eligible for sale subject to the lock-up agreements and securities laws described above.

PARTICIPATION IN OFFERING

Certain of our existing principal stockholders and their affiliated entities have indicated an interest in purchasing an aggregate of up to $9.1 million of shares of common stock in this offering at the initial public offering price. Any such shares purchased by these potential purchasers may not be able to be resold in the public market immediately following this offering as a result of restrictions under securities laws and lock-up agreements, but would be able to be sold following the expiration of these restrictions, in each case as described above. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential purchasers and any of these potential purchasers could determine to purchase more, less or no shares in this offering, and the foregoing discussion does not reflect any potential purchases by these potential purchasers.

 

 

 

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Material U.S. federal tax considerations for non-U.S. holders of common stock

The following is a general discussion of the material U.S. federal income and estate tax considerations applicable to non-U.S. holders with respect to their ownership and disposition of shares of our common stock. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-U.S. holders of our common stock should consult their own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock. For purposes of this discussion, a non-U.S. holder means a beneficial owner of our common stock that is not for U.S. federal income tax purposes:

 

Ø  

an individual who is a citizen or resident of the United States;

 

Ø  

a corporation or any other organization taxable as a corporation for U.S. federal income tax purposes, created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia;

 

Ø  

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

Ø  

a trust if (1) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing and proposed U.S. Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, all as in effect as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences to non-U.S. holders described in this prospectus. We assume in this discussion that a non-U.S. holder holds shares of our common stock as a capital asset, generally property held for investment.

This discussion does not address all aspects of U.S. federal income and estate taxation, including the Medicare contribution tax, that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances nor does it address any aspects of U.S. state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as:

 

Ø  

insurance companies;

 

Ø  

tax-exempt organizations;

 

Ø  

financial institutions;

 

Ø  

brokers or dealers in securities;

 

Ø  

regulated investment companies;

 

Ø  

pension plans;

 

Ø  

controlled foreign corporations;

 

Ø  

passive foreign investment companies;

 

Ø  

owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and

 

Ø  

certain U.S. expatriates.

 

 

 

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In addition, this discussion does not address the tax treatment of partnerships or persons that hold their common stock through partnerships or other pass-through entities for U.S. federal income tax purposes. A partner in a partnership or other pass-through entity that will hold our common stock should consult his, her or its own tax advisor regarding the tax consequences of acquiring, holding and disposing of our common stock through a partnership or other pass-through entity, as applicable.

There can be no assurance that the Internal Revenue Service, which we refer to as the IRS, will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, an opinion of counsel with respect to the U.S. federal income or estate tax consequences to a non-U.S. holder of the purchase, ownership or disposition of our common stock.

DISTRIBUTIONS ON OUR COMMON STOCK

Distributions on our common stock generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in the common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “Gain on sale, exchange or other disposition of our common stock.” Any such distributions will also be subject to the discussion below under the section titled “Withholding and information reporting requirements—FATCA.”

Dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.

Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to United States persons (as defined in the Code). Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.

A non-U.S. holder of our common stock who claims the benefit of an applicable income tax treaty between the United States and such holder’s country of residence generally will be required to provide a properly executed IRS Form W-8BEN (or successor form) and satisfy applicable certification and other requirements. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing a U.S. tax return with the IRS.

GAIN ON SALE, EXCHANGE OR OTHER DISPOSITION OF OUR COMMON STOCK

In general, a non-U.S. holder will not be subject to any U.S. federal income tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless:

 

Ø  

the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed

 

 

 

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base maintained by such non-U.S. holder in the United States, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to United States persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in “Distributions on our common stock” also may apply;

 

Ø  

the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence) on the net gain derived from the disposition, which may be offset by certain U.S. source capital losses of the non-U.S. holder, if any; or

 

Ø  

we are, or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter) a “U.S. real property holding corporation,” unless our common stock is regularly traded on an established securities market and the non-U.S. holder holds no more than 5% of our outstanding common stock, directly or indirectly, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our common stock. If we are determined to be a U.S. real property holding corporation and the foregoing exception does not apply, then a purchaser may withhold 10% of the proceeds payable to a non-U.S. holder from a sale of our common stock and the non-U.S. holder generally will be taxed on its net gain derived from the disposition at the graduated U.S. federal income tax rates applicable to United States persons (as defined in the Code). Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. No assurance can be provided that our common stock will be regularly traded on an established securities market for purposes of the rules described above.

U.S. FEDERAL ESTATE TAX

Shares of our common stock that are owned or treated as owned at the time of death by an individual who is not a citizen or resident of the United States, as specifically defined for U.S. federal estate tax purposes, are considered U.S. situs assets and will be included in the individual’s gross estate for U.S. federal estate tax purposes. Such shares, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax or other treaty provides otherwise.

BACKUP WITHHOLDING AND INFORMATION REPORTING

We must report annually to the IRS and to each non-U.S. holder the gross amount of the distributions on our common stock paid to such holder and the tax withheld, if any, with respect to such distributions. Non-U.S. holders may have to comply with specific certification procedures to establish that the holder is not a United States person (as defined in the Code) in order to avoid backup withholding at the applicable rate with respect to dividends on our common stock. Dividends paid to non-U.S. holders subject to the U.S. withholding tax, as described above in “Distributions on our common stock,” generally will be exempt from U.S. backup withholding.

Information reporting and backup withholding will generally apply to the proceeds of a disposition of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting

 

 

 

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purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS—FATCA

The Foreign Account Tax Compliance Act, or FATCA, will impose a U.S. federal withholding tax at a rate of 30% on payments of dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a foreign entity unless (i) if the foreign entity is a “foreign financial institution,” such foreign entity undertakes certain due diligence, reporting, withholding, and certification obligations, (ii) if the foreign entity is not a “foreign financial institution,” such foreign entity identifies certain of its U.S. investors, if any, or (iii) the foreign entity is otherwise exempt under FATCA. Although this legislation is effective with respect to amounts paid after December 31, 2012, under final regulations issued by the U.S. Department of Treasury on January 17, 2013 and IRS Notice 2013-43 released on July 12, 2013, withholding under FATCA will only apply (1) to payments of dividends on our common stock made after June 30, 2014, and (2) to payments of gross proceeds from a sale or other disposition of our common stock made after December 31, 2016. Under certain circumstances, a non-U.S. holder may be eligible for refunds or credits of the tax. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in our common stock and the entities through which they hold our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of the 30% withholding tax under FATCA.

 

 

 

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Underwriting

We are offering the shares of our common stock described in this prospectus through the underwriters named below. UBS Securities LLC and Wells Fargo Securities, LLC are acting as joint book-running managers of this offering and as representatives of the underwriters. We have entered into an underwriting agreement with the representatives acting on behalf of themselves and the other underwriters named below. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase, and we have agreed to sell to the underwriters, the number of shares of common stock listed next to its name in the following table.

 

Underwriters    Number of
Shares
 

UBS Securities LLC

  

Wells Fargo Securities, LLC

  

JMP Securities LLC

  

Roth Capital Partners, LLC

  
  

 

 

 

Total

     5,000,000   
  

 

 

 

The underwriting agreement provides that the underwriters must buy all of the shares of common stock if they buy any of them. However, the underwriters are not required to pay for the shares covered by the underwriters’ over-allotment option as described below.

Our common stock is offered subject to a number of conditions, including:

 

Ø  

receipt and acceptance of our common stock by the underwriters; and

 

Ø  

the underwriters’ right to reject orders in whole or in part.

We have been advised by the representatives that the underwriters intend to make a market in our common stock but that they are not obligated to do so and may discontinue making a market at any time without notice.

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.

OVER-ALLOTMENT OPTION

We have granted the underwriters an option to buy up to an aggregate of additional 750,000 shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares of common stock approximately in proportion to the amounts specified in the table above.

UNDERWRITING DISCOUNT

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $         per share from the initial public offering price. Sales of shares made outside of the United States may be made by affiliates of the underwriters. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein.

 

 

 

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The following table shows the per share and total underwriting discount we will pay to the underwriters assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase up to             additional shares of our common stock.

 

       No Exercise      Full Exercise  

Per share

   $                    $                

Total

   $         $     
  

 

 

    

 

 

 

We estimate that the total expenses of the offering payable by us, not including the underwriting discount, will be approximately $3.1 million. We have agreed to reimburse the underwriters for certain expenses in an amount up to $30,000.

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors, and holders of substantially all of our common stock have entered into lock-up agreements with the underwriters. Under the lock-up agreements, subject to certain exceptions and subject to extension in certain limited circumstances, we and each of these persons may not, without the prior written approval of UBS Securities LLC and Wells Fargo Securities, LLC, sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus.

UBS Securities LLC and Wells Fargo Securities, LLC may, at any time and in their sole discretion, release some or all the securities from these lock-up agreements. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price of our common stock.

INDEMNIFICATION

We have agreed to indemnify the several underwriters against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be required to make in respect of those liabilities.

NASDAQ GLOBAL MARKET LISTING

We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “CNCE.”

PRICE STABILIZATION, SHORT POSITIONS

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock during and after this offering, including:

 

Ø  

stabilizing transactions;

 

Ø  

short sales;

 

Ø  

purchases to cover positions created by short sales;

 

Ø  

imposition of penalty bids; and

 

Ø  

syndicate covering transactions.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. Stabilization transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed

 

 

 

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a specified maximum. These transactions may also include making short sales of our common stock, which involve 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 short positions created by short sales. Short sales may be “covered short sales,” which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked short sales,” which are short positions in excess of that amount.

The underwriters may close out any covered short position by either 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 as compared to the price at which they may purchase shares through the over-allotment option.

Naked short sales are short sales made in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. 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 purchased in this offering.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

These stabilizing transactions, short sales, purchases to cover positions created by short sales, the imposition of penalty bids and syndicate covering transactions may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. The underwriters may carry out these transactions on The NASDAQ Global Market, in the over-the- counter market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. Neither we, nor any of the underwriters make any representation that the underwriters will engage in these stabilization transactions or that any transaction, once commenced, will not be discontinued without notice.

DETERMINATION OF OFFERING PRICE

Prior to this offering, there was no public market for our common stock. The initial public offering price will be determined by negotiation among us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:

 

Ø  

the information set forth in this prospectus and otherwise available to the representatives;

 

Ø  

our history and prospects and the history and prospects for the industry in which we compete;

 

Ø  

our past and present financial performance;

 

Ø  

our prospects for future earnings and the present state of our development;

 

Ø  

the general condition of the securities markets at the time of this offering;

 

Ø  

the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

Ø  

other factors deemed relevant by the underwriters and us.

 

 

 

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The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock or that the common stock will trade in the public market at or above the initial public offering price.

AFFILIATIONS

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and their affiliates may from time to time in the future engage with us and perform services for us or in the ordinary course of their business for which they will receive customary fees and expenses. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities or instruments of us. The underwriters and their respective affiliates may also make investment recommendations or publish or express independent research views in respect of these securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in these securities and instruments.

ELECTRONIC DISTRIBUTION

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.

NOTICE TO PROSPECTIVE INVESTORS

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any shares which are the subject of the offering contemplated by this prospectus (the “Shares”) may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any Shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

 

  (a)   to any legal entity which is a qualified investor as defined under the Prospectus Directive;

 

  (b)   by the underwriters to fewer than 100, or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives of the underwriters for any such offer; or

 

  (c)   in any other circumstances falling within Article 3(2) of the Prospectus Directive,

 

 

 

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provided that no such offer of Shares shall result in a requirement us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to any Shares 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 any Shares to be offered so as to enable an investor to decide to purchase any Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. The expression “Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive means Directive 2010/73/EU.

The EEA selling restriction is in addition to any other selling restrictions set out in this prospectus.

United Kingdom

This prospectus is only being distributed to and is only directed at: (1) persons who are outside the United Kingdom; (2) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”); or (3) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons falling within (1)-(3) together being referred to as “relevant persons”). The shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such shares will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this prospectus or any of its contents.

Australia

This prospectus is not a formal disclosure document and has not been, nor will be, lodged with the Australian Securities and Investments Commission. It does not purport to contain all information that an investor or their professional advisers would expect to find in a prospectus or other disclosure document (as defined in the Corporations Act 2001 (Australia)) for the purposes of Part 6D.2 of the Corporations Act 2001 (Australia) or in a product disclosure statement for the purposes of Part 7.9 of the Corporations Act 2001 (Australia), in either case, in relation to the securities.

The securities are not being offered in Australia to “retail clients” as defined in sections 761G and 761GA of the Corporations Act 2001 (Australia). This offering is being made in Australia solely to “wholesale clients” for the purposes of section 761G of the Corporations Act 2001 (Australia) and, as such, no prospectus, product disclosure statement or other disclosure document in relation to the securities has been, or will be, prepared.

This prospectus does not constitute an offer in Australia other than to persons who do not require disclosure under Part 6D.2 of the Corporations Act 2001 (Australia) and who are wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Australia). By submitting an application for our securities, you represent and warrant to us that you are a person who does not require disclosure under Part 6D.2 and who is a wholesale client for the purposes of section 761G of the Corporations Act 2001 (Australia). If any recipient of this prospectus is not a wholesale client, no offer of, or invitation to apply for, our securities shall be deemed to be made to such recipient and no applications for our securities will be accepted from such recipient. Any offer to a recipient in Australia, and any agreement arising from acceptance of such offer, is personal and may only be accepted by the recipient. In addition, by applying for our securities you undertake to us that, for a period of 12 months from the date of issue of the securities, you will not transfer any interest in the securities to any person in Australia other than to a person who does not require disclosure under Part 6D.2 and who is a wholesale client.

 

 

 

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Underwriting

 

 

Hong Kong

The contents of this prospectus have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice. Please note that (i) our securities may not be offered or sold in Hong Kong, by means of this prospectus or any document other than to “professional investors” within the meaning of Part I of Schedule 1 of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) (SFO) and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong) (CO) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO, and (ii) no advertisement, invitation or document relating to our securities may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the SFO and any rules made thereunder.

Japan

Our securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and our securities will not be offered or sold, directly or indirectly, in Japan, or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan, or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our securities may not be circulated or distributed, nor may our securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (SFA), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where our securities are subscribed or purchased under Section 275 by a relevant person which is:

 

  (a)   a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

  (b)   a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired our securities pursuant to an offer made under Section 275 except:

 

  (1)   to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

 

 

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Underwriting

 

 

 

  (2)   where no consideration is or will be given for the transfer;

 

  (3)   where the transfer is by operation of law; or

 

  (4)   as specified in Section 276(7) of the SFA.

Switzerland

This Prospectus does not constitute an issue prospectus pursuant to Article 652a or Article 1156 of the Swiss Code of Obligations (CO) and the shares will not be listed on the SIX Swiss Exchange. Therefore, the Prospectus may not comply with the disclosure standards of the CO and/or the listing rules (including any prospectus schemes) of the SIX Swiss Exchange. Accordingly, the shares may not be offered to the public in or from Switzerland, but only to a selected and limited circle of investors, which do not subscribe to the shares with a view to distribution.

Greece

The securities have not been approved by the Hellenic Capital Markets Commission for distribution and marketing in Greece. This document and the information contained therein do not and shall not be deemed to constitute an invitation to the public in Greece to purchase the securities. The securities may not be advertised, distributed, offered or in any way sold in Greece except as permitted by Greek law.

Dubai International Finance Centre

This prospectus relates to an Exempt Offer in accordance with the Markets Rules of the Dubai Financial Services Authority. This prospectus is intended for distribution only to Professional Clients who are not natural persons. It must not be delivered to, or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The securities to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the securities offered should conduct their own due diligence on the securities. If you do not understand the contents of this document you should consult an authorized financial adviser.

 

 

 

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Legal matters

The validity of the shares of common stock being offered will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. The underwriters are represented by Gibson, Dunn & Crutcher LLP, New York, New York, in connection with certain legal matters related to this offering.

Experts

The consolidated financial statements of Concert Pharmaceuticals, Inc. at December 31, 2011 and December 31, 2012 and for the years then ended, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm 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 to be sold in this offering. This prospectus, which constitutes part of the registration statement, does not include all of the information contained in the registration statement and the exhibits, schedules and amendments to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement and to the exhibits and schedules to the registration statement. Statements contained in this prospectus about the contents of any contract or any other document filed as an exhibit are not necessarily complete, and in each instance, we refer you to the copy of the contract or other documents filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You may read and copy the registration statement of which this prospectus is a part at the SEC’s public reference room, which is located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of the registration statement by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the SEC’s public reference room. In addition, the SEC maintains an Internet website, which is located at www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. You may access the registration statement of which this prospectus is a part at the SEC’s Internet website.

Upon completion of this offering, we will be subject to the informational and periodic reporting requirements of the Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements certified by an independent registered public accounting firm. We also maintain a website at www.concertpharma.com. Our website is not a part of this prospectus.

 

 

 

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INDEX TO FINANCIAL STATEMENTS

 

 

        

Report of independent registered public accounting firm

     F-2   

Consolidated balance sheets

     F-3   

Consolidated statements of operations and comprehensive loss

     F-4   

Consolidated statements of redeemable convertible preferred stock and stockholders’
(deficit) equity

     F-5   

Consolidated statements of cash flows

     F-6   

Notes to consolidated financial statements

     F-7   

 

 

 

F-1


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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Concert Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Concert Pharmaceuticals, Inc. (the Company) as of December 31, 2011 and 2012, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ (deficit) equity and cash flows for each of the years then ended. 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, assessing the accounting principles used and significant estimates made by management, and 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 Concert Pharmaceuticals, Inc. at December 31, 2011 and 2012 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Boston, Massachusetts

November 5, 2013,

except as it relates to Note 16,

as to which the date is January 31, 2014

 

 

 

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Concert Pharmaceuticals, Inc.

 

 

CONSOLIDATED BALANCE SHEETS

 

    December 31,     September 30, 2013  
      2011     2012     Actual     Pro forma  
                (Unaudited)  
    (In thousands, except share and per share data)  

Assets

       

Current assets:

       

Cash and cash equivalents

  $ 22,949      $ 7,490      $ 18,612      $ 18,612   

Short-term investments, available for sale

    19,705        20,067        22,705        22,705   

Interest receivable

    128        102        115        115   

Accounts receivable

    500        13        164        164   

Prepaid expenses and other current assets

    853        1,178        1,305        1,305   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    44,135        28,850        42,901        42,901   

Property and equipment, net

    4,438        3,454        2,591        2,591   

Long-term investment

                  1,256        1,256   

Restricted cash

    706        706        706        706   

Other assets

    124        119        1,515        1,515   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 49,403      $ 33,129      $ 48,969      $ 48,969   
 

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity        

Current liabilities:

       

Accounts payable

  $ 1,576      $ 813        953        953   

Accrued expenses and other liabilities

    1,472        1,953        2,918        2,918   

Deferred revenue, current portion

    6,894               3,997        3,997   

Leasehold improvement loan, current portion

    332        332        332        332   

Loans payable, net of discount

           4,812        7,651        7,651   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    10,274        7,910        15,851        15,851   

Deferred revenue, net of current portion

    4,128        2,750        16,551        16,551   

Leasehold improvement loan, net of current portion

    913        581        332        332   

Deferred lease incentive, net of current portion

    1,411        898        513        513   

Deferred rent, net of current portion

    632        451        277        277   

Warrant to purchase redeemable securities

    168        459        489          

Loan payable, net of current portion and discount

    7,135        14,919        9,120        9,120   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    24,661        27,968        43,133        42,644   

Commitments (Note 9)

       

Redeemable convertible preferred stock (Series A, B, C and D), $0.001 par value per share; 62,916,667 shares authorized; 56,047,067 shares issued and outstanding at December 31, 2011 and 2012 and September 30, 2013 (unaudited); aggregate liquidation preference of $112,993 at December 31, 2011 and 2012 and September 30, 2013 (unaudited); no shares issued and outstanding pro forma

    111,460        111,848        112,144          

Stockholders’ (deficit) equity:

       

Common stock, $0.001 par value per share; 83,716,667 shares authorized; 1,290,238 shares issued and outstanding at December 31, 2011 and 2012 and 1,295,191 shares issued and outstanding at September 30, 2013 (unaudited); 11,215,012 shares issued and outstanding pro forma (unaudited)

    1        1        1        11   

Additional paid-in capital

    409        889        1,406        114,029   

Accumulated other comprehensive income

    9        4        7        7   

Accumulated deficit

    (87,137     (107,581     (107,722     (107,722
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (86,718     (106,687     (106,308     6,325   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity

  $ 49,403      $ 33,129      $ 48,969      $ 48,969   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

 

 

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Concert Pharmaceuticals, Inc.

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

     Year ended
December 31,
    Nine months
ended September  30,
 
       2011     2012     2012     2013  
                 (Unaudited)  
     (In thousands, except per share data)  

Revenue:

        

License and research and development revenue

   $ 13,967      $ 11,349      $ 11,126      $ 21,995   

Milestone revenue

     5,500        1,500        1,500        2,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     19,467        12,849        12,626        23,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     23,436        24,193        18,384        16,460   

General and administrative

     7,377        7,266        5,620        6,366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,813        31,459        24,004        22,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,346     (18,610     (11,378     1,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     44        22        17        17   

Interest and other expense

     (18     (1,856     (1,324     (1,327
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,320   $ (20,444   $ (12,685   $ (141
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Unrealized gain (loss) on investments

     16        (5     (6     3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (11,304   $ (20,449   $ (12,691   $ (138
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of net loss to net loss applicable to common stockholders:

        

Net loss

   $ (11,320   $ (20,444   $ (12,685   $ (141

Accretion on redeemable convertible preferred stock

     (1,069     (388     (290     (296
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders—basic and diluted

   $ (12,389   $ (20,832   $ (12,975   $ (437
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders—basic and diluted

   $ (9.66   $ (16.15   $ (10.06   $ (0.34
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in net loss per share applicable to common stockholders—basic

     1,283        1,290        1,290        1,291   

Weighted-average number of common shares used in net loss per share applicable to common stockholders—diluted

     1,283        1,290        1,290        1,291   

Pro forma net loss per share applicable to common stockholders (unaudited):

        

Basic:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Diluted:

     $ (1.80     $ (0.01
    

 

 

     

 

 

 

Pro forma weighted average number of common shares outstanding (unaudited):

        

Basic:

       11,210          11,211   

Diluted:

       11,210          11,211   

See accompanying notes.

 

 

 

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Concert Pharmaceuticals, Inc.

 

 

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

    Redeemable convertible
preferred stock
          Common stock    

Additional

paid-in

capital

   

Accumulated
other

comprehensive

income

   

Accumulated

deficit

   

Total

stockholders’

(deficit) equity

 
                   
    Shares    

Carrying

value

                 
              Shares     Amount          
                            (In thousands, except share data)                  
 

Balance at December 31, 2010

    56,047,067      $ 110,391            1,277,275      $ 1      $ 560      $ (7   $ (75,817   $ (75,263

Accretion of redeemable convertible preferred stock to redemption value

           1,069                          (1,069                   (1,069

Exercise of stock options

                      12,963               15                      15   

Unrealized gain on short-term investments

                                           16               16   

Stock-based compensation expense

                                    903                      903   

Net loss

                                                  (11,320     (11,320
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    56,047,067        111,460            1,290,238        1        409        9        (87,137     (86,718
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

      388                          (388                   (388

Unrealized gain on short-term investments

                                           (5            (5

Stock-based compensation expense

                                    868                      868   

Net loss

                                                  (20,444     (20,444
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    56,047,067        111,848            1,290,238        1        889        4        (107,581     (106,687
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accretion of redeemable convertible preferred stock to redemption value (unaudited)

           296                          (296                   (296

Exercise of stock option

                      4,953               20                      20   

Unrealized gain on short-term investments (unaudited)

                                           3               3   

Stock-based compensation expense (unaudited)

                                    793                      793   

Net loss (unaudited)

                                                  (141     (141
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013 (unaudited)

    56,047,067        112,144            1,295,191        1        1,406        7        (107,722     (106,308
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Conversion of preferred stock into common stock (unaudited)

    (56,047,067     (112,144         9,919,821        10        112,134                      112,144   

Reclassification of warrant to purchase preferred stock to stockholders’ equity (unaudited)

                                    489                      489   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma balance at September 30, 2013 (unaudited)

         $            11,215,012      $ 11      $ 114,029      $ 7      $ (107,722   $ 6,325   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

 

 

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Concert Pharmaceuticals, Inc.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year ended
December 31,
    Nine months ended 
September  30,
 
       2011     2012     2012     2013  
                 (unaudited)  
     (In thousands)  
Operating activities         

Net loss

   $ (11,320   $ (20,444   $ (12,685   $ (141

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

        

Depreciation and amortization

     1,619        1,452        1,113        1,006   

Stock-based compensation expense

     903        868        648        793   

Accretion of premiums and discounts on short-term investments

     774        365        288        223   

Amortization of discount on loan payable

            96        72        73   

Amortization of deferred financing costs

            39        30        28   

Re-measurement of warrant to purchase redeemable securities

            291        218        30   

Amortization of deferred lease incentive

     (513     (513     (385     (385

Changes in operating assets and liabilities:

        

Accounts receivable

     1,000        487        497        (151

Interest receivable

     114        26               (12

Prepaid expenses and other current assets

     (29     (364     (795     (156

Other assets

     (70     5        32        (1,103

Accounts payable

     403        (764     (508     130   

Accrued expenses and other liabilities

     274        432        749        631   

Deferred rent

     (62     (131     (90     (123

Deferred revenue

     (11,178     (8,272     (8,271     17,797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (18,085     (26,427     (19,088     18,640   

Investing activities

        

Purchases of property and equipment

     (290     (468     (280     (143

Purchases of short-term investments

     (40,879     (38,398     (34,122     (27,397

Purchases of long-term investments

                          (1,256

Maturities of short-term investments

     64,070        37,666        25,551        24,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     22,901        (1,200     (8,851     (4,256

Financing activities

        

Proceeds from issuance of loan payable, net of issuance costs

     7,302        12,500        12,500          

Principal payments on loan payable

                          (3,033

Repayment of leasehold improvement loan

     (332     (332     (249     (249

Proceeds from issuance of common stock

     15                      20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,985        12,168        12,251        (3,262
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     11,801        (15,459     (15,688     11,122   

Cash and cash equivalents at beginning of period

     11,148        22,949        22,949        7,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 22,949      $ 7,490      $ 7,261      $ 18,612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

        

Cash paid for interest

   $      $ 1,339      $ 910      $ 1,250   

Initial public offering costs incurred but unpaid at period end

   $      $      $      $ 293   

See accompanying notes.

 

 

 

F-6


Table of Contents

Concert Pharmaceuticals, Inc.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

1.    Nature of business

Concert Pharmaceuticals, Inc. (Concert or the Company) was incorporated on April 12, 2006 (inception) as a Delaware corporation, with operations based in Lexington, Massachusetts. The Company is a clinical stage biopharmaceutical company that applies its extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs. The Company’s approach starts with approved drugs, advanced clinical candidates or previously studied compounds that the Company believes can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy. The Company believes this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug development.

The Company has generated an accumulated deficit of $107.7 million since inception through September 30, 2013 and will require substantial additional capital to fund its research and development. It is subject to risks common to companies in the biotechnology industry, including, but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for its product candidates, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and ability to transition from pilot-scale manufacturing to large-scale production of products.

The Company believes that its cash and cash equivalents and investments of $42.6 million at September 30, 2013 will be sufficient to allow the Company to fund its current operating plan for at least the next 12 months. Management expects the Company to continue to incur losses for the full year ending December 31, 2013 and for the foreseeable future. The Company’s ability to achieve profitability in the future is dependent upon the successful development, approval, and commercialization of its product candidates and achieving a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional private or public debt or equity offerings, and may seek additional capital through arrangements with collaborators or from other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all.

Unless otherwise indicated, all amounts are in thousands except per share amounts.

2.    Summary of significant accounting policies

The accompanying financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying financial statements and notes.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Concert Pharmaceuticals, Inc. and its wholly owned subsidiary, Concert Pharmaceuticals Securities Corporation, which is a Massachusetts subsidiary created to buy, sell and hold securities. All intercompany transactions and balances have been eliminated.

 

 

 

F-7


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and in developing the estimates and assumptions that are used in the preparation of the financial statements. Management must apply significant judgment in this process. Management’s estimation process often may yield a range of potentially reasonable estimates and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: revenue recognition for multiple-element revenue arrangements; stock-based compensation expense, including estimating the fair value of the Company’s common stock; the valuation of liability-classified warrants; accrued expenses; and income taxes.

Unaudited interim financial information

The accompanying consolidated balance sheet as of September 30, 2013, the consolidated statements of operations and comprehensive loss and consolidated statements of cash flows for the nine months ended September 30, 2012 and 2013, and the consolidated statement of redeemable convertible preferred stock and stockholders’ (deficit) equity for the nine months ended September 30, 2013 are unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position as of September 30, 2013, and the consolidated results of its operations and its cash flows for the nine months ended September 30, 2012 and 2013. The financial data and other information disclosed in these notes as of and for the nine months ended September 30, 2012 and 2013 are unaudited. The results for the nine months ended September 30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013, any other interim periods, or any future year or period.

Unaudited pro forma information

On November 1, 2013, the Company’s board of directors authorized management to confidentially submit a draft registration statement to the Securities and Exchange Commission (SEC) for the Company to sell shares of its common stock to the public. Upon the closing of a qualified public offering or the consent of holders of at least 60% of the Series B redeemable convertible preferred stock (Series B Preferred Stock) and holders of at least 50% of the Series C redeemable convertible preferred stock (Series C Preferred Stock), all outstanding shares of our redeemable convertible preferred stock will convert into shares of common stock. The unaudited pro forma balance sheet as of September 30, 2013, assumes the automatic conversion of all the outstanding redeemable convertible preferred stock into shares of common stock, the automatic conversion of a warrant to purchase redeemable convertible preferred stock into a warrant to purchase common stock, and the reclassification of the Company’s outstanding warrant from a liability to stockholders’ equity upon the completion of this proposed offering.

Unaudited pro forma net loss per share applicable to common stockholders is computed using the weighted-average number of common shares outstanding after giving effect to the conversion of all the outstanding redeemable convertible preferred stock into shares of common stock as if such conversion had occurred at the beginning of the period presented and, accordingly, excludes the accretion of redeemable convertible preferred stock to redemption value. Additionally, the losses associated with the

 

 

 

F-8


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

changes in the fair value of the warrant to purchase redeemable convertible preferred stock have been excluded from the determination of unaudited pro forma net loss as those re-measurements would not be required when the warrant to purchase redeemable convertible preferred stock becomes a warrant to purchase common stock.

Segment information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business in one operating segment. All material long-lived assets of the Company reside in the United States.

Cash, cash equivalents and investments

Cash equivalents include all highly liquid investments maturing within 90 days from the date of purchase. Investments consist of securities with original maturities greater than 90 days when purchased. The Company classifies these investments as available-for-sale and records them at fair value in the accompanying consolidated balance sheets. Unrealized gains or losses are included in accumulated other comprehensive loss. Premiums or discounts from par value are amortized to investment income over the life of the underlying investment.

Cash, cash equivalents and investments included the following at December 31, 2011 and 2012 and September 30, 2013 (in thousands):

 

       Average
maturity
    

Amortized

cost

     Unrealized
gains
     Unrealized
losses
    

Fair

value

 

December 31, 2011

              

Cash

      $ 2,522       $       $       $ 2,522   

Money market funds

        20,427                         20,427   
     

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

      $ 22,949       $       $       $ 22,949   
     

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury obligations

     357 days       $ 6,039       $ 3       $       $ 6,042   

Government agency securities

     348 days         13,657         6                 13,663   
     

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

      $ 19,696       $ 9       $       $ 19,705   
     

 

 

    

 

 

    

 

 

    

 

 

 
       Average
maturity
     Amortized
cost
     Unrealized
gains
     Unrealized
losses
     Fair
value
 

December 31, 2012

              

Cash

      $ 593       $       $       $ 593   

Money market funds

        6,897                         6,897   
     

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

      $ 7,490       $       $       $ 7,490   
     

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury obligations

     230 days       $ 1,504       $       $       $ 1,504   

Government agency securities

     279 days         18,559         4                 18,563   
     

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

      $ 20,063       $ 4       $       $ 20,067   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

F-9


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

       Average
maturity
    

Amortized

cost

     Unrealized
gains
     Unrealized
losses
    

Fair

value

 

September 30, 2013 (unaudited)

              

Cash

      $ 3,107       $       $       $ 3,107   

Money market funds

        15,505                         15,505   
     

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

      $ 18,612       $       $       $ 18,612   
     

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Treasury obligation

     301 days      $ 500       $       $       $ 500   

Government agency securities

     290 days         22,198         7                 22,205   
     

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

      $ 22,698       $ 7       $       $ 22,705   
     

 

 

    

 

 

    

 

 

    

 

 

 

Government agency security

     421 days       $ 1,256      

$

  

   $       $ 1,256   
     

 

 

    

 

 

    

 

 

    

 

 

 

Long-term investment

      $ 1,256       $       $       $ 1,256   
     

 

 

    

 

 

    

 

 

    

 

 

 

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During 2011, 2012 and the nine months ended September 30, 2013 (unaudited), there were no realized gains or losses on sales of investments, and no investments were adjusted for other than temporary declines in fair value.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of money market funds and investments. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no foreign exchange contracts, option contracts or other foreign exchange hedging arrangements. At December 31, 2012 and September 30, 2013, substantially all of the Company’s cash was deposited in accounts at two highly rated financial institutions, thus limiting the amount of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits.

Deferred issuance costs

Deferred issuance costs, which primarily consist of direct and incremental legal and accounting fees relating to the Company’s proposed initial public offering of common stock, are capitalized as incurred. Deferred issuance costs related to the Company’s proposed initial public offering will be offset against initial public offering proceeds upon the consummation of the offering and are included as a component of other assets in the accompanying consolidated balance sheets. In the event the offering is terminated, the related deferred issuance costs will be expensed. No amounts were deferred related to the Company’s proposed initial public offering as of December 31, 2011 or December 31, 2012, and $1.5 million was deferred as of September 30, 2013.

Fair value of financial measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis (principally cash equivalents, short-term and long-term investments, and the preferred stock warrant liability) that have been classified as Level 1, 2 or 3 within the fair value hierarchy as described below. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates, and yield curves. Fair values

 

 

 

F-10


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

determined by Level 3 inputs utilize unobservable data points for the asset or liability. The Company’s investments in money market funds, U.S. treasury obligations, and government agency securities have been classified as Level 1 because their fair values are based on quoted market prices. The preferred stock warrant liability is classified as Level 3 because certain inputs to the valuation of the warrant are based on unobservable inputs. The assumptions used to value the warrant are more fully described in Note 12.

The carrying amount of financial instruments not carried at fair value, including accounts receivable, accounts payable, loan payable and leasehold improvement loan approximate fair value due to either their short-term maturities or interest rates which approximate market rates.

Property and equipment

Property and equipment are recognized at cost and depreciated over their estimated useful lives using the straight-line method. Repair and maintenance costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment. Potential impairment is assessed when there is evidence that events or circumstances indicate that the carrying amount of an asset may not be recovered. The Company has not recognized any impairments during 2011, 2012 or the nine months ended September 30, 2013 (unaudited).

Revenue recognition

The Company has primarily generated revenue through arrangements with collaborators and nonprofit organizations for the development and commercialization of product candidates.

The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (ASC 605). Accordingly, revenue is recognized when all of the following criteria are met:

 

Ø  

Persuasive evidence of an arrangement exists;

 

Ø  

Delivery has occurred or services have been rendered;

 

Ø  

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

 

Ø  

Collectability is reasonably assured.

Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s consolidated balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, current portion. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion.

The Company’s revenue is currently generated through collaborative research and development and licensing agreements. The terms of these agreements typically contain multiple elements, or deliverables, which may include licenses, or options to obtain licenses, to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by us on behalf of the collaboration partner related to the licensed product candidates. The terms of these agreements may include payments to the Company of one or more of the following: a nonrefundable, upfront payment; milestone payments; payment of license exercise or option fees with respect to product candidates; fees for research and development services rendered; and royalties on commercial sales of licensed product candidates, if any. To date, the Company has received upfront payments, several milestone payments and certain research and development service payments but has not received any license exercise or option fees or earned royalty revenue as a result of product sales.

 

 

 

F-11


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

When evaluating multiple element arrangements, the Company considers whether the deliverables under the arrangement represent separate units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have standalone value, based on the consideration of the relevant facts and circumstances for each arrangement. The consideration received is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to each of the separate units.

The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a deliverable requires significant judgment. The Company has used its BESP to estimate the selling price for licenses to the Company’s proprietary technology, since the Company does not have VSOE or TPE of selling price for these deliverables. In those circumstances where the Company utilizes BESP to determine the estimated selling price of a license to the Company’s proprietary technology, the Company considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreement, estimated development costs, and the probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating the Company’s BESP, the Company evaluates whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple deliverables.

The Company’s multiple-element revenue arrangements may include the following:

Exclusive Licenses . The deliverables under the Company’s collaboration agreements generally include exclusive licenses to develop, manufacture and commercialize one or more deuterated compounds. To account for this element of the arrangement, management evaluates whether the exclusive license has standalone value from the undelivered elements based on the consideration of the relevant facts and circumstances of each arrangement, including the research and development capabilities of the collaboration partner. The Company may recognize the arrangement consideration allocated to licenses upon delivery of the license if facts and circumstances indicate that the license has standalone value from the undelivered elements, which generally include research and development services. The Company defers arrangement consideration allocated to licenses if facts and circumstances indicate that the delivered license does not have standalone value from the undelivered elements.

When management believes the license does not have stand-alone value from the other deliverables to be provided in the arrangement, the Company generally recognizes revenue attributed to the license on a straight-line basis over the Company’s contractual or estimated performance period, which is typically the term of the Company’s research and development obligations. If management cannot reasonably estimate when the Company’s performance obligation ends, then revenue is deferred until management can reasonably estimate when the performance obligation ends. The periods over which revenue should be recognized are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

Research and Development Services . The deliverables under the Company’s collaboration and license agreements may include deliverables related to research and development services to be performed by the

 

 

 

F-12


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Company on behalf of the collaboration partner. As the Company is principally responsible for the performance of these services under the agreements, the Company recognizes revenue on a gross basis for research and development services as those services are performed.

Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts, so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related amount is reasonably assured.

Option Agreements . The Company’s arrangements may provide a collaborator with the right to select a deuterated compound for licensing within an initial pre-defined selection period. Under these agreements, a fee would be due to the Company upon the exercise of an option to acquire a license. The accounting for option arrangements is dependent on the nature of the option granted to the collaboration partner. An option is considered substantive if, at the inception of the arrangement, the Company is at risk as to whether the collaboration partner will choose to exercise the option to secure exclusive licenses. Factors that the Company considers in evaluating whether an option is substantive include the overall objective of the arrangement, the benefit the collaborator might obtain from the arrangement without exercising the option, the cost to exercise the option relative to the total upfront consideration and the additional financial commitments or economic penalties imposed on the collaborator as a result of exercising the option. For arrangements under which an option to secure a license is considered substantive, the Company does not consider the license underlying the option to be a deliverable at the inception of the arrangement. For arrangements under which the option to secure a license is not considered substantive, the Company considers the license underlying the option to be a deliverable at the inception of the arrangement and, upon delivery of the license, would apply the multiple-element revenue arrangement criteria to the license and any other deliverables to determine the appropriate revenue recognition. A significant and incremental discount included in an otherwise substantive option is considered to be a separate deliverable at the inception of the arrangement.

Milestone Revenue . The Company’s collaboration agreements generally include contingent milestone payments related to specified development milestones, regulatory milestones and sales-based milestones. Development milestones are typically payable when a product candidate initiates or advances in clinical trial phases or achieves defined clinical events such as proof-of-concept. Regulatory milestones are typically payable upon submission for marketing approval with regulatory authorities or upon receipt of actual marketing approvals for a compound, approvals for additional indications, upon commercial launch or upon the first commercial sale. Sales-based milestones are typically payable when annual sales reach specified levels.

At the inception of each arrangement that includes milestone payments, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the consideration is commensurate with either (i) the entity’s performance to achieve the milestone or (ii) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone; (b) the consideration relates solely to past performance; and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment. Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis over the remaining period of performance.

 

 

 

F-13


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Research and development costs

Costs incurred in the research and development of the Company’s products are expensed as incurred. Research and development expenses are comprised of costs incurred in providing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract research and development services, and other outside costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Accounting for stock-based compensation

The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (ASC 718) . ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. The Company uses the Black-Scholes option pricing model to determine the fair value of options granted.

Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Awards to non-employees are adjusted through share-based compensation expense as the award vests to reflect the current fair value of such awards and expensed using an accelerated attribution model.

The Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require management’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions affecting the biotechnology industry, the prices at which the Company sold shares of redeemable convertible preferred stock, the superior rights and preferences of securities senior to the common stock, and the likelihood of achieving a liquidity event, such as an initial public offering or sale. Significant changes to the key assumptions used in the valuations could result in different fair values of common stock at each valuation date.

Income taxes

The Company provides deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred tax assets to the amount that will more likely than not be realized.

The Company evaluates tax positions taken, or expected to be taken, in the course of preparing its tax returns to determine whether the tax positions are “more likely than not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recognized as a tax expense.

Guarantees

As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity.

 

 

 

F-14


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The term of the indemnification is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company has directors’ and officers’ insurance coverage that limits its exposure and enables it to recover a portion of any future amounts paid.

The Company leases office space under a non-cancelable operating lease which is further described in Note 9. The Company has a standard indemnification arrangement under the lease that requires it to indemnify the landlord against all costs, expenses, fines, suits, claims, demands, liabilities, and actions directly resulting from any breach, violation, or non-performance of any covenant or condition of the Company’s lease.

As of December 31, 2012 and September 30, 2013, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

Comprehensive loss

Comprehensive loss is comprised of net loss and other comprehensive income or loss. Other comprehensive income or loss consists of unrealized gains and losses on short-term investments.

Net income (loss) per share

Net income (loss) per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (a participating security). The Company’s redeemable convertible preferred stock are participating securities as defined by ASC 260-10, Earnings Per Share .

Under the two-class method, basic net income (loss) per share applicable to common stockholders is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted net income (loss) per share is computed using the more dilutive of (1) the two-class method or (2) the if converted method. The Company allocates net income first to preferred stockholders based on dividend rights under the Company’s articles of incorporation and then to preferred and common stockholders based on ownership interests. Net losses are not allocated to preferred stockholders as they do not have an obligation to share in the Company’s net losses.

Diluted net income (loss) per share gives effect to all potentially dilutive securities, including redeemable convertible preferred stock, and shares issuable upon the exercise of outstanding warrants and stock options, using the treasury stock method. For the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, the Company has excluded the effects of all potentially dilutive shares, which include redeemable convertible preferred stock, a warrant to purchase redeemable convertible preferred stock and outstanding common stock options, from the weighted-average number of common shares outstanding as their inclusion in the computation for all periods would be anti-dilutive due to net losses.

 

 

 

F-15


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect (in thousands):

 

     Year ended December 31,      Nine months ended September 30,  
               2011              2012              2012              2013  
                   (unaudited)  

Preferred stock

     9,920         9,920         9,920         9,920   

Warrant

     71         71         71         71   

Outstanding stock options

     1,952         1,960         1,932         2,009   
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,943         11,951         11,923         12,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subsequent events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Refer to Note 16, Subsequent Events.

Application of new or revised accounting standards

On April 5, 2012, the Jump-Start Our Business Startups Act (the JOBS Act) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an emerging growth company the Company has elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Recently adopted accounting pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material effect on its financial position or results of operations upon adoption.

3.    Restricted cash

At December 31, 2011 and 2012 and September 30, 2013 (unaudited), $0.7 million of the Company’s cash is restricted by a bank as collateral for a stand-by letter of credit issued by the Company to its landlord in connection with the lease of the Company’s corporate headquarters.

 

 

 

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Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

4.    Property and equipment

Property and equipment consists of the following at December 31, 2011 and 2012 and September 30, 2013 (in thousands):

 

      

Estimated useful life

(in years)

   December 31,
2011
    December 31,
2012
   

September 30,

2013

 
                      (unaudited)  

Laboratory equipment

   5    $ 3,435      $ 2,383      $ 2,446   

Computer and telephone equipment

   3      296        278        318   

Software

   3      106        141        156   

Furniture

   3      167        167        167   

Leasehold improvements

   Lesser of useful life or lease term (7 years)      5,863        5,863        5,880   
     

 

 

   

 

 

   

 

 

 
        9,867        8,832        8,967   

Less accumulated depreciation and amortization

        (5,429     (5,378     (6,376
     

 

 

   

 

 

   

 

 

 
      $ 4,438      $ 3,454      $ 2,591   
     

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense was charged to operations in the amounts of $1.6 million for the year ended December 31, 2011, $1.5 million for the year ended December 31, 2012, $1.1 million for the nine months ended September 30, 2012 (unaudited) and $1.0 million for the nine months ended September 30, 2013 (unaudited).

5.    Accrued expenses and other liabilities

Accrued expenses and other liabilities consist of the following (in thousands):

 

     December 31,      September 30,

2013

 
       2011      2012     
                   (unaudited)  

Accrued professional fees and other

   $ 418       $ 393       $ 847   

Employee compensation and benefits

                     760   

Research and development expenses

     410         866         566   

Deferred lease incentive, current portion

     513         513         513   

Deferred rent, current portion

     131         181         232   
  

 

 

    

 

 

    

 

 

 
   $ 1,472       $ 1,953       $ 2,918   
  

 

 

    

 

 

    

 

 

 

6.    Redeemable convertible preferred stock

The Company has issued Series A, Series B, Series C and Series D redeemable convertible preferred stock (collectively, the “Preferred Stock”). The Company classifies the Preferred Stock outside of stockholders’ deficit because the shares contain contingent redemption features that are not solely within the Company’s control.

 

 

 

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Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Preferred Stock consisted of the following as of December 31, 2011 (in thousands):

 

      

Preferred
shares

authorized

    

Preferred
shares

issued

and
outstanding

     Redemption
value /
liquidation
preference
     Carrying
value
    

Common
stock

issuable
upon

conversion

 

Series A

     10,000         10,000       $ 10,000       $ 9,986         1,770   

Series B

     24,250         24,250         48,500         48,476         4,292   

Series C

     22,000         15,130         37,826         37,790         2,678   

Series D

     6,667         6,667         16,667         15,208         1,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     62,917         56,047       $ 112,993       $ 111,460         9,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Preferred Stock consisted of the following as of December 31, 2012 (in thousands):

 

      

Preferred
shares

authorized

    

Preferred
shares

issued

and
outstanding

     Redemption
value /
liquidation
preference
     Carrying
value
    

Common
stock

issuable
upon

conversion

 

Series A

     10,000         10,000       $ 10,000       $ 9,990         1,770   

Series B

     24,250         24,250         48,500         48,482         4,292   

Series C

     22,000         15,130         37,826         37,799         2,678   

Series D

     6,667         6,667         16,667         15,577         1,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     62,917         56,047       $ 112,993       $ 111,848         9,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Preferred Stock consisted of the following as of September 30, 2013 (in thousands) (unaudited):

 

      

Preferred

shares

authorized

    

Preferred
shares

issued

and
outstanding

     Redemption
value /
liquidation
preference
     Carrying
value
    

Common
stock

issuable
upon

conversion

 

Series A

     10,000         10,000       $ 10,000       $ 9,993         1,770   

Series B

     24,250         24,250         48,500         48,487         4,292   

Series C

     22,000         15,130         37,826         37,806         2,678   

Series D

     6,667         6,667         16,667         15,858         1,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     62,917         56,047       $ 112,993       $ 112,144         9,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Preferred Stock have the following rights and preferences:

Voting. The holders of the Preferred Stock are entitled to vote, together with the holders of common stock, on all matters submitted to stockholders for a vote, except with respect to matters on which Delaware General Corporation Law requires that a vote will be by a separate class. Each preferred stockholder is entitled to the number of votes equal to the number of shares of common stock into which each preferred share is convertible at the time of such vote. The holders of at least 60% of the outstanding Series A Preferred Stock voting together as a single class are entitled to elect two directors to the Company’s Board of Directors. The holders of at least 60% of the outstanding Series B Preferred Stock voting together as a single class are entitled to elect two directors to the Company’s board of directors. The holders of Preferred Stock and the holders of common stock, voting together as a single class on an as-converted to common stock basis, are entitled to elect the remaining directors.

 

 

 

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Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Dividends. The holders of Preferred Stock are entitled to receive dividends when and if declared by the board of directors. No dividends may be paid on shares of common stock until the Company has first paid to the holders of Preferred Stock a dividend equal to 6% per annum of the aggregate conversion prices for the Preferred Stock accruing from the original issue dates of the Preferred Stock. As of December 31, 2012 and September 30, 2013, no dividends have been declared.

Liquidation preference. In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of the then-outstanding Preferred Stock shall receive the greater of (1) $1.00 per share for Series A Preferred Stock, $2.00 per share for Series B Preferred Stock, $2.50 per share for Series C Preferred Stock, and $2.50 per share for Series D Preferred Stock, plus all declared but unpaid dividends, or (2) such amount per share of Preferred Stock payable as converted into common stock. Any remaining assets of the Company shall be distributed ratably among the holders of common stock. If the assets or surplus funds to be distributed to the holders of the Preferred Stock are insufficient to permit the payment to such holders of their full preferential amount, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amount that each holder is otherwise entitled to receive.

Conversion. Each share of Preferred Stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by dividing $1.00 for Series A Preferred Stock, $2.00 for Series B Preferred Stock, $2.50 for Series C Preferred Stock, and $2.50 for Series D Preferred Stock by the conversion price in effect at the time. The conversion price of Series A Preferred Stock is $5.65 per share, the conversion price of Series B Preferred Stock is $11.30 per share, the conversion price of Series C Preferred Stock is $14.13 per share and the conversion price of Series D Preferred Stock is $14.13 per share. These conversion prices are subject to adjustment in accordance with anti-dilution provisions contained in the Company’s Certificate of Incorporation. Conversion is automatic immediately upon the closing of a firm commitment underwritten public offering in which the gross proceeds are not less than $30 million, or upon the written election of the holders of at least 60% of the then-outstanding shares of Series B Preferred Stock and at least 50% of the then-outstanding shares of Series C Preferred Stock.

Redemption . Commencing 90 days prior to October 31, 2015, the holders of at least 60% of the-then outstanding shares of Series B Preferred Stock and at least 50% of the-then outstanding shares of Series C Preferred Stock may require the Company to redeem the Preferred Stock in three equal annual installments, the first occurring as of a date that is at least 90 days after the redemption election, at $1.00 per share for Series A Preferred Stock, $2.00 per share for Series B Preferred Stock, $2.50 per share for Series C Preferred Stock and $2.50 per share for Series D Preferred Stock plus any declared but unpaid dividends. The Company is accreting the shares to the redemption values over the period from issuance to October 31, 2015, such that the carrying amount of the securities will equal the redemption amounts of $1.00 for Series A Preferred Stock, $2.00 for Series B Preferred Stock, $2.50 for Series C Preferred Stock and $2.50 for Series D Preferred Stock. The difference between the redemption values and the carrying amount at December 31, 2012 and September 30, 2013 are the issuance costs associated with each offering and the unamortized premium on Series D Preferred Stock (see Note 10). The accretion amounts are recognized as an increase to the carrying value of the Preferred Stock with a corresponding charge to additional paid-in capital, and amounted to $1.1 million for the year ended December 31, 2011, $0.4 million for the year ended December 31, 2012, $0.3 million for the nine months ended September 30, 2012 and $0.3 million for the nine months ended September 30, 2013. The annual accretion is expected to be $0.4 million for the year ended December 31, 2013, $0.4 million for the year ended December 31, 2014 and $0.3 million for the year ended December 31, 2015.

 

 

 

F-19


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The Company has evaluated the Preferred Stock and determined it should be considered an “equity host” and not a “debt host” as defined by ASC 815,  Derivatives and Hedging . This evaluation is necessary in order to determine if any embedded features require bifurcation and, therefore, separate accounting as a derivative liability. The Company’s analysis followed the “whole instrument approach,” which compares an individual feature against the entire preferred stock instrument which includes that feature. The Company’s analysis was based on a consideration of the Preferred Stock’s economic characteristics and risks and more specifically evaluated all the stated and implied substantive terms and features including (i) whether the Preferred Stock included redemption features, (ii) whether the preferred stockholders were entitled to dividends, (iii) the voting rights of the Preferred Stock and (iv) the existence and nature of any conversion rights. As a result of the Company’s determination that the Preferred Stock is an “equity host,” the embedded conversion feature is not considered a derivative liability.

7.    Stockholders’ deficit

Stock incentive plan

The Company’s Amended and Restated 2006 Stock Option and Grant Plan (the 2006 Plan) provides for the issuance of a total of 2,212,389 shares of common stock in the form of incentive stock options, non-qualified stock options, awards of stock and direct stock purchase opportunities to directors, officers, employees and consultants of the Company.

Generally, the Company’s stock options are granted with an exercise price equal to the estimated fair value of the underlying common stock on the date of grant as determined by the board of directors, expire no later than ten years from the date of grant, and vest over various periods not exceeding four years. At December 31, 2011, 176,829 shares were available for future grant under the 2006 Plan, at December 31, 2012, 169,258 shares were available for future grant under the 2006 Plan and at September 30, 2013 (unaudited), 115,407 shares were available for future grant under the 2006 Plan.

 

 

 

F-20


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The following is a summary of option activity under the 2006 Plan:

 

      

Number of
shares

(in thousands)

    Weighted-
average
exercise
price per
share
     Weighted-
average
remaining
contractual
term (in years)
    

Aggregate
intrinsic
values

(in thousands)

 

Outstanding at December 31, 2011

     1,952      $ 3.16         7.4       $ 1,401   

Granted

     39        2.98         

Forfeited and expired

     (31     3.62         

Exercised

                    
  

 

 

         

Outstanding at December 31, 2012

     1,960      $ 3.15         6.6       $ 11,000   

Granted

     81        3.73         

Forfeited and expired

     (27     3.98         

Exercised

     (5     4.07         
  

 

 

         

Outstanding at September 30, 2013

     2,009      $ 3.16         5.4       $ 15,000   
  

 

 

         

Exercisable at December 31, 2012

     1,421      $ 2.93         6.0       $ 8,275   
  

 

 

         

Unvested at December 31, 2012

     539      $ 3.70         8.4      
  

 

 

         

Vested and expected to vest at December 31, 2012 (1)

     1,937      $ 3.16         6.6       $ 10,879   
  

 

 

         

Exercisable at September 30, 2013 (unaudited)

     1,599      $ 3.04         5.0       $ 12,136   
  

 

 

         

Unvested at September 30, 2013 (unaudited)

     410      $ 3.63         7.6      
  

 

 

         

Vested and expected to vest at September 30, 2013 (unaudited) (2)

     1,995      $ 3.16         5.4       $ 14,903   
  

 

 

         

 

(1)   This represents the number of vested options as of December 31, 2012, plus the number of unvested options expected to vest as of December 31, 2012, based on the unvested options at December 31, 2012, adjusted for the estimated forfeiture rate of 5%.
(2)   This represents the number of vested options as of September 30, 2013, plus the number of unvested options expected to vest as of September 30, 2013, based on the unvested options at September 30, 2013, adjusted for the estimated forfeiture rate of 5%.

The intrinsic value of options exercised during the year ended December 31, 2011 was $32 thousand, during the year ended December 31, 2012 was $0, during the nine months ended September 30, 2012 was $0 (unaudited) and during the nine months ended September 30, 2013 was $84 thousand (unaudited).

The weighted-average fair values of options granted during the year ended December 31, 2011 was $2.26, during the year ended December 31, 2012 was $6.53, and during the nine months ended September 30, 2013 was $13.77.

The aggregate intrinsic values in the preceding table represent the total pre-tax intrinsic value (the difference between the Company’s common stock price on the last day of each reporting period and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the stock option holders had all stock option holders exercised their stock options at the end of the reporting period. The amount of aggregate intrinsic value will change based on the fair value of the Company’s common stock.

 

 

 

F-21


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Stock-based compensation expense

The Company estimates the fair value of its stock-based awards using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of the expected term of the award, (c) the risk-free interest rate, (d) expected dividends and (e) the fair value of the Company’s common stock on the date of grant.

Due to the lack of a public market for the trading of the Company’s common stock and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

The expected term was determined using the simplified method, which is the mid-point between the vesting date and the end of the contractual term.

The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company has applied an annual forfeiture rate of 5% to employee options granted as of December 31, 2011 and 2012 and September 30, 2013. The annual forfeiture rate was estimated based upon actual historical forfeitures.

The risk-free rate is determined by reference to U.S. Treasury zero-coupon issues with remaining maturities similar to the expected term of the options.

The Company has not paid, and does not anticipate paying, cash dividends on shares of common stock; therefore, the expected dividend yield is assumed to be zero.

The fair values of options granted during the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013 were calculated using the following estimated weighted-average assumptions:

 

     December 31,     September  30,
2013
 
       2011     2012    
                 (unaudited)  

Expected volatility

     78.1     72.8     70.3

Expected term (in years)

     6.0        6.0        6.0   

Risk-free interest rate

     1.09     0.95     1.69

Expected dividend yield

            

 

 

 

F-22


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The Company recognized stock-based compensation from grants of stock options to employees and non-employees of $0.9 million for the year ended December 31, 2011, $0.9 million for the year ended December 31, 2012, $0.6 million for the nine months ended September 30, 2012 (unaudited) and $0.8 million for the nine months ended September 30, 2013 (unaudited). Total compensation cost recognized for all stock-based compensation awards in the consolidated statements of operations and comprehensive loss is as follows (in thousands):

 

     Year ended
December 31,
     Nine months
ended
September 30,
 
       2011      2012      2012      2013  
                   (unaudited)  

Research and development

   $ 572       $ 564       $ 419       $ 452   

General and administrative

     331         304         229         341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 903       $ 868       $ 648       $ 793   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2013 there was $1.8 million of total unrecognized compensation cost related to unvested options. Total unrecognized compensation cost will be adjusted for future changes in forfeitures. The Company expects to recognize that cost over a weighted-average period of 1.9 years.

Reserved shares

The Company has reserved the following shares of common stock as of December 31, 2012 for the potential conversion of outstanding Preferred Stock and warrants and the exercise of stock options (in thousands):

 

       December 31,
2012
 

Series A Preferred Stock

     1,770   

Series B Preferred Stock

     4,292   

Series C Preferred Stock (including warrant)

     2,749   

Series D Preferred Stock

     1,180   

Common stock options

     2,129   
  

 

 

 
     12,120   
  

 

 

 

8.    Income taxes

During 2011 and 2012, the Company did not record a benefit for income taxes related to its operating losses. The Company has provided a full valuation allowance against its net deferred tax assets, as the Company believes that it is more likely than not that the deferred tax assets will not be realized. The Company did not record a federal or state income tax provision or benefit for the nine months ended September 30, 2013 because management expects the Company’s results of operations to reflect a net loss for the year ended December 31, 2013, as well as the Company’s continued maintenance of a full valuation allowance against its net deferred tax assets.

 

 

 

F-23


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

A reconciliation of the federal statutory income tax rate and the Company’s effective income tax rate is as follows:

 

     Year ended December 31,  
               2011             2012  

Federal statutory income tax rate

     34.0     34.0

State income taxes

     5.3        5.3   

Change in valuation allowance

     (44.5     (34.9

Credits

     9.3        1.2   

Permanent items

     (2.5     (1.8

Expiring state net operating loss carryforward

     (1.6     (3.8
  

 

 

   

 

 

 

Effective income tax rate

     0.0     0.0
  

 

 

   

 

 

 

The significant components of the Company’s net deferred tax assets consist of the following (in thousands):

 

     December 31,  
       2011     2012  

Net operating loss carryforwards

   $ 30,660      $ 38,059   

Deferred revenue

     1,731        1,081   

Research and development credit carryforwards

     4,109        4,335   

Depreciation

     729        1,032   

Start-up costs

     24        22   

Other

     (28     (166
  

 

 

   

 

 

 
     37,225        44,363   

Valuation allowance

     (37,225     (44,363
  

 

 

   

 

 

 

Net deferred tax assets

   $      $   
  

 

 

   

 

 

 

At December 31, 2012, the Company had federal net operating loss carryforwards of $98.8 million and state net operating loss carryforwards of $84.8 million available to reduce future taxable income, which expire at various dates beginning in 2012 through 2032. The Company also had federal and state research and development tax credit carryforwards of $3.2 million and $1.7 million, respectively, available to reduce future tax liabilities, and which expire at various dates through 2032.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. The use of these loss and credit carryforwards may also be limited due to ownership change limitations under Section 382 of the Internal Revenue Code.

At December 31, 2012, the Company had no unrecognized tax benefits. The Company has not conducted a study of its research and development credit carryforwards. A study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts will be presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. Interest and penalty charges, if any, related to unrecognized

 

 

 

F-24


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

tax benefits would be classified as income tax expense in the accompanying statement of operations. As of December 31, 2012, the Company had no accrued interest related to uncertain tax positions. In many cases, the Company’s uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.

9.    Commitments

In February 2008, the Company entered into a seven-year, non-cancelable operating lease for approximately 45,000 square feet of office and laboratory space (the 2008 Lease Agreement) in Lexington, Massachusetts, which serves as the Company’s headquarters.

The 2008 Lease Agreement provides for escalating rent payments over the seven-year lease term. The Company is accounting for the corresponding rent differential as deferred rent, and is recognizing rental expense on a straight-line basis, beginning in February 2008.

The 2008 Lease Agreement included certain lease incentives in the form of two tenant improvement allowances. The first tenant improvement allowance of $3.7 million was for general improvements to the facility’s office space and HVAC systems. The Company was required to manage the improvements including making payment for them up front, and then submitting requests to the landlord for reimbursement. Once approved, the landlord reimbursed the Company. The Company was not required to repay the landlord for any of this allowance. The Company has capitalized the improvements made with the first tenant improvement allowance into fixed assets, and has established a liability in the accompanying balance sheet under the caption deferred lease incentive. The Company is amortizing the deferred lease incentive and amortizing the related fixed assets over the lease term.

The second tenant improvement allowance of $2.3 million was for improvements to be made to build laboratory space to the Company’s specifications. The second tenant improvement allowance is similar to the first, except that the Company must repay the reimbursements to the landlord monthly over the lease term, plus interest at a 10% annual rate. The amount to be repaid to the landlord, exclusive of interest, is reflected in the accompanying balance sheet and table below as “leasehold improvement loan.” The Company has capitalized the improvements made with the second tenant improvement allowance into fixed assets, and is amortizing them over the lease term.

 

 

 

F-25


Table of Contents

Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The future minimum lease payments (including base rent obligations and repayment of the leasehold improvement loan, including interest accrued at 10% per annum) under the 2008 Lease Agreement is as follows (in thousands):

 

       Base rent
obligations
     Repayment of
leasehold
improvement
loan (1)
    Total
obligations
 

At September 30, 2013 (unaudited):

       

2013

   $ 337       $ 116      $ 453   

2014

     1,361         463        1,824   

2015

     1,045         347        1,392   
  

 

 

    

 

 

   

 

 

 
   $ 2,743         926      $ 3,669   
  

 

 

      

 

 

 

Less amounts representing interest

        (262  

Less leasehold improvement loan, current portion

        (332  
     

 

 

   

Leasehold improvement loan, net of current portion

      $ 332     
     

 

 

   

 

(1)   Includes interest accrued at 10% per annum.

Rent expense was $0.7 million for the year ended December 31, 2011, $0.7 million for the year ended December 31, 2012, $0.6 million for the nine months ended September 30, 2012 and $0.6 million for the nine months ended September 30, 2013.

Employment agreements

Five of the Company’s employees are covered by employment agreements, covering salary, certain benefits and incentive compensation. Under these agreements, the executives could be entitled to severance pay up to 12 months of base salary, benefits continuation for 12 months, acceleration of stock option vesting and additional payments to cover tax liabilities in certain circumstances.

10.    Collaboration agreements

Celgene

In April 2013, the Company entered into a master development and license agreement (the Celgene Agreement) with Celgene Corporation and Celgene International Sàrl (Celgene), which is primarily focused on the research, development and commercialization of deuterated compounds that are deuterated analogs of certain non-deuterated compounds targeting cancer or inflammation. The collaboration will initially focus on one program, but has the potential to encompass up to four programs.

For the initial program, the Company granted Celgene an exclusive worldwide license to develop, manufacture and commercialize products that contain deuterated analogs of a selected non-deuterated compound and several close chemical derivatives thereof. The Company further granted Celgene licenses with respect to two additional programs and an option with respect to a third additional program. The Company and Celgene have agreed on the non-deuterated compounds for each of the two additional license programs. For the option program, Celgene may select the non-deuterated compound at a later time, which, unless otherwise agreed by the Company, will be limited to a compound for which Celgene possesses exclusive rights. With respect to the two additional license programs, on the effective date of the Celgene

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Agreement the Company granted Celgene an exclusive worldwide license to develop, manufacture and commercialize products that contain deuterated analogs of the agreed upon non-deuterated compounds. Celgene is restricted from utilizing their research, development and commercialization rights under each of the upfront licenses unless, within seven years of the effective date of the Celgene Agreement, Celgene pays the Company a license exercise fee. If Celgene does not elect to pay the license exercise fee during the seven year period, the license will expire. With respect to the option program, once a compound is selected, Celgene may exercise its option by paying the Company an option exercise fee within seven years of the effective date of the Celgene Agreement, and upon Celgene’s exercise of the option the Company will grant to Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the selected non-deuterated compound.

The Company is responsible, at its own expense, for conducting research and early development activities for the initial program pursuant to agreed upon development plans. This includes the completion of single and multiple ascending dose Phase 1 clinical trials and any mutually agreed upon additional Phase 1 clinical trials, as set forth in the development plan and approved by the joint steering committee (JSC) for the collaboration.

The Company does not have any obligation to conduct any research or development activities for any of the additional programs unless and until Celgene exercises its rights with respect to such program and pays us the applicable exercise fee. If Celgene exercises its rights with respect to any additional program and pays the Company the applicable exercise fee, the Company is responsible, at its own expense, for conducting research and development activities for such program pursuant to agreed upon development plans until the completion of Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis. In addition, if Celgene exercises its rights with respect to the option program and pays the Company the applicable option exercise fee, the Company is responsible for seeking to generate a deuterated compound for clinical development in the selected option program. Oversight of the development program for each program under the Celgene Agreement is guided by separate JSCs.

Celgene is solely responsible for all research, development and commercialization costs with respect to the initial program beyond the Phase 1 clinical trials that the Company conducts. If Celgene exercises its rights with respect to any additional program, Celgene will be solely responsible for all research, development and commercialization costs for such program following the completion of the first Phase 1 clinical trial for such program.

Following its assumption of responsibility for development costs of a product candidate, Celgene is required to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize the product candidate until such time, if any, as Celgene determines in its reasonable discretion based on comparative metrics that the product candidate does not represent a substantial improvement over the corresponding non-deuterated compound.

Under the terms of the Celgene Agreement, the Company received a $35.0 million non-refundable upfront payment from Celgene. In addition, the Company is eligible to earn up to $23.0 million in development milestone payments, up to $247.5 million in regulatory milestone payments and up to $50.0 million in sales-based milestone payments related to products within the initial program. The next milestone payment the Company might be entitled to receive under the initial program is $8.0 million related to the completion of a Phase 1 clinical trial. If Celgene exercises its rights with respect to either of the two additional license programs, the Company will receive a license exercise fee of $30.0 million and will also be eligible to receive up to $23.0 million in development milestone payments and up to $247.5

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

million in regulatory milestone payments for such program. With respect to one of the additional license programs, the Company is eligible to receive up to $100.0 million in sales-based milestone payments based on net sales of products, and with respect to the other additional license program, the Company is eligible to receive up to $50.0 million in sales-based milestone payments based on net sales of products. If Celgene exercises its option with respect to the option program, the Company will receive an option exercise fee of $10.0 million and will be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments.

In addition, with respect to each program, Celgene is required to pay the Company royalties on net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20%, on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the latest of expiration of specified patent coverage, expiration of regulatory exclusivity or 10 years following commercial launch. The royalty rate is reduced on a country-by-country basis during any period within the royalty term when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country.

During the term of the Celgene Agreement, the Company may not research, develop or commercialize, or grant or offer to grant a third party a license to research, develop or commercialize, any licensed product, and with respect to the option program, certain products that Celgene has the right to select as an option product, other than pursuant to the Celgene Agreement.

The Celgene Agreement will expire upon the later of the seventh anniversary of the effective date of the Celgene Agreement and the expiration of all royalty terms with respect to each licensed product in each country. Celgene has the right to terminate the Celgene Agreement, in whole or only with respect to a particular licensed product, upon 60 days prior written notice to the Company. The Celgene Agreement may also be terminated by the Company in the event of an uncured material breach by Celgene. If the Celgene Agreement is terminated for any reason, the licenses granted by the Company to Celgene will terminate and specified rights to licensed products will revert to the Company. There are no cancellation, termination or refund provisions in this arrangement that contain material financial consequences to the Company.

The Company’s arrangement with Celgene contains the following deliverables: (i) an exclusive worldwide license to develop, manufacture and commercialize deuterated analogs of a selected compound related to the initial program (the License Deliverable), (ii) obligations to perform research and development services associated with the initial program (the R&D Services Deliverable), (iii) obligation to supply preclinical and clinical trial material related to the initial program (the Supply Deliverable), (iv) participation on the JSC during the term of the initial program (the JSC Deliverable), (v) significant and incremental discount related to the first additional license program for which the non-deuterated compound has been selected (the First Discount Deliverable) and (vi) significant and incremental discount related to the second additional license program for which the non-deuterated compound has been selected (the Second Discount Deliverable).

As a result of the restrictions placed on the two additional license programs that preclude Celgene from exercising its rights under the respective licenses without the payment of a significant license exercise fee, for accounting purposes the Company concluded that it had effectively provided Celgene an option to obtain licenses to those programs. The Company has determined that the rights with respect to the three additional programs are substantive options. Celgene is not contractually obligated to exercise its rights and there is a significant fee that is due upon exercise of the rights. Therefore, it is uncertain as to

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

whether Celgene will decide to exercise its rights for any of the three additional programs. Consequently, the Company is at risk with regard to whether Celgene will exercise its rights. Accordingly, none of the licenses with respect to the three additional programs are considered deliverables at the inception of the arrangement and the associated license right or option fees are not included in the allocable arrangement consideration. Similarly, the Company has determined that for each additional program the potential obligations to perform research and development services, supply preclinical and clinical trial material and participate on the respective JSC are contingent upon Celgene exercising its rights with respect to such programs. Therefore, consistent with the treatment of the associated license right or option, the Company’s related potential obligations are also not considered deliverables at the outset of the arrangement.

As it relates solely to the option program for which the non-deuterated compound has not yet been selected, the Company has determined that such option is not priced at a significant and incremental discount as the option fee approximates the best estimate of selling price of the underlying license. As it relates to the two additional programs for which the non-deuterated compound has been selected, the Company concluded the respective license exercise fee was less than the aggregate BESP for the respective license and related obligations to perform research and development services, supply preclinical and clinical trial materials and participate on the JSC. Accordingly, pursuant to the provisions of ASC 605-25, the Company concluded that the license exercise fees were priced at a significant and incremental discount. As a result, the Company has concluded for accounting purposes that the discounts for these two additional programs represent separate elements in the arrangement at inception.

The Company has concluded that the License Deliverable has standalone value because Celgene can fully utilize the underlying license for its intended purpose without receipt of the remaining deliverables in the arrangement. This conclusion considered Celgene’s internal product development expertise and commercialization capabilities that enable it to use the License Deliverable for its intended purpose without the involvement of the Company. Moreover, the rights conveyed by the Company to Celgene in connection with the License Deliverable include the contractual right to sublicense. Similarly, all of the remaining deliverables were deemed to have standalone value upon delivery. Factors considered in this determination included, among other things, whether any other vendors sell the items separately and if the customer could use the item for its intended purpose without the receipt of the remaining deliverables. Additionally, there are no refund provisions in the Celgene Agreement. Accordingly, each deliverable included in the Celgene arrangement qualifies as a separate unit of accounting.

The Company determined that neither VSOE of selling price nor TPE of selling price was available for any of the units of accounting identified at the inception of the arrangement with Celgene. Accordingly, the selling price of each unit of accounting was determined based on management’s BESP. The Company developed BESP for the License Deliverable in reference to its other licensing transactions, applicable market conditions, relevant entity-specific factors, and those factors contemplated in negotiating the agreement, including territories covered by the license, the stage of development and market potential of the product candidate, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant to the license and the Company’s pricing practices and pricing objectives. The Company developed BESP for the R&D Services Deliverable, the Supply Deliverable and the JSC Deliverable based on the nature of the services to be performed and estimates of the associated effort and cost of the services adjusted for a reasonable profit margin such that they represented estimated market rates for similar services sold on a standalone basis. The Company developed BESP for the First Discount Deliverable and the Second Discount Deliverable based on the estimated value of the associated in-the-money license right. In developing such estimate, the Company

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

considered the period to exercise the license right, an appropriate discount rate and the likelihood that a market participant who was entitled to the discount would exercise the license right.

Allocable arrangement consideration at inception is limited to the $35.0 million non-refundable upfront payment. Total allocable arrangement consideration was allocated among the separate units of accounting using the relative selling price method as follows: (i) $17.0 million to the License Deliverable; (ii) $8.7 million to the R&D Services Deliverable; (iii) $3.2 million to the Supply Deliverable; (iv) $0.1 million to the JSC Deliverable; (v) $3.0 million to the First Discount Deliverable; and (vi) $3.0 million to the Second Discount Deliverable.

The arrangement consideration allocated to the License Deliverable was recognized upon delivery. Amounts allocated to the R&D Services Deliverable and Supply Deliverable are recognized under the proportional performance method over the expected period of performance, or 39 months. The amount allocated to the JSC Deliverable is recognized ratably over the expected period of performance, or 39 months. Amounts allocated to the First Discount Deliverable and the Second Discount Deliverable are deferred and will be recognized at the earlier of when the associated license rights are exercised and licenses are delivered or upon lapsing of the underlying right, if the respective right expires unexercised. The Company reassesses the estimated periods of performance for each unit of accounting at the end of each reporting period. The Company will recognize royalty revenue in the period of sale of the related licensed product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable assuming all other revenue recognition criteria are met.

In the event Celgene exercises its rights with respect to either of the two additional license programs, the license exercise fee would be considered a license fee and would be allocated among the license and the related R&D Services Deliverable, Supply Deliverable, and JSC Deliverable using the relative selling price method. The revenue recognition for the amounts allocated to the various deliverables would be consistent with the revenue recognition described in the previous paragraphs.

The Company has evaluated all of the milestones that may be received in connection with the Celgene arrangement. All development and regulatory milestones are considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All sales-based milestones will be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, the Company may not receive any milestone or royalty payments from Celgene.

During the nine months ended September 30, 2013, the Company recognized revenue of $17.0 million upon delivery of the license deliverable, $0.2 million for the R&D Services Deliverable and $0.2 million for the Supply Deliverable. The revenue is classified as license and research and development revenue in the accompanying consolidated statement of operations and comprehensive loss. As of September 30, 2013, there is $17.6 million of deferred revenue related to the Company’s collaboration with Celgene, $3.9 million of which is classified as current and $13.7 million of which is classified as long-term, in the accompanying consolidated balance sheet.

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Jazz Pharmaceuticals

In February 2013, the Company signed a development and license agreement with Jazz Pharmaceuticals, Inc. (Jazz Pharmaceuticals) that provides Jazz Pharmaceuticals worldwide rights to develop and commercialize the Company’s deuterated sodium oxybate (D-SXB) compounds (the Jazz Pharmaceuticals Agreement). Jazz Pharmaceuticals has principal responsibility for ongoing development activities. Pursuant to the terms of the license agreement, Jazz Pharmaceuticals has the option to require the Company to provide development support services through a single Phase 1 clinical trial. If Jazz Pharmaceuticals exercises its option, the Company will receive payment for any development support services provided and will be reimbursed for all external costs related to the development support services including preclinical, manufacturing, regulatory and clinical costs.

Under the terms of the Jazz Pharmaceuticals Agreement, the Company received a $4.0 million non-refundable upfront payment. In addition, the Company is eligible to earn up to $8.0 million in development milestone payments, up to $35.0 million in regulatory milestone payments and up to $70.0 million in sales-based milestone payments. The next milestone payment that the Company might be entitled to receive under this agreement is $4.0 million related to the completion of a Phase 1 clinical trial.

In addition, Jazz Pharmaceuticals is required to pay the Company royalties at defined percentages ranging from the mid-single digits to low double digits below 20%, on a country-by-country and licensed product-by-licensed product basis, on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the later of the expiration of specified patent coverage or 10 years following commercial launch. The royalty rate is lowered on a country-by-country basis, under certain circumstances as specified in the agreement.

The Jazz Pharmaceuticals Agreement will expire on a licensed product-by-licensed product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country. Jazz Pharmaceuticals may terminate the agreement, on a country-by-country basis or in its entirety, upon 90 days prior written notice. The Company may terminate the agreement upon written notice to Jazz Pharmaceuticals if Jazz Pharmaceuticals decides to permanently cease development and commercialization of all licensed products. The Company may also terminate the agreement if Jazz Pharmaceuticals has abandoned development or commercialization activities for licensed products and following notice from the Company does not resume development or commercialization activities. The agreement may also be terminated by either party in the event of an uncured material breach by the other party. If the agreement is terminated for any reason, the licenses granted by the Company to Jazz Pharmaceuticals with respect to D-SXB products will terminate and specified rights to licensed products will revert to the Company. There are no cancellation, termination or refund provisions in this arrangement that contain material financial consequences to the Company.

The Company determined that there were three deliverables under the Jazz Pharmaceuticals Agreement: (i) an exclusive, royalty-bearing sub-licensable worldwide license to develop and commercialize D-SXB compounds (the License Deliverable), (ii) participation on a joint steering committee (the JSC Deliverable) and (iii) a deliverable to direct external patent activities and bear a portion of the external patent fees (the Patent Support Deliverable).

The development support services were evaluated at the inception of the arrangement and determined to be a substantive option as the Company is not obligated to deliver services unless and until such time as Jazz Pharmaceuticals elects to exercise the option and the consideration for the development support

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

services is not priced at a significant and incremental discount. The nature of the development support services is such that they are not essential to Jazz Pharmaceuticals’ use of the License Deliverable as Jazz Pharmaceuticals could perform the services themselves or obtain them from another service provider, if so desired. Therefore, the Company concluded that the License Deliverable had value to Jazz Pharmaceuticals on a standalone basis and was therefore separable from the option to procure development support services.

The Company has concluded that the License Deliverable has standalone value upon delivery because Jazz Pharmaceuticals can fully utilize the underlying license for its intended purpose without the receipt of other deliverables in the arrangement. This conclusion considered Jazz Pharmaceuticals’ internal product development expertise that enables it to use the License Deliverable for its intended purposes without the involvement of the Company or the receipt of the other deliverables. Moreover, the rights conveyed by the Company to Jazz Pharmaceuticals in connection with the License Deliverable include the contractual right to sublicense. Similarly, all of the remaining deliverables were deemed to have standalone value based on their nature. Factors considered in this determination included, among other things, whether any other vendors sell the items separately and if the customer could use the item for its intended purpose without the receipt of the remaining deliverables. Additionally, there are no refund provisions in the Jazz Pharmaceuticals Agreement. Accordingly, each deliverable included in the Jazz Pharmaceuticals Agreement qualifies as a separate unit of accounting.

The Company allocated the non-refundable upfront consideration of $4.0 million among the deliverables based on management’s best estimate of selling price of each deliverable using the relative selling price method. The Company did not have VSOE or TPE of selling price for such deliverables. The Company’s BESP for the License Deliverable considered the market opportunity for the development and commercialization of D-SXB compounds, the probability of successfully developing and commercializing such compounds, the remaining development costs to develop such compounds, and the estimated time to commercialization. The Company’s analysis included the following market conditions and entity-specific factors: (a) the specific rights provided under the license deliverable, (b) the potential indications pursuant to the license, (c) the relevant territories for the license, (d) the development risk, (e) the market size, (f) the expected product life assuming commercialization and (g) the competitive environment. The Company developed BESP for the JSC Deliverable and Patent Support Deliverable based on the nature of the services to be performed and estimates of the associated effort and cost of the services adjusted for a reasonable profit margin such that they represented estimated market rates for similar services sold on a standalone basis.

The Company allocated arrangement consideration of $3.7 million to the License Deliverable, $0.1 million to the JSC Deliverable and $0.2 million to the Patent Support Deliverable. The Company recognized the arrangement consideration allocated to the License Deliverable upon delivery and will recognize revenue related to the JSC Deliverable and the Patent Support Deliverable over the respective periods of performance which is estimated to be 46 months.

The Company has evaluated all of the milestones that may be received in connection with the Jazz Pharmaceuticals Agreement. All development and regulatory milestones are considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All sales-based milestones will be accounted for in the same manner as royalties and

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

For the nine months ended September 30, 2013, the Company recognized revenue of $3.7 million upon delivery of the License Deliverable, approximately $12 thousand related to the JSC Deliverable and approximately $24 thousand related to the Patent Support Deliverable.

For the nine months ended September 30, 2013, the Company recognized revenue of $0.5 million related to the performance of development support services and revenue of approximately $0.1 million for reimbursements of travel and intellectual property expenses, the cost of which is recorded within general and administrative expenses.

Avanir

In February 2012, the Company signed a license agreement (the Avanir Agreement) with Avanir Pharmaceuticals, Inc. (Avanir) that provides Avanir worldwide rights to develop and commercialize Concert’s deuterated dextromethorphan (D-DM). The agreement includes the rights to multiple D-DM compounds. Avanir will have overall responsibility for research, development and commercialization of D-DM. Avanir has the option to require the Company to provide manufacturing services through a first IND filing. If Avanir exercises its option, the Company will receive payment for any manufacturing services provided and will be reimbursed for all external costs related to the manufacturing services.

Under the terms of the Avanir Agreement, the Company received a $2.0 million non-refundable upfront payment. In the nine months ended September 30, 2013, the Company recognized as revenue a $2.0 million milestone payment received from Avanir based on positive data from Avanir’s Phase 1 clinical trial of AVP-786. AVP-786 includes one of the D-DM analogs licensed to Avanir. In addition, the Company is eligible to earn up to $4.0 million in development milestone payments, up to $37.0 million in regulatory milestone payments and up to $125.0 million in sales-based milestone payments. The next potential milestone the Company might be entitled to receive under the Avanir Agreement is $2.0 million for initiation of dosing in a Phase 2 or Phase 3 clinical trial study for AVP-786.

Avanir also is required to pay the Company royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on worldwide net product sales of licensed products. The royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the later of expiration of specified patent coverage or 10 years following commercial launch. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim, covering the licensed product in the particular country.

The Agreement will expire on a licensed product-by-licensed product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country. Following the earlier of the completion of a specified Phase 2 clinical trial milestone or the second anniversary of the effective date of the agreement, Avanir has the right to terminate the agreement upon 90 days prior written notice to us. We may terminate the agreement if Avanir ceases to develop or commercialize licensed products and does not recommence development or commercialization efforts following our notice to Avanir. The agreement may also be terminated by either Avanir or us in the event of an uncured material breach by the other party. If the agreement is terminated for any reason, the licenses granted by us to Avanir will terminate subject to certain specified conditions.

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

The Company determined that the deliverables under the Avanir Agreement were the exclusive, royalty-bearing sub-licensable license to D-DM delivered at the inception of the arrangement as well as participation on a joint steering committee through a first IND filing.

Pursuant to the terms of the agreement, the Company is only required to participate in the joint steering committee through a specified event. Accordingly, the Company estimated that its participation on the joint steering committee would not extend more than two years from the date the agreement was executed and therefore concluded the estimated selling price of this deliverable was insignificant.

The manufacturing services were evaluated and determined to be a substantive option as the Company is not obligated to deliver manufacturing services unless and until such time as Avanir elects to exercise the option and the consideration for the manufacturing services is not priced at a significant and incremental discount. The nature of the manufacturing services is such that they are not essential to the D-DM license and Avanir could perform the manufacturing services themselves or obtain them from another service provider, if so desired. Therefore, the Company concluded that the D-DM license had standalone value to Avanir and was separable from the option to procure manufacturing services as the D-DM license is sub licensable, there are no restrictions as to Avanir’s use of the license and Avanir has the requisite scientific expertise in the central nervous system disorder field to utilize the D-DM license for its intended purpose without the involvement of the Company.

The Company has concluded that the license deliverable has standalone value upon delivery because Avanir can fully utilize the underlying license for its intended purpose without the receipt of the other deliverables in the arrangement. This conclusion considered Avanir’s internal product development expertise that enables it to use the license deliverable for its intended purposes without the involvement of the Company or the receipt of the other deliverables. Moreover, the rights conveyed by the Company to Avanir in connection with the license deliverable include the contractual right to sublicense.

The Company allocated arrangement consideration of $2.0 million to the license and an insignificant amount to the Company’s participation on the joint steering committee. Accordingly, the Company recognized the $2.0 million non-refundable upfront fee as revenue upon delivery of the D-DM license during the nine months ended September 30, 2012 (unaudited).

The Company has evaluated all of the milestones that may be received in connection with the Avanir license agreement. All development and regulatory milestones are considered substantive on the basis of the contingent nature of the milestone, specifically reviewing factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the milestone as well as the level of effort and investment required. Accordingly, such amounts will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. All sales-based milestones will be accounted for in the same manner as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

The Company recognized research and development revenue of $0.1 million for the performance of manufacturing services purchased at Avanir’s option and $0.1 million for reimbursement of manufacturing materials during the nine months ended September 30, 2012 (unaudited). Since June 2012, Avanir has elected to conduct all research and development activities, including manufacturing activities; however, the Company has continued to receive intellectual property cost reimbursements. The Company recognized $0.2 million for the nine months ended September 30, 2012, $0.2 million for the year ended December 31, 2012 and $0.2 million for the nine months ended September 30, 2013 within license and research and development revenue for intellectual property cost reimbursements, the cost of which is recorded within general and administrative expense.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

GSK

In May 2009, the Company entered into a Research and Development Collaboration and License Agreement (the GSK Agreement) with Glaxo Group Limited (GSK) for the development and commercialization of deuterium-containing medicines. The Company was responsible for the development of three programs through completion of proof of concept studies, two of which were identified, and for providing deuterated versions of three GSK pipeline compounds (to be selected by GSK) for GSK to develop.

Under the terms of the GSK Agreement, GSK paid the Company a non-refundable upfront cash payment of $18.3 million in June 2009. In addition, GSK purchased 6,666,667 shares of Series D Preferred Stock at a per share price of $2.50, resulting in gross proceeds to the Company of $16.7 million. The Company determined that the price of $2.50 per share included a premium of $0.58 per share over the fair value of the Series D Preferred Stock of $1.92 per share based on the results of a contemporaneous valuation. The Company concluded all of the deliverables at the inception of the arrangement should be accounted for as a single unit of accounting because neither VSOE or TPE of fair value existed for the undelivered elements. Accordingly, the entire premium paid of $3.9 million and the $18.3 million non-refundable upfront cash payment were included in deferred revenue until the third program was identified and the period of the Company’s performance obligations could be determined.

In March 2011, the Company and GSK signed an amendment to the GSK Agreement. Under this amendment GSK paid the Company a $2.75 million payment and returned all rights in the second identified program to the Company. This $2.75 million amount is subject to repayment to GSK in the event that the Company commercializes CTP-499 or if, at any time during the seven year period from the date of the amendment, the Company re-licenses or otherwise transfers the rights to the Company’s CTP-499 program to a third party at any time during the seven year period from the date of the amendment. The payment was classified as deferred revenue and will not be recognized as revenue until all repayment obligations lapse. This amendment also extended the deadlines for selection of (i) the third program for which the Company was responsible for development and (ii) deuterated versions of two GSK pipeline compounds for GSK to develop.

The Company determined that the amendment resulted in a material modification of the GSK Agreement pursuant to the provisions of ASU 2009-13, because the amendment changed the overall arrangement consideration, deliverables, and expected timing of performance by a material amount. As such, on the date of modification, the remaining activities under the GSK Agreement were evaluated under ASC 605-25 (as amended by ASU 2009-13) to determine if they represented a multiple element revenue arrangement. The Company determined that the GSK Agreement, as amended, included the following units of accounting that remained undelivered on the date of modification:

 

Ø  

A combined unit of accounting comprised of research and development services for CTP 298 (the CTP-298 Program) and an option to license CTP-298;

 

Ø  

A combined unit of accounting comprised of an option to license a third program and related research and development services for that program (the Unselected Program); and

 

Ø  

A deliverable to provide deuterated versions of two GSK pipeline compounds (to be selected by GSK) for GSK to develop (the Research Programs).

The Company combined the delivered options and related research and development services into combined units of accounting because the delivered options were determined to not have standalone value apart from the related research and development services because only the Company was capable

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

of performing such services. The Company further determined that each unit of accounting had stand-alone value from the other units of accounting. Therefore, the Company allocated the non-refundable upfront consideration of $22.2 million among the units of accounting on the date of modification based on management’s BESP of the deliverables included in each unit of accounting using the relative selling price method. The Company did not have VSOE or TPE of selling price for such deliverables. The Company’s BESP considered the market opportunity for the development and commercialization of each program, the probability of GSK selecting a third program (the Unselected Program) and successfully developing and commercializing such program, the remaining development costs for each program, and the estimated time to clinical proof of concept for each program.

The Company’s analysis included an assessment of comparable market transactions in which exclusive options were sold without related research and development services, an estimate of the internal and external costs and effort that would be required to complete proof of concept for the each program assuming market rates for full time employee services and external costs, and in the case of the Unselected Program and the Research Programs, an assessment of the probability that GSK would exercise its rights to select a compound for such deliverables and require the Company to perform the related research and development services.

The Company allocated arrangement consideration of $20.7 million to the CTP-298 Program, $1.5 million to the Unselected Program, and $37 thousand to the Research Programs. Revenue for the CTP-298 Program was to be recognized over the period of performance from the GSK Agreement effective date through the estimated delivery date of the CTP-298 option package in early 2013. Revenue for the Unselected Program and Research Program would be recognized upon selection by GSK or the lapsing of the deadline.

For the year ended December 31, 2011, the Company recognized $13.9 million of revenue related to the CTP-298 Program, including a cumulative catch up adjustment on the date of the amendment for services previously performed of $8.5 million. In addition during 2011, the Company recognized $37 thousand of revenue upon the lapsing of the Research Programs selection deadline. Also during the year ended December 31, 2011, the Company recognized milestone revenue of $4.0 million for achieving certain clinical criteria in the first-in-human clinical trial and $1.5 million for toxicology and regulatory achievements.

In first quarter of 2012, the Company received and recognized a $1.5 million milestone for opening an IND for CTP-298.

For the nine months ended September 30, 2012 (unaudited), the Company recognized the remaining deferred revenue of $6.8 million associated with the CTP-298 Program upon GSK’s exercise of its opt out right in May 2012 with respect to this program and the remaining deferred revenue of $1.5 million upon the lapsing of the Unselected Program deadline.

Other than with respect to the Company’s repayment obligation, the GSK Agreement is no longer in effect and, as a result, the Company does not expect to receive additional payments under the GSK Agreement.

11.    Sponsored research agreement

In February 2012, the Company entered into a sponsored research agreement with Fast Forward LLC (Fast Forward), the National Multiple Sclerosis Society’s subsidiary devoted to research and drug development. Under the research agreement, Fast Forward provided $0.8 million of funding for the preclinical advancement of CTP-354 (the Compound), a deuterated subtype-selective GABA A modulator

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

developed by Concert with the therapeutic potential of treating spasticity. Concert received the funding as it met certain preclinical milestones.

In certain circumstances, the Company is obligated to make milestone payments to Fast Forward not in excess of a low-single digit multiple of the funding amount. The Company will account for any milestone payments paid to Fast Forward as royalty expenses when it becomes probable that any royalties will be owed to Fast Forward. As of December 31, 2012 and September 30, 2013, it was not probable any royalties would be owed to Fast Forward.

During 2012, Concert received payments totaling $0.7 million from Fast Forward, which were recognized as revenue within license and research and development revenue in the accompanying statement of operations and comprehensive loss. The revenue recognized is commensurate with the services performed in 2012, and such payments are non-refundable as the Company has incurred costs in excess of the amounts funded.

During the nine months ended September 30, 2013 (unaudited), Concert received payments totaling $45 thousand from Fast Forward, which were recognized as revenue within license and research and development revenue in the accompanying statement of operations and comprehensive loss. The revenue recognized is commensurate with the services performed in the nine months ended September 30, 2013, and such payments are non-refundable as the Company has incurred costs in excess of the amounts funded.

12.    Loan payable and warrant to purchase redeemable securities

On December 22, 2011, the Company entered into a Loan and Security Agreement (the Loan and Security Agreement) with Hercules Technology Growth Capital, Inc. (Hercules). The Loan and Security Agreement provides for aggregate advances of up to $20 million. The advances under the Loan and Security Agreement were to be made in two tranches: (i) $7.5 million funded at closing, and (ii) up to an additional $12.5 million through March 31, 2012. The maximum amount of principal outstanding allowable under the Loan and Security Agreement is $20 million. Under the first tranche of the Loan and Security Agreement, the Company obtained an advance on December 22, 2011 totaling $7.5 million (the December 2011 Advance). Under the second tranche of the Loan and Security Agreement, the Company obtained an advance on March 29, 2012 totaling $12.5 million (the March 2012 Advance). The Company incurred $0.2 million in loan issuance costs paid directly to the lenders, which have been offset against the loan proceeds as a loan discount.

Each advance made under the Loan and Security Agreement bears interest at a variable rate of the greater of 8.5% and an amount equal to 8.5% plus the prime rate of interest minus 5.25%, provided however, that the per annum interest rate shall not exceed 11%. At September 30, 2013 and December 31, 2012, the December 2011 Advance and the March 2012 Advance had an interest rate of 8.5%. Interest-only payments are due monthly on the first day of each month beginning the month after the date of the respective advance until April 30, 2013. Then, the aggregate principal balance outstanding is payable in 30 equal monthly installments of principal and interest beginning May 1, 2013 and continuing through the maturity date on October 1, 2015.

Additionally, the advances are to be repaid in full immediately upon an event of default, as defined. The Loan and Security Agreement defines events of default, including the occurrence of an event that results in a material adverse effect upon the Company’s business operations, properties, assets or condition (financial or otherwise), its ability to perform its obligations under and in accordance with the terms of the new loan agreement, or upon the ability of the lenders to enforce any of their rights or remedies with

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

respect to such obligations, or upon the collateral under the Loan and Security Agreement or upon the liens of the lenders on such collateral or upon the priority of such liens. The Company does not believe that any events have occurred that could reasonably be deemed to have a material adverse effect. Substantially all assets of the Company are pledged as collateral, with the exception of intellectual property, which is the subject of a negative pledge under the Loan and Security Agreement. The lenders’ security interest in the collateral is a first priority security interest. There are no financial covenants associated with the Loan and Security Agreement.

As of September 30, 2013, the future minimum payments due under the Loan and Security Agreement are as follows (in thousands):

 

       Year      Minimum
Payments
 
     2013       $ 2,227   
     2014         8,908   
     2015         7,463   
     

 

 

 
        18,598   

Less amounts representing interest

        (1,631
     

 

 

 

Present value of minimum payments

        16,967   

Less discount

        (196

Less current portion

        (7,651
     

 

 

 

Loan payable net of current portion and unamortized discount

      $ 9,120   
     

 

 

 

In connection with the Loan and Security Agreement, the Company granted Hercules a warrant (the Warrant) to purchase up to 200,000 shares of Series C Preferred Stock at an exercise price of $2.50 per share which vested immediately upon the December 2011 Advance. Upon the draw of the March 2012 Advance, the warrant became exercisable for an additional 200,000 shares of Series C Preferred Stock at an exercise price of $2.50 per share.

Pursuant to ASC Topic 480, Distinguishing Liabilities from Equity , the Warrant is classified as a liability and is re-measured to the-then current value at each balance sheet date. The following table sets forth a summary of changes in the fair value of the Warrant which represents a recurring measurement that is classified within Level 3 of the fair value hierarchy wherein fair value is estimated using significant unobservable inputs (in thousands):

 

     Year ended December 31,      Nine months ended September 30,  
               2011              2012              2012              2013  
                   (unaudited)  

Beginning balance

   $       $ 168       $ 168       $ 459   

Change in fair value

     168         291         218         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 168       $ 459       $ 386       $ 489   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Warrant expires on the earlier of: (i) ten years from the effective date of the Loan and Security Agreement or (ii) five years after the closing of an initial public offering of the Company’s common stock.

The Company measured the fair value of the Warrant as of December 31, 2011 using the Black-Scholes option pricing method. The Company measured the fair value of the Warrant as of September 30, 2012, December 31, 2012 and September 30, 2013 using a hybrid method that is consistent with the manner in

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

which the Company estimated the fair value of its common stock on those dates. Using the hybrid method, the Company used the Black-Scholes option pricing method to value the Warrant based on the results of the initial public offering scenarios and the option pricing method to value the Warrant based on the results of the other assumed scenarios (sale or liquidation). The results of those valuations were then weighted consistent with the weightings used in the Company’s common stock valuation to determine the warrant fair value. The significant assumptions used in estimating the fair value of the Warrant include the exercise price, volatility of the stock underlying the warrant, risk-free interest rate, estimated fair value of the preferred stock underlying the warrant, and the estimated life of the warrant.

Where the fair value of the Warrant was estimated using the Black-Scholes option pricing model, the Company used the following weighted-average assumptions:

 

     Year ended December 31,     Nine months ended September 30,  
               2011             2012             2012             2013  
                 (unaudited)  

Fair value of underlying instrument

   $ 0.73      $ 1.15      $ 1.15      $ 1.18   

Expected volatility

     70     70     70     70

Expected term (in years)

     10.0        7.9        7.9        5.7   

Risk-free interest rate

     2.0     0.95     0.95     1.4

Expected dividend yield

                

Fair value

The Company estimated the fair value of its shares of Series C Preferred Stock as of September 30, 2012 (unaudited), December 31, 2012 and September 30, 2013 (unaudited), using a hybrid approach based on a probability-weighted average expected return method and the option pricing method. The Company estimated the fair value of its shares of Series C Preferred Stock as of December 31, 2011 using the probability-weighted expected return method.

Expected volatility

The Company estimated the expected volatility based on actual historical volatility of the stock price of similar companies with publicly-traded equity securities. The Company calculated the historical volatility of the selected companies by using daily closing prices over a period of the expected term of the associated award. The companies were selected based on their enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the associated award.

Expected term

The Company based the expected term on the actual remaining contractual term as of each respective measurement date.

Risk-free interest rate

The Company estimated the risk-free interest rate in reference to the yield on U.S. Treasury securities with a maturity date commensurate with the expected term of the Warrant.

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Expected dividend yield

The Company estimated the expected dividend yield based on consideration of its historical dividend experience and future dividend expectations. The Company has not historically declared or paid dividends to stockholders. Moreover, it does not intend to pay dividends in the future, but instead expects to retain any earnings to invest in the continued growth of the business. Accordingly, the Company assumed an expected dividend yield of 0.0%.

13.    Related-party transactions

For the year ended December 31, 2012, the Company paid a member of the board of directors $12 thousand in fees for service on the Company’s Product Advisory Board. These fees were recognized as research and development expense.

14.    401(k) retirement plan

In January 2008, the Company established the Concert Pharmaceuticals 401(k) Retirement Plan (the 401(k) Plan) in which substantially all of its permanent employees are eligible to participate to contribute a percentage of base wages up to an amount not to exceed an annual statutory maximum. The Company is required to match 50% of the first 6% of an employee’s contributions subject to statutory limits.

The Company made matching contributions under the 401(k) Plan of $0.2 million for the year ended December 31, 2011, $0.2 million for the year ended December 31, 2012, $0.2 million for the nine months ended September 30, 2012 (unaudited) and $0.2 million for the nine months ended September 30, 2013 (unaudited).

15.    Unaudited pro forma earnings per share

On November 1, 2013, the Company’s board of directors authorized management to confidentially submit a draft registration statement to the SEC for the Company to sell shares of its common stock to the public. The unaudited pro forma basic and diluted loss per share applicable to common stockholders for the year ended December 31, 2012 and the nine months ended September 30, 2013 give effect to the automatic conversion of all shares of redeemable convertible preferred stock to common stock in the event of an initial public offering by treating all shares of redeemable convertible preferred stock as if they had been converted to common stock at the beginning of the period presented. Accordingly, the pro forma basic and diluted loss per share applicable to common stockholders does not include the effects of the accretion of redeemable convertible preferred stock to redemption value. Additionally, the gains (losses) associated with the changes in the fair value of the warrants to purchase redeemable convertible preferred stock have been excluded from the determination of net loss as these re-measurements would not be required when the warrants to purchase shares of preferred stock becomes a warrant to purchase common stock. Shares to be sold in the offering are excluded from the unaudited pro forma basic and diluted loss per share applicable to common stockholders calculations.

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 is unaudited

 

Unaudited pro forma loss per share applicable to common stockholders are computed as follows (in thousands):

 

       Year ended
December 31,
2012
    

Nine months

ended
September 30, 2013

 

Net loss

   $ (20,444)       $ (141)   

Add back: Re-measurement of warrant to purchase redeemable convertible preferred stock

     291         30   
  

 

 

    

 

 

 

Net loss applicable to common stockholders- basic and diluted

   $ (20,153)       $ (111)   
  

 

 

    

 

 

 

Pro forma weighted average common shares outstanding:

     

Weighted average common shares outstanding

     1,290         1,291   

Adjustment for assumed conversion of redeemable convertible preferred stock

     9,920         9,920   
  

 

 

    

 

 

 

Pro forma weighted average common shares outstanding- basic and diluted

     11,210         11,211   
  

 

 

    

 

 

 

Pro forma basic and diluted loss per share applicable to common stockholders

   $ (1.80)       $ (0.01)   
  

 

 

    

 

 

 

The following common stock equivalents were excluded from the calculation of pro forma diluted loss per share applicable to common stockholders because their inclusion would have been antidilutive.

 

      

Year ended

December 31,

2012

    

Nine months

ended

September 30, 2013

 

Stock options

     1,960         2,009   

Warrant

     71         71   

16.    Subsequent events

The Company has completed an evaluation of all subsequent events after the audited balance sheet date of December 31, 2012 through November 5, 2013 and the unaudited balance sheet date of September 30, 2013 through December 10, 2013, the date the respective financial statements were available to be issued, and through January 31, 2014, as it relates to the matters described below, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of December 31, 2012 and September 30, 2013, and events which occurred subsequently but were not recognized in the financial statements. The Company has concluded that no subsequent events have occurred that require disclosure, except as follows:

In connection with preparing for its initial public offering:

The Company’s Board of Directors and stockholders approved an amendment of the Company’s certificate of incorporation to, among other things, change the definition of a qualified public offering to remove the per share price requirement and provide that mandatory conversion will occur upon the closing of a firm commitment underwritten public offering of common stock with gross proceeds to the Company of not less than $30 million. The amendment became effective on January 29, 2014.

 

 

 

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Concert Pharmaceuticals, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Information as of September 30, 2013 and for the six months ended September 30, 2012 and 2013 is unaudited

 

The Company’s Board of Directors and stockholders approved a 1-for-5.65 reverse stock split of the Company’s common stock. The reverse stock split became effective on January 29, 2014. All share and per share amounts in the consolidated financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

The Company’s board of directors adopted and the Company’s stockholders approved the 2014 stock incentive plan (“2014 Plan”), which will become effective on the date that is immediately prior to the date of effectiveness of the registration statement on Form S-1 for the Company’s initial public offering. The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company’s employees, officers, directors and consultants and advisors are eligible to receive awards under the 2014 Plan.

 

 

 

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LOGO

Until                     , 2014, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


Table of Contents

              

 

 

Part II

Information not required in prospectus

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table indicates the expenses to be incurred in connection with this offering described in this Registration Statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the Securities and Exchange Commission registration fee and the FINRA filing fee.

 

       Amount  

Securities and Exchange Commission registration fee

   $ 10,368   

FINRA filing fee

     12,575   

NASDAQ Global Market listing fee

     125,000   

Accountants’ fees and expenses

     800,000   

Legal fees and expenses

     1,750,000   

Transfer agent’s fees and expenses

     12,500   

Printing and engraving expenses

     350,000   

Miscellaneous

     39,557   
  

 

 

 

Total Expenses

   $ 3,100,000   
  

 

 

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Upon the completion of this offering, our certificate of incorporation will provide that none of our directors shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as director, notwithstanding any provision of law imposing such liability, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty.

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, in any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Upon the completion of this offering, our certificate of incorporation will provide that we will indemnify each person who was or is a party or threatened to be made a party to or is involved in any threatened,

 

 

 

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pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director or officer of Concert Pharmaceuticals, or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust or other enterprise to the fullest extent permitted by the Delaware General Corporation Law. Upon the completion of this offering, our certificate of incorporation will provide that expenses must be advanced to these indemnitees under certain circumstances.

The indemnification provisions contained in our certificate of incorporation that will be effective as of the closing date of this offering are not exclusive. In addition, we have entered into indemnification agreements with each of our directors and officers. These indemnification agreements may require us, among other things, to indemnify our directors and executive officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

In addition, we maintain standard policies of insurance under which coverage is provided to our directors and officers against losses arising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law. In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933 against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Set forth below is information regarding shares of common stock and preferred stock issued, and options and warrants granted, by us within the past three years that were not registered under the Securities Act of 1933, as amended, or the Securities Act. Included is the consideration, if any, we received for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

(a) Stock Option Grants

Between January 13, 2011 and February 3, 2014 we granted options to purchase an aggregate of 623,435 shares of common stock, with exercise prices ranging from $2.88 to $3.79 per share, to employees, directors and consultants pursuant to our Amended and Restated 2006 Stock Option and Grant Plan. Between January 13, 2011 and February 3, 2014, we issued an aggregate of 52,800 shares of common stock upon the exercise of options for aggregate consideration of $151,668.

The stock options and the common stock issuable upon the exercise of such options as described in this section (a) of Item 15 were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

(b) Warrant Grants

On December 22, 2011, we issued a warrant to purchase an aggregate of 200,000 shares of Series C preferred stock at a price of $2.50 per share to Hercules. On March 29, 2012, this warrant became exercisable for an additional 200,000 shares of Series C preferred stock at a price of $2.50 per share.

The securities described in this section (b) of Item 15 were issued to Hercules in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

 

 

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All of the securities described in paragraphs (a) and (b) of this Item 15 are deemed restricted securities for purposes of the Securities Act. All of the certificates representing such securities included appropriate legends setting forth that the securities have not been registered and the applicable restrictions on transfer.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The exhibits to the registration statement are listed in the Exhibit Index attached hereto and incorporated by reference herein.

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(c) The undersigned registrant hereby undertakes that:

 

Ø  

For purposes of determining any liability under the Securities Act of 1933, 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.

 

Ø  

For the purpose of determining any liability under the Securities Act of 1933, 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, the registrant has duly caused this Amendment No. 1 registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Lexington, Commonwealth of Massachusetts, on the 3 rd day of February, 2014.

 

  CONCERT PHARMACEUTICALS, INC.
By:    

/s/ Roger D. Tung

 

Roger D. Tung, Ph.D.

President and Chief Executive Officer

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/ Roger D. Tung

Roger D. Tung, Ph.D.

   Director, President and Chief Executive Officer (Principal Executive Officer)   February 3, 2014

 

/s/ Ryan Daws

Ryan Daws

  

Chief Financial Officer

(Principal Financial Officer)

  February 3, 2014

 

/s/ Pauline McGowan

Pauline McGowan

   Vice President, Finance and Corporate Controller (Principal Accounting Officer)   February 3, 2014

 

*

Richard H. Aldrich

   Chairman   February 3, 2014

 

*

Ronald W. Barrett, Ph.D.

   Director   February 3, 2014

 

*

John G. Freund, M.D.

   Director   February 3, 2014

 

*

Peter Barton Hutt

   Director   February 3, 2014

 

 

 

II-4


Table of Contents

Part II

 

 

Signature    Title   Date

 

*

Wilfred E. Jaeger, M.D.

   Director   February 3, 2014

 

*

Helmut M. Schühsler, Ph.D.

   Director   February 3, 2014

 

*By:

 

/s/ Roger D. Tung        

  Roger D. Tung, Ph.D.
  Attorney-in-Fact

 

 

 

II-5


Table of Contents

  

 

 

Exhibit index

 

Exhibit
number
   Description
  1.1    Underwriting Agreement
  3.1*    Fourth Amended and Restated Certificate of Incorporation of the Registrant, as amended
  3.2    Restated Certificate of Incorporation of the Registrant to be effective upon the closing of this offering
  3.3*    Bylaws of the Registrant
  3.4    Amended and Restated Bylaws of the Registrant to be effective upon the closing of this offering
  3.5    Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation of the Registrant effective January 29, 2014
  4.1    Specimen certificate evidencing shares of common stock
  5.1    Opinion of Wilmer Cutler Pickering Hale and Dorr LLP
10.1*    Third Amended and Restated Registration Rights Agreement, dated as of June 1, 2009, as amended
10.2*    Warrant to purchase shares of Series C Convertible Preferred Stock issued by the Registrant to Hercules Technology Growth Capital, Inc.
10.3*    Amended and Restated 2006 Stock Option and Grant Plan, as amended
10.4*    Form of Incentive Stock Option Agreement under 2006 Stock Option and Grant Plan
10.5*    Form of Nonstatutory Stock Option Agreement under 2006 Stock Option and Grant Plan
10.6    2014 Stock Incentive Plan
10.7    Form of Incentive Stock Option Agreement under 2014 Stock Incentive Plan
10.8    Form of Nonstatutory Stock Option Agreement under 2014 Stock Incentive Plan
10.9*    Amended and Restated Employment Agreement, dated as of January 10, 2014, by and between the Registrant and Roger Tung
10.10*    Amended and Restated Employment Agreement, dated as of January 10, 2014, by and between the Registrant and Nancy Stuart
10.11*    Separation Agreement, dated as of October 2, 2013, by and between the Registrant and James E. Shipley, as amended
10.12*    Amended and Restated Employment Agreement, dated as of January 10, 2014, by and between the Registrant and I. Robert Silverman
10.13*    Form of Director and Officer Indemnification Agreement by and between the Registrant and each of Roger D. Tung, Nancy Stuart, D. Ryan Daws, James E. Shipley, Ian Robert Silverman, Pauline McGowan, Richard H. Aldrich, Ronald W. Barrett, John G. Freund, Peter Barton Hutt, Wilfred E. Jaeger and Helmut M. Schühsler
10.14*    Loan and Security Agreement, dated as of December 22, 2011, between the Registrant and Hercules Technology Growth Capital, Inc.

 

 

 


Table of Contents

Exhibit index

 

 

Exhibit
number
   Description
10.15*    Lease Agreement, dated as of February 12, 2008, by and between the Registrant and One Ledgemont LLC
10.16†    Development and License Agreement, dated as of February 24, 2012, between the Registrant and Avanir Pharmaceuticals, Inc.
10.17†    Development and License Agreement, dated as of February 26, 2013, between the Registrant and Jazz Pharmaceuticals Ireland Limited
10.18†    Master Development and License Agreement, dated as of April 4, 2013, among the Registrant, Celgene International Sàrl and Celgene Corporation
10.19*    Summary of Executive Bonus Program
10.20*   

Summary of Director Compensation Program

10.21    Employment Agreement, dated as of January 16, 2014, by and between the Registrant and D. Ryan Daws
21.1*    Subsidiaries of the Registrant
23.1    Consent of Ernst & Young LLP
23.2    Consent of Wilmer Cutler Pickering Hale and Dorr LLP (included in Exhibit 5.1)
24.1*    Power of Attorney (included on signature page)

 

*   Previously filed

 

  Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.

 

 

 

Exhibit 1.1

C ONCERT P HARMACEUTICALS , I NC .

[•] Shares

Common Stock

($0.001 par value per share)

U NDERWRITING A GREEMENT

[Pricing date]


U NDERWRITING A GREEMENT

[Pricing date]

UBS Securities LLC

Wells Fargo Securities, LLC

    as Managing Underwriters

c/o UBS Securities LLC

299 Park Avenue

New York, New York 10171-0026

Ladies and Gentlemen:

Concert Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the “ Underwriters ”), for whom you are acting as representatives, an aggregate of [•] shares (the “ Firm Shares ”) of common stock, $0.001 par value per share (the “ Common Stock ”), of the Company. In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Underwriters the option to purchase from the Company up to an additional [•] shares of Common Stock (the “ Additional Shares ”). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the “ Shares .” The Shares are described in the Prospectus which is referred to below.

The Company has prepared and filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the “ Act ”), with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form S-1 (File No. 333-193335) under the Act, including a prospectus, relating to the Shares.

Except where the context otherwise requires, “ Registration Statement ,” as used herein, means the registration statement, as amended at the time of such registration statement’s effectiveness for purposes of Section 11 of the Act, as such section applies to the respective Underwriters (the “ Effective Time ”), including (i) all documents filed as a part thereof, (ii) any information contained in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, to the extent such information is deemed, pursuant to Rule 430A or Rule 430C under the Act, to be part of the registration statement at the Effective Time, and (iii) any registration statement filed to register the offer and sale of Shares pursuant to Rule 462(b) under the Act.

Except where the context otherwise requires, “ Prospectus, ” as used herein, means the final prospectus, relating to the Shares, filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act), or, if no such filing is required, the final prospectus included in the Registration Statement at the time it became effective under the Act, in each case in the form furnished by the Company to you for use by the Underwriters and by dealers in connection with the offering of the Shares.

 

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Preliminary Prospectus ,” as used herein, means each prospectus relating to the Shares that is included in the Registration Statement prior to the Effective Time.

Permitted Free Writing Prospectuses ,” as used herein, means the documents listed under the heading “Permitted Free Writing Prospectuses” on Schedule B attached hereto and each “road show” (as defined in Rule 433 under the Act), if any, related to the offering of the Shares contemplated hereby that is a “written communication” (as defined in Rule 405 under the Act) (each such road show, an “ Electronic Road Show ”). The Underwriters have not offered or sold and will not offer or sell, without the Company’s consent, any Shares by means of any “free writing prospectus” (as defined in Rule 405 under the Act) that is required to be filed by the Underwriters with the Commission pursuant to Rule 433 under the Act, other than a Permitted Free Writing Prospectus.

Covered Free Writing Prospectuses ,” as used herein, means (i) each “issuer free writing prospectus” (as defined in Rule 433(h)(1) under the Act), if any, relating to the Shares, which is not a Permitted Free Writing Prospectus and (ii) each Permitted Free Writing Prospectus.

Exempt Communication ,” as used herein, means any oral or written communication related to the offering of the Shares contemplated hereby made by the Company or any person authorized to act on behalf of the Company to one or more potential investors undertaken in reliance on Section 5(d) of the Act.

Exempt Written Communication ,” as used herein, means each Exempt Communication that is a written communication within the meaning of Rule 405 under the Act.

Permitted Exempt Written Communication ,” as used herein, means the documents listed under the heading “Permitted Exempt Written Communications” on Schedule B attached hereto.

Disclosure Package ,” as used herein, means, collectively, with the pricing information set forth under the heading “Pricing Information Provided Orally by Underwriters” on Schedule B attached hereto, the Preliminary Prospectus dated [•] and all Permitted Free Writing Prospectuses, if any, considered together.

Applicable Time ”, as used herein, means [•], New York City time, on [•].

As used in this Agreement, “business day” shall mean a day on which the New York Stock Exchange (the “ NYSE ”) is open for trading. The terms “herein,” “hereof,” “hereto,” “hereinafter” and similar terms, as used in this Agreement, shall in each case refer to this Agreement as a whole and not to any particular section, paragraph, sentence or other subdivision of this Agreement. The term “or,” as used herein, is not exclusive.

The Company has prepared and filed, in accordance with Section 12 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (collectively, the “Exchange Act”), a registration statement (as amended, the “Exchange Act Registration Statement”) on Form 8-A (File No. [•]) under the Exchange Act to register, under Section 12(b) of the Exchange Act, the class of securities consisting of the Common Stock.

 

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The Company and the Underwriters agree as follows:

1. Sale and Purchase . Upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company the number of Firm Shares set forth opposite the name of such Underwriter in Schedule A attached hereto, subject to adjustment in accordance with Section 8 hereof, in each case at a purchase price of $[•] per Share. The Company is advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine.

In addition, the Company hereby grants to the several Underwriters the option (the “ Over-Allotment Option ”) to purchase, and upon the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Underwriters shall have the right to purchase, severally and not jointly, from the Company, ratably in accordance with the number of Firm Shares to be purchased by each of them, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per Share to be paid by the Underwriters to the Company for the Firm Shares. The Over-Allotment Option may be exercised by UBS Securities LLC (“ UBS ”) and Wells Fargo Securities, LLC (“ Wells Fargo ”) on behalf of the several Underwriters at any time and from time to time on or before the thirtieth day following the date of the Prospectus, by written notice to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the Over-Allotment Option is being exercised and the date and time when the Additional Shares are to be delivered (any such date and time being herein referred to as an “ additional time of purchase ”); provided , however , that no additional time of purchase shall be earlier than the “time of purchase” (as defined below) nor earlier than the second business day after the date on which the Over-Allotment Option shall have been exercised nor later than the tenth business day after the date on which the Over-Allotment Option shall have been exercised. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment as UBS and Wells Fargo may determine to eliminate fractional shares), subject to adjustment in accordance with Section 8 hereof.

2. Payment and Delivery . Payment of the purchase price for the Firm Shares shall be made to the Company by federal funds wire transfer against delivery of the certificates for the Firm Shares to you through the facilities of The Depository Trust Company (“ DTC ”) for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on [•] (unless another time shall be agreed to by you and the Company or unless postponed in accordance with the provisions of Section 8 hereof). The time at which such payment and delivery are to be made is hereinafter sometimes called the “ time of purchase .” Electronic transfer of the Firm Shares shall be made to you at the time of purchase in such names and in such denominations as you shall specify.

 

4


Payment of the purchase price for the Additional Shares shall be made at the additional time of purchase in the same manner and at the same office and time of day as the payment for the Firm Shares. Electronic transfer of the Additional Shares shall be made to you at the additional time of purchase in such names and in such denominations as you shall specify.

Deliveries of the documents described in Section 6 hereof with respect to the purchase of the Shares shall be made at the offices of Gibson, Dunn & Crutcher LLP at 200 Park Avenue, New York, New York, at 9:00 A.M., New York City time, on the date of the closing of the purchase of the Firm Shares or the Additional Shares, as the case may be.

3. Representations and Warranties of the Company . The Company represents and warrants to and agrees with each of the Underwriters that:

(a) the Registration Statement has heretofore become effective under the Act or; with respect to any registration statement to be filed to register the offer and sale of Shares pursuant to Rule 462(b) under the Act, will be filed with the Commission and become effective under the Act no later than 10:00 P.M., New York City time, on the date of determination of the public offering price for the Shares; no stop order of the Commission preventing or suspending the use of any Preliminary Prospectus or Permitted Free Writing Prospectus, or the effectiveness of the Registration Statement, has been issued, and no proceedings for such purpose have been instituted or, to the Company’s knowledge, are contemplated by the Commission; the Exchange Act Registration Statement has become effective as provided in Section 12 of the Exchange Act;

(b) as of the Effective Time, the Registration Statement complied in all material respects with the requirements of the Act and did not at the Effective Time and, as amended or supplemented at the time of purchase and each additional time of purchase, if any, will not, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; at the time it was filed with the Commission, each Preliminary Prospectus complied in all material respects with the requirements of the Act (including, without limitation, Section 10(a) of the Act) and the Disclosure Package, as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the Prospectus will comply, as of its date, the time of purchase and each additional time of purchase, if any, in all material respects, with the requirements of the Act (including, without limitation, Section 10(a) of the Act) and, as of the date the Prospectus is filed with the Commission, the time of purchase and any additional time of purchase, if any, the Prospectus will not, as then amended or supplemented, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that the Company

 

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makes no representation or warranty in this Section 3(b) with respect to any statement contained in the Registration Statement, any Preliminary Prospectus, the Disclosure Package or the Prospectus made in reliance upon and in conformity with information concerning an Underwriter and furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in the Registration Statement, such Preliminary Prospectus, the Disclosure Package or the Prospectus;

(c) prior to the execution of this Agreement, the Company has not, directly or indirectly, offered or sold any Shares by means of any “prospectus” (within the meaning of the Act) or used any “prospectus” (within the meaning of the Act) in connection with the offer or sale of the Shares, in each case other than a Preliminary Prospectus, the Permitted Free Writing Prospectuses, if any, and the Permitted Exempt Written Communications, if any; the Company has not, directly or indirectly, prepared, used or referred to any Permitted Free Writing Prospectus except in compliance with Rules 164 and 433 under the Act; assuming that such Permitted Free Writing Prospectus is accompanied or preceded by the most recent Preliminary Prospectus that contains a price range or the Prospectus, as the case may be, and that such Permitted Free Writing Prospectus is so sent or given after the Registration Statement was filed with the Commission (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) under the Act, filed with the Commission), the sending or giving, by any Underwriter, of any Permitted Free Writing Prospectus will satisfy the provisions of Rule 164 and Rule 433 (without reliance on subsections (b), (c) and (d) of Rule 164); the Preliminary Prospectus dated [•], forming part of the Disclosure Package is a prospectus that, other than by reason of Rule 433 or Rule 431 under the Act, satisfies the requirements of Section 10 of the Act, including a price range where required by rule; neither the Company nor the Underwriters are disqualified, by reason of subsection (f) or (g) of Rule 164 under the Act, from using, in connection with the offer and sale of the Shares, “free writing prospectuses” (as defined in Rule 405 under the Act) pursuant to Rules 164 and 433 under the Act; the Company is not an “ineligible issuer” (as defined in Rule 405 under the Act) as of the eligibility determination date for purposes of Rules 164 and 433 under the Act with respect to the offering of the Shares contemplated by the Registration Statement, without taking into account any determination by the Commission pursuant to Rule 405 under the Act that it is not necessary under the circumstances that the Company be considered an “ineligible issuer”; the parties hereto agree and understand that the content of any and all “road shows” (as defined in Rule 433 under the Act) and Exempt Communications related to the offering of the Shares contemplated hereby are solely the property of the Company; and the Company has caused there to be made available at least one version of a “ bona fide electronic road show” (as defined in Rule 433 under the Act) in a manner that, pursuant to Rule 433(d)(8)(ii) under the Act, causes the Company not to be required, pursuant to Rule 433(d) under the Act, to file, with the Commission, any Electronic Road Show;

(d) as of the date of this Agreement, the Company qualifies as an emerging growth company (“ EGC ”), as defined in Section 2(a)(19) of the Act;

 

6


(e) each Permitted Exempt Written Communication, if any, complied in all material respects with the Act and as of its date and, when considered together with the Disclosure Package as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(f) the Company has filed publicly on the Commission’s EDGAR database at least 21 calendar days prior to any “road show,” (as defined in Rule 433 under the Act) any confidentially submitted registration statements and registration amendments relating to the offer and sale of the Shares;

(g) the Company (i) has not alone engaged in any Exempt Communications other than (A) Exempt Communications set forth on Schedule B attached hereto under the heading “Other Exempt Communications” and (B) Exempt Communications that were otherwise made with the consent of UBS and Wells Fargo, which Exempt Communications were in the case of either clause (A) or (B) made with entities that were qualified institutional buyers within the meaning of Rule 144A under the Act or institutions that were accredited investors within the meaning of Rule 501 under the Act, and (ii) has not authorized anyone other than UBS and Wells Fargo to engage in Exempt Communications. The Company reconfirms that UBS and Wells Fargo have been authorized to act on its behalf in undertaking Exempt Communications. The Company has not distributed or caused to be distributed any Exempt Written Communications other than the Permitted Exempt Written Communications;

(h) as of the date of this Agreement, the Company has an authorized and outstanding capitalization as set forth in the sections of the Registration Statement, the Disclosure Package and the Prospectus entitled “Capitalization,” and “Description of capital stock” (and any similar sections or information, if any, contained in any Permitted Free Writing Prospectus), and, as of the time of purchase and any additional time of purchase, as the case may be, the Company shall have an authorized and outstanding capitalization as set forth in the sections of the Registration Statement, the Disclosure Package and the Prospectus entitled “Capitalization,” and “Description of capital stock” (and any similar sections or information, if any, contained in any Permitted Free Writing Prospectus) (subject, in each case, to the issuance of shares of Common Stock upon exercise of stock options and warrants disclosed as outstanding in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus and the grant of awards under existing equity incentive plans described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus); all of the issued and outstanding shares of capital stock, including the Common Stock, of the Company have been duly authorized and validly issued and are fully paid and non-assessable, have been issued in compliance with all applicable securities laws and were not issued in violation of any preemptive right, resale right, right of first refusal or similar right; at the time of purchase, all outstanding shares of Series A Convertible Preferred Stock, $.001 par value per share, Series B Convertible Preferred Stock, $.001 par value per share, Series C Convertible Preferred Stock, $.001 par value per share and Series D Convertible Preferred Stock, $.001 par value per share of the Company shall convert into shares of Common Stock in the manner described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus; prior to the date hereof, the Company has duly effected and completed a

 

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1-for-5.65 reverse stock split of the Common Stock in the manner described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus; and the Restated Certificate of Incorporation of the Company and the Amended and Restated Bylaws of the Company, each in the form filed as an exhibit to the Registration Statement, have been heretofore duly authorized and approved in accordance with the Delaware General Corporation Law and shall become effective and in full force and effect at or immediately following the time of purchase; and the Shares are duly listed, and admitted and authorized for trading, subject to official notice of issuance and evidence of satisfactory distribution, on The NASDAQ Global Market (the “ NASDAQ ”);

(i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement, the Disclosure Package and the Prospectus, to execute and deliver this Agreement and to issue, sell and deliver the Shares as contemplated herein;

(j) the Company is duly qualified to do business as a foreign corporation and is in good standing in the Commonwealth of Massachusetts, which is the only jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing does not, individually or in the aggregate, either (i) have a material adverse effect on the business, properties, financial condition, results of operations or prospects of the Company and the Subsidiary (as defined below) taken as a whole, (ii) prevent or materially interfere with consummation of the transactions contemplated hereby or (iii) prevent the shares of Common Stock from being accepted for listing on, or result in the delisting of shares of Common Stock from the NASDAQ (the occurrence of any such effect or any such prevention or interference or any such result described in the foregoing clauses (i), (ii) and (iii) being herein referred to as a “ Material Adverse Effect ”);

(k) the Company has no subsidiaries (as defined under the Act) other than Concert Pharmaceuticals Securities Company (the “ Subsidiary ”); the Company owns all of the issued and outstanding capital stock of the Subsidiary; other than the capital stock of the Subsidiary, the Company does not own, directly or indirectly, any shares of stock or any other equity interests or long-term debt securities of any corporation, firm, partnership, joint venture, association or other entity; complete and correct copies of the charters and the bylaws of the Company and the Subsidiary and all amendments thereto have been made available to you, and, except as set forth in the exhibits to the Registration Statement, no changes therein will be made on or after the date hereof through and including the time of purchase or, if later, any additional time of purchase; the Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Massachusetts, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Disclosure Package and the Prospectus; the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the ownership or leasing of its properties or the

 

8


conduct of its business requires such qualification, except where the failure to be so qualified and in good standing would not, individually or in the aggregate, have a Material Adverse Effect; all of the outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, have been issued in compliance with all applicable securities laws, were not issued in violation of any preemptive right, resale right, right of first refusal or similar right and are owned by the Company subject to no security interest, other encumbrance or adverse claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiary are outstanding;

(l) the Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non-assessable and free of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights; the Shares, when issued and delivered against payment therefor as provided herein, will be free of any restriction upon the voting or transfer thereof pursuant to the Delaware General Corporation Law or the Company’s charter or bylaws or any agreement or other instrument to which the Company is a party;

(m) the capital stock of the Company, including the Shares, conforms in all material respects to each description thereof, if any, contained in the Registration Statement, the Disclosure Package and the Prospectus;

(n) there is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit thereto, which is not described or filed as required (and the Disclosure Package contains in all material respects the same description of the foregoing matters contained in the Prospectus);

(o) this Agreement has been duly authorized, executed and delivered by the Company;

(p) neither the Company nor the Subsidiary is in breach or violation of or in default under (nor has any event occurred which, with notice, lapse of time or both, would result in any breach or violation of, constitute a default under or give the holder of any indebtedness (or a person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) (A) its respective charter or bylaws, or (B) any indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any license, lease, contract or other agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected, or (C) any applicable federal, state, local or foreign law, regulation or rule, or (D) any applicable rule or regulation of any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, the rules and regulations of the NASDAQ), or (E) any decree, judgment or order applicable to it or any of its properties, except in the case of the foregoing clauses (B), (C), (D) and (E), for any such breaches, violations, defaults or events that would not, individually or in the aggregate, have a Material Adverse Effect;

 

9


(q) the execution, delivery and performance of this Agreement, the issuance and sale of the Shares and the consummation of the transactions contemplated hereby will not conflict with, result in any breach or violation of or constitute a default under (nor constitute any event which, with notice, lapse of time or both, would result in any breach or violation of, constitute a default under or give the holder of any indebtedness (or a person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) (or result in the creation or imposition of a lien, charge or encumbrance on any property or assets of the Company or the Subsidiary pursuant to) (A) the charter or bylaws of the Company or the Subsidiary, or (B) any indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any license, lease, contract or other agreement or instrument to which the Company or the Subsidiary is a party or by which either of them or any of their respective properties may be bound or affected, or (C) any applicable federal, state, local or foreign law, regulation or rule, or (D) any applicable rule or regulation of any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, the rules and regulations of the NASDAQ), or (E) any decree, judgment or order applicable to the Company or the Subsidiary or any of their respective properties, except in the case of the foregoing clauses (B), (C), (D) and (E), for any such breaches, violations, defaults or events that would not, individually or in the aggregate, have a Material Adverse Effect;

(r) no approval, authorization, consent or order of or filing with any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or of or with any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, the NASDAQ) having jurisdiction over the Company, or approval of the stockholders of the Company, is required in connection with the issuance and sale of the Shares or the consummation by the Company of the transactions contemplated hereby, other than (i) the registration of the Shares under the Act, which has been effected (or, with respect to any registration statement to be filed hereunder pursuant to Rule 462(b) under the Act, will be effected in accordance herewith), (ii) any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters, (iii) under the Conduct Rules of the Financial Industry Regulatory Authority, Inc. (“ FINRA ”) or (iv) except as otherwise have already been obtained or made as of the date of this Agreement;

(s) except as described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus, (i) no person has the right, contractual or otherwise, to cause the Company to issue or sell to it any shares of Common Stock or shares of any other capital stock or other equity interests of the Company, (ii) no person has any preemptive rights, resale rights, rights of first refusal or other rights to purchase any shares of Common Stock or shares of any other capital stock of or other equity interests in the Company and (iii) no person has the right to act as an underwriter or as a financial advisor to the Company in connection with the offer and sale

 

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of the Shares, except, in each case, any such rights that have been validly waived in writing as of the date of this Agreement, copies of such waivers previously having been made available to you; no person has the right, contractual or otherwise, to cause the Company to register under the Act any shares of Common Stock or shares of any other capital stock of or other equity interests in the Company, or to include any such shares or interests in the Registration Statement or the offering contemplated thereby, except any such right that has been validly waived in writing as of the date of this Agreement, copies of such waivers previously having been made available to you;

(t) each of the Company and the Subsidiary has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any applicable law, regulation or rule, and has obtained all necessary licenses, authorizations, consents and approvals from other persons, in order to conduct their respective businesses, except where the failure to have, make or obtain the same would not, individually or in the aggregate, have a Material Adverse Effect; neither the Company nor the Subsidiary is in violation of, or in default under, or has received notice of any proceedings relating to revocation or modification of, any such license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or the Subsidiary, as applicable, except where such violation, default, revocation or modification would not, individually or in the aggregate, have a Material Adverse Effect;

(u) there are no actions, suits, claims, investigations or proceedings pending or, to the Company’s knowledge, threatened or contemplated to which the Company or the Subsidiary or any of their respective directors or officers is or would be a party or of which any of their respective properties is or would be subject at law or in equity, before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency, or before or by any self-regulatory organization or other non-governmental regulatory authority (including, without limitation, the NASDAQ), except any such action, suit, claim, investigation or proceeding which, if resolved adversely to the Company or the Subsidiary, would not, individually or in the aggregate, have a Material Adverse Effect;

(v) Ernst & Young LLP, whose report on the consolidated financial statements of the Company and the Subsidiary is included in the Registration Statement, the Disclosure Package and the Prospectus, are independent registered public accountants as required by the Act and by the rules of the Public Company Accounting Oversight Board;

(w) the financial statements included in the Registration Statement, the Disclosure Package and the Prospectus, together with the related notes and schedules, present fairly the consolidated financial position of the Company and the Subsidiary as of the dates indicated and the consolidated results of operations, cash flows and changes in stockholders’ equity of the Company and the Subsidiary for the periods specified and have been prepared in compliance in all material respects with the requirements of the Act and Exchange Act and in conformity with U.S. generally accepted accounting principles applied on a consistent basis during the periods involved, except as otherwise

 

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disclosed therein, and, in the case of unaudited, interim financial statements, subject to normal year end audit adjustments and the exclusion of certain footnotes; all pro forma financial statements or data included in the Registration Statement, the Disclosure Package and the Prospectus comply in all material respects with the requirements of the Act and the Exchange Act, to the extent applicable, and the assumptions used in the preparation of such pro forma financial statements and data are reasonable, the pro forma adjustments used therein are appropriate to give effect to the transactions or circumstances described therein and the pro forma adjustments have been properly applied to the historical amounts in the compilation of those statements and data; the other financial and statistical data contained in the Registration Statement, the Disclosure Package and the Prospectus are accurately and fairly presented in all material respects and prepared on a basis consistent with the financial statements and books and records of the Company; there are no financial statements (historical or pro forma) that are required to be included in the Registration Statement, the Disclosure Package or the Prospectus that are not included as required; and the Company and the Subsidiary do not have any material liabilities or obligations, direct or contingent (including any off-balance sheet obligations), not described in the Registration Statement (excluding the exhibits thereto);

(x) except as disclosed in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus, each stock option granted under any equity incentive plan of the Company or the Subsidiary (each, a “ Stock Plan ”) was granted with a per share exercise price no less than the fair market value per share of Common Stock on the grant date of such option and no such grant involved any “back-dating” or similar practice with respect to the effective date of such grant; except as would not, individually or in the aggregate, have a Material Adverse Effect, each such option (i) was granted in compliance with applicable law and with the applicable Stock Plan(s), (ii) was duly approved by the board of directors (or a duly authorized committee thereof or an officer of the Company duly authorized by the board of directors or authorized committee thereof to make such grants) of the Company or the Subsidiary, as applicable and (iii) has been properly accounted for in the Company’s financial statements in accordance with U.S. generally accepted accounting principles;

(y) subsequent to the respective dates as of which information is given in the Registration Statement, the Disclosure Package and the Prospectus, in each case excluding any amendments or supplements to the foregoing made after the execution of this Agreement, there has not been (i) any material adverse change, or any development that would reasonably be expected to result in a material adverse change, in the business, properties, management, financial condition or results of operations of the Company and the Subsidiary taken as a whole, (ii) any transaction to which the Company is a party which is material to the Company and the Subsidiary taken as a whole, (iii) any obligation or liability, direct or contingent (including any off-balance sheet obligations), incurred by the Company or the Subsidiary, which is material to the Company and the Subsidiary taken as a whole, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary (other than the issuance of shares of Common Stock upon exercise of stock options and warrants described as outstanding in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus and the grant of awards under Stock Plans described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus, in each case in the ordinary course of business) or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary;

 

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(z) the Company has obtained for the benefit of the Underwriters the agreement (a “ Lock-Up Agreement ”), in substantially the form set forth as Exhibit A hereto, of (i) each of its directors and “officers” (within the meaning of Rule 16a-1(f) under the Exchange Act) and (ii) each other holder of shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock or any warrant or other right to acquire shares of Common Stock or any such security, listed on Exhibit A-1 ;

(aa) the Company is not, and at no time during which a prospectus is required by the Act to be delivered (whether physically or through compliance with Rule 172 under the Act or any similar rule) in connection with any sale of Shares will it be and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof, it will not be an “investment company” or an entity “controlled” by an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended (the “ Investment Company Act ”);

(bb) each of the Company and the Subsidiary has good and marketable title to all personal property described in the Registration Statement, the Disclosure Package and the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances, except those that do not materially interfere with the use or proposed use of such property by the Company or the Subsidiary, respectively, or as would not materially or adversely affect the value of such property; neither the Company nor the Subsidiary owns any real property; all the real property described in the Registration Statement, the Disclosure Package and the Prospectus as being held under lease by the Company or the Subsidiary is held thereby under valid, subsisting and enforceable leases;

(cc) except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, (i) the Company and the Subsidiary own, or have obtained valid and enforceable licenses for, or other rights to use, the inventions, patent applications, patents, trademarks (both registered and unregistered), tradenames, service names, copyrights, trade secrets and other proprietary information described in the Registration Statement, the Disclosure Package and the Prospectus as being owned or licensed by them or which are necessary for the conduct of their collective business as currently conducted or as currently proposed to be conducted (including the commercialization of products or services described in the Registration Statement, the Disclosure Package and the Prospectus as under development), except where the failure to own, license or have such rights would not, individually or in the aggregate, have a Material Adverse Effect (collectively, “ Intellectual Property ”), except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the rights of creditors generally, and general equitable principles; (ii) there are no third parties who have, or, to the Company’s knowledge, will be able to establish, rights to use any Intellectual Property that is owned by the Company, other than any co-owner of any patent or patent application constituting

 

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Intellectual Property who is listed as such on the records of the U.S. Patent and Trademark Office (the “PTO”), and, to the Company’s knowledge, no third party has any ownership right in or to any Intellectual Property in any field of use that is exclusively licensed to the Company, except for, and to the extent of, the ownership rights of the owners of the Intellectual Property which the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus disclose is licensed to the Company; (iii) to the Company’s knowledge, there is no infringement, misappropriation or other violation by any third parties of any Intellectual Property; (iv) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s rights in or to any Intellectual Property; (v) the Company has not received any notice from, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity, enforceability or scope of any Intellectual Property; (vi) the Company has not received any notice from, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or the Subsidiary infringes or otherwise violates, or would, upon the commercialization of any product or service described in the Registration Statement, the Disclosure Package and the Prospectus as under development, infringe or violate, any patent, trademark, tradename, service name, copyright, trade secret or other proprietary rights of others; (vii) the Company and the Subsidiary have complied in all material respects with the applicable terms of each agreement pursuant to which Intellectual Property has been licensed to the Company or the Subsidiary, and all such agreements are in full force and effect; (viii) to the Company’s knowledge, except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, or as would not have a Material Adverse Effect, there is no patent or patent application that contains claims that interfere with the issued or pending claims of any of the Intellectual Property or that challenges the validity, enforceability or scope of any of the Intellectual Property; (ix) there is no prior art of which the Company is aware that to the Company’s knowledge would render any of the issued or pending claims of any of the Intellectual Property invalid or otherwise unpatentable; (x) to the Company’s knowledge, the product candidates described in the Registration Statement, the Disclosure Package and the Prospectus as under development by the Company or the Subsidiary fall within the scope of the claims of one or more patents or patent applications owned by, or exclusively licensed to, the Company or the Subsidiary; (xi) all patents and patent applications owned by the Company have been duly and properly filed and maintained and the Company has complied and, to the Company’s knowledge, each of its licensors has complied with its duty of candor and disclosure to the PTO with respect to all patent applications owned or exclusively licensed by or to the Company and included in the Intellectual Property and filed with the PTO; (xii) the Company has taken commercially reasonable steps to secure its interest in the Intellectual Property, including, in the case of Intellectual Property that is owned by the Company, obtaining assignments from its employees, consultants and contractors pursuant to written agreements containing present tense assignments of all Intellectual Property created by such employees, consultants and contractors; (xiii) the Company has taken reasonable steps in accordance with normal industry practice to maintain the confidentiality of all non-published Intellectual Property the value of which to the Company is contingent upon maintaining the confidentiality thereof, and no such

 

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Intellectual Property has been disclosed other than to employees, representatives, independent contractors, collaborators, licensors, licensees, agents and advisors of the Company, all of whom are bound by written obligations to maintain the confidentiality thereof; and (xiv) the Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property of any other person or entity that are required to be described in the Registration Statement, the Disclosure Package and the Prospectus that are not so described therein;

(dd) neither the Company nor the Subsidiary is engaged in any unfair labor practice; except for matters which would not, individually or in the aggregate, have a Material Adverse Effect, (i) there is (A) no unfair labor practice complaint pending or, to the Company’s knowledge, threatened against the Company or the Subsidiary before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending or, to the Company’s knowledge, threatened, (B) no strike, labor dispute, slowdown or stoppage pending or, to the Company’s knowledge, threatened against the Company or the Subsidiary and (C) no union representation dispute currently existing concerning the employees of the Company or the Subsidiary, (ii) to the Company’s knowledge, no union organizing activities are currently taking place concerning the employees of the Company or the Subsidiary and (iii) there has been no violation of any federal, state, local or foreign law relating to discrimination in the hiring, promotion or pay of employees, any applicable wage or hour laws or any provision of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder concerning the employees of the Company or the Subsidiary;

(ee) the Company and the Subsidiary and their respective properties, assets and operations are in compliance with, and the Company and the Subsidiary hold all permits, authorizations and approvals required under, Environmental Laws (as defined below), except to the extent that failure to so comply or to hold such permits, authorizations or approvals would not, individually or in the aggregate, have a Material Adverse Effect; in the ordinary course of its business, the Company has from time to time engaged an environmental consulting firm to assist the Company in its compliance with Environmental Laws as they pertain to its businesses, operations and properties; there are no past, present or, to the Company’s knowledge, reasonably anticipated future events, conditions, circumstances, activities, practices, actions, omissions or plans that would reasonably be expected to give rise to any material costs or liabilities to the Company or the Subsidiary under, or to interfere with or prevent compliance by the Company or the Subsidiary with, Environmental Laws; except as would not, individually or in the aggregate, have a Material Adverse Effect, neither the Company nor the Subsidiary (i) is the subject of any investigation, (ii) has received any notice or claim, (iii) is a party to or affected by any pending or, to the Company’s knowledge, threatened action, suit or proceeding, (iv) is bound by any judgment, decree or order or (v) has entered into any agreement, in each case relating to any alleged violation of any Environmental Law or any actual or alleged release or threatened release or cleanup at any location of any Hazardous Materials (as defined below) (as used herein, “ Environmental Law ” means any federal, state, local or foreign law, statute, ordinance, rule, regulation, order, decree, judgment, injunction, permit, license, authorization or other binding requirement, or

 

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common law, relating to health, safety or the protection, cleanup or restoration of the environment or natural resources, including those relating to the distribution, processing, generation, treatment, storage, disposal, transportation, other handling or release or threatened release of Hazardous Materials, and “ Hazardous Materials ” means any material (including, without limitation, pollutants, contaminants, hazardous or toxic substances or wastes) that is regulated by or may give rise to liability under any Environmental Law);

(ff) all tax returns required to be filed by the Company or the Subsidiary have been timely filed (within any applicable time limit extensions permitted by the relevant tax authority), and all taxes and other assessments of a similar nature (whether imposed directly or through withholding) including any interest, additions to tax or penalties applicable thereto due or claimed to be due from the Company or the Subsidiary have been timely paid, other than those being contested in good faith and for which adequate reserves have been provided, except to the extent failure to file any such returns or make such payments would not, individually or in the aggregate, have a Material Adverse Effect;

(gg) except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, the Company maintains insurance covering the properties, operations, personnel and businesses of the Company and the Subsidiary as the Company reasonably deems adequate to insure against such losses and risks in accordance with customary industry practice to protect the Company and the Subsidiary and their respective businesses; all such insurance is fully in force on the date hereof and will be fully in force at the time of purchase and each additional time of purchase, if any; the Company has no reason to believe that it will not be able to renew any such insurance as and when such insurance expires or obtain similar coverage at a reasonable cost from similar insurers;

(hh) neither the Company nor the Subsidiary has sent any communication or received any written communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in the Disclosure Package, the Prospectus, any Permitted Free Writing Prospectus or the Registration Statement as being in effect, or filed as an exhibit to the Registration Statement, and no such termination or non-renewal has been threatened by the Company or the Subsidiary or, to the Company’s knowledge, threatened in writing by any other party to any such contract or agreement;

(ii) the Company has established and maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences;

 

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(jj) the Company has established and maintains “disclosure controls and procedures” (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) and “internal control over financial reporting” (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act); such disclosure controls and procedures are designed to ensure that material information relating to the Company, including the Subsidiary, is made known to the Company’s Chief Executive Officer and its Chief Operating Officer by others within the Company and the Subsidiary, and such disclosure controls and procedures are effective to perform the functions for which they were established; the Company’s independent registered public accountants and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies, if any, in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data; and (ii) all fraud, if any, whether or not material, that involves management or other employees who have a role in the Company’s internal controls; all “significant deficiencies” and “material weaknesses” (as such terms are defined in Rule 1-02(a)(4) of Regulation S-X under the Act) of the Company, if any, have been identified to the Company’s independent registered public accountants and are disclosed in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus; and the Company has taken all necessary actions to ensure that, upon and at all times after the filing of the Registration Statement, Company and its officers and directors in their capacities as such, will be, in compliance in all material respects with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”) and the rules and regulations promulgated thereunder;

(kk) each “forward-looking statement” (within the meaning of Section 27A of the Act or Section 21E of the Exchange Act) contained in the Registration Statement, the Disclosure Package and the Prospectus has been made or reaffirmed with a reasonable basis and in good faith;

(ll) all statistical or market-related data included in the Registration Statement, the Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably believes to be reliable and accurate, and the Company has obtained the written consent to the use of such data from such sources to the extent required;

(mm) neither the Company nor the Subsidiary nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or the Subsidiary has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “ Foreign Corrupt Practices Act ”); the Company is not aware of any such action, directly or indirectly, having been taken on behalf of the Company or the Subsidiary; and the Company and the Subsidiary and, to the knowledge of the Company, their respective affiliates have instituted and maintain policies and procedures designed to ensure continued compliance therewith;

 

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(nn) the operations of the Company and the Subsidiary are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the USA Patriot Act, the Bank Secrecy Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”); and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator or non-governmental authority involving the Company or the Subsidiary with respect to the Money Laundering Laws is pending or, to the Company’s knowledge, threatened;

(oo) neither the Company nor the Subsidiary nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or the Subsidiary is currently subject to any sanctions administered or enforced by the Office of Foreign Assets Control of the United States Treasury Department, the United Nations Security Council, the European Union, Her Majesty’s Treasury or any other relevant sanctions authority; and the Company will not directly or indirectly use the proceeds of the offering of the Shares contemplated hereby, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity for the purpose of financing the activities of any person currently subject to any sanctions administered or enforced by such authorities;

(pp) the Company acknowledges that, in accordance with the requirements of the USA Patriot Act, the Underwriters are required to obtain, verify and record information that identifies their respective clients, including the Company, which information may include the names and addresses of their respective clients, as well as other information that will allow the Underwriters to properly identify their respective clients;

(qq) the Subsidiary is not currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on the Subsidiary’s capital stock, from repaying to the Company any loans or advances to the Subsidiary from the Company or from transferring any of the Subsidiary’s property or assets to the Company, except, in each case, as described in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus;

(rr) the preclinical tests and clinical trials that are being conducted by the Company and, to the knowledge of the Company, the preclinical tests and clinical trials that are being conducted by the Company’s strategic collaborators, and that in each case are described in, or the results of which are referred to in, the Registration Statement, the Disclosure Package and the Prospectus were and, if still pending, are being conducted in all material respects in accordance with protocols, procedures and controls filed with the appropriate regulatory authorities for each such test or trial, as the case may be, and with standard accepted medical and scientific research procedures for products or product candidates comparable to those being developed by the Company; the descriptions of the results of such tests and trials contained in the Registration Statement, the Disclosure Package and the Prospectus are accurate and complete in all material respects and fairly present the data derived from such tests and trials, and the Company has no knowledge of any other studies or tests or trials not described in the Registration Statement, the Disclosure Package and the Prospectus the results of which reasonably call into question

 

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the results described or referred to in the Registration Statement, the Disclosure Package and the Prospectus; neither the Company nor the Subsidiary has received any notices or other correspondence from the Food and Drug Administration of the U.S. Department of Health and Human Services or any committee thereof or from any other U.S. or foreign government or drug or medical device regulatory agency (collectively, the “ Regulatory Agencies ”) requiring the termination, suspension or material modification of any tests or trials that are described or referred to in the Registration Statement, the Disclosure Package and the Prospectus; and the Company and the Subsidiary have operated and currently are in compliance in all material respects with all applicable rules, regulations and policies of the Regulatory Agencies;

(ss) the issuance and sale of the Shares as contemplated hereby will not cause any holder of any shares of capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Company to have any right to acquire any additional securities of the Company, except that, as described in the Registration Statement, the Disclosure Package and the Prospectus, the Company’s outstanding warrant to acquire preferred stock issued to Hercules Technology Growth Capital, Inc. will convert to a warrant to acquire common stock of the Company upon the closing of the sale of the Firm Shares pursuant to this Agreement;

(tt) except pursuant to this Agreement, neither the Company nor the Subsidiary has incurred any liability for any finder’s or broker’s fee or agent’s commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby or by the Registration Statement;

(uu) neither the Company nor the Subsidiary nor any of their respective directors or officers, affiliates or controlling persons has taken, directly or indirectly, without giving effect to activities by the Underwriters, any action designed, or which has constituted or might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; and

(vv) to the Company’s knowledge, there are no affiliations or associations between (i) any member of FINRA and (ii) the Company or any of the Company’s officers, directors or 5% or greater security holders or any beneficial owner of the Company’s unregistered equity securities that were acquired at any time on or after the 180th day immediately preceding the date the Registration Statement was initially filed with the Commission, except as disclosed in writing to UBS and Wells Fargo or disclosed in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus.

In addition, any certificate signed by any officer of the Company or the Subsidiary and delivered to any Underwriter or counsel for the Underwriters in connection with the offering of the Shares shall be deemed to be a representation and warranty by the Company, as to matters covered thereby, to each Underwriter.

 

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4. Certain Covenants of the Company . The Company hereby agrees:

(a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states or other jurisdictions as you may reasonably designate and to maintain such qualifications in effect so long as you may reasonably request for the distribution of the Shares; provided , however , that the Company shall not be required to qualify as a foreign corporation, to subject itself to taxation in any foreign jurisdiction or to consent to the service of process under the laws of any such jurisdiction (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for offer or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;

(b) to make available to the Underwriters in New York City, as soon as practicable after this Agreement becomes effective, and thereafter from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may reasonably request for the purposes contemplated by the Act; in case any Underwriter is required to deliver (whether physically or through compliance with Rule 172 under the Act or any similar rule), in connection with the sale of the Shares, a prospectus after the nine-month period referred to in Section 10(a)(3) of the Act, the Company will prepare, at its expense, promptly upon request such amendment or amendments to the Registration Statement and the Prospectus as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act;

(c) if, at the time this Agreement is executed and delivered, it is necessary or appropriate for a post-effective amendment to the Registration Statement, or a Registration Statement under Rule 462(b) under the Act, to be filed with the Commission and become effective before the Shares may be sold, the Company will use its reasonable best efforts to cause such post-effective amendment or such Registration Statement to be filed and become effective, and will pay any applicable fees in accordance with the Act, as soon as possible; and the Company will advise you promptly and, if requested by you, will confirm such advice in writing, (i) when such post-effective amendment or such Registration Statement has become effective, and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner in accordance with such Rules);

(d) for so long as a prospectus is required by the Act to be delivered (whether physically or through compliance with Rule 172 under the Act or any similar rule) the Company shall notify you immediately upon an event that causes the Company to no longer qualify as an EGC;

 

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(e) to advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement, or the Exchange Act Registration Statement, any Preliminary Prospectus, the Prospectus or any Permitted Free Writing Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order, suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to use its best efforts to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or the Exchange Act Registration Statement, any Preliminary Prospectus or the Prospectus, and to provide you and Underwriters’ counsel copies of any such documents for review and comment a reasonable amount of time prior to any proposed filing and to file no such amendment or supplement to which you shall object or have objected as soon as reasonably practicable in writing;

(f) subject to Section 4(e) hereof, to file promptly all reports and documents and any preliminary or definitive proxy or information statement required to be filed by the Company with the Commission in order to comply with the Exchange Act for so long as a prospectus is required by the Act to be delivered (whether physically or through compliance with Rule 172 under the Act or any similar rule) in connection with any sale of Shares; and to provide you, for your review and comment, with a copy of such reports and statements and other documents to be filed by the Company pursuant to Section 13, 14 or 15(d) of the Exchange Act during such period a reasonable amount of time prior to any proposed filing; and to promptly notify you of such filing;

(g) to advise the Underwriters promptly of the happening of any event within the period during which a prospectus is required by the Act to be delivered (whether physically or through compliance with Rule 172 under the Act or any similar rule) in connection with any sale of Shares, which event could require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, and to advise the Underwriters promptly if, during such period, it shall become necessary to amend or supplement the Prospectus to cause the Prospectus to comply with the requirements of the Act, and, in each case, during such time, subject to Section 4(e) hereof, to prepare and furnish, at the Company’s expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change or to effect such compliance;

(h) to make generally available (within the meaning of Rule 158 under the Act) to its security holders, and, if not available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (“ EDGAR ”), to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act) as soon as is reasonably practicable after the termination of such twelve-month period but in any case not later than [•];

(i) to furnish to you one copy for each of UBS and Wells Fargo and one copy for the Underwriters’ counsel of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and sufficient copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters;

 

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(j) to furnish to you as early as reasonably practicable prior to the time of purchase and any additional time of purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim and monthly consolidated financial statements, if any, of the Company which have been read by the Company’s independent registered public accountants, as stated in their letter to be furnished pursuant to Section 6(d) hereof;

(k) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption “Use of proceeds” in the Prospectus and to file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required by Rule 463 under the Act;

(l) to pay all costs, expenses, fees and taxes in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, each Permitted Free Writing Prospectus, if any, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the registration, issue, sale and delivery of the Shares including any stock or transfer taxes and stamp or similar duties payable upon the sale, issuance or delivery of the Shares to the Underwriters, (iii) the producing, word processing and/or printing of this Agreement, any Agreement Among Underwriters, any dealer agreements and any closing documents (including compilations thereof by the Company or its counsel) and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and (except closing documents) to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state or foreign laws and the determination of their eligibility for investment under state or foreign law (including the reasonable legal fees and filing fees and other disbursements of counsel for the Underwriters) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriters and to dealers, (v) any listing of the Shares on any securities exchange or qualification of the Shares for listing on the NASDAQ and any registration thereof under the Exchange Act, (vi) any filing for review of the public offering of the Shares by FINRA, including the reasonable legal fees and filing fees and other disbursements of counsel to the Underwriters relating to FINRA matters, such legal fees shall not exceed $30,000; (vii) the fees and disbursements of any transfer agent or registrar for the Shares, (viii) the costs and expenses of the Company relating to presentations or meetings undertaken in connection with the marketing of the offering and sale of the Shares to prospective investors and the Underwriters’ sales forces, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged by the Company or by the Underwriters with the Company’s consent in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Company and any such consultants, one-half of the cost of any aircraft chartered in connection with the road show, and the costs of all Exempt Communications, (ix) the costs and expenses of qualifying the Shares for inclusion in the book-entry settlement system of the DTC, (x) the preparation and filing of the Exchange Act Registration Statement, including any amendments thereto and (xi) the performance of the Company’s other obligations hereunder;

 

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(m) to comply with Rule 433(d) under the Act (without reliance on Rule 164(b) under the Act) and with Rule 433(g) under the Act;

(n) beginning on the date hereof and ending on, and including, the date that is 180 days after the date of the Prospectus (the “ Lock-Up Period ”), without the prior written consent of UBS and Wells Fargo, not to (i) issue, sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, with respect to, any Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to purchase, the foregoing, (ii) file or cause to become effective a registration statement under the Act relating to the offer and sale of any Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to purchase, the foregoing, other than any registration statement on Form S-8 filed to register securities issuable by the Company upon the exercise of options granted by the Company in connection with the Company’s Stock Plans disclosed in the Registration Statement, provided , however , that, for the further avoidance of doubt, any such registration statement on Form S-8 shall be solely for the purpose of registering issuances of securities by the Company pursuant to the Company’s Stock Plans described in the Prospectus relating to the offering of the Shares, and shall not provide for the resale or other disposition of securities by the undersigned or any other party; (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to purchase, the foregoing, whether any such transaction is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (iv) publicly announce an intention to effect any transaction specified in clause (i), (ii) or (iii), except, in each case, for (A) the registration of the offer and sale of the Shares as contemplated by this Agreement, (B) issuances of Common Stock upon the exercise of options or warrants disclosed as outstanding in the Registration Statement (excluding the exhibits thereto), the Disclosure Package and the Prospectus, (C) the grant of awards under Stock Plans described in the Registration Statement (excluding the exhibits thereto), and the Prospectus provided that each recipient thereof who receives a grant of an award that is exercisable during the Lock-Up Period signs a Lock-Up Agreement in the form referred to in Section 3(z) hereof; and (D) issuances of Common Stock or other securities in connection with a transaction that includes a commercial relationship (including joint ventures, marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) or any acquisition of assets or at least a controlling portion of the equity of

 

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another entity, provided that (x) the aggregate number of shares or securities issued pursuant to this clause (D) shall not exceed 5.0% of the total number of outstanding shares of Common Stock immediately following the issuance and sale of the Firm Shares pursuant hereto and (y) the beneficial owner of any such shares or securities shall sign a Lock-Up Agreement in the form referred to in Section 3(z) hereof; provided , however , that if prior to the expiration of the Lock-Up Period the Company ceases to be an EGC and (a) during the period that begins on the date that is fifteen (15) calendar days plus three (3) business days before the last day of the Lock-Up Period and ends on the last day of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (b) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the sixteen (16) day period beginning on the last day of the Lock-Up Period, then the restrictions imposed by this Section 4(n) shall continue to apply until the expiration of the date that is fifteen (15) calendar days plus three (3) business days after the date on which the issuance of the earnings release or the material news or material event occurs;

(o) except as required by applicable law, prior to the time of purchase or any additional time of purchase, as the case may be, to issue no press release or other communication directly or indirectly and hold no press conferences with respect to the Company or the Subsidiary, the financial condition, results of operations, business, properties, assets, or liabilities of the Company or the Subsidiary, or the offering of the Shares, and to issue no such press release or communications or hold such press conference, without your prior consent, which consent shall not be unreasonably withheld, conditioned or delayed;

(p) not, at any time at or after the execution of this Agreement, to, directly or indirectly, offer or sell any Shares by means of any “prospectus” (within the meaning of the Act), or use any “prospectus” (within the meaning of the Act) in connection with the offer or sale of the Shares, in each case other than the Prospectus;

(q) not to, and to cause the Subsidiary not to, take, directly or indirectly, without giving effect to activities by the Underwriters, any action designed, or which will constitute, or has constituted, or might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares;

(r) to use its best efforts to cause the Shares to be listed on the NASDAQ and to maintain such listing on the NASDAQ;

(s) to maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock; and

(t) if UBS and Wells Fargo have notified the Company of the Underwriters’ intention to release any director or “officer” (within the meaning of Rule 16a-1(f) under the Exchange Act) of the Company from any of the restrictions imposed by any Lock-Up Agreement at least three business days prior to such release, the Company agrees to issue, through a major news service, a press release, in substantially the form attached as

 

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Exhibit A-2 hereto, promptly following the receipt of such notification from UBS and Wells Fargo in which the Underwriters indicate such intention, but in any case not later than the close of the second business day prior to the date on which such release or waiver is to become effective; provided , however , that nothing shall prevent UBS and Wells Fargo, on behalf of the Underwriters, from announcing the same through a major news service, irrespective of whether the Company has made the required announcement; and further provided that no such announcement shall be made of any release or waiver granted solely to permit a transfer of securities that is not for consideration and where the transferee has agreed in writing to be bound by the terms of a Lock-Up Agreement in the form set forth as Exhibit A hereto.

5. Reimbursement of the Underwriters’ Expenses . If, after the execution and delivery of this Agreement, the Shares are not delivered for any reason other than the termination of this Agreement pursuant to the fifth paragraph of Section 8 hereof or the default by one or more of the Underwriters in its or their respective obligations hereunder, the Company shall, in addition to paying the amounts described in Section 4(l) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel reasonably incurred by the Underwriters in connection with the offering of the Shares and the other transactions contemplated hereby.

6. Conditions of the Underwriters’ Obligations . The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof, at the time of purchase and, if applicable, at the additional time of purchase, the performance by the Company of its obligations hereunder and to the following additional conditions precedent:

(a) The Company shall furnish to you at the time of purchase and, if applicable, at the additional time of purchase, an opinion of Wilmer Cutler Pickering Hale and Dorr LLP, counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with executed copies for each Underwriter, in the form set forth in Exhibit B hereto.

(b) The Company shall furnish to you at the time of purchase and, if applicable, at the additional time of purchase, opinions of Edwards Wildman Palmer LLP, Fish & Richardson P.C. and McCarter & English, LLP, special counsels for the Company with respect to patents and proprietary rights, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with executed copies for each Underwriter, in the forms set forth in Exhibit C-1 , C-2 and C-3 hereto.

(c) The Company shall furnish to you at the time of purchase and, if applicable, at the additional time of purchase, a negative assurance letter of Ian Robert Silverman, General Counsel of the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with executed copies for each Underwriter, in the form set forth in Exhibit D hereto.

 

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(d) You shall have received from Ernst & Young LLP letters dated, respectively, the date of this Agreement, the time of purchase and, if applicable, the additional time of purchase, and addressed to the Underwriters (with executed copies for each Underwriter) in the forms satisfactory to UBS and Wells Fargo, which letters shall cover, without limitation, the various financial disclosures contained in the Registration Statement, the Disclosure Package, the Prospectus and the Permitted Free Writing Prospectuses, if any.

(e) You shall have received at the time of purchase and, if applicable, at the additional time of purchase, the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, dated the time of purchase or the additional time of purchase, as the case may be, in form and substance reasonably satisfactory to UBS and Wells Fargo.

(f) No Prospectus or amendment or supplement to the Registration Statement or the Prospectus shall have been filed to which you shall have objected in writing.

(g) The Registration Statement, the Exchange Act Registration Statement and any registration statement required to be filed, prior to the sale of the Shares, under the Act pursuant to Rule 462(b) shall have been filed and shall have become effective under the Act or the Exchange Act, as the case may be. If Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act at or before 5:30 P.M., New York City time, on the second full business day after the date of this Agreement (or such earlier time as may be required under the Act).

(h) (i) At the time of purchase, and if applicable, the additional time of purchase, no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act (ii) the Registration Statement shall not, as of the Effective Time, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) the Prospectus shall not, as of its date, the date that it was filed with the Commission, the time of purchase and, if applicable, the additional time of purchase, as then amended or supplemented, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (iv) the Disclosure Package shall not, as of the Applicable Time, the time of purchase and, if applicable, the additional time of purchase, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(i) The Company will, at the time of purchase and, if applicable, at the additional time of purchase, deliver to you a certificate of its Chief Executive Officer and its Chief Operating Officer, dated the time of purchase or the additional time of purchase, as the case may be, in the form attached as Exhibit E hereto.

 

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(j) You shall have received each of the signed Lock-Up Agreements referred to in Section 3(z) hereof, and each such Lock-Up Agreement shall be in full force and effect at the time of purchase and the additional time of purchase, as the case may be.

(k) The Company shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement, any Preliminary Prospectus, the Prospectus or any Permitted Free Writing Prospectus as of the time of purchase and, if applicable, the additional time of purchase, as you may reasonably request.

(l) The Shares shall have been approved for listing on the NASDAQ, subject only to notice of issuance and evidence of satisfactory distribution at or prior to the time of purchase or the additional time of purchase, as the case may be.

(m) FINRA shall not have raised any objection with respect to the fairness or reasonableness of the underwriting, or other arrangements of the transactions, contemplated hereby.

7. Effective Date of Agreement; Termination . This Agreement shall become effective when the parties hereto have executed and delivered this Agreement.

The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of UBS and Wells Fargo, if (1) since the time of execution of this Agreement or the earlier respective dates as of which information is given in the Registration Statement, the Preliminary Prospectuses, the Prospectus and the Permitted Free Writing Prospectuses, if any, there has been any change or any development involving a prospective change in the business, properties, management, financial condition or results of operations of the Company and the Subsidiary taken as a whole, the effect of which change or development is, in the sole judgment of UBS and Wells Fargo, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement, the Disclosure Package and the Prospectus or (2) since the time of execution of this Agreement, there shall have occurred: (A) a suspension or material limitation in trading in securities generally on the NYSE, the NYSE MKT or the NASDAQ; (B) a suspension or material limitation in trading in the Company’s securities on the NASDAQ; (C) a general moratorium on commercial banking activities declared by either federal or New York State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (D) an outbreak or escalation of hostilities or acts of terrorism involving the United States or a declaration by the United States of a national emergency or war; or (E) any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (D) or (E), in the sole judgment of UBS and Wells Fargo, makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement, the Disclosure Package and the Prospectus, or (3) since the time of execution of this Agreement, there shall have occurred any downgrading, or any notice or announcement shall have been given or made of: (A) any intended or potential downgrading or (B) any watch, review or possible change that does not indicate an affirmation or improvement in the rating accorded any securities of or guaranteed by the Company or the Subsidiary by any “nationally recognized statistical rating organization,” as that term is defined in Rule 436(g)(2) under the Act.

 

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If UBS and Wells Fargo elect to terminate this Agreement as provided in this Section 7, the Company and each other Underwriter shall be notified promptly in writing.

If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement, or if such sale is not carried out because the Company shall be unable to comply with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(l), 5 and 9 hereof); and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder.

8. Increase in Underwriters’ Commitments . Subject to Sections 6 and 7 hereof, if any Underwriter shall default in its obligation to take up and pay for the Firm Shares to be purchased by it hereunder (otherwise than for a failure of a condition set forth in Section 6 hereof or the termination of this Agreement under the provisions of Section 7 hereof) and if the number of Firm Shares which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total number of Firm Shares, the non-defaulting Underwriters (including the Underwriters, if any, substituted in the manner set forth below) shall take up and pay for (in addition to the aggregate number of Firm Shares they are obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Shares shall be taken up and paid for by such non-defaulting Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Shares shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Firm Shares set forth opposite the names of such non-defaulting Underwriters in Schedule A .

Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that it will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval).

If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the time of purchase for a period not exceeding five business days in order that any necessary changes in the Registration Statement and the Prospectus and other documents may be effected.

The term “Underwriter” as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with like effect as if such substituted Underwriter had originally been named in Schedule A hereto.

 

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If the aggregate number of Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Firm Shares which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the five-business day period stated above for the purchase of all the Firm Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall terminate without further act or deed and without any liability on the part of the Company to any Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

9. Indemnity and Contribution .

(a) The Company agrees to indemnify, defend and hold harmless each Underwriter, its partners, directors, officers and members, any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and any “affiliate” (within the meaning of Rule 405 under the Act) of such Underwriter, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning such Underwriter furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in, the Registration Statement or arises out of or is based upon any omission or alleged omission to state a material fact in the Registration Statement in connection with such information, which material fact was not contained in such information and which material fact was required to be stated in such Registration Statement or was necessary to make such information not misleading or (ii) any untrue statement or alleged untrue statement of a material fact included in any Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and any amendments or supplements to the foregoing), in any Covered Free Writing Prospectus, in any Exempt Written Communication, in any “issuer information” (as defined in Rule 433 under the Act) of the Company or in any Prospectus together with any combination of one or more of the Covered Free Writing Prospectuses, if any, and one or more Exempt Written Communications, if any, or arises out of or is based upon any omission or alleged omission to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except, with respect to such Prospectus, any Permitted Free Writing Prospectus or any Permitted Exempt Written Communication insofar as any such loss, damage, expense, liability or

 

29


claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning such Underwriter furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in, such Prospectus, Permitted Free Writing Prospectus or Permitted Exempt Written Communication or arises out of or is based upon any omission or alleged omission to state a material fact in such Prospectus, Permitted Free Writing Prospectus or Permitted Exempt Written Communication in connection with such information, which material fact was not contained in such information and which material fact was necessary in order to make the statements in such information, in the light of the circumstances under which they were made, not misleading.

(b) Each Underwriter severally agrees to indemnify, defend and hold harmless the Company, its directors and officers, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons, from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Company or any such person may incur under the Act, the Exchange Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning such Underwriter furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in, the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact in such Registration Statement in connection with such information, which material fact was not contained in such information and which material fact was required to be stated in such Registration Statement or was necessary to make such information not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in, and in conformity with information concerning such Underwriter furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use in, a Prospectus, a Permitted Free Writing Prospectus, or a Permitted Exempt Written Communication, or arises out of or is based upon any omission or alleged omission to state a material fact in such Prospectus, Permitted Free Writing Prospectus, or Permitted Exempt Written Communication in connection with such information, which material fact was not contained in such information and which material fact was necessary in order to make the statements in such information, in the light of the circumstances under which they were made, not misleading.

(c) If any action, suit or proceeding (each, a “ Proceeding ”) is brought against a person (an “ indemnified party ”) in respect of which indemnity may be sought against the Company or an Underwriter (as applicable, the “ indemnifying party ”) pursuant to subsection (a) or (b), respectively, of this Section 9, such indemnified party shall promptly notify such indemnifying party in writing of the institution of such Proceeding and such indemnifying party shall assume the defense of such Proceeding, including the retention of counsel reasonably satisfactory to such indemnified party, and pay all legal or other fees and expenses related to such Proceeding or incurred in connection with such indemnified party’s enforcement of subsection (a) of this Section 9; provided , however ,

 

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that the omission to so notify such indemnifying party shall not relieve such indemnifying party from any liability that such indemnifying party may have to any indemnified party pursuant to subsection (a) or (b), except to the extent that it has been materially prejudiced (through forfeiture of substantive rights or defenses by such failure) or otherwise. The indemnified party or parties shall have the right to retain its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the retention of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such Proceeding, (ii) the indemnifying party shall not have, within a reasonable period of time in light of the circumstances, retained counsel to defend such Proceeding or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them that are different from, additional to or in conflict with those available to such indemnifying party (in which case such indemnifying party shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by such indemnifying party and paid as incurred (it being understood, however, that such indemnifying party shall not be liable for the fees or expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The indemnifying party shall not be liable for any settlement of any Proceeding effected without its written consent but, if settled with its written consent, such indemnifying party agrees to indemnify and hold harmless the indemnified party or parties from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this Section 9(c), then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have fully reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days’ prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault or culpability or a failure to act by or on behalf of such indemnified party.

(d) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 or insufficient to hold an indemnified party harmless in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other

 

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hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the Shares. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding.

(e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (d) above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damage which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint.

(f) The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Company contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any of their respective partners, directors, officers or members or any person (including each partner, officer, director or member of such person) who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Company, its directors or officers or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company and each Underwriter agree promptly to notify each other of the commencement of any Proceeding against it and, in the case of the Company, against any of the Company’s officers or directors in connection with the issuance and sale of the Shares, or in connection with the Registration Statement, any Preliminary Prospectus, the Prospectus or any Permitted Free Writing Prospectus.

 

32


10. Information Furnished by the Underwriters . The statements set forth in the last paragraph on the cover page of the Prospectus and the statements set forth in the second, third and fourth sentences under the title “Underwriting Discount” and the first six paragraphs (other than the third-to-last sentence therein) following the title “Price Stabilization, Short Positions” each under the caption “Underwriting” in the Prospectus, only insofar as such statements relate to the amount of selling concession and reallowance or to over-allotment and stabilization activities that may be undertaken by the Underwriters (and, for the avoidance of doubt, not by the Company or any other party), constitute the only information furnished by or on behalf of the Underwriters, as such information is referred to in Sections 3 and 9 hereof.

11. Notices . Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram or facsimile and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to UBS Securities LLC, 1285 Avenue of the Americas, New York, New York 10019, Attention: Syndicate / Michael Ryan (fax: (212) 713-3371) and Wells Fargo Securities, LLC, 375 Park Avenue, New York, New York 10152, Attention: Equity Syndicate Department fax: 212-214-5918; and if to the Company, shall be sufficient in all respects if delivered or sent to the Company at the offices of the Company at 99 Hayden Avenue, Suite 500, Lexington, Massachusetts 02421, Attention: Chief Operating Officer.

12. Governing Law; Construction . This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement (“ Claim ”), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the conflicts of law principles thereof. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.

13. Submission to Jurisdiction . Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have exclusive jurisdiction over the adjudication of such matters, and the Company consents to the jurisdiction of such courts and personal service with respect thereto. The Company hereby consents to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against any Underwriter or any indemnified party to the extent such Underwriter or indemnified party is likewise subject. Each Underwriter and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waive all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts to the jurisdiction of which the Company is or may be subject, by suit upon such judgment.

 

33


14. Parties at Interest . The Agreement herein set forth has been and is made solely for the benefit of the Underwriters and the Company and to the extent provided in Section 9 hereof the controlling persons, partners, directors, officers, members and affiliates referred to in such Section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement.

15. No Fiduciary Relationship . The Company hereby acknowledges that the Underwriters are acting solely as underwriters in connection with the purchase and sale of the Company’s securities. The Company further acknowledges that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s length basis, and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, stockholders or creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the purchase and sale of the Company’s securities, either before or after the date hereof. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Company, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company hereby confirms its understanding and agreement to that effect. The Company and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions and that any opinions or views expressed by the Underwriters to the Company regarding such transactions, including, but not limited to, any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company. The Company and the Underwriters agree that the Underwriters are acting as principal and not the agent or fiduciary of the Company and no Underwriter has assumed, and none of them will assume, any advisory responsibility in favor of the Company with respect to the transactions contemplated hereby or the process leading thereto (irrespective of whether any Underwriter has advised or is currently advising the Company on other matters). The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of any fiduciary, advisory or similar duty to the Company in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.

16. Counterparts . This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.

17. Successors and Assigns . This Agreement shall be binding upon the Underwriters and the Company and their successors and assigns and any successor or assign of any substantial portion of the Company’s and any of the Underwriters’ respective businesses and/or assets.

 

34


18. Miscellaneous . UBS, an indirect, wholly owned subsidiary of UBS AG, is not a bank and is separate from any affiliated bank, including any U.S. branch or agency of UBS AG. Because UBS is a separately incorporated entity, it is solely responsible for its own contractual obligations and commitments, including obligations with respect to sales and purchases of securities. Securities sold, offered or recommended by UBS are not deposits, are not insured by the Federal Deposit Insurance Corporation, are not guaranteed by a branch or agency, and are not otherwise an obligation or responsibility of a branch or agency.

[The Remainder of This Page Intentionally Left Blank; Signature Page Follows]

 

35


If the foregoing correctly sets forth the understanding between the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this Agreement and your acceptance shall constitute a binding agreement between the Company and the Underwriters, severally.

 

Very truly yours,
C ONCERT P HARMACEUTICALS , I NC .
By:  

 

  Name:
  Title:


Accepted and agreed to as of the date first above written, on behalf of itself and the other several Underwriters named in Schedule A

 

UBS S ECURITIES LLC
By:  

 

  Name:
  Title:
By:  

 

  Name:
  Title:

 

W ELLS F ARGO S ECURITIES , LLC
By:  

 

  Name:
  Title:


SCHEDULE A

 

Underwriter

   Number of
Firm Shares
 

UBS SECURITIES LLC

     [ •] 

WELLS FARGO SECURITIES, LLC

     [ •] 

JMP SECURITIES LLC

     [ •] 

ROTH CAPITAL PARTNERS, LLC

     [ •] 
  

 

 

 

Total

     [ •] 
  

 

 

 


SCHEDULE B

Permitted Free Writing Prospectuses

[•]

Permitted Exempt Written Communications

[•]

Other Exempt Communications

[•]

Pricing Information Provided Orally by Underwriters

Price per Share to the public: $[•]

Number of Shares to be sold: [•]


EXHIBIT A

Lock-Up Agreement

[Date]

UBS Securities LLC

Wells Fargo Securities, LLC

Together with the other Underwriters

named in Schedule A to the Underwriting Agreement

referred to herein

c/o UBS Securities LLC

299 Park Avenue

New York, New York 10171-0026

Ladies and Gentlemen:

This Lock-Up Agreement is being delivered to you in connection with the proposed Underwriting Agreement (the “ Underwriting Agreement ”) to be entered into by Concert Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”), and you and the other underwriters named in Schedule A to the Underwriting Agreement, with respect to the public offering (the “ Offering ”) of common stock, par value $0.001 per share, of the Company (the “ Common Stock ”). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to them in the Underwriting Agreement.

In order to induce you to enter into the Underwriting Agreement, the undersigned agrees that, for a period (the “ Lock-Up Period ”) beginning on the date hereof and ending on, and including, the date that is 180 days after the date of the final prospectus relating to the Offering, the undersigned will not, without the prior written consent of UBS Securities LLC (“ UBS ”) and Wells Fargo Securities, LLC (“ Wells Fargo ”), (i) sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or file (or participate in the filing of) a registration statement with the Securities and Exchange Commission (the “ Commission ”) in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder (the “ Exchange Act ”) with respect to, any Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to acquire, the foregoing, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exchangeable or exercisable for, or any warrants or other rights to acquire, the


foregoing, whether any such transaction is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (iii) publicly announce an intention to effect any transaction specified in clause (i) or (ii). The foregoing sentence shall not apply to (a) the registration of the offer and sale of Common Stock as contemplated by the Underwriting Agreement and the sale of the Common Stock to the Underwriters (as defined in the Underwriting Agreement) in the Offering, (b) bona fide gifts, (c) dispositions to any trust for the direct or indirect benefit of the undersigned and/or the immediate family of the undersigned, (d) dispositions to any corporation, partnership, limited liability company or other entity all of the beneficial ownership interests of which are held by the undersigned and/or the immediate family of the undersigned, (e) dispositions by will, other testamentary document or intestate succession to the legal representative, heir, beneficiary or a member of the immediate family of the undersigned, (f) distributions to partners, members or stockholders of the undersigned, (g) the exercise of options to acquire Common Stock outstanding as of the date hereof or granted under equity incentive plans in effect as of the date hereof or described in the registration statement filed with the Commission with respect to the Offering, (h) the entry into any trading plan established pursuant to Rule 10b5-1 under the Exchange Act, provided that such plan does not provide for any sales or other dispositions of Common Stock during the Lock-Up Period and no public announcement or public disclosure of entry into such plan is made or required to be made, (i) the repurchase of Common Stock by the Company in connection with termination of the undersigned’s employment with the Company, or (j) transactions relating to Common Stock acquired by the undersigned in the Offering (other than shares purchased in a directed share program relating to the Offering) or in open market transactions after the completion of the Offering, provided that, with respect to transactions described in this clause (j), no filing under Section 16 of the Exchange Act or other public announcement shall be required or shall be voluntarily made in connection with such transactions; provided , however , that (x) in the case of any transfer or disposition pursuant to any of the foregoing clauses (b) through (f), (i) each transferee, distributee or recipient of the Common Stock transferred, distributed or disposed of agrees to be bound by the same restrictions in place for the undersigned pursuant to this Lock-Up Agreement for the duration that such restrictions remain in effect at the time of such transfer, distribution or disposition and executes and delivers to UBS and Wells Fargo a lock-up agreement in the form of this Lock-Up Agreement, (ii) no filing under the Exchange Act or other public announcement shall be required or shall be made voluntarily in connection with such transfer or distribution (other than, in the case of a transfer or other disposition pursuant to clause (e) above, any Form 4 or Form 5 required to be filed under the Exchange Act if the undersigned is subject to Section 16 reporting with respect to the Company under the Exchange Act and indicating by footnote disclosure or otherwise the nature of the transfer or disposition), and (iii) any such transfer or distribution shall not involve a disposition for value, (y) in the case of any exercise of options pursuant to the foregoing clause (g), the Common Stock underlying such options and all other Common Stock and other securities subject to the terms of this Lock-Up Agreement continue to be subject to the terms of this Lock-Up Agreement and, provided further , that no filing under the Exchange Act or other public announcement shall be required or shall be voluntarily made in connection with such exercise (other than, in connection with an option exercise pursuant to this clause (y), a Form 4 or Form 5 required to be filed under the Exchange Act if the undersigned is subject to Section 16 reporting with respect to the Company under the Exchange Act, provided , however , that if such Form 4 or Form 5 is filed during the Lock-Up Period, such Form 4 or Form 5 (A) shall not report any reduction in beneficial ownership of

 

2


Common Stock in connection with such option exercise and (B) shall indicate by footnote disclosure or otherwise that such Form 4 or Form 5 relates to an exercise of options, that no shares of Common Stock are being sold or otherwise disposed by the undersigned of in connection therewith and that the shares of Common Stock received by the undersigned upon such option exercise are subject to the terms of the Lock-Up Agreement) and (z) in the case of any repurchase of Common Stock of the undersigned by the Company pursuant to clause (i) above in connection with the termination of the undersigned’s employment with the Company, any Common Stock of the undersigned not so repurchased by the Company and other securities subject to the terms of this Lock-Up Agreement continue to be subject to the terms of this Lock-Up Agreement and, provided further , that no filing under the Exchange Act or other public announcement shall be required or shall be voluntarily made in connection with such repurchase by the Company (other than, in connection with a repurchase of Common Stock by the Company pursuant to this clause (z), a Form 4 or Form 5 required to be filed under the Exchange Act if the undersigned is subject to Section 16 reporting with respect to the Company under the Exchange Act, provided , however , that if such Form 4 or Form 5 is filed during the Lock-Up Period, such Form 4 or Form 5 shall indicate by footnote disclosure or otherwise that such Form 4 or Form 5 relates to a repurchase of Common Stock by the Company in connection with the termination of the undersigned’s employment with the Company and that any shares of Common Stock and other securities subject to the Lock-Up Agreement that continue to be held by the undersigned remain subject to the terms of the Lock-Up Agreement). For the avoidance of doubt, the restrictions set forth in this Lock-Up Agreement shall not preclude the undersigned from assisting the Company in the filing by the Company of a registration statement by the Company on Form S-8 in the ordinary course of the undersigned’s responsibilities if the undersigned is an officer, director or employee of the Company; provided , however , that, for the further avoidance of doubt, any such registration statement on Form S-8 shall be solely for the purpose of registering issuances of securities by the Company pursuant to the Company’s equity compensation plans described in the final prospectus relating to the Offering, and shall not provide for the resale or other disposition of securities by the undersigned or any other party. For purposes of this paragraph, “immediate family” shall mean the undersigned and the spouse, any lineal descendent, father, mother, brother, sister, nephew or niece of the undersigned.

In addition, the undersigned hereby waives any rights the undersigned may have to require registration of Common Stock in connection with the filing of a registration statement relating to the Offering. The undersigned further agrees that, for the Lock-Up Period, the undersigned will not, without the prior written consent of UBS and Wells Fargo, make any demand for, or exercise any right with respect to, the registration of Common Stock or any other securities of the Company that are substantially similar to Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock, or warrants or other rights to purchase Common Stock or any such other securities. In addition, the undersigned hereby waives any and all preemptive rights, participation rights, resale rights, rights of first refusal and similar rights that the undersigned may have in connection with the Offering or with any issuance or sale by the Company of any equity or other securities before the Offering.

 

3


Notwithstanding the above, if at any time prior to the expiration of the Lock-Up Period, the Company ceases to be an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act and (a) during the period that begins on the date that is fifteen (15) calendar days plus three (3) business days before the last day of the Lock-Up Period and ends on the last day of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (b) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the sixteen (16) day period beginning on the last day of the Lock-Up Period, then the restrictions imposed by this Lock-Up Agreement shall continue to apply until the expiration of the date that is fifteen (15) calendar days plus three (3) business days after the date on which the issuance of the earnings release or the material news or material event occurs.

If the undersigned is an officer or director of the Company, UBS and Wells Fargo agree that, at least three business days prior to the release or waiver of any of the foregoing restrictions in connection with a transfer of shares of Common Stock, including, for the avoidance of doubt, any security of the Company acquired by the undersigned from the Company in the Offering, UBS and Wells Fargo will (i) notify the Company of the impending release or waiver and (ii) announce such impending release or waiver by press release through a major news service in accordance with its obligations under the Underwriting Agreement. Any such release or waiver granted hereunder shall only be effective two business days after such announcement is made by the Company or UBS and Wells Fargo. The provisions of this paragraph shall not apply to any release or waiver granted solely to permit a transfer of securities that is not for consideration and where the transferee has agreed in writing to be bound by the terms of this Lock-Up Agreement.

The undersigned hereby confirms that the undersigned has not, directly or indirectly, taken, and hereby covenants that the undersigned will not, directly or indirectly, take, any action designed, or which has constituted or will constitute or might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of shares of Common Stock.

The undersigned hereby authorizes the Company and its transfer agent, during the Lock-Up Period, to decline the transfer of or to note stop transfer restrictions on the stock register and other records relating to shares of Common Stock or other securities subject to this Lock-Up Agreement of which the undersigned is the record holder, and, with respect to shares of Common Stock or other securities subject to this Lock-Up Agreement of which the undersigned is the beneficial owner but not the record holder, the undersigned hereby agrees to cause such record holder to authorize the Company and its transfer agent, during the Lock-Up Period, to decline the transfer of or to note stop transfer restrictions on the stock register and other records relating to such shares or other securities.

* * *

 

4


If (i) the Company notifies you in writing that it does not intend to proceed with the Offering, (ii) the registration statement filed with the Commission with respect to the Offering is withdrawn, (iii) the Underwriting Agreement does not become effective on or prior to June 30, 2014 or (iv) for any reason the Underwriting Agreement shall be terminated prior to the “time of purchase” (as defined in the Underwriting Agreement), this Lock-Up Agreement shall be terminated and the undersigned shall be released from its obligations hereunder.

 

Yours very truly,

 

Name:

 

A-1


EXHIBIT A-1

LIST OF PARTIES TO EXECUTE LOCK-UP AGREEMENTS

[•]

 

A-1-1


EXHIBIT A-2

FORM OF PRESS RELEASE

[•]

 

A-2-1


EXHIBIT B

OPINION OF WILMER CUTLER PICKERING HALE AND DORR LLP

[•]

 

B-1


EXHIBIT C-1

OPINION OF EDWARDS WILDMAN PALMER LLP

[•]

 

C-1-1


EXHIBIT C-2

OPINION OF FISH & RICHARDSON P.C.

[•]

 

C-2-1


EXHIBIT C-3

OPINION OF MCCARTER & ENGLISH, LLP

[•]

 

C-3-1


EXHIBIT D

NEGATIVE ASSURANCE LETTER OF IAN ROBERT SILVERMAN

[•]

 

D-1


EXHIBIT E

OFFICER’S CERTIFICATE

[•]

 

E-1

Exhibit 3.2

RESTATED CERTIFICATE OF INCORPORATION

OF

CONCERT PHARMACEUTICALS, INC.

(originally incorporated on April 12, 2006)

Concert Pharmaceuticals, Inc. (the “Corporation”), a corporation organized and existing under and by virtue of the provisions of the Delaware General Corporation Law (the “DGCL”), does hereby certify as follows:

A. The current name of the Corporation is Concert Pharmaceuticals, Inc. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on April 12, 2006 and was amended and restated on May 16, 2006, November 27, 2006 and April 25, 2008, further amended on April 1, 2009, further amended and restated on June 1, 2009 and further amended on May 3, 2010, December 22, 2011 and January 29, 2014.

B. A resolution was duly adopted by the Board of Directors of the Corporation pursuant to Sections 242 and 245 of the DGCL proposing this Restated Certificate of Incorporation and declaring the advisability of this Restated Certificate of Incorporation. The stockholders of the Corporation duly approved and adopted this Restated Certificate of Incorporation by written consent in accordance with Sections 228, 242 and 245 of the DGCL.

Accordingly, the Certificate of Incorporation of the Corporation, as previously amended and restated, is hereby further amended and restated in its entirety to read as follows:

FIRST: The name of the Corporation is Concert Pharmaceuticals, Inc.

SECOND: The address of the Corporation’s registered office in the State of Delaware is 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808, and, the name of its registered agent at that address is Corporation Service Company.

THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 105,000,000 shares, consisting of (i) 100,000,000 shares of Common Stock, par value $0.001 per share (“Common Stock”), and (ii) 5,000,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.


A COMMON STOCK .

1. General . The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors of the Corporation (the “Board of Directors”) upon any issuance of the Preferred Stock of any series.

2. Voting . The holders of the Common Stock shall have voting rights at all meetings of stockholders, each such holder being entitled to one vote for each share thereof held by such holder; provided , however , that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (which, as used herein, shall mean the certificate of incorporation of the Corporation, as amended from time to time, including the terms of any certificate of designations of any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation. There shall be no cumulative voting.

The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

3. Dividends . Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend or other rights of any then outstanding Preferred Stock.

4. Liquidation . Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential or other rights of any then outstanding Preferred Stock.

 

B PREFERRED STOCK .

Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law.

Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate of designations relating thereto in accordance with the General Corporation Law of the State of Delaware, to determine and fix the number of shares of such series and such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or

 

-2-


restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to any other series of Preferred Stock to the extent permitted by law.

The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority of the voting power of the capital stock of the Corporation entitled to vote thereon, voting as a single class, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

FIFTH: Except as otherwise provided herein, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation.

SIXTH: In furtherance and not in limitation of the powers conferred upon it by the General Corporation Law of the State of Delaware, and subject to the terms of any series of Preferred Stock, the Board of Directors shall have the power to adopt, amend, alter or repeal the By-laws of the Corporation by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. The stockholders may not adopt, amend, alter or repeal the By-laws of the Corporation, or adopt any provision inconsistent therewith, unless such action is approved, in addition to any other vote required by this Certificate of Incorporation, by the affirmative vote of the holders of at least seventy-five percent (75%) of the votes that all the stockholders would be entitled to cast in any annual election of directors or class of directors. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article SIXTH.

SEVENTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the General Corporation Law of the State of Delaware is amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended.

 

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EIGHTH: The Corporation shall provide indemnification as follows:

1. Actions, Suits and Proceedings Other than by or in the Right of the Corporation . The Corporation shall indemnify each person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974), and amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

2. Actions or Suits by or in the Right of the Corporation . The Corporation shall indemnify any Indemnitee who was or is a party to or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made under this Section 2 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless, and only to the extent, that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses (including attorneys’ fees) which the Court of Chancery of Delaware or such other court shall deem proper.

 

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3. Indemnification for Expenses of Successful Party . Notwithstanding any other provisions of this Article EIGHTH, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article EIGHTH, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, Indemnitee shall be indemnified against all expenses (including attorneys’ fees) actually and reasonably incurred by or on behalf of Indemnitee in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to Indemnitee, (ii) an adjudication that Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by Indemnitee, (iv) an adjudication that Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that Indemnitee had reasonable cause to believe his or her conduct was unlawful, Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

4. Notification and Defense of Claim . As a condition precedent to an Indemnitee’s right to be indemnified, such Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to Indemnitee. After notice from the Corporation to Indemnitee of its election so to assume such defense, the Corporation shall not be liable to Indemnitee for any legal or other expenses subsequently incurred by Indemnitee in connection with such action, suit, proceeding or investigation, other than as provided below in this Section 4. Indemnitee shall have the right to employ his or her own counsel in connection with such action, suit, proceeding or investigation, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) counsel to Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and Indemnitee in the conduct of the defense of such action, suit, proceeding or investigation or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, suit, proceeding or investigation, in each of which cases the fees and expenses of counsel for Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article EIGHTH. The Corporation shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. The Corporation shall not be required to indemnify Indemnitee under this Article EIGHTH for any amounts paid in settlement of any action, suit, proceeding or investigation effected without its written consent. The Corporation shall not settle any action, suit, proceeding or investigation in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. Neither the Corporation nor Indemnitee will unreasonably withhold or delay its consent to any proposed settlement.

5. Advance of Expenses . Subject to the provisions of Section 6 of this Article EIGHTH, in the event of any threatened or pending action, suit, proceeding or investigation of which the Corporation receives notice under this Article EIGHTH, any expenses (including attorneys’ fees) incurred by or on behalf of an Indemnitee in defending an action, suit, proceeding

 

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or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter; provided , however , that the payment of such expenses incurred by or on behalf of Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article EIGHTH; and provided further that no such advancement of expenses shall be made under this Article EIGHTH if it is determined (in the manner described in Section 6 of this Article EIGHTH) that (i) Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe his or her conduct was unlawful. Such undertaking shall be accepted without reference to the financial ability of Indemnitee to make such repayment.

6. Procedure for Indemnification and Advancement of Expenses . In order to obtain indemnification or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article EIGHTH, an Indemnitee shall submit to the Corporation a written request. Any such advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of Indemnitee, unless (i) the Corporation has assumed the defense pursuant to Section 4 of this Article EIGHTH (and none of the circumstances described in Section 4 of this Article EIGHTH that would nonetheless entitle the Indemnitee to indemnification for the fees and expenses of separate counsel have occurred) or (ii) the Corporation determines within such 60-day period that Indemnitee did not meet the applicable standard of conduct set forth in Section 1, 2 or 5 of this Article EIGHTH, as the case may be. Any such indemnification, unless ordered by a court, shall be made with respect to requests under Section 1 or 2 of this Article EIGHTH only as authorized in the specific case upon a determination by the Corporation that the indemnification of Indemnitee is proper because Indemnitee has met the applicable standard of conduct set forth in Section 1 or 2 of this Article EIGHTH, as the case may be. Such determination shall be made in each instance (a) by a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the action, suit or proceeding in question (“disinterested directors”), whether or not a quorum, (b) by a committee of disinterested directors designated by majority vote of disinterested directors, whether or not a quorum, (c) if there are no disinterested directors, or if the disinterested directors so direct, by independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation) in a written opinion, or (d) by the stockholders of the Corporation.

7. Remedies . The right to indemnification or advancement of expenses as granted by this Article EIGHTH shall be enforceable by Indemnitee in any court of competent jurisdiction. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 of this Article EIGHTH that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. In any suit brought by Indemnitee to enforce a right to indemnification, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall have the burden of proving that Indemnitee is not entitled to be indemnified, or to such advancement of expenses,

 

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under this Article EIGHTH. Indemnitee’s expenses (including attorneys’ fees) reasonably incurred in connection with successfully establishing Indemnitee’s right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. Notwithstanding the foregoing, in any suit brought by Indemnitee to enforce a right to indemnification hereunder it shall be a defense that the Indemnitee has not met any applicable standard for indemnification set forth in the General Corporation Law of the State of Delaware.

8. Limitations . Notwithstanding anything to the contrary in this Article EIGHTH, except as set forth in Section 7 of this Article EIGHTH, the Corporation shall not indemnify an Indemnitee pursuant to this Article EIGHTH in connection with a proceeding (or part thereof) initiated by such Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. Notwithstanding anything to the contrary in this Article EIGHTH, the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund indemnification payments to the Corporation to the extent of such insurance reimbursement.

9. Subsequent Amendment . No amendment, termination or repeal of this Article EIGHTH or of the relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws shall adversely affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal.

10. Other Rights . The indemnification and advancement of expenses provided by this Article EIGHTH shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee’s official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of Indemnitee. Nothing contained in this Article EIGHTH shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth in this Article EIGHTH. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article EIGHTH.

11. Partial Indemnification . If an Indemnitee is entitled under any provision of this Article EIGHTH to indemnification by the Corporation for some or a portion of the expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974) or amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974) or amounts paid in settlement to which Indemnitee is entitled.

 

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12. Insurance . The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) against any expense, liability or loss 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 such person against such expense, liability or loss under the General Corporation Law of the State of Delaware.

13. Savings Clause . If this Article EIGHTH or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974) and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article EIGHTH that shall not have been invalidated and to the fullest extent permitted by applicable law.

14. Definitions . Terms used herein and defined in Section 145(h) and Section 145(i) of the General Corporation Law of the State of Delaware shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i).

NINTH: This Article NINTH is inserted for the management of the business and for the conduct of the affairs of the Corporation.

1. General Powers . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

2. Number of Directors; Election of Directors . Subject to the rights of holders of any series of Preferred Stock to elect directors, the number of directors of the Corporation shall be established by the Board of Directors. Election of directors need not be by written ballot, except as and to the extent provided in the By-laws of the Corporation.

3. Classes of Directors . Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board of Directors shall be and is divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The Board of Directors is authorized to assign members of the Board of Directors already in office to Class I, Class II or Class III at the time such classification becomes effective.

4. Terms of Office . Subject to the rights of holders of any series of Preferred Stock to elect directors, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such director was

 

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elected; provided that each director initially assigned to Class I shall serve for a term expiring at the Corporation’s first annual meeting of stockholders held after the effectiveness of this Restated Certificate of Incorporation; each director initially assigned to Class II shall serve for a term expiring at the Corporation’s second annual meeting of stockholders held after the effectiveness of this Restated Certificate of Incorporation; and each director initially assigned to Class III shall serve for a term expiring at the Corporation’s third annual meeting of stockholders held after the effectiveness of this Restated Certificate of Incorporation; provided further , that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, resignation or removal.

5. Quorum . The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors fixed pursuant to Section 2 of this Article NINTH shall constitute a quorum of the Board of Directors. If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

6. Action at Meeting . Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law or by this Certificate of Incorporation.

7. Removal . Subject to the rights of holders of any series of Preferred Stock, directors of the Corporation may be removed only for cause and only by the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors.

8. Vacancies . Subject to the rights of holders of any series of Preferred Stock, any vacancy or newly created directorship in the Board of Directors, however occurring, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director and shall not be filled by the stockholders. A director elected to fill a vacancy shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of a successor and to such director’s earlier death, resignation or removal.

9. Stockholder Nominations and Introduction of Business, Etc . Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided by the By-laws of the Corporation.

10. Amendments to Article . Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article NINTH.

 

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TENTH: Stockholders of the Corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article TENTH.

ELEVENTH: Special meetings of stockholders for any purpose or purposes may be called at any time by only the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer of the Corporation, and may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article ELEVENTH.

IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which restates, integrates and amends the certificate of incorporation of the Corporation, and which has been duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware, has been executed by its duly authorized officer this      day of              , 20      .

 

CONCERT PHARMACEUTICALS, INC.
By:     
  Name: Roger D. Tung, Ph.D.
  Title: President and Chief Executive Officer

 

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Exhibit 3.4

AMENDED AND RESTATED BY-LAWS

OF

CONCERT PHARMACEUTICALS, INC.


TABLE OF CONTENTS

 

             Page  

ARTICLE I

  

STOCKHOLDERS

  
 

1.1

  Place of Meetings      1   
 

1.2

  Annual Meeting      1   
 

1.3

  Special Meetings      1   
 

1.4

  Notice of Meetings      1   
 

1.5

  Voting List      2   
 

1.6

  Quorum      2   
 

1.7

  Adjournments      3   
 

1.8

  Voting and Proxies      3   
 

1.9

  Action at Meeting      3   
 

1.10

  Nomination of Directors      4   
 

1.11

  Notice of Business at Annual Meetings      8   
 

1.12

  Conduct of Meetings      11   
 

1.13

  No Action by Consent in Lieu of a Meeting      12   

ARTICLE II

  

DIRECTORS

  
 

2.1

  General Powers      13   
 

2.2

  Number, Election and Qualification      13   
 

2.3

  Chairman of the Board; Vice Chairman of the Board      13   
 

2.4

  Classes of Directors      13   
 

2.5

  Terms of Office      14   
 

2.6

  Quorum      14   
 

2.7

  Action at Meeting      14   
 

2.8

  Removal      14   

 

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2.9

  Vacancies      14   
 

2.10

  Resignation      15   
 

2.11

  Regular Meetings      15   
 

2.12

  Special Meetings      15   
 

2.13

  Notice of Special Meetings      15   
 

2.14

  Meetings by Conference Communications Equipment      15   
 

2.15

  Action by Consent      16   
 

2.16

  Committees      16   
 

2.17

  Compensation of Directors      17   

ARTICLE III

  

OFFICERS

  
 

3.1

  Titles      17   
 

3.2

  Election      17   
 

3.3

  Qualification      17   
 

3.4

  Tenure      17   
 

3.5

  Resignation and Removal      18   
 

3.6

  Vacancies      18   
 

3.7

  President; Chief Executive Officer      18   
 

3.8

  Vice Presidents      18   
 

3.9

  Secretary and Assistant Secretaries      19   
 

3.10

  Treasurer and Assistant Treasurers      19   
 

3.11

  Salaries      20   
 

3.12

  Delegation of Authority      20   

ARTICLE IV

  

CAPITAL STOCK

  
 

4.1

  Issuance of Stock      20   
 

4.2

  Stock Certificates; Uncertificated Shares      20   
 

4.3

  Transfers      21   

 

ii


 

4.4

  Lost, Stolen or Destroyed Certificates      22   
 

4.5

  Record Date      22   
 

4.6

  Regulations      23   

ARTICLE V

  

GENERAL PROVISIONS

  
 

5.1

  Fiscal Year      23   
 

5.2

  Corporate Seal      23   
 

5.3

  Waiver of Notice      23   
 

5.4

  Voting of Securities      23   
 

5.5

  Evidence of Authority      24   
 

5.6

  Certificate of Incorporation      24   
 

5.7

  Severability      24   
 

5.8

  Pronouns      24   

ARTICLE VI

  
AMENDMENTS      24   

 

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ARTICLE I

STOCKHOLDERS

1.1 Place of Meetings . All meetings of stockholders shall be held at such place as may be designated from time to time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President or, if not so designated, at the principal office of the corporation.

1.2 Annual Meeting . The annual meeting of stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly be brought before the meeting shall be held on a date and at a time designated by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President (which date shall not be a legal holiday in the place where the meeting is to be held).

1.3 Special Meetings . Special meetings of stockholders for any purpose or purposes may be called at any time by only the Board of Directors, the Chairman of the Board or the Chief Executive Officer, and may not be called by any other person or persons. The Board of Directors may postpone or reschedule any previously scheduled special meeting of stockholders. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

1.4 Notice of Meetings . Except as otherwise provided by law, notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Without limiting the manner by which notice otherwise may be given to stockholders, any notice shall be effective if given by a form of electronic transmission consented to (in a manner consistent with the General Corporation Law of the State of Delaware) by the stockholder to whom the notice is given. The notices of all meetings shall state the place, date and time of the meeting and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If notice is given by mail, such notice shall be deemed given when deposited in the United States mail, postage


prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. If notice is given by electronic transmission, such notice shall be deemed given at the time specified in Section 232 of the General Corporation Law of the State of Delaware.

1.5 Voting List . The Secretary shall prepare, at least 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. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least 10 days prior to the meeting: (a) 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 (b) during ordinary business hours, at the principal place of business of the corporation. The list shall also 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. The 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.

1.6 Quorum . Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, the holders of a majority in voting power of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person, present by means of remote communication in a manner, if any, authorized by the Board of Directors in its sole discretion, or represented by proxy, shall constitute a quorum for the transaction of business; provided, however, that where a separate vote by a class or classes or series of capital stock is required by law or the Certificate of Incorporation, the holders of a majority in voting power of the shares of such class or classes or series of the capital stock of the corporation issued and outstanding and entitled to vote on such matter, present in person, present by means of remote communication in a manner, if any, authorized by the Board of Directors in its sole discretion, or represented by proxy, shall constitute a quorum entitled to take action with respect to the vote on such matter. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum.

 

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1.7 Adjournments . Any meeting of stockholders may be adjourned from time to time to any other time and to any other place at which a meeting of stockholders may be held under these By-laws by the chairman of the meeting or by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting.

1.8 Voting and Proxies . Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by law or the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders may vote in person (including by means of remote communications, if any, by which stockholders may be deemed to be present in person and vote at such meeting) or may authorize another person or persons to vote for such stockholder by a proxy executed or transmitted in a manner permitted by the General Corporation Law of the State of Delaware by the stockholder or such stockholder’s authorized agent and delivered (including by electronic transmission) to the Secretary of the corporation. No such proxy shall be voted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period.

1.9 Action at Meeting . When a quorum is present at any meeting, any matter other than the election of directors to be voted upon by the stockholders at such meeting shall be decided by the vote of the holders of shares of stock having a majority in voting power of the votes cast by the holders of all of the shares of stock present or represented at the meeting and voting affirmatively or negatively on such matter (or if there are two or more classes or series of stock entitled to vote as separate classes, then in the case of each such class or series, the holders of a majority in voting power of the shares of stock of that class or series present or represented at the meeting and voting affirmatively or negatively on such matter), except when a different vote is required by law, the Certificate of Incorporation or these By-laws. When a quorum is present at any meeting, any election by stockholders of directors shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election.

 

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1.10 Nomination of Directors .

(a) Except for (1) any directors entitled to be elected by the holders of preferred stock, (2) any directors elected in accordance with Section 2.9 hereof by the Board of Directors to fill a vacancy or newly-created directorship or (3) as otherwise required by applicable law or stock exchange regulation, at any meeting of stockholders, only persons who are nominated in accordance with the procedures in this Section 1.10 shall be eligible for election as directors. Nomination for election to the Board of Directors at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who (x) timely complies with the notice procedures in Section 1.10(b), (y) is a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such meeting and (z) is entitled to vote at such meeting.

(b) To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the corporation as follows: (i) in the case of an election of directors at an annual meeting of stockholders, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the corporation to be held in 2015 or (y) in the event that the date of the annual meeting in any other year is advanced by more than 20 days, or delayed by more than 60 days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (A) the 90th day prior to such annual meeting and (B) the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs; or (ii) in the case of an election of directors at a special meeting of stockholders, provided that the Board of Directors, the Chairman of the Board or the Chief Executive Officer has determined, in accordance with Section 1.3, that directors shall be elected at such special meeting and provided further that the nomination made by the

 

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stockholder is for one of the director positions that the Board of Directors, the Chairman of the Board or the Chief Executive Officer, as the case may be, has determined will be filled at such special meeting, not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of (x) the 90th day prior to such special meeting and (y) the tenth day following the day on which notice of the date of such special meeting was mailed or public disclosure of the date of such special meeting was made, whichever first occurs. In no event shall the adjournment or postponement of a meeting (or the public disclosure thereof) commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

The stockholder’s notice to the Secretary shall set forth: (A) as to each proposed nominee (1) such person’s name, age, business address and, if known, residence address, (2) such person’s principal occupation or employment, (3) the class and series and number of shares of stock of the corporation that are, directly or indirectly, owned, beneficially or of record, by such person, (4) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among (x) the stockholder, the beneficial owner, if any, on whose behalf the nomination is being made and the respective affiliates and associates of, or others acting in concert with, such stockholder and such beneficial owner, on the one hand, and (y) each proposed nominee, and his or her respective affiliates and associates, or others acting in concert with such nominee(s), on the other hand, including all information that would be required to be disclosed pursuant to Item 404 of Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made or any affiliate or associate thereof or person acting in concert therewith were the “registrant” for purposes of such Item and the proposed nominee were a director or executive officer of such registrant, and (5) any other information concerning such person that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and (B) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is being made (1) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner, (2) the class and series and number of shares of stock of the corporation that are, directly or indirectly, owned, beneficially or of record, by such stockholder and such beneficial owner, (3) a

 

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description of any agreement, arrangement or understanding between or among such stockholder and/or such beneficial owner and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are being made or who may participate in the solicitation of proxies in favor of electing such nominee(s), (4) a description of any agreement, arrangement or understanding (including any derivative or short positions, swaps, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, such stockholder or such beneficial owner, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner with respect to shares of stock of the corporation, (5) any other information relating to such stockholder and such beneficial owner that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, (6) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the person(s) named in its notice and (7) a representation whether such stockholder and/or such beneficial owner intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock reasonably believed by such stockholder or such beneficial owner to be sufficient to elect the nominee (and such representation shall be included in any such proxy statement and form of proxy) and/or (y) otherwise to solicit proxies from stockholders in support of such nomination (and such representation shall be included in any such solicitation materials). Not later than 10 days after the record date for the meeting, the information required by Items (A)(1)-(5) and (B)(1)-(5) of the prior sentence shall be supplemented by the stockholder giving the notice to provide updated information as of the record date. In addition, to be effective, the stockholder’s notice must be accompanied by the written consent of the proposed nominee to serve as a director if elected. The corporation may require any proposed nominee to furnish such other information as the corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation or whether such nominee would be independent under applicable Securities and Exchange Commission and stock exchange rules and the corporation’s publicly disclosed

 

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corporate governance guidelines. A stockholder shall not have complied with this Section 1.10(b) if the stockholder (or beneficial owner, if any, on whose behalf the nomination is made) solicits or does not solicit, as the case may be, proxies in support of such stockholder’s nominee in contravention of the representations with respect thereto required by this Section 1.10.

(c) The chairman of any meeting shall have the power and duty to determine whether a nomination was made in accordance with the provisions of this Section 1.10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee in compliance with the representations with respect thereto required by this Section 1.10), and if the chairman should determine that a nomination was not made in accordance with the provisions of this Section 1.10, the chairman shall so declare to the meeting and such nomination shall not be brought before the meeting.

(d) Except as otherwise required by law, nothing in this Section 1.10 shall obligate the corporation or the Board of Directors to include in any proxy statement or other stockholder communication distributed on behalf of the corporation or the Board of Directors information with respect to any nominee for director submitted by a stockholder.

(e) Notwithstanding the foregoing provisions of this Section 1.10, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the meeting to present a nomination, such nomination shall not be brought before the meeting, notwithstanding that proxies in respect of such nominee may have been received by the corporation. For purposes of this Section 1.10, to be considered a “qualified representative of the stockholder”, a person must be authorized by a written instrument executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, at the meeting of stockholders.

(f) For purposes of this Section 1.10, “public disclosure” shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

 

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1.11 Notice of Business at Annual Meetings .

(a) At any 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 (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (3) properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, (i) if such business relates to the nomination of a person for election as a director of the corporation, the procedures in Section 1.10 must be complied with and (ii) if such business relates to any other matter, the business must constitute a proper matter under Delaware law for stockholder action and the stockholder must (x) have given timely notice thereof in writing to the Secretary in accordance with the procedures in Section 1.11(b), (y) be a stockholder of record on the date of the giving of such notice and on the record date for the determination of stockholders entitled to vote at such annual meeting and (z) be entitled to vote at such annual meeting.

(b) To be timely, a stockholder’s notice must be received in writing by the Secretary at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) in the case of the annual meeting of stockholders of the corporation to be held in 2015 or (y) in the event that the date of the annual meeting in any other year is advanced by more than 20 days, or delayed by more than 60 days, from the first anniversary of the preceding year’s annual meeting, a stockholder’s notice must be so received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (A) the 90th day prior to such annual meeting and (B) the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting (or the public disclosure thereof) commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

 

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The stockholder’s notice to the Secretary shall set forth: (A) as to each matter the stockholder proposes to bring before the annual meeting (1) a brief description of the business desired to be brought before the annual meeting, (2) the text of the proposal (including the exact text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend the By-laws, the exact text of the proposed amendment), and (3) the reasons for conducting such business at the annual meeting, and (B) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is being made (1) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner, (2) the class and series and number of shares of stock of the corporation that are, directly or indirectly, owned, beneficially or of record, by such stockholder and such beneficial owner, (3) a description of any material interest of such stockholder or such beneficial owner and the respective affiliates and associates of, or others acting in concert with, such stockholder or such beneficial owner in such business, (4) a description of any agreement, arrangement or understanding between or among such stockholder and/or such beneficial owner and any other person or persons (including their names) in connection with the proposal of such business or who may participate in the solicitation of proxies in favor of such proposal, (5) a description of any agreement, arrangement or understanding (including any derivative or short positions, swaps, profit interests, options, warrants, convertible securities, stock appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into by, or on behalf of, such stockholder or such beneficial owner, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such stockholder or such beneficial owner with respect to shares of stock of the corporation, (6) any other information relating to such stockholder and such beneficial owner that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the business proposed pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, (7) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting and (8) a representation whether such stockholder and/or such beneficial owner intends or is part of a group which intends (x) to deliver a proxy statement

 

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and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal (and such representation shall be included in any such proxy statement and form of proxy) and/or (y) otherwise to solicit proxies from stockholders in support of such proposal (and such representation shall be included in any such solicitation materials). Not later than 10 days after the record date for the meeting, the information required by Items (A)(3) and (B)(1)-(6) of the prior sentence shall be supplemented by the stockholder giving the notice to provide updated information as of the record date. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting of stockholders except in accordance with the procedures in this Section 1.11; provided that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Exchange Act and is to be included in the corporation’s proxy statement for an annual meeting of stockholders shall be deemed to comply with the notice requirements of this Section 1.11. A stockholder shall not have complied with this Section 1.11(b) if the stockholder (or beneficial owner, if any, on whose behalf the proposal is made) solicits or does not solicit, as the case may be, proxies in support of such stockholder’s proposal in contravention of the representations with respect thereto required by this Section 1.11.

(c) The chairman of any annual meeting shall have the power and duty to determine whether business was properly brought before the annual meeting in accordance with the provisions of this Section 1.11 (including whether the stockholder or beneficial owner, if any, on whose behalf the proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s proposal in compliance with the representation with respect thereto required by this Section 1.11), and if the chairman should determine that business was not properly brought before the annual meeting in accordance with the provisions of this Section 1.11, the chairman shall so declare to the meeting and such business shall not be brought before the annual meeting.

(d) Except as otherwise required by law, nothing in this Section 1.11 shall obligate the corporation or the Board of Directors to include in any proxy statement or other stockholder communication distributed on behalf of the corporation or the Board of Directors information with respect to any proposal submitted by a stockholder.

 

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(e) Notwithstanding the foregoing provisions of this Section 1.11, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual meeting to present business, such business shall not be considered, notwithstanding that proxies in respect of such business may have been received by the corporation.

(f) For purposes of this Section 1.11, the terms “qualified representative of the stockholder” and “public disclosure” shall have the same meaning as in Section 1.10.

1.12 Conduct of Meetings .

(a) Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the Chairman’s absence by the Vice Chairman of the Board, if any, or in the Vice Chairman’s absence by the Chief Executive Officer, or in the Chief Executive Officer’s absence, by the President, or in the President’s absence by a Vice President, or in the absence of all of the foregoing persons by a chairman designated by the Board of Directors. The Secretary shall act as secretary of the meeting, but in the Secretary’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

(b) The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the corporation as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the participation by means of remote communication of stockholders and proxyholders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as

 

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shall be determined; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

(c) The chairman of the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted.

(d) In advance of any meeting of stockholders, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President shall appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is present, ready and willing to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the corporation. Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law. Every vote taken by ballots shall be counted by a duly appointed inspector or duly appointed inspectors.

1.13 No Action by Consent in Lieu of a Meeting . Stockholders of the corporation may not take any action by written consent in lieu of a meeting.

 

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ARTICLE II

DIRECTORS

2.1 General Powers . The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation.

2.2 Number, Election and Qualification . Subject to the rights of holders of any series of Preferred Stock to elect directors, the number of directors of the corporation shall be established by the Board of Directors. Election of directors need not be by written ballot. Directors need not be stockholders of the corporation.

2.3 Chairman of the Board; Vice Chairman of the Board . The Board of Directors may appoint from its members a Chairman of the Board and a Vice Chairman of the Board, neither of whom need be an employee or officer of the corporation. If the Board of Directors appoints a Chairman of the Board, such Chairman shall perform such duties and possess such powers as are assigned by the Board of Directors and, if the Chairman of the Board is also designated as the corporation’s Chief Executive Officer, shall have the powers and duties of the Chief Executive Officer prescribed in Section 3.7 of these By-laws. If the Board of Directors appoints a Vice Chairman of the Board, such Vice Chairman shall perform such duties and possess such powers as are assigned by the Board of Directors. Unless otherwise provided by the Board of Directors, the Chairman of the Board or, in the Chairman’s absence, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors.

2.4 Classes of Directors . Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The allocation of directors among classes shall be determined by resolution of the Board of Directors.

 

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2.5 Terms of Office . Subject to the rights of holders of any series of Preferred Stock to elect directors, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided that each director initially assigned to Class I shall serve for a term expiring at the corporation’s first annual meeting of stockholders held after the effectiveness of these Amended and Restated By-laws; each director initially assigned to Class II shall serve for a term expiring at the corporation’s second annual meeting of stockholders held after the effectiveness of these Amended and Restated By-laws; and each director initially assigned to Class III shall serve for a term expiring at the corporation’s third annual meeting of stockholders held after the effectiveness of these Amended and Restated By-laws; provided further, that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, resignation or removal.

2.6 Quorum . The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors established by the Board of Directors pursuant to Section 2.2 of these By-laws shall constitute a quorum of the Board of Directors. If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

2.7 Action at Meeting . Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number is required by law or by the Certificate of Incorporation.

2.8 Removal . Subject to the rights of holders of any series of Preferred Stock, directors of the corporation may be removed only for cause and only by the affirmative vote of the holders of at least 75% of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors.

2.9 Vacancies . Subject to the rights of holders of any series of Preferred Stock, any vacancy or newly-created directorship on the Board of Directors, however occurring, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director and shall not be filled by the stockholders. A director elected to fill a vacancy shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of a successor or until such director’s earlier death, resignation or removal.

 

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2.10 Resignation . Any director may resign by delivering a resignation in writing or by electronic transmission to the corporation at its principal office or to the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Such resignation shall be effective upon delivery unless it is specified to be effective at some later time or upon the happening of some later event.

2.11 Regular Meetings . Regular meetings of the Board of Directors may be held without notice at such time and place as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders.

2.12 Special Meetings . Special meetings of the Board of Directors may be held at any time and place designated in a call by the Chairman of the Board, the Chief Executive Officer, the President, two or more directors, or by one director in the event that there is only a single director in office.

2.13 Notice of Special Meetings . Notice of the date, place and time of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (a) in person or by telephone at least 24 hours in advance of the meeting, (b) by sending written notice by reputable overnight courier, telecopy, facsimile or electronic transmission, or delivering written notice by hand, to such director’s last known business, home or electronic transmission address at least 48 hours in advance of the meeting, or (c) by sending written notice by first-class mail to such director’s last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting.

2.14 Meetings by Conference Communications Equipment . Directors may participate in meetings of the Board of Directors or any committee thereof by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting.

 

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2.15 Action by Consent . Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent to the action in writing or by electronic transmission, and the written consents or electronic transmissions are filed with the minutes of proceedings of the Board of Directors 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.

2.16 Committees . The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation with such lawfully delegable powers and duties as the Board of Directors thereby confers, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one 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 of the committee 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 of Directors 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 of Directors and subject to the provisions of law, shall have and may exercise all the powers and authority of the Board of Directors 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 which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-laws for the Board of Directors. Except as otherwise provided in the Certificate of Incorporation, these By-laws, or the resolution of the Board of Directors designating the committee, a committee may create one or more subcommittees, each subcommittee to consist of one or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.

 

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2.17 Compensation of Directors . Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary entities in any other capacity and receiving compensation for such service.

ARTICLE III

OFFICERS

3.1 Titles . The officers of the corporation shall consist of a Chief Executive Officer, a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including one or more Vice Presidents, Assistant Treasurers and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate.

3.2 Election . The Chief Executive Officer, President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting.

3.3 Qualification . No officer need be a stockholder. Any two or more offices may be held by the same person.

3.4 Tenure . Except as otherwise provided by law, by the Certificate of Incorporation or by these By-laws, each officer shall hold office until such officer’s successor is elected and qualified, unless a different term is specified in the resolution electing or appointing such officer, or until such officer’s earlier death, resignation or removal.

 

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3.5 Resignation and Removal . Any officer may resign by delivering a written resignation to the corporation at its principal office or to the Chief Executive Officer, the President or the Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some later time or upon the happening of some later event. Any officer may be removed at any time, with or without cause, by vote of a majority of the directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following such officer’s resignation or removal, or any right to damages on account of such removal, whether such officer’s compensation be by the month or by the year or otherwise, unless such compensation is expressly provided for in a duly authorized written agreement with the corporation.

3.6 Vacancies . The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of Chief Executive Officer, President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of such officer’s predecessor and until a successor is elected and qualified, or until such officer’s earlier death, resignation or removal.

3.7 President; Chief Executive Officer . Unless the Board of Directors has designated another person as the corporation’s Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The Chief Executive Officer shall have general charge and supervision of the business of the corporation subject to the direction of the Board of Directors, and shall perform all duties and have all powers that are commonly incident to the office of chief executive or that are delegated to such officer by the Board of Directors. The President shall perform such other duties and shall have such other powers as the Board of Directors or the Chief Executive Officer (if the President is not the Chief Executive Officer) may from time to time prescribe. In the event of the absence, inability or refusal to act of the Chief Executive Officer or the President (if the President is not the Chief Executive Officer), the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the Chief Executive Officer and when so performing such duties shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer.

3.8 Vice Presidents . Each Vice President shall perform such duties and possess such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors.

 

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3.9 Secretary and Assistant Secretaries . The Secretary shall perform such duties and shall have such powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents.

Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary.

In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the chairman of the meeting shall designate a temporary secretary to keep a record of the meeting.

3.10 Treasurer and Assistant Treasurers . The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned by the Board of Directors or the Chief Executive Officer. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation.

 

19


The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer.

3.11 Salaries . Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.

3.12 Delegation of Authority . The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

ARTICLE IV

CAPITAL STOCK

4.1 Issuance of Stock . Subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any shares of the authorized capital stock of the corporation held in the corporation’s treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such lawful consideration and on such terms as the Board of Directors may determine.

4.2 Stock Certificates; Uncertificated Shares . The shares of the corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the corporation’s stock shall be uncertificated shares. Every holder of stock of the corporation represented by certificates shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, representing the number of shares held by such holder registered in certificate form. Each such certificate shall be signed in a manner that complies with Section 158 of the General Corporation Law of the State of Delaware.

 

20


Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, these By-laws, applicable securities laws or any agreement among any number of stockholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction.

If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, 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 shall be set forth in full or summarized on the face or back of each certificate representing shares of such class or series of stock, provided that in lieu of the foregoing requirements there may be set forth on the face or back of each certificate representing shares of such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the full text of 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.

Within a reasonable time after the issuance or transfer of uncertificated shares, 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 Sections 151, 202(a) or 218(a) of the General Corporation Law of the State of Delaware or, with respect to Section 151 of General Corporation Law of the State of Delaware, 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.

4.3 Transfers . Shares of stock of the corporation shall be transferable in the manner prescribed by law and in these By-laws. Transfers of shares of stock of the corporation shall be made only on the books of the corporation or by transfer agents designated to transfer shares of stock of the corporation. Subject to applicable law, shares of stock represented by certificates shall be transferred only on the books of the corporation by the surrender to the corporation or its

 

21


transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws.

4.4 Lost, Stolen or Destroyed Certificates . The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity and posting of such bond as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar.

4.5 Record Date . The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not precede the date on which the resolution fixing the record date is adopted, and such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates.

If no record date is fixed, 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 before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. If no record date is fixed, the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose.

 

22


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 of Directors may fix a new record date for the adjourned meeting.

4.6 Regulations . The issue, transfer, conversion and registration of shares of stock of the corporation shall be governed by such other regulations as the Board of Directors may establish.

ARTICLE V

GENERAL PROVISIONS

5.1 Fiscal Year . Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January of each year and end on the last day of December in each year.

5.2 Corporate Seal . The corporate seal shall be in such form as shall be approved by the Board of Directors.

5.3 Waiver of Notice . Whenever notice is required to be given by law, by the Certificate of Incorporation or by these By-laws, a written waiver signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before, at or after the time of the event for which notice is to be given, shall be deemed equivalent to notice required to be given to such person. Neither the business nor the purpose of any meeting need be specified in any such waiver. Attendance of a person at a meeting shall 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.

5.4 Voting of Securities . Except as the Board of Directors may otherwise designate, the Chief Executive Officer, the President or the Treasurer may waive notice of, vote, or appoint any person or persons to vote, on behalf of the corporation at, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or securityholders of any other entity, the securities of which may be held by this corporation.

 

23


5.5 Evidence of Authority . A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action.

5.6 Certificate of Incorporation . All references in these By-laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time.

5.7 Severability . Any determination that any provision of these By-laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-laws.

5.8 Pronouns . All pronouns used in these By-laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

ARTICLE VI

AMENDMENTS

These By-laws may be altered, amended or repealed, in whole or in part, or new By-laws may be adopted by the Board of Directors or by the stockholders as provided in the Certificate of Incorporation.

 

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Exhibit 3.5

CERTIFICATE OF AMENDMENT TO

FOURTH AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

CONCERT PHARMACEUTICALS, INC.

Pursuant to Section 242 of the

General Corporation Law of the State of Delaware

Concert Pharmaceuticals, Inc. (hereinafter called the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows:

A resolution was duly adopted by the Board of Directors of the Corporation pursuant to Section 242 of the General Corporation Law of the State of Delaware setting forth an amendment to the Fourth Amended and Restated Certificate of Incorporation of the Corporation, as amended, and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. The resolutions setting forth the amendment are as follows:

 

RESOLVED :    That the first sentence of Article FOURTH of the Fourth Amended and Restated Certificate of Incorporation of the Corporation, as amended, be and hereby is deleted in its entirety and the following three paragraphs are inserted in lieu thereof:
   “FOURTH. That, effective on the filing of this Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Effective Time”), a one-for-5.65 reverse stock split of the Corporation’s common stock, par value $0.001 per share (the “Common Stock”), shall become effective, pursuant to which each 5.65 shares of Common Stock outstanding and held of record by each stockholder of the Corporation (including treasury shares) immediately prior to the Effective Time shall be reclassified and combined into one validly issued, fully paid and nonassessable share of Common Stock automatically and without any action by the holder thereof upon the Effective Time and shall represent one share of Common Stock from and after the Effective Time (such reclassification and combination of shares, the “Reverse Stock Split”). The par value of the Common Stock following the Reverse Stock Split shall remain at $0.001 per share. No fractional shares of Common Stock shall be issued as a result of the Reverse Stock Split and, in lieu thereof, upon surrender after the Effective Time of a certificate which formerly represented shares of Common Stock


     that were issued and outstanding immediately prior to the Effective Time, any person who would otherwise be
entitled to a fractional share of Common Stock as a result of the Reverse Stock Split, following the Effective Time,
shall be entitled to receive a cash payment equal to the fraction of a share of Common Stock to which such holder
would otherwise be entitled multiplied by the fair value per share of the Common Stock immediately prior to the
Effective Time as determined by the Board of Directors of the Corporation.
  

Each stock certificate that, immediately prior to the Effective Time, represented shares of Common Stock that were issued and outstanding immediately prior to the Effective Time shall, from and after the Effective Time, automatically and without the necessity of presenting the same for exchange, represent that number of whole shares of Common Stock after the Effective Time into which the shares formerly represented by such certificate have been reclassified (as well as the right to receive cash in lieu of fractional shares of Common Stock after the Effective Time); provided, however, that each person of record holding a certificate that represented shares of Common Stock that were issued and outstanding immediately prior to the Effective Time shall receive, upon surrender of such certificate, a new certificate evidencing and representing the number of whole shares of Common Stock after the Effective Time into which the shares of Common Stock formerly represented by such certificate shall have been reclassified.

  

The total number of shares of all classes of stock that the Corporation shall have the authority to issue is 146,633,334 shares consisting of 83,716,667 shares of Common Stock; and 62,916,667 shares of preferred stock (the “ Preferred Stock ”), of which 10,000,000 shares are designated Series A Convertible Preferred Stock, par value $0.001 per share (the “ Series A Preferred Stock ”), 24,250,000 shares are designated Series B Convertible Preferred Stock, par value $0.001 per share (the “ Series B Preferred Stock ”), 22,000,000 shares are designated Series C Convertible Preferred Stock, par value $0.001 per share (the “ Series C Preferred Stock ”), and 6,666,667 shares are designated Series D Convertible Preferred Stock, par value $0.001 per share (the “ Series D Preferred Stock ” and, together with the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, the “ Preferred Stock ”).”

RESOLVED :    That Section 2(b)(i) of ARTICLE FOURTH of the Fourth Amended and Restated Certificate of Incorporation of the Corporation, as amended, be and hereby is deleted in its entirety and the following is inserted in lieu thereof:
   “(i)Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price or Series D Conversion

 

- 2 -


     Price, as applicable, then in effect, plus any declared but unpaid dividends thereon, upon the closing of a firm
commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public with
gross proceeds to the Corporation of not less than $30,000,000 (in the event of which offering, the person(s) entitled
to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have
converted the Preferred Stock until the closing of such offering) (a “ Qualified Public Offering ”).”
RESOLVED :    That Section 2(e)(i)(4)(B) of Article FOURTH of the Fourth Amended and Restated Certificate of Incorporation of the Corporation, as amended, be and hereby is amended by deleting the number “12,500,000” and inserting in lieu thereof “2,212,389”.
RESOLVED :    That Section 3(e)(vi) of Article FOURTH of the Fourth Amended and Restated Certificate of Incorporation of the Corporation, as amended, be and hereby is amended by deleting the number “1,000,000” and inserting in lieu thereof “176,991”.

IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its President and Chief Executive Officer this 29 th day of January, 2014.

 

CONCERT PHARMACEUTICALS, INC.
By:  

/s/ Roger D. Tung

  Roger D. Tung
  President and Chief Executive Officer

 

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Exhibit 4.1

 

LOGO

CoNCERT Pharmaceuticals Inc.

PO BOX 43004, Providence, RI 02940-3004

MR A SAMPLE

DESIGNATION (IF ANY)

ADD 1

ADD 2

ADD 3

ADD 4

CUSIP XXXXXX XX X

Holder ID XXXXXXXXXX

Insurance Value 1,000,000.00

Number of Shares 123456

DTC 12345678 123456789012345

Certificate Numbers Num/No. Denom. Total

1234567890/1234567890 1 1 1

1234567890/1234567890 2 2 2

1234567890/1234567890 3 3 3

1234567890/1234567890 4 4 4

1234567890/1234567890 5 5 5

1234567890/1234567890 6 6 6

Total Transaction 7

ZQ|CERT#|COY|CLS|RGSTRY|ACCT#|TRANSTYPE|RUN#|TRANS#

COMMON STOCK PAR VALUE $0.001

CoNCERT Pharmaceuticals Inc.

COMMON STOCK

THIS CERTIFICATE IS TRANSFERABLE IN CANTON, MA, JERSEY CITY, NJ AND COLLEGE STATION, TX

Certificate Number ZQ00000000

CONCERT PHARMACEUTICALS, INC.

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

Shares

**000000***********

***000000**********

****000000*********

*****000000********

******000000*******

CUSIP 206022 10 5

SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT MR. SAMPLE & MRS. SAMPLE &

MR. SAMPLE & MRS. SAMPLE

Is the owner of

*** ZERO HUNDRED THOUSAND ZERO HUNDERD AND ZERO***

FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF

Concert Pharmaceuticals, Inc. (hereinafter called the “Company”), transferable on the books of the Company in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby, are issued and shall be held subject to all of the provisions of the Certificate of Incorporation, as amended, and the By-Laws, as amended, of the Company (copies of which are on file with the Company and with the Transfer Agent), to all of which each holder, by acceptance hereof, assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

Witness the facsimile seal of the Company and the facsimile signatures of its duly authorized officers.

DATED DD-MMM-YYYY

COUNTERSIGNED AND REGISTERED:

COMPUTERSHARE TRUST COMPANY, N.A.

TRANSFER AGENT AND REGISTRAR,

CONCERT PHARMACEUTICALS, INC.

President and Chief Executive Officer SEAL 2006 DELAWARE

By

Senior Vice President and General Counsel AUTHORIZED SIGNATURE

1234567


 

CONCERT PHARMACEUTICALS, INC.

THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS, A SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE COMPANY AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND RIGHTS, AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH SERIES, WHICH ARE FIXED BY THE CERTIFICATE OF INCORPORATION OF THE COMPANY, AS AMENDED, AND THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE COMPANY, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES. SUCH REQUEST MAY BE MADE TO THE OFFICE OF THE SECRETARY OF THE COMPANY OR TO THE TRANSFER AGENT. THE BOARD OF DIRECTORS MAY REQUIRE THE OWNER OF A LOST OR DESTROYED STOCK CERTIFICATE, OR HIS LEGAL REPRESENTATIVES, TO GIVE THE COMPANY A BOND TO INDEMNIFY IT AND ITS TRANSFER AGENTS AND REGISTRARS AGAINST ANY CLAIM THAT MAY BE MADE AGAINST THEM ON ACCOUNT OF THE ALLEGED LOSS OR DESTRUCTION OF ANY SUCH CERTIFICATE.

 

    The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
   
        TEN COM   -   as tenants in common    UNIF GIFT MIN ACT   -                                                       Custodian                                                     
                                     (Cust)                                            (Minor)
        TEN ENT   -   as tenants by the entireties      under Uniform Gifts to Minors Act                                                                  
                                                        (State)
        JT TEN   -   as joint tenants with right of survivorship and not as tenants in common    UNIF TRF MIN ACT  

-                                                       Custodian (until age                                     )

                         (Cust)

                                           under Uniform Transfers to Minors Act                             
                       (Minor)                                                                 (State)
        Additional abbreviations may also be used though not in the above list.        

 

  PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

 

For value received,                                               hereby sell, assign and transfer unto

 

   

 

 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)

 

 

 

 

 

 

 

 

   Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint   

 

   Attorney
to transfer the said stock on the books of the within-named Company with full power of substitution in the premises.   

 

Dated:                                                                                  20                                 

Signature(s) Guaranteed: Medallion Guarantee Stamp

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.

 

Signature:

 

 

      

 

Signature:

 

 

      
  Notice:   The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever.       
            
            
            

 

LOGO

Exhibit 5.1

 

February 3, 2014    LOGO

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, MA 02421

 

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

This opinion is furnished to you in connection with a Registration Statement on Form S-1 (File No. 333-193335) (the “Registration Statement”) filed with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), for the registration of shares of Common Stock, par value $0.001 per share, of Concert Pharmaceuticals, Inc., a Delaware corporation (the “Company”), with a proposed maximum aggregate offering price of $80,500,000 (the “Shares”), including Shares issuable upon exercise of an over-allotment option granted by the Company.

The Shares are to be sold by the Company pursuant to an underwriting agreement (the “Underwriting Agreement”) to be entered into by and among the Company and UBS Securities LLC and Wells Fargo Securities, LLC, as representatives of the several underwriters named in the Underwriting Agreement, the form of which has been filed as Exhibit 1.1 to the Registration Statement.

We are acting as counsel for the Company in connection with the issue and sale by the Company of the Shares. We have examined signed copies of the Registration Statement as filed with the Commission. We have also examined and relied upon the Underwriting Agreement, minutes of meetings of the stockholders and the Board of Directors of the Company as provided to us by the Company, stock record books of the Company as provided to us by the Company, the Certificate of Incorporation and By-Laws of the Company, each as restated and/or amended to date, and such other documents as we have deemed necessary for purposes of rendering the opinions hereinafter set forth.

In our examination of the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, the authenticity of the originals of such latter documents and the legal competence of all signatories to such documents.

We express no opinion herein as to the laws of any state or jurisdiction other than the state laws of the Commonwealth of Massachusetts, the General Corporation Law of the State of Delaware and the federal laws of the United States of America.

Based upon and subject to the foregoing, we are of the opinion that the Shares have been duly authorized for issuance and, when the Shares are issued and paid for in accordance with the terms and conditions of the Underwriting Agreement, the Shares will be validly issued, fully paid and nonassessable.

 

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LOGO

February 3, 2014

Page 2

 

Please note that we are opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein.

We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our name therein and in the related Prospectus under the caption “Legal matters.” In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.

Sincerely,

 

WILMER CUTLER PICKERING

HALE AND DORR LLP

By:  

/s/ Lia Der Marderosian

  Lia Der Marderosian, Partner

Exhibit 10.6

C ONCERT P HARMACEUTICALS , I NC .

2014 STOCK INCENTIVE PLAN

January 29, 2014

 

1. Purpose

The purpose of this 2014 Stock Incentive Plan (the “ Plan ”) of Concert Pharmaceuticals, Inc., a Delaware corporation (the “ Company ”), is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who are expected to make important contributions to the Company and by providing such persons with equity ownership opportunities and performance-based incentives that are intended to better align the interests of such persons with those of the Company’s stockholders. Except where the context otherwise requires, the term “ Company ” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations thereunder (the “ Code ”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a controlling interest, as determined by the Board of Directors of the Company (the “ Board ”).

 

2. Eligibility

All of the Company’s employees, officers and directors, as well as consultants and advisors to the Company (as such terms are defined and interpreted for purposes of Form S-8 under the Securities Act of 1933, as amended (the “ Securities Act ”), or any successor form) are eligible to be granted Awards under the Plan. Each person who is granted an Award under the Plan is deemed a “ Participant .” “ Award ” means Options (as defined in Section 5), SARs (as defined in Section 6), Restricted Stock (as defined in Section 7), Restricted Stock Units (as defined in Section 7) and Other Stock-Based Awards (as defined in Section 8).

 

3. Administration and Delegation

(a) Administration by Board of Directors . The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may construe and interpret the terms of the Plan and any Award agreements entered into under the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award.


(b) Appointment of Committees . To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a “ Committee ”). All references in the Plan to the “ Board ” shall mean the Board or a Committee of the Board or the officers referred to in Section 3(c) to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee or officers.

(c) Delegation to Officers . To the extent permitted by applicable law, the Board may delegate to one or more officers of the Company the power to grant Options and other Awards that constitute rights under Delaware law (subject to any limitations under the Plan) to employees or officers of the Company and to exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the terms of such Awards to be granted by such officers (including the exercise prices of such Awards, which may include a formula by which the exercise prices will be determined) and the maximum number of shares subject to such Awards that the officers may grant; provided further , however, that no officer shall be authorized to grant such Awards to any “executive officer” of the Company (as defined by Rule 3b-7 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) or to any “officer” of the Company (as defined by Rule 16a-1 under the Exchange Act). The Board may not delegate authority under this Section 3(c) to grant Restricted Stock, unless Delaware law then permits such delegation.

 

4. Stock Available for Awards

(a) Number of Shares; Share Counting .

(1) Authorized Number of Shares . Subject to adjustment under Section 9, Awards may be made under the Plan (any or all of which Awards may be in the form of Incentive Stock Options, as defined in Section 5(b)) for up to such number of shares of common stock, par value $0.001 per share, of the Company (the “ Common Stock ”) as is equal to the sum of:

(A) the lesser of 2,600,000 shares of Common Stock and the number of shares of Common Stock that represents 12% of the outstanding shares of Common Stock upon the closing of the Company’s initial public offering; plus

(B) such additional number of shares of Common Stock (up to 2,200,000 shares) as is equal to the sum of (i) the number of shares of Common Stock reserved for issuance under the Company’s Amended and Restated 2006 Stock Option and Grant Plan (the “ Existing Plan ”) that remain available for grant under the Existing Plan immediately prior to the closing of the Company’s initial public offering and (ii) the number of shares of Common Stock subject to awards granted under the Existing Plan which awards expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (subject, however, in the case of Incentive Stock Options to any limitations of the Code); plus

(C) an annual increase to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2015 and continuing for each fiscal year

 

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until, and including, the fiscal year ending December 31, 2024, equal to the least of (i) 2,000,000, (ii) 4% of the number of outstanding shares of Common Stock on such date or (iii) an amount determined by the Board.

Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares.

(2) Share Counting . For purposes of counting the number of shares available for the grant of Awards under the Plan:

(A) all shares of Common Stock covered by SARs shall be counted against the number of shares available for the grant of Awards under the Plan; provided, however , that (i) SARs that may be settled only in cash shall not be so counted and (ii) if the Company grants an SAR in tandem with an Option for the same number of shares of Common Stock and provides that only one such Award may be exercised (a “ Tandem SAR ”), only the shares covered by the Option, and not the shares covered by the Tandem SAR, shall be so counted, and the expiration of one in connection with the other’s exercise will not restore shares to the Plan;

(B) if any Award (i) expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or (ii) results in any Common Stock not being issued (including as a result of an SAR that was settleable either in cash or in stock actually being settled in cash), the unused Common Stock covered by such Award shall again be available for the grant of Awards; provided, however , that (1) in the case of Incentive Stock Options, the foregoing shall be subject to any limitations under the Code, (2) in the case of the exercise of an SAR, the number of shares counted against the shares available under the Plan shall be the full number of shares subject to the SAR multiplied by the percentage of the SAR actually exercised, regardless of the number of shares actually used to settle such SAR upon exercise and (3) the shares covered by a Tandem SAR shall not again become available for grant upon the expiration or termination of such Tandem SAR; and

(C) shares of Common Stock delivered (either by actual delivery, attestation or net exercise) to the Company by a Participant to (i) purchase shares of Common Stock upon the exercise of an Award or (ii) satisfy tax withholding obligations with respect to Options and SARs (including shares retained from the Option or SAR creating the tax obligation) shall not be added back to the number of shares available for the future grant of Awards.

(b) Substitute Awards . In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Awards in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Substitute Awards may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Awards contained in the Plan. Substitute Awards shall not count against the overall share limit set forth in Section 4(a)(1), except as may be required by reason of Section 422 and related provisions of the Code.

 

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5. Stock Options

(a) General . The Board may grant options to purchase Common Stock (each, an “ Option ”) and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable.

(b) Incentive Stock Options . An Option that the Board intends to be an “incentive stock option” as defined in Section 422 of the Code (an “ Incentive Stock Option ”) shall only be granted to employees of Concert Pharmaceuticals, Inc., any of Concert Pharmaceuticals, Inc.’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Code, and any other entities the employees of which are eligible to receive Incentive Stock Options under the Code, and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. An Option that is not intended to be an Incentive Stock Option shall be designated a “ Nonstatutory Stock Option .” The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) that is intended to be an Incentive Stock Option is not an Incentive Stock Option or if the Company converts an Incentive Stock Option to a Nonstatutory Stock Option.

(c) Exercise Price . The Board shall establish the exercise price of each Option and specify the exercise price in the applicable Option agreement. The exercise price shall be not less than 100% of the fair market value per share of Common Stock as determined by (or in a manner approved by) the Board (“ Fair Market Value ”) on the date the Option is granted; provided that if the Board approves the grant of an Option with an exercise price to be determined on a future date, the exercise price shall be not less than 100% of the Fair Market Value on such future date.

(d) Duration of Options . Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement; provided, however , that no Option will be granted with a term in excess of 10 years.

(e) Exercise of Options . Options may be exercised by delivery to the Company of a notice of exercise in a form (which may be electronic) approved by the Company, together with payment in full (in the manner specified in Section 5(f)) of the exercise price for the number of shares for which the Option is exercised. Shares of Common Stock subject to the Option will be delivered by the Company as soon as practicable following exercise.

(f) Payment Upon Exercise . Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows:

(1) in cash or by check, payable to the order of the Company;

(2) except as may otherwise be provided in the applicable Option agreement or approved by the Board, in its sole discretion, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

 

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(3) to the extent provided for in the applicable Option agreement or approved by the Board, in its sole discretion, by delivery (either by actual delivery or attestation) of shares of Common Stock owned by the Participant valued at their Fair Market Value, provided (i) such method of payment is then permitted under applicable law, (ii) such Common Stock, if acquired directly from the Company, was owned by the Participant for such minimum period of time, if any, as may be established by the Board in its discretion and (iii) such Common Stock is not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements;

(4) to the extent provided for in the applicable Nonstatutory Stock Option agreement or approved by the Board in its sole discretion, by delivery of a notice of “net exercise” to the Company, as a result of which the Participant would receive (i) the number of shares underlying the portion of the Option being exercised, less (ii) such number of shares as is equal to (A) the aggregate exercise price for the portion of the Option being exercised divided by (B) the Fair Market Value on the date of exercise;

(5) to the extent permitted by applicable law and provided for in the applicable Option agreement or approved by the Board, in its sole discretion, by payment of such other lawful consideration as the Board may determine; or

(6) by any combination of the above permitted forms of payment.

(g) Limitation on Repricing . Unless such action is approved by the Company’s stockholders, the Company may not (except as provided for under Section 9): (1) amend any outstanding Option granted under the Plan to provide an exercise price per share that is lower than the then-current exercise price per share of such outstanding Option, (2) cancel any outstanding option (whether or not granted under the Plan) and grant in substitution therefor new Awards under the Plan (other than Awards granted pursuant to Section 4(b)) covering the same or a different number of shares of Common Stock and having an exercise price per share lower than the then-current exercise price per share of the cancelled option, (3) cancel in exchange for a cash payment any outstanding Option with an exercise price per share above the then-current Fair Market Value or (4) take any other action under the Plan that constitutes a “repricing” within the meaning of the rules of the NASDAQ Stock Market (“ NASDAQ ”).

 

6. Stock Appreciation Rights

(a) General . The Board may grant Awards consisting of stock appreciation rights (“ SARs ”) entitling the holder, upon exercise, to receive an amount of Common Stock or cash or a combination thereof (such form to be determined by the Board) determined by reference to appreciation, from and after the date of grant, in the Fair Market Value of a share of Common Stock over the measurement price established pursuant to Section 6(b). The date as of which such appreciation is determined shall be the exercise date.

(b) Measurement Price . The Board shall establish the measurement price of each SAR and specify it in the applicable SAR agreement. The measurement price shall not be less than 100% of the Fair Market Value on the date the SAR is granted; provided that if the Board approves the grant of an SAR effective as of a future date, the measurement price shall be not less than 100% of the Fair Market Value on such future date.

 

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(c) Duration of SARs . Each SAR shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable SAR agreement; provided, however , that no SAR will be granted with a term in excess of 10 years.

(d) Exercise of SARs . SARs may be exercised by delivery to the Company of a notice of exercise in a form (which may be electronic) approved by the Company, together with any other documents required by the Board.

(e) Limitation on Repricing . Unless such action is approved by the Company’s stockholders, the Company may not (except as provided for under Section 9): (1) amend any outstanding SAR granted under the Plan to provide a measurement price per share that is lower than the then-current measurement price per share of such outstanding SAR, (2) cancel any outstanding SAR (whether or not granted under the Plan) and grant in substitution therefor new Awards under the Plan (other than Awards granted pursuant to Section 4(b)) covering the same or a different number of shares of Common Stock and having an exercise or measurement price per share lower than the then-current measurement price per share of the cancelled SAR, (3) cancel in exchange for a cash payment any outstanding SAR with a measurement price per share above the then-current Fair Market Value or (4) take any other action under the Plan that constitutes a “repricing” within the meaning of the rules of NASDAQ.

 

7. Restricted Stock; Restricted Stock Units

(a) General . The Board may grant Awards entitling recipients to acquire shares of Common Stock (“ Restricted Stock ”), subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award. The Board may also grant Awards entitling the recipient to receive shares of Common Stock or cash to be delivered at the time such Award vests (“ Restricted Stock Units ”) (Restricted Stock and Restricted Stock Units are each referred to herein as a “ Restricted Stock Award ”).

(b) Terms and Conditions for All Restricted Stock Awards . The Board shall determine the terms and conditions of a Restricted Stock Award, including the conditions for vesting and repurchase (or forfeiture) and the issue price, if any.

(c) Additional Provisions Relating to Restricted Stock .

(1) Dividends . Unless otherwise provided in the applicable Award agreement, any dividends (whether paid in cash, stock or property) declared and paid by the Company with respect to shares of Restricted Stock (“ Accrued Dividends ”) shall be paid to the Participant only if and when such shares become free from the restrictions on transferability and forfeitability that apply to such shares. Each payment of Accrued Dividends will be made no later than the end of the calendar year in which the dividends are paid to stockholders of that class of stock or, if later, the 15th day of the third month following the lapsing of the restrictions on transferability and the forfeitability provisions applicable to the underlying shares of Restricted Stock.

 

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(2) Stock Certificates . The Company may require that any stock certificates issued in respect of shares of Restricted Stock, as well as dividends or distributions paid on such Restricted Stock, shall be deposited in escrow by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to his or her Designated Beneficiary. “ Designated Beneficiary ” means (i) the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death or (ii) in the absence of an effective designation by a Participant, the Participant’s estate.

(d) Additional Provisions Relating to Restricted Stock Units .

(1) Settlement . Upon the vesting of and/or lapsing of any other restrictions (i.e., settlement) with respect to each Restricted Stock Unit, the Participant shall be entitled to receive from the Company one share of Common Stock or (if so provided in the applicable Award agreement) an amount of cash equal to the Fair Market Value of one share of Common Stock. The Board may, in its discretion, provide that settlement of Restricted Stock Units shall be deferred, on a mandatory basis or at the election of the Participant in a manner that complies with Section 409A of the Code.

(2) Voting Rights . A Participant shall have no voting rights with respect to any Restricted Stock Units.

(3) Dividend Equivalents . The Award agreement for Restricted Stock Units may provide Participants with the right to receive an amount equal to any dividends or other distributions declared and paid on an equal number of outstanding shares of Common Stock (“ Dividend Equivalents ”). Dividend Equivalents may be paid currently or credited to an account for the Participant, may be settled in cash and/or shares of Common Stock and may be subject to the same restrictions on transfer and forfeitability as the Restricted Stock Units with respect to which paid, in each case to the extent provided in the Award agreement.

 

8. Other Stock-Based Awards

(a) General . Other Awards of shares of Common Stock, and other Awards that are valued in whole or in part by reference to, or are otherwise based on, shares of Common Stock or other property, may be granted hereunder to Participants (“ Other Stock-Based-Awards ”). Such Other Stock-Based Awards shall also be available as a form of payment in the settlement of other Awards granted under the Plan or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may be paid in shares of Common Stock or cash, as the Board shall determine.

(b) Terms and Conditions . Subject to the provisions of the Plan, the Board shall determine the terms and conditions of each Other Stock-Based Award, including any purchase price applicable thereto.

 

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9. Adjustments for Changes in Common Stock and Certain Other Events

(a) Changes in Capitalization . In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any dividend or distribution to holders of Common Stock other than an ordinary cash dividend, in each case after the Effective Date (as defined below), (i) the number and class of securities available under the Plan, (ii) the share counting rules set forth in Section 4(a), (iii) the number and class of securities and exercise price per share of each outstanding Option, (iv) the share and per-share provisions and the measurement price of each outstanding SAR, (v) the number of shares subject to and the repurchase price per share subject to each outstanding Restricted Stock Award and (vi) the share and per-share-related provisions and the purchase price, if any, of each outstanding Other Stock-Based Award, shall be equitably adjusted by the Company (or substituted Awards may be made, if applicable) in the manner determined by the Board. Without limiting the generality of the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to an outstanding Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

(b) Reorganization Events .

(1) Definition . A “ Reorganization Event ” shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property or is cancelled, (b) any transfer or disposition of all of the Common Stock of the Company for cash, securities or other property pursuant to a share exchange or other transaction or (c) any liquidation or dissolution of the Company.

(2) Consequences of a Reorganization Event on Awards Other than Restricted Stock .

(A) In connection with a Reorganization Event, the Board may take any one or more of the following actions as to all or any (or any portion of) outstanding Awards other than Restricted Stock on such terms as the Board determines (except to the extent specifically provided otherwise in an applicable Award agreement or another agreement between the Company and the Participant): (i) provide that such Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), (ii) upon written notice to a Participant, provide that all of the Participant’s unvested and/or unexercised Awards will terminate immediately prior to the consummation of such Reorganization Event unless exercised by the Participant (to the extent then exercisable) within a specified period following the date of such notice, (iii) provide that outstanding Awards shall become exercisable, realizable or deliverable, or restrictions applicable to an Award shall lapse, in whole or in part prior to or upon such Reorganization Event, (iv) in

 

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the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share surrendered in the Reorganization Event (the “ Acquisition Price ”), make or provide for a cash payment to Participants with respect to each Award held by a Participant equal to (A) the number of shares of Common Stock subject to the vested portion of the Award (after giving effect to any acceleration of vesting that occurs upon or immediately prior to such Reorganization Event) multiplied by (B) the excess, if any, of (I) the Acquisition Price over (II) the exercise, measurement or purchase price of such Award and any applicable tax withholdings, in exchange for the termination of such Award, (v) provide that, in connection with a liquidation or dissolution of the Company, Awards shall convert into the right to receive liquidation proceeds (if applicable, net of the exercise, measurement or purchase price thereof and any applicable tax withholdings) and (vi) any combination of the foregoing. In taking any of the actions permitted under this Section 9(b)(2), the Board shall not be obligated by the Plan to treat all Awards, all Awards held by a Participant, or all Awards of the same type, identically.

(B) Notwithstanding the terms of Section 9(b)(2)(A), in the case of outstanding Restricted Stock Units that are subject to Section 409A of the Code: (i) if the applicable Restricted Stock Unit agreement provides that the Restricted Stock Units shall be settled upon a “change in control event” within the meaning of Treasury Regulation Section 1.409A-3(i)(5)(i), and the Reorganization Event constitutes such a “change in control event”, then no assumption or substitution shall be permitted pursuant to Section 9(b)(2)(A)(i) and the Restricted Stock Units shall instead be settled in accordance with the terms of the applicable Restricted Stock Unit agreement; and (ii) the Board may only undertake the actions set forth in clauses (iii), (iv) or (v) of Section 9(b)(2)(A) if the Reorganization Event constitutes a “change in control event” as defined under Treasury Regulation Section 1.409A-3(i)(5)(i) and such action is permitted or required by Section 409A of the Code; if the Reorganization Event is not a “change in control event” as so defined or such action is not permitted or required by Section 409A of the Code, and the acquiring or succeeding corporation does not assume or substitute the Restricted Stock Units pursuant to clause (i) of Section 9(b)(2)(A), then the unvested Restricted Stock Units shall terminate immediately prior to the consummation of the Reorganization Event without any payment in exchange therefor.

(C) For purposes of Section 9(b)(2)(A)(i), an Award (other than Restricted Stock) shall be considered assumed if, following consummation of the Reorganization Event, such Award confers the right to purchase or receive pursuant to the terms of such Award, for each share of Common Stock subject to the Award immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however , that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise or settlement of the Award to consist solely of such number of shares of common stock of the acquiring or succeeding corporation (or an affiliate thereof) that the Board determined to be equivalent in value (as of the date of such determination or another date specified by the Board) to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event.

 

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(3) Consequences of a Reorganization Event on Restricted Stock . Upon the occurrence of a Reorganization Event other than a liquidation or dissolution of the Company, the repurchase and other rights of the Company with respect to outstanding Restricted Stock shall inure to the benefit of the Company’s successor and shall, unless the Board determines otherwise, apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to such Restricted Stock; provided , however , that the Board may provide for termination or deemed satisfaction of such repurchase or other rights under the instrument evidencing any Restricted Stock or any other agreement between a Participant and the Company, either initially or by amendment. Upon the occurrence of a Reorganization Event involving the liquidation or dissolution of the Company, except to the extent specifically provided to the contrary in the instrument evidencing any Restricted Stock or any other agreement between a Participant and the Company, all restrictions and conditions on all Restricted Stock then outstanding shall automatically be deemed terminated or satisfied.

 

10. General Provisions Applicable to Awards

(a) Transferability of Awards . Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or, other than in the case of an Incentive Stock Option, pursuant to a qualified domestic relations order, and, during the life of the Participant, shall be exercisable only by the Participant; provided, however , that the Board may permit or provide in an Award for the gratuitous transfer of the Award by the Participant to or for the benefit of any immediate family member, family trust or other entity established for the benefit of the Participant and/or an immediate family member thereof if the Company would be eligible to use a Form S-8 under the Securities Act for the registration of the sale of the Common Stock subject to such Award to such proposed transferee; provided further , that the Company shall not be required to recognize any such permitted transfer until such time as such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument in form and substance satisfactory to the Company confirming that such transferee shall be bound by all of the terms and conditions of the Award. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. For the avoidance of doubt, nothing contained in this Section 10(a) shall be deemed to restrict a transfer to the Company.

(b) Documentation . Each Award shall be evidenced in such form (written, electronic or otherwise) as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c) Board Discretion . Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly.

 

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(d) Termination of Status . The Board shall determine the effect on an Award of the disability, death, termination or other cessation of employment, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participant’s legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award.

(e) Withholding . The Participant must satisfy all applicable federal, state and local or other income and employment tax withholding obligations before the Company will deliver stock certificates or otherwise recognize ownership of Common Stock under an Award. The Company may decide to satisfy the withholding obligations through additional withholding on salary or wages. If the Company elects not to or cannot withhold from other compensation, the Participant must pay the Company the full amount, if any, required for withholding or have a broker tender to the Company cash equal to the withholding obligations. Payment of withholding obligations is due before the Company will issue any shares on exercise, vesting or release from forfeiture of an Award or at the same time as payment of the exercise or purchase price, unless the Company determines otherwise. If provided for in an Award or approved by the Board in its sole discretion, a Participant may satisfy such tax obligations in whole or in part by delivery (either by actual delivery or attestation) of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however , except as otherwise provided by the Board, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). Shares used to satisfy tax withholding requirements cannot be subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements.

(f) Amendment of Award . Except as otherwise provided in Sections 5(g) and 6(e) with respect to repricings or Section 11(d) with respect to actions requiring stockholder approval, the Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option. The Participant’s consent to such action shall be required unless (i) the Board determines that the action, taking into account any related action, does not materially and adversely affect the Participant’s rights under the Plan or (ii) the change is permitted under Section 9.

(g) Conditions on Delivery of Stock . The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously issued or delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and regulations and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

 

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(h) Acceleration . The Board may at any time provide that any Award shall become immediately exercisable in whole or in part, free of some or all restrictions or conditions, or otherwise realizable in whole or in part, as the case may be.

 

11. Miscellaneous

(a) No Right To Employment or Other Status . No person shall have any claim or right to be granted an Award by virtue of the adoption of the Plan, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.

(b) No Rights As Stockholder . Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares.

(c) Effective Date and Term of Plan . The Plan shall become effective on the later of (i) the date the Plan is approved by the Company’s stockholders and (ii) the date immediately prior to the date of effectiveness of the registration statement on Form S-1 in connection with the Company’s initial public offering (the “ Effective Date ”). No Awards shall be granted under the Plan after the expiration of 10 years from the Effective Date, but Awards previously granted may extend beyond that date.

(d) Amendment of Plan . The Board may amend, suspend or terminate the Plan or any portion thereof at any time provided that (i) to the extent required by Section 162(m) of the Code, no Award granted to a Participant that is intended to comply with Section 162(m) of the Code after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award, unless and until the Company’s stockholders approve such amendment in the manner required by Section 162(m) of the Code and (ii) no amendment that would require stockholder approval under the rules of the NASDAQ Stock Market may be made effective unless and until the Company’s stockholders approve such amendment. In addition, if at any time the approval of the Company’s stockholders is required as to any other modification or amendment under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, the Board may not effect such modification or amendment without such approval. Unless otherwise specified in the amendment, any amendment to the Plan adopted in accordance with this Section 11(d) shall apply to, and be binding on the holders of, all Awards outstanding under the Plan at the time the amendment is adopted, provided the Board determines that such amendment, taking into account any related action, does not materially and adversely affect the rights of Participants under the Plan. No Award shall be made that is conditioned upon stockholder approval of any amendment to the Plan unless the Award provides that (i) it will terminate or be forfeited if stockholder approval of such amendment is not obtained within no more than 12 months from the date of grant and (2) it may not be exercised or settled (or otherwise result in the issuance of Common Stock) prior to such stockholder approval.

 

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(e) Authorization of Sub-Plans (including for Grants to non-U.S. Employees) . The Board may from time to time establish one or more sub-plans under the Plan for purposes of satisfying applicable securities, tax or other laws of various jurisdictions. The Board shall establish such sub-plans by adopting supplements to the Plan containing (i) such limitations on the Board’s discretion under the Plan as the Board deems necessary or desirable or (ii) such additional terms and conditions not otherwise inconsistent with the Plan as the Board shall deem necessary or desirable. All supplements adopted by the Board shall be deemed to be part of the Plan, but each supplement shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any supplement to Participants in any jurisdiction which is not the subject of such supplement.

(f) Compliance with Section 409A of the Code . Except as provided in individual Award agreements initially or by amendment, if and to the extent (i) any portion of any payment, compensation or other benefit provided to a Participant pursuant to the Plan in connection with his or her employment termination constitutes “nonqualified deferred compensation” within the meaning of Section 409A of the Code and (ii) the Participant is a specified employee as defined in Section 409A(a)(2)(B)(i) of the Code, in each case as determined by the Company in accordance with its procedures, by which determinations the Participant (through accepting the Award) agrees that he or she is bound, such portion of the payment, compensation or other benefit shall not be paid before the day that is six months plus one day after the date of “separation from service” (as determined under Section 409A of the Code) (the “ New Payment Date ”), except as Section 409A of the Code may then permit. The aggregate of any payments that otherwise would have been paid to the Participant during the period between the date of separation from service and the New Payment Date shall be paid to the Participant in a lump sum on such New Payment Date, and any remaining payments will be paid on their original schedule.

The Company makes no representations or warranty and shall have no liability to the Participant or any other person if any provisions of or payments, compensation or other benefits under the Plan are determined to constitute nonqualified deferred compensation subject to Section 409A of the Code but do not to satisfy the conditions of that section.

(g) Limitations on Liability . Notwithstanding any other provisions of the Plan, no individual acting as a director, officer, employee or agent of the Company will be liable to any Participant, former Participant, spouse, beneficiary, or any other person for any claim, loss, liability, or expense incurred in connection with the Plan, nor will such individual be personally liable with respect to the Plan because of any contract or other instrument he or she executes in his or her capacity as a director, officer, employee or agent of the Company. The Company will indemnify and hold harmless each director, officer, employee or agent of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been or will be delegated, against any cost or expense (including attorneys’ fees) or liability (including any sum paid in settlement of a claim with the Board’s approval) arising out of any act or omission to act concerning the Plan unless arising out of such person’s own fraud or bad faith.

(h) Governing Law . The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, excluding choice-of-law principles of the law of such state that would require the application of the laws of a jurisdiction other than the State of Delaware.

 

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Exhibit 10.7

C ONCERT P HARMACEUTICALS , I NC .

I NCENTIVE S TOCK O PTION A GREEMENT

G RANTED U NDER 2014 S TOCK I NCENTIVE P LAN

 

1. Grant of Option .

This agreement evidences the grant by Concert Pharmaceuticals, Inc., a Delaware corporation (the “Company”), on             , 20    (the “Grant Date”) to                     (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2014 Stock Incentive Plan (the “Plan”), a total of                     shares (the “Shares”) of common stock, par value $0.001 per share, of the Company (“Common Stock”) at a price of $                    per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on                     (the “Final Exercise Date”).

It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

 

2. Vesting Schedule .

This option will become exercisable (“vest”) as follows:                            .

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

 

3. Exercise of Option .

(a) Form of Exercise . Each election to exercise this option shall be in writing in the Form of Notice of Stock Option Exercise attached hereto, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, or by such other method as shall be approved by the Company, in any case together with payment in full in the manner provided in the Plan. The Participant may exercise this option for less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b) Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee or officer or director of, or consultant or advisor (as such terms are defined and interpreted for purposes of Form S-8 under the Securities Act of 1933, as amended) to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an “Eligible Participant”).


(c) Termination of Relationship with the Company . If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon written notice to the Participant from the Company describing such violation.

(d) Exercise Period Upon Death or Disability . If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for “cause” as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

(e) Termination for Cause . If, prior to the Final Exercise Date, the Participant’s employment is terminated by the Company for Cause (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such termination of employment. If, prior to the Final Exercise Date, the Participant is given notice by the Company of the termination of his or her employment by the Company for Cause, and the effective date of such employment termination is subsequent to the date of delivery of such notice, the right to exercise this option shall be suspended from the time of the delivery of such notice until the earlier of (i) such time as it is determined or otherwise agreed that the Participant’s employment shall not be terminated for Cause as provided in such notice or (ii) the effective date of such termination of employment (in which case the right to exercise this option shall, pursuant to the preceding sentence, terminate upon the effective date of such termination of employment). If the Participant is party to an employment or severance agreement with the Company that contains a definition of “cause” for termination of employment, “Cause” shall have the meaning ascribed to such term in such agreement. Otherwise, “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant’s employment shall be considered to have been terminated for Cause if the Company determines, within 30 days after the Participant’s resignation, that termination for Cause was warranted.

 

4. Tax Matters .

(a) Withholding . No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

 

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(b) Disqualifying Disposition . If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition.

 

5. Transfer Restrictions.

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

 

6. Provisions of the Plan .

This option is subject to the provisions of the Plan (including the provisions relating to amendments to the Plan), a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

 

CONCERT PHARMACEUTICALS, INC.
By:  

 

Name:  

 

Title:  

 

 

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PARTICIPANT’S ACCEPTANCE

The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2014 Stock Incentive Plan.

 

PARTICIPANT:

 

Address:  

 

 

 

 

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FORM OF NOTICE OF STOCK OPTION EXERCISE

Date:                     

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, MA 02421

Attention: Treasurer

Dear Sir or Madam:

I am the holder of an Incentive Stock Option granted to me under the Concert Pharmaceuticals, Inc. (the “ Company ”) 2014 Stock Incentive Plan on                     for the purchase of                     shares of common stock, par value $0.001 per share, of the Company (“ Common Stock ”) at a purchase price of $                    per share.

I hereby exercise my option with respect to                     shares of Common Stock, for which I have enclosed                                         in the amount of                     . Please register my stock certificate as follows:

 

Name(s):     

 

 
    

 

 
Address:     

                                                                       

 
Tax I.D. #:     

 

 

 

Very truly yours,

 

Name:  

 

Exhibit 10.8

C ONCERT P HARMACEUTICALS , I NC .

N ONSTATUTORY S TOCK O PTION A GREEMENT G RANTED U NDER 2014 S TOCK I NCENTIVE P LAN

 

1. Grant of Option .

This agreement evidences the grant by Concert Pharmaceuticals, Inc., a Delaware corporation (the “Company”), on             , 20    (the “Grant Date”) to                     (the “Participant”), of an option to purchase, in whole or in part, on the terms provided herein and in the Company’s 2014 Stock Incentive Plan (the “Plan”), a total of                     shares (the “Shares”) of common stock, par value $0.001 per share, of the Company (“Common Stock”) at a price of $                    per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on                     (the “Final Exercise Date”).

It is intended that the option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

 

2. Vesting Schedule .

This option will become exercisable (“vest”) as follows:                             

The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan.

 

3. Exercise of Option .

(a) Form of Exercise . Each election to exercise this option shall be in writing in the Form of Notice of Stock Option Exercise attached hereto, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, or by such other method as shall be approved by the Company, in any case together with payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share.

(b) Continuous Relationship with the Company Required . Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee, officer or director of, or consultant or advisor (as such terms are defined and interpreted for purposes of Form S-8 under the Securities Act of 1933, as amended) to, the Company or any other entity the employees, officers, directors, consultants or advisors of which are eligible to receive option grants under the Plan (an “Eligible Participant”).


(c) Termination of Relationship with the Company . If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon written notice to the Participant from the Company describing such violation.

(d) Exercise Period Upon Death or Disability . If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for “cause” as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date.

(e) Termination for Cause . If, prior to the Final Exercise Date, the Participant’s employment or other relationship with the Company is terminated by the Company for Cause (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such termination of employment or other relationship. If, prior to the Final Exercise Date, the Participant is given notice by the Company of the termination of his or her employment or other relationship by the Company for Cause, and the effective date of such employment or other termination is subsequent to the date of the delivery of such notice, the right to exercise this option shall be suspended from the time of the delivery of such notice until the earlier of (i) such time as it is determined or otherwise agreed that the Participant’s employment or other relationship shall not be terminated for Cause as provided in such notice or (ii) the effective date of such termination of employment or other relationship (in which case the right to exercise this option shall, pursuant to the preceding sentence, terminate immediately upon the effective date of such termination of employment or other relationship). If the Participant is party to an employment, consulting or severance agreement with the Company that contains a definition of “cause” for termination of employment or other relationship, “Cause” shall have the meaning ascribed to such term in such agreement. Otherwise, “Cause” shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant’s employment or other relationship shall be considered to have been terminated for “Cause” if the Company determines, within 30 days after the Participant’s resignation, that termination for Cause was warranted.

 

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4. Withholding .

No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option.

 

5. Transfer Restrictions.

This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant.

 

6. Provisions of the Plan .

This option is subject to the provisions of the Plan (including the provisions relating to amendments to the Plan), a copy of which is furnished to the Participant with this option.

IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument.

 

CONCERT PHARMACEUTICALS, INC.
By:  

 

Name:  

 

Title:  

 

 

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PARTICIPANT’S ACCEPTANCE

The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company’s 2014 Stock Incentive Plan.

 

PARTICIPANT:

 

 

Address:

 

 

 

 

 

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FORM OF NOTICE OF STOCK OPTION EXERCISE

Date:                     

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, MA 02421

Attention: Treasurer

Dear Sir or Madam:

I am the holder of a Nonstatutory Stock Option granted to me under the Concert Pharmaceuticals, Inc. (the “ Company ”) 2014 Stock Incentive Plan (the “ Plan ”) on                     for the purchase of                     shares of common stock, par value $0.001 per share, of the Company (“ Common Stock ”) at a purchase price of $                    per share.

I hereby exercise my option with respect to                     shares of Common Stock for which I have enclosed                                         in the amount of                     .

Please register my stock certificate as follows:

 

Name(s):

    

                                                                           

 
    

 

 

Address:

    

 

 

Tax I.D. #:

    

 

 

 

Very truly yours,

 

Name:  

 

DEVELOPMENT AND LICENSE AGREEMENT

This Development and License Agreement (“ Agreement ”) dated as of this 28 th of February, 2012 (“ Effective Date ”), is between Concert Pharmaceuticals, Inc., a Delaware corporation having offices located at 99 Hayden Avenue, Suite 500, Lexington, Massachusetts 02421, USA (“ Concert ”) and Avanir Pharmaceuticals, Inc., a Delaware corporation having offices located at 20 Enterprise, Suite 200, Aliso Viejo, California 92656, USA (“ Avanir ”). Each of Concert and Avanir may be referred to hereinafter individually as a “ Party ” and together as the “ Parties .”

RECITALS

A. Concert is a pharmaceutical company with expertise in the research and development of deuterated dextromethorphan.

B. Avanir is a pharmaceutical company having the capability to continue pre-clinical research, develop, conduct clinical trials using, obtain regulatory approval for, manufacture, distribute, market and sell such products.

AGREEMENT

The Parties agree as follows:

ARTICLE 1

DEFINITIONS

The following capitalized terms, when used in this Agreement, shall have the meanings ascribed to them or referenced in this Article 1 :

1.1 Affiliate ” means, with respect to a first Person, any other Person that directly or indirectly Controls, is Controlled by, or is under common Control with, such first Person.

1.2 Agreement ” has the meaning set forth in the preamble to this Agreement.

1.3 Avanir ” has the meaning set forth in the preamble to this Agreement.

1.4 Blocking Third Party Patent Rights ” means, on a country-by-country basis, patent rights owned or controlled by a Third Party that, in the absence of a license thereunder, could reasonably be or is determined to be infringed by (i) the use, offer for sale, sale or importation of any Licensed Product as it is formulated as of the Effective Date (“ Blocking Third Party Product Rights ”) or (ii) the manufacture of any drug substance within a Licensed Product as it is manufactured as of the Effective Date or pursuant to a process developed by or on behalf of Concert during the Development Program (“ Blocking Third Party Manufacturing Rights ”).

1.5 Business Day ” means a day other than a Saturday, Sunday, or bank or other public holiday in the United States.

 

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1.6 Change of Control ” means, with respect to a first Person, a single transaction or series of related transactions pursuant to which another Person or group of Persons who did not Control such first Person before the transaction(s) do Control such first Person after the transaction(s). A Change of Control will be presumed to occur to a first Person upon the occurrence of any of the following: (i) any other Person becomes the beneficial owner, directly or indirectly, of more than fifty percent (50%) of the voting securities of the first Person; (ii) the sale or other disposition of all or substantially all of the assets of the Person; (iii) a consolidation or merger of the first Person with any other Person, other than a merger or consolidation which would result in the voting securities of the first Person outstanding immediately prior thereto continuing to represent at least fifty percent (50%) of the total voting power represented by the voting securities of the Person outstanding immediately after such merger or consolidation.

1.7 Clinical Trial ” means a human clinical study that is designed to (i) investigate whether a Licensed Product is reasonably safe for continued testing, (ii) investigate the safety, efficacy, or pharmacokinetics of the Licensed Product for its intended use, and define warnings, precautions and adverse reactions that may be associated with the Licensed Product in the dosage range to be prescribed, or (iii) support Regulatory Approval of such Licensed Product or label expansion of such Licensed Product, in each case conducted by or on behalf of Avanir, its Affiliates, their respective sublicensees or any of their respective successors or assigns.

1.8 Collaboration Technology ” means all inventions, discoveries, data, trade secrets, information, compositions, materials (including chemical and biological materials), methods, processes, results, know-how and other information, in each case specifically relating to D-DM, conceived, discovered, created or developed by either Party, or jointly by both Parties, in the course of activities conducted pursuant to a Development Plan before the First IND, excluding the Collaboration Patents.

1.9 Collaboration Patents ” means all patent applications filed on any invention or discovery within the Collaboration Technology, including any continuations, divisional, reissues or foreign counterparts thereof, and any patents issuing from any of the foregoing.

1.10 Concert ” has the meaning set forth in the preamble to this Agreement.

1.11 Concert Patents ” means all patents and patent applications owned by or licensed (with a right to sublicense to Avanir as provided herein) to Concert at any time during the Term and claiming the composition, use, administration, manufacture of or a method involving a D-DM compound or composition, including the patents and applications listed on Schedule 1.11 and any continuations, divisional, reissues or foreign counterparts thereof, and any patents issuing from the priority application from which any of the foregoing was issued, excluding Collaboration Patents. Notwithstanding the foregoing, with respect to any such patents or patent applications licensed by Concert from Third Parties after the Effective Date, such patents or patent applications shall be included in the Concert Patents only to the extent set forth in Section 5.2.3 and only if Avanir agrees, pursuant to the process set forth in Section 5.2.3 or otherwise, to pay any royalties and other amounts payable to such Third Parties on account of the sublicensing thereof to Avanir hereunder or Avanir’s exploitation of the sublicensed subject matter.

 

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1.12 Concert Technology ” means all inventions, discoveries, data, trade secrets, information, compositions, materials (including chemical and biological materials), methods, processes, results, know-how and other information, owned by or licensed (with a right to sublicense to Avanir as provided herein) to Concert at any time during the Term and relating to D-DM, excluding Collaboration Technology, Collaboration Patents, and Concert Patents. Notwithstanding the foregoing, with respect to any such inventions, discoveries, data, trade secrets, information, compositions, materials (including chemical and biological materials), methods, processes, results, know-how and other information licensed by Concert from Third Parties after the Effective Date, such inventions, discoveries, data, trade secrets, information, compositions, materials (including chemical and biological materials), methods, processes, results, know-how and other information shall be included in the Concert Technology only to the extent set forth in Section 5.2.3 and only if Avanir agrees, pursuant to the process set forth in Section 5.2.3 or otherwise, to pay any royalties and other amounts payable to such Third Parties on account of the sublicensing thereof to Avanir hereunder or Avanir’s exploitation of the sublicensed subject matter.

1.13 Competitive Infringement ” has the meaning set forth in Section 7.5.1 .

1.14 Confidential Information ” means any information regarding the business and operations of a Party or any of its Affiliates, that is or has been disclosed (whether orally or in writing) by such Party or its Affiliates (“ Discloser ”) to the other Party or its Affiliates (“ Recipient ”) to the extent that such information is not (i) as of the date of disclosure to the Recipient, known to the Recipient (other than pursuant to an obligation of confidentiality to the Discloser); or (ii) disclosed in published literature, or otherwise generally known to the public through no breach by the Recipient of this Agreement; or (iii) obtained by the Recipient from a Third Party free from any obligation of confidentiality to the Discloser; or (iv) independently developed by the Recipient without use of the information disclosed to the Recipient by the Discloser.

1.15 Control ” including, its correlative meanings, “Controls”, “Controlled by” and “under common Control with” means the possession, directly or indirectly, of the power to direct or cause direction of the management or policies of another Person (whether through ownership of securities or other ownership interests, by contract or otherwise). A first Person shall be presumed to Control another Person if such first Person actually owns or has beneficial ownership of at least 50% of the voting securities or other comparable equity interests of such other Person (whether directly, indirectly or pursuant to any option, warrant or other similar arrangement).

1.16 D-DM ” means the compounds described on Schedule 1.16 .

1.17 “[**]” means the compounds described on Schedule 1.17 .

1.18 D-DM and Quinidine Milestone Event ” has the meaning set forth in Section 6.3.1 .

1.19 D-DM and Quinidine Milestone Event Payment ” means the amounts set forth in Section 6.3.1 opposite the respective “Development Milestone”.

 

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1.20 D-DM and Quinidine Product ” means a Licensed Product that contains or is administered with quinidine in accordance with the approved label for such Licensed Product.

1.21 D-DM Only Milestone Event ” has the meaning set forth in Section 6.3.2 .

1.22 D-DM Only Milestone Event Payment ” means the amounts set forth in Section 6.3.2 opposite the respective “Development Milestone”.

1.23 D-DM Only Product ” means a Licensed Product that is not a D-DM and Quinidine Product.

1.24 Deuterated Products ” means a compound, wherein for a given sample of the compound, the abundance of deuterium at one or more of the hydrogens of the compound is greater than the natural abundance of deuterium.

1.25 Development Plan ” means a plan with estimated timelines that sets forth the responsibilities of, and activities to be conducted by, each Party with respect to pre-clinical and clinical development of Licensed Products until the First IND and the development until First IND of manufacturing methods for the commercial production of Licensed Products, as such plan may be revised or replaced from time to time in accordance with the terms hereof. Exhibit A contains an initial partial version of the Development Plan covering activities through the First IND and will be timely updated and expanded by the JSC with respect to responsibilities and activities until the First IND.

1.26 Development Program ” means the pre-clinical and clinical development activities conducted by (or to be conducted by) each Party pursuant to a Development Plan.

1.27 Discloser ” has the meaning set forth in the definition of Confidential Information.

1.28 Effective Date ” has the meaning set forth in the preamble to this Agreement.

1.29 EMA ” means the European Medicines Agency or any successor agency thereto.

1.30 EU ” means the European Union.

1.31 FDA ” means the United States Food and Drug Administration or any successor agency thereto.

1.32 FDCA ” means the U.S. Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder.

1.33 First IND ” means the first acceptance for filing of a submission by Avanir or any of its Affiliates or sublicensees of an IND in the U.S., EU or Japan for any Licensed Product.

1.34 FTE ” means the equivalent of one person working full time for one year, consisting of at least [**] hours in such year, whether such work is performed by one or multiple persons, on activities directly related to the Development Program.

 

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1.35 Governmental Authority ” means any court, agency, department, authority or other instrumentality of any international, national, regional, province, state, county, city or other political subdivision, including a Regulatory Authority.

1.36 Initial pK and Safety Milestone ” means the first to occur of: (i) demonstration of positive pharmacokinetic and safety results in a Clinical Trial conducted anywhere in the world, as evidenced by demonstration of the following for a D-DM Product: a) steady-state area under the curve (AUC) plasma concentrations of a D-DM Product of at least [**] percent of the steady-state AUC plasma concentrations of the comparator drug, and b) minimum plasma concentrations of a D-DM Product of at least [**]% of the minimum plasma concentrations of the comparator drug, and c) maximum plasma concentrations of a D-DM Product of no more than [**]-fold greater than the maximum plasma concentrations of the comparator drug, and d) safety profile of a D-DM Product which is similar or more favourable to the comparator drug. For purposes of this definition, “steady-state AUC” shall be defined as plasma concentrations following at least [**] days of dosing, “ D-DM Product ” shall mean either a D-DM Only Product or a D-DM and Quinidine Product, as applicable, and the comparator drug is [**] mg of dextromethorphan combined with [**] mg of quinidine dosed with the same frequency as the D-DM Product; or (ii) initiation of first dosing of a patient in a Phase 2 Clinical Trial.

1.37 IND ” means an Investigational New Drug Application submitted under the FDCA or an analogous application or filing with any analogous Regulatory Authority outside of the United States under any analogous foreign Law for the purposes of obtaining permission to conduct Clinical Trials in such jurisdiction.

1.38 Indemnified Party ” has the meaning set forth in Section 11.2 .

1.39 Indemnifying Party ” has the meaning set forth in Section 11.2 .

1.40 Joint Patent Committee ” has the meaning set forth in Section 2.2 .

1.41 Joint Steering Committee ” has the meaning set forth in Section 2.1 .

1.42 Knowledge ” with respect to Concert means the actual knowledge of the following individuals: [**] and all of Concert’s U.S. internal and external patent agents and attorneys who have been involved in the prosecution, maintenance or enforcement of any of the Concert Patents.

1.43 Launch ” means the first commercial sale of a Licensed Product by Avanir, its Affiliate or its sublicensee to a Third Party in a country after receipt by Avanir, its Affiliate or its sublicensee of the first Regulatory Approval for such Licensed Product in such country.

1.44 Laws ” means all laws, statutes, rules, regulations, orders, judgments or ordinances of any Governmental Authority, as such may be revised from time to time.

1.45 Licensed Products ” means any product or composition that (i) contains a D-DM compound and (ii) that either (A) the manufacture, use, offer for sale, sale or importation of which is covered by a Valid Claim of any Concert Patent or Collaboration Patent, (B) is developed, made, used or administered using a process covered by a Valid Claim of and Concert

 

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Patent or Collaboration Patent, or (C) is developed, made, used, sold or otherwise exploited using any of the Concert Technology or Collaboration Technology anywhere in the world. A Licensed Product shall continue to be a Licensed Product following expiration of all such Valid Claims.

1.46 Losses ” means any and all costs, expenses, claims, losses, liabilities, damages, fines, royalties, governmental penalties or punitive damages, deficiencies, interest, settlement amounts, awards, and judgments, including any and all reasonable, out-of-pocket costs and expenses properly incurred as a result of a claim (including reasonable, out-of-pocket attorneys’ fees and all other expenses reasonably incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened), in each case, net of any tax benefit or insurance recovery received in connection with any of the foregoing.

1.47 MHLW ” means the Ministry of Health, Labour and Welfare of Japan and any successor thereto.

1.48 NDA ” means a New Drug Application submitted under the FDCA or an analogous application or filing with any analogous Regulatory Authority outside of the United States (including any supra-national agency such as the European Union) under any analogous foreign Law for the purpose of obtaining approval to market and sell a pharmaceutical product in such jurisdiction.

1.49 Net Sales ” means, with respect to sales of Licensed Products, on a country by country basis, the gross amount invoiced by Avanir, its Affiliates and its sublicensees of such Licensed Products during the applicable Royalty Term, less:

 

  (i) allowances for sales actually paid, granted or accrued, including, trade, quantity and cash discounts and any other adjustments, including, those granted on account of price adjustments, billing errors, rejected goods, damaged or defective goods, recalls, returns, rebates, chargeback rebates, reimbursements or similar payments granted or given to wholesalers or other distributors, buying groups, health care insurance carriers, chain pharmacies, mass merchandisers, staff model HMO’s, pharmacy benefit managers, government health insurance programs, or other institutions, retailers’ adjustments arising from consumer discount programs, copay discounts or other similar programs, and any other discounts or reductions required to comply with GAAP,

 

  (ii) portions of invoiced amounts written off as uncollectible in accordance with GAAP,

 

  (iii) payments for customs or excise duties, sales tax, consumption tax, value added tax, and other taxes (except income taxes) or duties that are separately reflected on the applicable invoice, and

 

  (iv) freight and shipping insurance amounts that are separately reflected on the applicable invoice.

 

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1.50 Party ” and “ Parties ” have the meanings set forth in the preamble to this Agreement.

1.51 Payment of the Phase 2 Milestone ” means the payment by Avanir to Concert of the first of either the D-DM and Quinidine Milestone Event Payment for the Phase 2 Milestone or the D-DM Only Payment for the Phase 2 Milestone as described in Sections 6.3.1 and 6.3.2 .

1.52 Person ” means any natural person, any form of for-profit or non-profit business entity recognized by any Governmental Authority, including any corporation, partnership, limited liability company, association, or trust, or any Governmental Authority.

1.53 Phase 2 Clinical Trial ” means a Clinical Trial with a defined dose or a set of defined doses of a Licensed Product designed to generate initial efficacy and safety data for such Licensed Product when tested in patients with a disease with the objective of demonstrating that the Licensed Product is reasonably safe and effective for continued testing.

1.54 Phase 2 Milestone ” means initiation of first dosing of a patient in a Phase 2 Clinical Trial.

1.55 Phase 3 Clinical Trial ” means a pivotal Clinical Trial with a defined dose or a set of defined doses of a Licensed Product designed to generate, together with other previously conducted and/or then-planned Clinical Trials, sufficient data regarding the efficacy and safety of such Licensed Product when tested in patients with a disease with the objective of enabling the preparation and submission of an NDA.

1.56 Recipient ” has the meaning set forth in the definition of Confidential Information.

1.57 Regulatory Approval ” means, with respect to any jurisdiction, any and all approvals or authorizations of a Regulatory Authority that are legally necessary for the commercial manufacture, distribution, use, marketing or sale of a pharmaceutical in such jurisdiction, including, as applicable, any associated regulatory or data exclusivity associated with such approvals or authorizations.

1.58 Regulatory Authority ” means, with respect to any jurisdiction, the Governmental Authority having responsibility for granting Regulatory Approvals in such country or jurisdiction, including the FDA in the U.S., the EMA in the European Union and the MHLW in Japan.

1.59 Representatives ” means with respect to a Party, such Party’s Affiliates, and each of their respective officers, directors, managers, employees, consultants, contractors, sublicensees and agents.

1.60 Restricted Indication ” means pseudobulbar affect (also known as emotional lability in some regulatory jurisdictions), or behavioural symptoms in dementia patients.

1.61 Royalty Term ” has the meaning set forth in Section 6.4.1 .

 

7


1.62 Tax ” or “ Taxes ” has the meaning set forth in Section 6.9.1 .

1.63 Term ” has the meaning set forth in Section 10.1 .

1.64 Third Party ” means any person or entity other than Avanir or Concert or their respective Affiliates.

1.65 Third Party Claim ” has the meaning set forth in Section 11.2 .

1.66 Valid Claim ” means either (i) an issued, unexpired patent claim within the Concert Patents or Collaboration Patents that has not been permanently declared invalid or unenforceable by a Governmental Authority of competent jurisdiction or (ii) a pending claim within the Concert Patents or Collaboration Patents that has not been pending more than [**] years from the date of filing of the first patent application to which such pending claim claims priority and that has not been irrevocably determined to be unpatentable by a Governmental Authority of competent jurisdiction.

ARTICLE 2

JOINT COMMITTEES AND REPORTING

2.1 Joint Steering Committee .

2.1.1 The Parties hereby establish a committee (the “ Joint Steering Committee ” or the “ JSC ”) to review the Development Program and oversee progress of the activities conducted thereunder until the First IND and facilitate the sharing of information between the Parties with respect to such activities.

2.1.2 The JSC shall be comprised of [**] Representatives of Avanir and [**] Representatives of Concert. Each Party shall make its designation of its Representatives within [**] days following the Effective Date, and each Party may substitute one or more of its Representatives, in its sole discretion, effective upon notice to the other Party of such change. [**] shall appoint one of its Representatives to be the chairperson of the JSC.

2.1.3 The JSC shall meet within [**] days after the Effective Date and, thereafter, [**] until the First IND. The chairperson of the JSC shall be responsible for calling meetings of the JSC and for leading the meetings. Each Party may have in attendance one or more other non-voting employees or other Representatives from time to time, by written consent of the Parties, with such consent not to be unreasonably withheld or delayed, subject to any such Representative’s written agreement to comply with requirements of confidentiality and non-use at least as stringent as those set forth in Article 9 . The location of meetings of the JSC shall alternate between Avanir’s principal place of business and Concert’s principal place of business, or as otherwise agreed by the Parties. The JSC may also meet by means of a telephone conference call or videoconference. The chairperson may convene a special meeting of the JSC for the purpose of resolving disputes of the JSC or the JPC.

2.1.4 Avanir shall bear its own costs and expenses related to its participation in the JSC. Except as provided in Section 6.2 , Concert shall bear its own costs and expenses associated with its participation in the JSC.

 

8


2.1.5 The JSC has the authority to amend or replace the Development Plan from time to time. The JSC is intended to serve primarily as a forum to facilitate the exchange of information and for each Party to provide suggestions to the other as to the conduct of activities to be conducted under the Development Plan.

2.2 Joint Patent Committee .

2.2.1 The Parties hereby establish a committee (the “ Joint Patent Committee ” or the “ JPC ”) to discuss all patent matters relating to the Concert Patents and Collaboration Patents and to ensure each Party has a reasonable opportunity to review, comment and cooperate in the preparation, prosecution, maintenance, and enforcement of the Concert Patents and Collaboration Patents.

2.2.2 The JPC shall be comprised of [**] Representatives of Avanir and [**] Representatives of Concert. Each Party shall make its designation of its Representatives within [**] days following the Effective Date, and each Party may substitute one or more of its representatives, in its sole discretion, effective upon notice to the other Party of such change. [**] shall appoint one of its Representatives to be the chairperson of the JPC.

2.2.3 The chairperson of the JPC shall call meetings of the JPC as needed and upon the request of either Party. The location of meetings of the JPC shall alternate between Avanir’s principal place of business and Concert’s principal place of business, or as otherwise agreed by the Parties. The JPC may also meet by means of a telephone conference call or videoconference by mutual agreement of the Parties.

2.2.4 Avanir shall bear its own costs and expenses related to its participation in the JPC. Concert shall bear its own costs and expenses related to its participation in the JPC.

2.3 Committee Decisions .

2.3.1 The intent of the JSC and JPC is to use reasonable efforts to achieve, and then act, by consensus of the members of the JSC or JPC, as applicable, on all issues properly before the committee for decision. If the JSC or JPC is unable to reach consensus on an issue properly before it, then the matter will be referred to the Chief Executive Officers of the Parties for resolution. Upon referral of a matter to the Parties’ respective Chief Executive Officers for resolution, such officers shall promptly, and in any case within [**] days, meet to discuss the matter and seek a mutually acceptable resolution. Such meeting shall be in person unless otherwise agreed by the Parties. If the Parties’ respective Chief Executive Officers are not able to resolve the matter by mutual agreement within [**] days after such meeting, then the matter will, after reasonable consideration of the views of Concert that were made known to the JSC before the referral to the Chief Executive Officers or made know to Avanir’s Chief Executive Officer by Concert’s Chief Executive Officer, be made by the chairperson of the committee; provided however, that (i) no such decision may require Concert to provide resources beyond those Concert is required to provide pursuant to this Agreement or the Development Plan, as it exists on the Effective Date, and (ii) no such decision may be inconsistent with the express terms of Articles 1 - 12 of this Agreement, be used to unilaterally amend this Agreement (except for the Development Plan in accordance with the foregoing process), or resolve any dispute between the

 

9


Parties as to their respective rights and obligations under this Agreement (except for disputes among the members of the JSC or JPC, as applicable, on issues properly before the committee for decision as provided in this Section 2.3.1).

2.4 Reporting .

2.4.1 Every [**] months after the First IND until Payment of the Phase 2 Milestone, and thereafter every [**] months until the first Regulatory Approval of a Licensed Product by the FDA or EMA Avanir shall provide Concert with a written summary report of the Development Program. The written report shall at a minimum include the following: (a) a summary of activities completed during the reporting period, (b) an updated [**] general timeline for the Development Program, including expected dates for top-line trial data, (c) an outline of any clinical study to be conducted in the forthcoming [**] months of detail and scope similar to those typically submitted on clinicaltrials.gov and (d) clinical trial enrollment information, and such other information reasonably necessary for Concert to monitor the progress of the Development Program (“Progress Report”).

2.4.2 Within [**] after the Progress Report is provided to Concert, the Parties shall meet in person or by telephone to discuss the Progress Report.

ARTICLE 3

DEVELOPMENT PROGRAM

3.1 Disclosure of Technology .

Within [**] days after the Effective Date, Concert will use commercially reasonable efforts to disclose to Avanir or its designated Affiliate all Concert Technology Controlled by Concert as of the Effective Date that may be reasonably necessary or useful to Avanir to develop, manufacture, seek or obtain Regulatory Approval for, or commercialize Licensed Products and efficiently exploit the rights and licenses granted to Avanir under this Agreement. In addition, from time-to-time throughout the Term, and at any time during the Term at the reasonable request of Avanir, Concert will use commercially reasonable efforts to disclose to Avanir or its designated Affiliate all Concert Technology required to be disclosed to Avanir pursuant to Section 5.2.3 . Without limiting the foregoing, Concert will, to the extent in the possession of Concert’s internal and external U.S. patent attorney(s) or agent(s) that have been involved in prosecution of the Concert Patents and Concert employees that have been involved in the prosecution of the Concert Patents, use commercially reasonable efforts to disclose to Avanir for each of the Concert Patents: invention disclosures, prior art search results and related memoranda and patentability opinions or evaluations, validity and enforceability searches and opinions or evaluations, freedom to operate searches and opinions or evaluations, and correspondence with and interview notes or other notes regarding communications with any of the inventor(s), in each case where such information relates to D-DM, but excluding such information that is specific to [**]. To the extent not provided before the Effective Date, Concert will use commercially reasonable efforts to provide the foregoing that exists on the Effective Date within [**] days after the Effective Date. With respect to any such new information created after the Effective Date, where such information relates to D-DM, but excluding such information that is specific to [**], Concert shall use commercially reasonable efforts to provide it within [**] after request by Avanir therefor from time to time throughout the Term.

 

10


3.2 Purpose of Development Program .

Concert and Avanir will conduct the Development Program and any other activities agreed upon by the Parties. The goal of the Development Program is to: (i) complete pre-clinical research of Licensed Products; (ii) evaluate the potential to advance one or more Licensed Products through clinical research; and (iii) file an IND and achieve the development and regulatory milestones set forth herein for a Licensed Product. Concert shall use commercially reasonable efforts to conduct and complete the activities assigned to Concert under the Development Plan within the time frame and budget specified for each such activity.

3.3 Development Program Costs .

Avanir will be responsible for the costs of all of Avanir’s activities conducted under the Development Program as well as any costs and expenses payable to any Third Party contractors executing any activities under the Development Program. Except as specified in Section 6.2 , Concert shall be responsible for all of the costs and expenses associated with Concert’s activities under the Development Program.

3.4 Regulatory Affairs .

3.4.1 As between the Parties, Avanir shall be responsible for preparing, seeking, submitting and maintaining all INDs, NDAs and other regulatory filings and Regulatory Approvals for each Licensed Product, including preparing all reports necessary as part of a regulatory filing or Regulatory Approval and for all communications with Regulatory Authorities, in each case in the name of Avanir or its Affiliate or sublicensee.

3.4.2 Each Party shall immediately notify the other Party upon receiving information concerning any serious adverse event involving a Licensed Product and shall provide to such other Party, unless prohibited by applicable Law or contract with a Third Party, a copy of: (i) all relevant adverse event reports which it submits to any Regulatory Authority in respect of the Licensed Product, and (ii) any other information relating to such adverse event as the other Party may reasonably request to comply with its pharmacovigilance obligations with respect to Licensed Products.

3.4.3 As between the Parties, Avanir shall have the sole right to apply for and secure Regulatory Approvals for the Licensed Products that may be available under the Law of any country, including any data or market exclusivity periods, in each case in Avanir’s or its Affiliates or sublicensee’s own name. Concert shall in good faith cooperate with Avanir and such Affiliates and sublicensee(s) and take reasonable actions to assist Avanir and such Affiliates and sublicensee(s) in obtaining such Regulatory Approvals in each country.

3.4.4 Concert shall cooperate with Avanir as reasonably requested from time to time (and subject to reimbursement in accordance with Section 6.2 ) in connection with Avanir seeking and obtaining Regulatory Approval for Licensed Products, including providing data within the Concert Technology in the form as may be requested by Avanir from time to time for disclosure to Regulatory Authorities.

 

11


3.5 Publication of Clinical Trial Results .

Notwithstanding anything to the contrary in Article 8 , Avanir may publish any data within the Concert Technology, Collaboration Technology or otherwise resulting from Clinical Trials conducted on a Licensed Product, subject to the JSC’s review and approval of all such proposed publications before First IND, and thereafter in Avanir’s discretion without review by the JSC or Concert. Avanir shall send a draft manuscript of any such publication proposed to be published before the First IND of a Licensed Product by FDA or EMA to Concert for review at least [**] days before the date on which Avanir plans to submit the proposed submission for publication, and as to any such proposed publications before First IND Concert may provide comments thereon to Avanir. If Concert has any comments as to any such proposed publications before First IND, Concert shall provide its written comment on the publication within [**] days from receipt of the draft. Avanir shall, to the extent permitted under applicable Laws, reasonably consider all such comments from Concert as to any such proposed publications. Any dispute over any such proposed publications shall be resolved by the chairperson of the JSC.

3.6 Development Recordkeeping and Access .

3.6.1 Concert will prepare and maintain, and shall require all approved subcontractors to keep, accurate records and books relating to the actual costs and expenses of its activities under a Development Plan and otherwise in relation to the development of Licensed Products. From time-to-time throughout the Term (but not more than [**]) at the reasonable request of Avanir, Concert will allow Avanir, Avanir’s designated Affiliate or Avanir’s designated Third Party to audit the records and books related to the costs and expenses of Concert, its Affiliates and their subcontractors’ activities in relation to the development of any Licensed Product.

3.6.2 Concert will prepare and maintain, and shall require all approved subcontractors to keep, accurate records and books relating to the progress and status of its activities under each Development Plan and otherwise in relation to the development of Licensed Products, including all Collaboration Technology. From time-to-time throughout the Term (but not more than [**]) upon reasonable advance notice by Avanir, Concert will disclose to or permit direct access to, during regular business hours, Avanir, Avanir’s designated Affiliate or Avanir’s designated Third Party to all records, books and data of Concert, its Affiliates and their subcontractors related to the foregoing.

3.7 Compliance with Laws .

Each Party shall, and shall cause its Affiliates and its and their respective Representatives and subcontractors to, use commercially reasonable efforts to comply strictly with all applicable Laws in connection with the Development Program, including, as applicable, the FDCA and associated rules and regulations, including current Good Clinical Practices, current Good Laboratory Practices, and current Good Manufacturing Practices, the United States Health Insurance Portability and Accountability Act of 1996 and its applicable rules and regulations, the U.S. Occupational Safety and Health Act and its applicable rules and regulations, and foreign equivalents thereto.

 

12


3.8 Manufacturing Oversight by Concert .

Until First IND, Concert shall use commercially reasonable efforts to identify potential manufacturers for Licensed Products in bulk form, to assist Avanir in negotiating the commercial terms of supply of the same to Avanir and Avanir’s designated compounder(s) and finisher(s), and to oversee such manufacturers’ supply of same in quantities reasonably necessary to conduct the activities specified in the Development Program, in each case subject to reimbursement in accordance with Section 6.2 . Except as specified in the preceding sentence, as between the Parties, Avanir shall be responsible for the manufacture (itself or through one or more Third Party manufacturer(s)) of Licensed Products. Nothing in this Section shall be construed as providing Concert with the right or authority to enter any contract on behalf of Avanir or any of Avanir’s Affiliates, whether as an agent, distributor, partner or otherwise, Concert shall not hold itself out to any Third Party as having such authority or right, and Concert shall not attempt to enter any contract or other binding obligation on behalf of Avanir or any of Avanir’s Affiliates.

ARTICLE 4

CERTAIN COVENANTS

4.1 Diligence Obligation of Avanir .

Avanir shall attempt to develop and commercialize Licensed Products for at least [**] indications in the U.S. and [**] in each of the EU and Japan; provided, however, that such obligation shall be [**] in the US automatically upon the filing of an NDA by Concert, its Affiliate or any of their respective licensee or sublicensees for a [**] for the treatment of any indication for which Avanir previously has obtained Regulatory Approval of a Licensed Product. Avanir shall do so using the resources and efforts that a biopharmaceutical company of similar size and resources as Avanir would normally apply to a program at a similar stage of development and with similar commercial and market potential.

4.2 Exclusivity .

4.2.1 Neither Party shall, and each Party shall cause its Affiliates not to, research, develop or commercialize any product containing D-DM, other than a Licensed Product as permitted in connection with this Agreement. Neither Party shall, and each Party shall cause its Affiliates not to, grant or offer to grant a license under any D-DM-specific technology or patents, or work independently or with or for the benefit of itself or any Third Party, with respect to the research, development or commercialization of any product containing D-DM, other than a Licensed Product as permitted in connection with this Agreement.

4.2.2 Subject to Section 4.2.3, Concert shall not, and shall cause its Affiliates not to, develop or commercialize any product that contains a [**] for treatment of any Restricted Indication. Subject to Section 4.2.3, Concert shall not, and cause its Affiliates not to, grant or offer to grant a license under any [**] technology or patents to develop or commercialize any product that is a [**] for the treatment of any Restricted Indication. Concert shall not, and shall cause its Affiliates not to, research, develop, or commercialize any product that is, prior to its

 

13


administration in humans or animals, a deuterated metabolite of [**]. Concert shall not, and shall cause its Affiliates not to, grant or offer to grant a license under any [**] technology or patents for any product that is, prior to its administration in humans or animals, a deuterated metabolite of [**]. For the avoidance of doubt, Concert or its licensee(s) shall have the right to conduct any research, development or commercialization activities with a [**] for any indication other than a Restricted Indication.

4.2.3 Notwithstanding Section 4.2.2, Concert and its Affiliates and licensees may research, develop or commercialize, on a country-by-country basis, any product that contains a [**] for treatment of a Restricted Indication if:

 

  (a) for each Restricted Indication, over a period of [**] consecutive years, Avanir has not evaluated [**] in a patient population in a Restricted Indication; and

 

  (b) no [**] is being actively commercialized by Avanir for the Restricted Indication.

4.3 Supply of Deuterium .

If and to the extent permitted in accordance with all applicable Laws and commercially beneficial to both Parties, Avanir and Concert may join in the purchase of deuterium or deuterium-containing starting materials, intermediates or reagents useful for the manufacturing of Licensed Products, including for use in connection with Licensed Products or other Deuterated Products, in each case at such time and upon such terms as may be agreed in writing by the Parties.

ARTICLE 5

INTELLECTUAL PROPERTY OWNERSHIP AND LICENSES

5.1 Ownership Of New Technology and Patents .

5.1.1 Inventorship of all inventions and discoveries conceived, reduced to practice, discovered or made pursuant to this Agreement, whether or not patentable, shall be determined in accordance with U.S. patent laws. Authorship of all works created pursuant to the Development Program shall be determined in accordance with United States copyright laws.

5.1.2 As between the Parties, Avanir shall be the owner of all Collaboration Patents, the inventions and discoveries claimed therein, and Collaboration Technology, whether conceived, reduced to practice, discovered or made: (i) solely by Concert or its Representatives, (ii) jointly by at least one of Concert or its Representatives with at least one of Avanir or its Representatives, or (iii) solely by Avanir and its Representatives. In addition, Avanir shall be the owner of all reports prepared by Concert regarding either or both of the Parties’ activities under the Development Program. Concert agrees to assign, and hereby does assign, to Avanir all of the Collaboration Patents and Collaboration Technology and reports prepared by Concert regarding either or both of the Parties’ activities under the Development Program.

 

14


5.1.3 As between the Parties, ownership of all other inventions and discoveries conceived, reduced to practice, discovered or made or created during the Term of this Agreement shall be determined consistent with inventorship, as determined pursuant to Section 5.1.1 .

5.1.4 Each Party shall (i) execute all further instruments to document, record or perfect the Party’s respective ownership consistent with this ARTICLE 5 as reasonably requested by the other Party, and shall cause its respective Representatives to do the same, and (ii) make its Representatives available to the other Party and its Representatives as reasonably requested in connection with the owner’s protection thereof, including seeking patents.

5.2 Concert Grants .

5.2.1 Concert grants to Avanir an exclusive, royalty-bearing license, including the right to sublicense, under the Concert Patents, to make, use, offer for sale, sell and import Licensed Products worldwide.

5.2.2 Concert grants to Avanir an exclusive, royalty-bearing license, including the right to sublicense, under Concert’s rights in the Concert Technology, to use, copy, distribute and create derivative works of Concert Technology to make, use, offer for sale, sell and import Licensed Products worldwide.

5.2.3 If Concert first obtains a license after the Effective Date from any Third Party for any patents or technology that is/are reasonably necessary for the exploitation of Licensed Products and that include(s) the right to sublicense consistent with Sections 5.2.1 or 5.2.2 , then Concert shall notify Avanir accordingly, including any royalties and other amounts that would be payable to the Third Party associated with the sublicensing thereof to Avanir hereunder or Avanir’s exploitation of the Licensed Products in connection with this Agreement. Avanir may elect by notice to Concert whether Avanir desires to obtain such sublicense. If Avanir so elects, the subject patents or technology shall be deemed Concert Patents or Concert Technology, as applicable, and thereafter Avanir shall be responsible for all associated royalties due to the Third Party for Avanir’s exploitation of the sublicensed subject matter, subject in the case of Blocking Third Party Patent Rights to Section 6.4.4 .

5.3 Avanir Grants .

5.3.1 Avanir grants to Concert a non-exclusive, royalty-free, license, under all patents and patent applications owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Patents) to Avanir, to make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program.

5.3.2 Avanir grants to Concert a non-exclusive, royalty-free, license, under all technology owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Technology) to Avanir, to use, copy, distribute and create derivative works of such technology to make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program.

 

15


5.4 Sublicense .

The licenses granted under Sections 5.2 and 5.3 include the right of the licensee to sublicense without consent upon the following conditions:

 

  (i) the sublicense be granted in writing;

 

  (ii) the sublicense terminate automatically upon termination of the underlying license granted pursuant to this Agreement;

 

  (iii) the sublicense not purport to grant more rights in the subject matter licensed than granted pursuant to this Agreement;

 

  (iv) the sublicense granted by Avanir under the license granted to it in Section 5.2 include obligations of the sublicensee substantially similar to those as if sublicensee were Avanir in Sections 3.4.2, 3.5, 3.7, 5.5, 6.8.1, 8.1, 8.2, 11.1.2(iii), 11.2, 12.8 and 12.9 , impose diligence obligations upon the sublicensee to enable Avanir to comply with its obligations under Section 4.1 commensurate with the scope of the rights sublicensed, and if Avanir grants the sublicensee the further right to sublicense, then the requirement such sub-sublicenses contain provisions consistent with this Section 5.4 , and if the sublicense grants any rights associated with development of Licensed Products or otherwise to the extent such provisions are reasonably applicable to the scope of the sublicense granted, then also Section 10.3.3 and subsections (a), (b), (e) (first sentence), (h), (i), (k), (l) and (m) of Section 10.3.4 , and, if Avanir extends to the sublicensee any of the rights in Sections 7.1, 7.2, 7.3, or 7.5 with respect to any of the Concert Patents or the Collaboration Patents, then the sublicense must include the obligations in such Sections for such Concert Patents or Collaboration Patents;

 

  (v) the sublicense granted by Concert under the license granted to it in Section 5.3 may not be granted without the advance written consent of Avanir; and

 

  (vi) a copy of the sublicense agreement (redacted for competitively sensitive information) as executed by the parties thereto is provided to the licensor (under this Agreement of the rights sublicensed) promptly after its execution by both parties thereto.

Any sublicense desired to be granted by Avanir upon conditions other than or that does not include the foregoing requires consent of Concert, such consent not to be unreasonably withheld. Avanir shall also use good faith efforts to negotiate provisions substantially similar to those in subsections (c), (d), (f), (g) and (j) in Section 10.3.4 to the extent such provisions are reasonably applicable to the scope of the sublicense granted.

5.5 Reservation of Rights .

Except as expressly stated in this Agreement, no rights or licenses are granted under this Agreement by either Party or its Affiliates under any intellectual property of such Party or its Affiliates to the other Party or its Affiliates, whether by implication, estoppel or otherwise, and all such rights not expressly granted are hereby reserved by each Party and its Affiliates.

 

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ARTICLE 6

LICENSE FEES AND PAYMENTS

6.1 License and Access Fee .

Within [**] days after the Effective Date, Avanir shall pay to Concert a one-time, non-refundable and non-creditable upfront license fee of Two Million United States Dollars ($2,000,000.00).

6.2 Concert Development Program Costs .

6.2.1 Avanir will be responsible for the costs of all of Avanir’s activities conducted under the Development Program as well as any costs and expenses payable to any Third Party contractors executing any activities under the Development Program. Avanir will pay Concert for Concert’s activities actually conducted under the Development Program or conducted at Avanir’s request pursuant to Section 3.4.5 or Section 3.8 at the rate of [**] U.S. Dollars ($[**]) per FTE (prorated for partial FTEs as appropriate) until First IND, subject in the case of Development Plan activities to the maximum amount of FTEs to be reimbursed for each of Concert’s activities specified in the Development Plan. After First IND, any additional activities undertaken in the Development Program or conducted at Avanir’s request pursuant to Section 3.4.5 or Section 3.8 by Concert would be upon written agreement of the Parties, but at the rate of [**] U.S. Dollars ($[**]) per FTE.

6.2.2 Within [**] days after the end of each calendar quarter during the Development Program, and once within [**] days after the end of the Development Program, Concert shall send an invoice to Avanir, in reasonable detail the amount of time actually worked by Representatives of Concert on the Development Program during the subject reporting period (including, for each person, the hours spent per week reported for the applicable category (such as process chemistry, analytical development, and CMC management, project management and regulatory and clinical operations support)) and for which Concert seeks reimbursement consistent with the terms of this Agreement, the total quantity of FTEs due, the total amount due at the applicable rate per FTE (prorated as applicable), and any Third Party expenses incurred during a calendar quarter during the subject reporting period for which it seeks reimbursement consistent with the terms of this Agreement. Avanir shall pay all such amounts properly invoiced within [**] days of receipt of invoice.

 

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6.3 Development Milestone Payments .

6.3.1 Avanir shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 6.3.1 below as a “Development Milestone” in connection with a D-DM and Quinidine Product, (each such event a “ D-DM and Quinidine Milestone Event ”). Provided that Avanir has not made a D-DM Only Milestone Event Payment for the corresponding D-DM Only Milestone Event, Avanir shall pay to Concert the “Milestone Payment” set forth in Table 6.3.1 below corresponding to a D-DM and Quinidine Milestone Event within [**] days after the occurrence of such D-DM and Quinidine Milestone Event (each such payment, a “ D-DM and Quinidine Milestone Event Payment ”).

Table 6.3.1: D-DM and Quinidine Product

 

     Milestone
Payment  1 st
Indication (in
millions)
     Milestone
Payment 1st
Label
Expansion (in
millions)
     Milestone
Payment
Additional
Label
Expansion (in
millions)
 

Development Milestones

        

Initial pK and Safety Milestone

   $ 2.0         —           —     

Phase 2 Milestone

   $ 2.0         —           —     

First actual dosing of a patient in Phase 3 Clinical Trial

   $ 2.0         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     
  

 

 

    

 

 

    

 

 

 

Subtotal - Development Milestones

   $ 27.5       $ 10.0       $ 5.5   
  

 

 

    

 

 

    

 

 

 

6.3.2 Avanir shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 6.3.2 below as a “Development Milestone” in connection with a D-DM Only Product, (each such event a “ D-DM Only Milestone Event ”).

Table 6.3.2: D-DM Only Product

 

     Milestone
Payment 1 st
Indication (in
millions)
     Milestone
Payment 1st
Label
Expansion (in
millions)
     Milestone
Payment
Additional
Label
Expansion (in
millions)
 

Development Milestones

        

Initial pK and Safety Milestone

   $ 2.0         —           —     

Phase 2 Milestone

   $ 6.0         —           —     

[**]

     [**]         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     

[**]

     [**]         —           —     

[**]

     —           [**]         [**]   

[**]

     [**]         —           —     
  

 

 

    

 

 

    

 

 

 

Subtotal - Development Milestones

   $ 56.0       $ 19.0       $ 11.0   
  

 

 

    

 

 

    

 

 

 

 

18


(i) If Avanir has not made a D-DM and Quinidine Milestone Event Payment for a D-DM and Quinidine Milestone Event that corresponds to a D-DM Only Milestone Event, then Avanir shall pay to Concert the “Milestone Payment” set forth in Table 6.3.2 above corresponding to a D-DM Only Milestone Event within [**] days after the occurrence of such D-DM Only Milestone Event (each such payment, a “ D-DM Only Milestone Event Payment ”).

(ii) If Avanir has made a D-DM and Quinidine Milestone Event Payment for the corresponding D-DM and Quinidine Milestone Event and thereafter the corresponding D-DM Only Milestone is achieved, then Avanir shall only pay to Concert the difference in the “Milestone Payment” set forth in Table 6.3.2 above corresponding to the D-DM Only Milestone Event minus the previously paid “Milestone Payment” set forth in Table 6.3.1 above corresponding to the D-DM and Quinidine Milestone Event within [**] days after the occurrence of such D-DM Only Milestone Event.

6.4 Royalty Payments on Sales .

6.4.1 Avanir shall pay to Concert royalties on Net Sales of each Licensed Product on a country by country basis until the later of (i) the last to expire Valid Claim covering the manufacture, use, offer for sale, sale or importation of the Licensed Product in the country or (ii) ten (10) years after Launch of the Licensed Product in the country (“ Royalty Term ”). Upon expiration of the applicable Royalty Term, provided that all such royalties are made by Avanir to Concert based on Net Sales occurring during the Royalty Term, the license granted for such Licensed Product in such country shall be deemed fully paid up, irrevocable and non-terminable.

6.4.2 Subject to Section 6.4.3 , as to Net Sales made during the Royalty Term, Avanir shall pay to Concert as follows:

(i) [**]% of Net Sales for the portion of Net Sales of Licensed Products less than [**] U.S. Dollars ($[**]) in each calendar year; plus

(ii) [**]% of Net Sales for the portion of Net Sales of Licensed Products greater than or equal to [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iii) [**]% of Net Sales for the portion of Net Sales of Licensed Products greater than [**] U.S. Dollars ($[**]) in each calendar year.

6.4.3 On a Licensed Product-by-Licensed Product and country-by-country basis, the royalty rates set forth above in Section 6.4.2 shall be reduced to [**]% of the otherwise applicable rate as to Net Sales occurring during any period within the Royalty Term when no Valid Claim of a Concert Patent or a Collaboration Patent covers the manufacture, use, offer for sale, sale or importation of such Licensed Product in such country.

 

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6.4.4 On a Licensed Product-by-Licensed Product and country-by-country basis, upon approval of an NDA by Concert, its Affiliate or any of their respective licensees or sublicensees for a [**] for the treatment of any indication for which Avanir previously has obtained Regulatory Approval of a Licensed Product, the royalty rates applicable pursuant to Sections 6.4.2 and 6.4.3 shall be reduced to [**]% of the otherwise applicable rates thereunder (for all Net Sales of such Licensed Products in such country occurring after such filing).

6.4.5 If (a) Avanir agrees pursuant to Section 5.2.3 to pay the royalties and other amounts payable by Concert to its licensor for the sublicense of rights to Blocking Third Party Patent Rights granted to Avanir hereunder with respect to the exploitation of any Licensed Product(s) in one or more country(ies), (b) Avanir or its Affiliate determines in good faith that in order to avoid infringement of any Blocking Third Party Patent Rights not licensed to it hereunder it is advisable to obtain a license from any Third Party(ies) to exploit any Licensed Product(s) in one or more country(ies), or (c) Avanir or its Affiliate is required by an order, judgment or similar action of a Governmental Authority to pay royalties or other amounts for the exploitation of any Licensed Product(s) in one or more country(ies) due to infringement of Blocking Third Party Patent Rights, then Avanir may deduct from the royalties otherwise due pursuant to Sections 6.4.1 - 6.4.3 for such Licensed Product(s) in such country(ies), [**] percent ([**]%) of any royalties or other amounts payable by Avanir or its Affiliates to such Third Party(ies) during the applicable royalty reporting period for Blocking Third Party Product Rights and [**] percent ([**]%) of any royalties or other amounts for Blocking Third Party Manufacturing Rights; provided, however, that in no event will the deduction(s) and reduction(s) permitted under this Section and under Section 6.4.3 in the aggregate reduce by more than [**] percent ([**]%) the royalties otherwise due pursuant to Sections 6.4.1 and 6.4.2 for such Licensed Product(s) in such country(ies) during the royalty reporting period.

6.4.6 Avanir shall provide a report to Concert with the Net Sales of each Licensed Product in each country and shall make the royalty payment described in Sections 6.4.1 - 6.4.5 above within [**] days after the end of the each calendar quarter of the Royalty Term, provided, however, that such report and payment shall be made after the last fiscal quarter of each fiscal year of Avanir within the first to occur of: (a) [**] days after Avanir’s public year end earnings announcement or (b) [**] days after such fiscal quarter. Such royalty reports shall provide, on a Licensed Product-by-Licensed Product and country-by-country basis, invoiced amounts during the reporting period, deductions from such invoiced amounts by allowable category applied in the calculation of Net Sales during the reporting period, Net Sales during the reporting period, and the calculation of the resulting royalty payment due through the end of the reporting period.

6.5 Sales Milestone Payments .

Avanir shall pay to Concert the “Payment” set forth in Table 6.5 below within [**] days after the achievement of the corresponding “Sales Milestone” identified below. The “Threshold” for purposes of such payments is the cumulative Net Sales of all Licensed Products in all countries in a given calendar year. For the avoidance of doubt, Avanir shall only be required to pay Sales Milestones #1, #2 and #3 once during the Term of this Agreement. Each Sales Milestone payment shall become payable based on the first occurrence of cumulative Net Sales in a calendar year that equals or exceeds the applicable threshold, regardless of whether or not any other Sales Milestone is first achieved in the same calendar year.

 

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Table 6.5: Sales Milestones

 

     Payment (in millions)      Threshold  

Sales Milestones

     

Sales Milestone #1

     [**]         [**]   

Sales Milestone #2

     [**]         [**]   

Sales Milestone #3

     [**]         [**]   
  

 

 

    

 

 

 

Subtotal - Sales Milestones

   $ 125.0      
  

 

 

    

 

 

 

6.6 Method of Payments .

Each payment hereunder shall be made in United States Dollars by check or electronic funds transfer in immediately available funds to such bank account as Concert shall designate in writing to Avanir.

6.7 Late Payments

Any amount owed by Avanir to Concert under this Agreement that is not paid on or before the date such payment is due shall bear interest at a rate per annum equal to the lesser of the prime or equivalent rate per annum quoted by The Wall Street Journal on the first Business Day after such payment is due, plus [**] percent ([**]%), or the highest rate permitted by applicable Law, calculated on the number of days such payment is paid after such payment is due and compounded monthly.

6.8 Inspection of Records .

6.8.1 During the Term and for at least [**] years thereafter, Avanir shall, and shall cause its Affiliates and sublicensees to, keep accurate books and records setting forth the Net Sales of each Licensed Product in each country. Avanir shall, and shall cause its Affiliates and sublicensees to, permit Concert, using independent certified public accountants engaged by Concert and approved by Avanir (not to be unreasonably withheld), to examine such books and records at any reasonable time, upon reasonable notice; provided, however, that Avanir and its Affiliates and sublicensees shall not be required to produce for inspection any such records relating to any period prior to the [**] then most recently ended calendar years. The foregoing right of examination may be exercised [**] period of the Term and [**] period after the Term. Avanir or its Affiliate or sublicensee may require such accountants to enter into a reasonably acceptable confidentiality agreement, and in no event shall such accountants disclose to Concert any information, other than such as relates to the accuracy of the corresponding payments required to be made under this Agreement. The opinion of said independent accountants regarding such reports and related payments shall be binding on the Parties, other than in the case of manifest error. Concert shall bear the cost of any such examination and review; provided, however, that if the examination shows an underpayment of any amounts due of more than both (i) [**] percent ([**]%) of the amount due for an applicable calendar year and (ii) [**] U.S. Dollars ($[**]), then Avanir shall promptly reimburse Concert for its reasonable out-of-pocket expenses actually incurred in connection with such examination. Avanir shall promptly pay to Concert the amount of any underpayment of amounts due revealed by any such examination.

 

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6.8.2 During the Term and for at least [**] years thereafter, Concert shall, and shall cause its Affiliates and sublicensees to, keep accurate books and records setting forth the expenses incurred by Concert pursuant to Section 7.1.1 . Concert shall, and shall cause its Affiliates and contractors to, permit Avanir, using independent certified public accountants engaged by Avanir and approved by Concert (not to be unreasonably withheld), to examine such books and records at any reasonable time, upon reasonable notice; provided, however, that Concert and its Affiliates and contractors shall not be required to produce for inspection any such records relating to any period prior to the [**] then most recently ended calendar years. The foregoing right of examination may be exercised [**] period of the Term and [**] period after the Term. Concert or its Affiliate or contractor may require such accountants to enter into a reasonably acceptable confidentiality agreement. The opinion of said independent accountants regarding such reports and related payments shall be binding on the Parties, other than in the case of manifest error. Avanir shall bear the cost of any such examination and review; provided, however, that if the examination shows an overcharge by Concert of any amounts due of more than both (i) [**] percent ([**]%) of the amount due for an applicable calendar year and (ii) [**] U.S. Dollars ($[**]), then Concert shall promptly reimburse Avanir for its reasonable out-of-pocket expenses actually incurred in connection with such examination. Concert shall promptly refund to Avanir the amount of any overpayment of amounts due revealed by any such examination.

6.9 Tax Matters .

6.9.1 “ Tax ” or “ Taxes ” shall mean all taxes, charges, duties, fees, levies or other assessments, including income, excise, property, sales, consumption, use, value added, profits, license, withholding (with respect to compensation or otherwise), payroll, employment, net worth, capital gains, transfer, stamp, social security, environmental, occupation and franchise taxes, imposed by any Governmental Authority, and including any interest, penalties and additions attributable thereto, and all amounts payable pursuant to an agreement or arrangement with respect to taxes.

6.9.2 The Parties agree to cooperate and produce on a timely basis any Tax forms or reports reasonably requested by the other Party in connection with any payment made under this Agreement. Each Party further agrees to provide reasonable cooperation to the other Party, at the other Party’s expense, in connection with any official or unofficial Tax audit or contest relating to payments made by the other Party under this Agreement.

6.9.3 Any payments made by a Party pursuant to this Agreement shall not be reduced on account of any Taxes unless required by applicable Law. Concert shall be responsible for paying any and all Taxes (other than withholding taxes required to be paid by Avanir under applicable Law) levied on account of, or measured in whole or in part by reference to, any payments it receives. Avanir shall deduct or withhold from the payments any Taxes that Avanir is required to deduct or withhold under applicable Law. Notwithstanding the foregoing, if Concert is entitled under any applicable Tax treaty to a reduction in the rate of, or the elimination of, applicable withholding Tax, it may deliver to Avanir or the appropriate Governmental Authority (with the assistance of Avanir to the extent that such assistance is reasonably required and is requested in writing) the prescribed forms necessary to reduce the applicable rate of withholding or to relieve Avanir of its obligation to withhold Tax, and Avanir shall apply the

 

22


reduced rate of withholding, or dispense with withholding, as the case may be, provided that Avanir has received evidence, in a form reasonably satisfactory to Avanir, of Concert’s delivery of all applicable forms (and, if necessary, its receipt of appropriate governmental authorization) at least [**] days before the time that the payments are due. If, in accordance with the foregoing, Avanir withholds any amount, it shall (i) timely remit to Concert the balance of such payment; (ii) timely remit the full amount withheld to the proper Governmental Authority; and (iii) send to Concert written proof of remittance of the full amount withheld within [**] days following remittance.

6.9.4 Notwithstanding Section 6.9.3 , if, as a result of any change in the corporate status or location of Avanir, or the permitted assignment of this Agreement by Avanir, withholding taxes in addition to those that would be due in the absence of such change or assignment become due on payments from Avanir or its permitted assignee to Concert that would not have been due absent such change in corporate status or location or permitted assignment, in whole or in part, then Avanir will deduct withholding taxes in accordance with Section 6.9.3 , but will, in addition to the sums otherwise payable under this Agreement, pay to Concert such further sum as will ensure that, after deduction of withholding taxes on all such sums, the net amount received by Concert equals the amount that Concert would have received had the additional withholding taxes not been deducted.

ARTICLE 7

PATENTS AND INFRINGEMENT

7.1 Prosecution of Concert Patents .

7.1.1 Until Payment of the Phase 2 Milestone, Concert will be responsible for preparation, filing, prosecution and maintenance of all Concert Patents under the direction of the JPC. Through the JPC, Concert shall provide Avanir reasonable opportunities to comment on the prosecution and maintenance of the Concert Patents, and Concert shall reasonably consider all such comments unless implementation of such comments would unduly limit the scope of the Concert Patents. The JPC shall establish a budget for such activities from time to time. Avanir shall reimburse Concert for all reasonable external expenses relating to the Concert Patents incurred by Concert in executing the activities directed by the JPC, including Concert’s out-of-pocket expenses incurred in connection with preparation, filing, prosecution and maintenance of all Concert Patents, up to the amount budgeted for such activities by the JPC.

7.1.2 Upon and after Payment of the Phase 2 Milestone, Avanir will be responsible for preparation, filing, prosecution and maintenance of all Concert Patents at Avanir’s own cost and expense. Through the JPC, Avanir shall provide Concert reasonable opportunities to comment on but, subject to Section 7.3 , not approve the preparation, filing, prosecution and maintenance of the Concert Patents. Avanir shall not purposefully narrow the claims of any pending Concert Patents simply to avoid paying royalties hereunder at the higher rate that would otherwise be required pursuant to Section 6.4.2 , and shall not, without Concert’s prior written consent, which may not be unreasonably withheld, voluntarily narrow or agree to the narrowing of the claims of any Concert Patents after they have been allowed or issued.

 

23


7.2 Prosecution of Collaboration Patents

7.2.1 From the Effective Date, Avanir will be responsible for preparation, filing, prosecution and maintenance all Collaboration Patents at Avanir’s own cost and expense. Through the JPC, Avanir shall provide Concert reasonable opportunities to comment on the preparation, filing, prosecution and maintenance of the Collaboration Patents. Avanir shall not purposefully narrow the claims of the Collaboration Patents simply to avoid paying royalties hereunder at the higher rate that would otherwise be required pursuant to Section 6.4.2 .

7.3 Abandonment of Concert Patent or Collaboration Patent

If Avanir intends to abandon any Concert Patent or Collaboration Patent (without filing any substitute application), it will notify Concert of such intent at least [**] days in advance of any deadline that would prejudice Concerts rights under this Section 7.3 . Concert then shall have the opportunity to prepare, prosecute or maintain such Concert Patent or Collaboration Patent at Concert’s own expense. Thereafter, ownership of such patent rights shall be assigned to Concert.

7.4 Collaboration Technology and Trademarks

Avanir has the sole right and responsibility for registration, preparation, filing, prosecution, maintenance and enforcement of all Collaboration Technology or trademarks for the Licensed Products in Avanir’s discretion and at Avanir’s own cost and expense.

7.5 Enforcement of Concert and Collaboration Patents

7.5.1 Each Party will promptly notify the other in the event of any actual, threatened or suspected infringement of any Concert Patents by Third Party D-DM products that compete with any Licensed Product (“ Competitive Infringement ”).

7.5.2 Avanir shall have the first right, but not the obligation, to institute litigation to enforce the Concert Patents in connection with any Competitive Infringement or any infringement of the Collaboration Patents. Any such litigation shall be at Avanir’s sole cost and expense. If required in order to establish Avanir’s standing to sue under any applicable Laws, Concert, upon request of Avanir, agrees to timely join in any such litigation, at Avanir’s expense, and in any event to cooperate with Avanir at Avanir’s expense. The Parties shall consult with respect to potential strategies for terminating such Competitive Infringement without litigation. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 7.5.2 may be undertaken by Avanir without the consent of Concert if such settlement, stipulated judgment or other voluntary final disposition would require Concert to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect Concert’s rights under this Agreement or any of the Concert Patents. Any Governmental Authority awarded judgment for Competitive Infringement will be allocated first to pay any and all of Avanir’s and Concert’s reasonable costs and expenses relating to the action and the remainder will be shared by the Parties as follows: [**]% to Avanir, [**]% to Concert

7.5.3 Concert shall not have any right to enforce the Collaboration Patents with respect to any product that contains D-DM or that competes with a Licensed Product. If Avanir fails to bring an action with respect to, or to terminate, either (a) a Competitive Infringement (involving a Concert Patent) or (b) infringement of any Collaboration Patents by Third Party products that do not contain D-DM or compete with any Licensed Product, in each case (a) or (b)

 

24


within the sooner of (i) [**] days following the notice of alleged infringement or (ii) [**] days after being notified in the case of an action brought under the Hatch-Waxman Act or similar Laws applicable to follow-on biologic products, or any ex-U.S. equivalent of the Hatch-Waxman Act or such other Laws, then Concert shall have the right, but not the obligation, to institute litigation in connection therewith, and any such litigation shall be at Concert’s sole cost and expense. If required in order to establish Concert’s standing to sue under any applicable Laws, Avanir, upon request of Concert, agrees to timely join in any such litigation, at Concert’s expense, and in any event to cooperate with Concert at Concert’s expense. The Parties shall consult with respect to potential strategies for terminating such infringement without litigation and Concert may not enter into settlements, stipulated judgments or other arrangements respecting such infringement that would conflict with the exclusive license granted to Avanir hereunder without the prior written consent of Avanir. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 7.5.3 may be undertaken by Concert without the written consent of Avanir if such settlement, stipulated judgment or other voluntary final disposition would require Avanir to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect Avanir’s rights under this Agreement or any of the Concert Patents or Collaboration Patents. Any recoveries relating to Concert’s actions under this Section 7.5.3 will be allocated first to pay any and all of Avanir’s reasonable costs and expenses relating to the action and the remainder will retained by Concert.

7.5.4 Each Party shall reasonably cooperate with the other Party in any litigation asserting infringement of the Concert Patents or Collaboration Patents. Such cooperation includes asserting, and not waiving, the joint defense privilege with respect to any communications between the Parties pursuant to this Agreement to the greatest extent permissible in accordance with Law. If Avanir lacks standing to sue to enforce any of the Concert Patents in accordance with Avanir’s rights under Section 7.5.2 and the transfer to Avanir of sole ownership of the Concert Patent(s) in the subject jurisdiction is the only means available for conferring such standing upon Avanir (e.g., if Concert’s agreement to be joined as a party to the enforcement action would not enable Avanir to enforce such Concert Patents), then Concert agrees to assign its interest in such Concert Patent(s) in such jurisdiction to Avanir, (i) subject to a license back to Concert of all rights thereunder not already licensed to Avanir under Section 5.2.1 and (ii) provided that upon conclusion of such litigation, Avanir will assign back to Concert its interest in the subject Concert Patent(s) subject to the licensees granted in Section 5.2 .

ARTICLE 8

CONFIDENTIALITY

8.1 Confidential Information.

8.1.1 All Concert Technology and unpublished Concert Patents constitute the Confidential Information of Concert. All Collaboration Technology, unpublished Collaboration Patents, all reports prepared under Section 3.4 , the reports assigned to Avanir pursuant to Section 5.1.2 , and all communications with Regulatory Authorities concerning any Licensed Product are the Confidential Information of Avanir. Moreover, notwithstanding that Concert is the Discloser of the Concert Technology specific to D-DM or of any Collaboration Technology, Concert shall also be deemed a Recipient thereof for purposes of this Article 8 during the Term. Subject to Section 8.1.3 , during the Term and for [**] years thereafter, Recipient will keep confidential, and

 

25


will cause its Representatives to keep confidential, all of the Discloser’s Confidential Information that is disclosed to it under this Agreement. The Recipient agrees to take such action, and to cause its Representatives to take such action, to preserve the confidentiality of the Discloser’s Confidential Information as it would customarily take to preserve the confidentiality of the Recipient’s own similar types of Confidential Information.

8.1.2 The Recipient shall, and shall cause its respective Representatives (i) to use the Discloser’s Confidential Information only as expressly permitted in this Agreement and (ii) subject to Section 8.1.3 , not to disclose the Discloser’s Confidential Information to any Third Parties without the prior written consent of the other Party, except as expressly permitted in this Agreement.

8.1.3 Notwithstanding anything to the contrary in this Article 8 , the Recipient and its Representatives may disclose the Discloser’s Confidential Information in connection with the exercise of rights granted to it hereunder to: (i) Governmental Authorities to the extent necessary to obtain or maintain INDs or Regulatory Approvals; (ii) to outside consultants, contractors, advisory boards, managed care organizations, and non-clinical and clinical investigators; provided , however , that the Recipient shall enter into a confidentiality agreement with the consultant, contractor, advisory board, managed care organization or investigator before disclosing any of the Discloser’s Confidential Information, (iii) in connection with prosecuting or defending litigation; provided , however , that the Recipient or Representative shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information; (iv) in connection with the resolution of disputes under this Agreement; provided , however , that such Recipient shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information; and (v) in connection with filings required by security regulations and the rules and regulations of any securities exchanges upon which the Recipient’s securities are traded; provided , however , that such Recipient shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information.

8.2 Publicity .

The Parties shall use their respective best efforts to mutually agree to an initial joint press release announcing the execution of this Agreement as promptly as reasonably possible, but in any event not later than such time as either Party is required by applicable Law to make such an announcement publicly, and thereafter promptly disseminate such press release; provided , however , that either Party may, if required by applicable Law, announce the execution of this Agreement in the absence of such mutual agreement over the content thereof. Subject to Avanir’s prior review and approval, Concert may issue press releases or otherwise disclose the following: (i) filing of an IND for a Licensed Product or (ii) reaching a D-DM and Quinidine Product Milestone Event, D-DM Only Product Milestone Event or Sales Milestone under Sections 6.2 and 6.5 . Avanir may issue press releases concerning the Licensed Products at any time, including on the foregoing subject matter, without consent of Concert. Concert will provide Avanir an opportunity to provide comments, but not approval, if and to the extent reasonably possible under the circumstances and permitted in accordance with applicable Law (as

 

26


determined by outside legal counsel of Concert) of any such press releases by Concert. Until First IND, Avanir will provide Concert an opportunity to provide comments, but not approval, if and to the extent reasonably possible under the circumstances and permitted in accordance with applicable Law (as determined by outside legal counsel of Avanir) of any such press releases by Avanir.

ARTICLE 9

REPRESENTATIONS AND WARRANTIES

9.1 Concert Representations and Warranties .

Concert hereby represents and warrants to Avanir that, as of the Effective Date:

9.1.1 Concert has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement by Concert have been duly and validly authorized and approved by proper corporate action on the part of Concert, and Concert has taken all other action required by Law, its certificate of incorporation, by-laws or other organizational documents to authorize such execution, delivery and performance. Assuming due authorization, execution and delivery on the part of Avanir, this Agreement constitutes a legal, valid and binding obligation of Concert, enforceable against Concert in accordance with its terms, except as enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

9.1.2 The execution and delivery of this Agreement by Concert and the performance by Concert contemplated hereunder does not conflict with, or constitute a breach or default under, any of its charter or organizational documents, any Law, order or governmental rule or regulation applicable to Concert, or any material agreement, contract, commitment or instrument to which Concert is a party.

9.1.3 There is no action, claim, complaint, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, request for information by a Governmental Authority, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to the Knowledge of Concert, threatened against Concert, any of its Affiliates relating to the Concert Technology, the Concert Patents, or the transactions contemplated by this Agreement.

9.1.4 Concert has used commercially reasonable efforts to disclose or make available to Avanir, and, to the Knowledge of Concert, Concert has disclosed or made available to Avanir, (a) all material scientific and technical information, including any material publications, posters and pharmacokinetics data, relating to Licensed Products or their manufacture or use as such exists as of the Effective Date, and (b) all material information relating to D-DM and further relating to the Concert Patents and Concert Technology, including any invention disclosures, prior art search results and related memoranda and patentability opinions or evaluations, validity and enforceability searches and opinions or evaluations, freedom to operate searches and opinions or evaluations, and correspondence with and interview notes or other notes regarding communications with any of the inventor(s) and all other such

 

27


material information in the possession of Concert as of the Effective Date (including all material facts and publications that could constitute prior art, , whether discovered before or after filing of the subject patent application) that, in such attorney(s),’ agent(s),’ or employees’ reasonable judgment likely would be relevant to any Governmental Authority’s consideration of whether any of the Concert Patents are patentable/unpatentable, valid/invalid or enforceable/unenforceable.

9.1.5 The scientific, technical and other information relating to D-DM and further relating to the Concert Patents, Concert Technology and Licensed Products disclosed or made available by Concert to Avanir prior to the Effective Date has, to Concert’s Knowledge, been true and correct in all material respects and includes any materially adverse information known to Concert or its Affiliates relating to D-DM and further relating to the Concert Patents, Concert Technology or Licensed Products. To the Knowledge of Concert, no IND has been filed by Concert or a Third Party for a D-DM or [**] containing compound to any Regulatory Authority in any country. Neither Concert nor any of its Affiliates nor, to Concert’s Knowledge, a Representatives (in their capacity as such) is currently:

 

  (i) working to file on their own behalf,

 

  (ii) advising or consulting with any Person in preparation for or in connection with filing,

 

  (iii) holding an investment in (other than the acquisition of less than five percent (5%) of the voting securities of a publicly traded entity) or providing debt financing to any Person that is preparing to file, or

 

  (iv) assisting or encouraging any Person in connection with,

submission to a Regulatory Authority in any country for D-DM using D-DM as the reference listed drug.

9.1.6 To Concert’s Knowledge, the manufacture and commercialization of Licensed Products, as formulated and manufactured as of the Effective Date, does not infringe the patent rights of any other Person. The use, reproduction or disclosure of the Concert Technology to Avanir pursuant to the terms of this Agreement, and Avanir’s exercise of its rights hereunder in connection therewith, does not infringe, misappropriate or otherwise violate the trade secret rights or copyrights of any other Person. Concert has not received any notice alleging that the manufacture and commercialization of Licensed Products, as formulated and manufactured as of the Effective Date, infringes or will infringe the patent rights of any Third Party.

9.1.7 Concert has the unrestricted right to grant to Avanir all rights in the Concert Patents and Concert Technology that are being granted to Avanir under this Agreement upon the terms set forth herein. Concert has not granted any license or sublicense to any rights in the Concert Patents or Concert Technology to any Third Party that are in conflict with the rights granted to Avanir in this Agreement.

 

28


9.1.8 Schedule 1.11 sets forth, with the owner, country(ies) or region, registration and application numbers and dates indicated, as applicable, all Concert Patents that have issued or that have been applied for and are pending issuance with any Governmental Authority. All fees, taxes, annuities and other payments associated with filing, prosecuting, issuing, recording, registering or maintaining Concert Patents have been paid in full in a timely manner to the proper Governmental Authority. Each Concert Patent listed or required to be listed thereon is owned solely by Concert, is active, and, to Concert’s Knowledge, each such Concert Patent that is issued as of the Effective Date is valid and enforceable, and the ownership of the entire right, title and interest in each Concert Patent listed or required to be listed in Schedule 1.11 is recorded with the applicable Governmental Authority solely in the name of Concert. Concert’s internal and external U.S. patent attorney(s) and agent(s) that have been involved in prosecution of the Concert Patents and Concert’s employees that have been involved in the prosecution of the Concert Patents are not aware of any information that, in their reasonable judgment, would likely render any of the granted Concert Patents invalid or unenforceable and that is not part of the publicly available file history. Concert has complied with all duties of candor owed to patent offices with respect to the Concert Patents.

9.1.9 Concert has taken reasonable and customary measures to maintain and protect, as applicable, the confidentiality of Concert Technology.

9.1.10 All current and former employees of Concert who are or were involved in the design, creation, conception, reduction to practice or development of Concert Technology or Concert Patents or who were provided the chemistry of the Licensed Products manufactured before the Effective Date using the Concert Technology or claimed by the Concert Patents, have executed written contracts (a) obligating them to protect the confidential Concert Technology, (b) specifying that all work performed by them on behalf of Concert is “work made for hire” under U.S. copyright laws or that they are otherwise obligated to assign to Concert all copyrights in such works, and (c) specifying that Concert solely owns all other intellectual property rights in the Concert Technology and Concert Patents.

9.1.11 All employees of Concert who are or will be involved in the design, review, creation, evaluation, conception, reduction to practice or development of Collaboration Technology or Collaboration Patents or who have been or will be exposed to the Collaboration Technology or Collaboration Patents have executed written contracts, or will, before being assigned any tasks under Development Program, JSC or JPC, execute a written contract (a) obligating them to protect the confidential Collaboration Technology, (b) specifying that all work performed by them on behalf of Concert is “work made for hire” under U.S. copyright laws or that they are otherwise obligated to assign to Concert all copyrights in such works, and (c) specifying that, as between such Person and Concert, Concert solely owns all other intellectual property rights in the Collaboration Technology and Collaboration Patents.

9.1.12 Concert has not been granted a license from any Person under any intellectual property contained within or necessary to exploit the Concert Technology or Concert Patents.

 

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9.2 Avanir Representations and Warranties .

Avanir hereby represents and warrants to Concert that, as of the Effective Date:

9.2.1 Avanir has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement by Avanir have been duly and validly authorized and approved by proper corporate action on the part of Avanir, and Avanir has taken all other action required by Law, its certificate of incorporation, by-laws, or other organizational documents to authorize such execution, delivery and performance. Assuming due authorization, execution and delivery on the part of Concert, this Agreement constitutes a legal, valid and binding obligation of Avanir, enforceable against Avanir in accordance with its terms, except as enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

9.2.2 The execution and delivery of this Agreement by Avanir and the performance by Avanir contemplated hereunder does not and will not violate any Laws or any order of any court or Governmental Authority, except for such violations that would not have an adverse effect on the ability of Avanir to perform its obligation under this Agreement.

9.2.3 There is no action, claim, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to the knowledge of Avanir, threatened against Avanir or any of its Affiliates relating to the transactions contemplated by this Agreement.

9.3 DISCLAIMER .

EXCEPT AS OTHERWISE EXPRESSLY STATED IN SECTIONS 9.1 AND 9.2 , NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO ANY PRODUCTS. TECHNOLOGY, INTELLECTUAL PROPERTY RIGHTS OR ANY OTHER SUBJECT MATTER UNDER THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 9.1 AND 9.2 , EACH PARTY EXPRESSLY DISCLAIMS ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED. INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT.

ARTICLE 10

TERM AND TERMINATION

10.1 Term .

10.1.1 This Agreement shall be effective as of the Effective Date and, unless terminated sooner pursuant to Section 10.2 , shall remain in effect, on a Licensed Product-by-Licensed Product and country-by-country basis, for the duration of the Royalty Term applicable to such Licensed Product in each country.

10.1.2 The period from the Effective Date until termination (for any reason) of this Agreement in its entirety is the “ Term ” of this Agreement.

 

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10.2 Termination Rights .

10.2.1 If either Party materially breaches or materially defaults in the performance or observance of any of its respective obligations under this Agreement, the non-breaching Party may terminate this Agreement as follows: (a) upon [**] days notice as to breaches of payment obligations hereunder if the breaching Party has not cured the breach within such [**] day notice period; (b) except as to payment breaches and breaches specified in clause (c) below, upon [**] days notice if the breaching Party has not cured the breach within such [**] day notice period; and (c) if the breach is not a payment breach and was not deliberate, but cannot be cured within [**] days of the non-breaching Party’s notice of breach, if the breaching Party has not cured the breach within [**] days of the non-breaching Party’s notice of breach, unless the breaching Party has discontinued the breaching act, has used commercially reasonable efforts to cure the breach to the extent possible within such [**] day period and has implemented all commercially reasonable steps to further cure such breach to the extent possible and to prevent further occurrences of such breach; provided, however, that if Avanir is deemed to be in material breach or default in the performance or observance of any of its obligations under this Agreement due to the actions (or failure to act where a duty to act exists) of any of its sublicensees, then the foregoing right of termination (x) may not be exercised if the breach is curable and Avanir is using commercially reasonable efforts to have the breach cured and, if such commercially reasonable efforts do not result in such cure, provides notice of termination of the sublicense prior to or at the end of or promptly after the cure period and thereafter terminates such sublicense in accordance with such notice, (y) may not be exercised if the breach was not deliberate, but cannot be cured within [**] days of notice of breach, if the sublicensee has discontinued the breaching act, has used commercially reasonable efforts to cure the breach to the extent possible within such [**] day period and has implemented all commercially reasonable steps to further cure such breach to the extent possible and to prevent further occurrences of such breach, and (z) if terminable, shall be limited to termination of rights hereunder equivalent to the scope of the corresponding sublicense granted to such sublicensee(s).

10.2.2 Following the completion of the study designed to achieve the Phase 2 Milestone or after twenty four (24) months after the Effective Date, whichever occurs first, Avanir may terminate this Agreement by ninety (90) days written notice to Concert.

10.2.3 Concert may terminate this Agreement upon [**] days notice if Avanir ceases to continue the development and/or commercialization of all Licensed Products, irrespective of whether or not such cessation is consistent with the exercise by Avanir of commercially reasonable efforts as required in Section 4.1 , if Avanir has not recommenced active development and/or commercialization efforts within such [**] day notice period.

10.3 Effects of Termination .

10.3.1 Upon expiration of the Royalty Term as to a Licensed Product in a country and payment of all royalties associated with Net Sales of such Licensed Product in such country (but not termination of this Agreement prior to such expiration and payment), the licenses granted hereunder to Avanir for such Licensed Product in such country shall be deemed fully paid-up, irrevocable and non-terminable.

10.3.2 Upon termination of this Agreement during any such time as any Clinical Trials involving a Licensed Product are being conducted by Avanir, its Affiliates, their licensees or their Representatives, Avanir and any other such Person shall be entitled to complete the Clinical Trials to the extent reasonably necessary to comply with applicable Law.

 

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10.3.3 Subject to Sections 10.3.1 and 10.3.2 , all licenses granted hereunder by Concert to Avanir under Concert Patents and Concert Technology shall terminate upon any termination of this Agreement. Subject to Sections 10.3.1 and 10.3.2 , Avanir shall cease, as promptly as reasonably possible, all further development and commercialization of Licensed Products in a manner that uses any Concert Technology disclosed to Avanir during the Term or that would infringe any Concert Patent in any country as to which Avanir’s licenses have not, prior to such termination, become fully paid-up, irrevocable and non-terminable pursuant to Section 10.3.1. To the extent that Avanir continues to further develop or commercialize any Licensed Products in a manner that does not use any such Concert Technology and that does not infringe any Concert Patent, then Avanir shall continue to pay royalties thereon as set forth in Section 6.4 for the full duration of the Royalty Term if the manufacture, use, sale, offer for sale or import of the Licensed Product in a country during the Term would have infringed any Concert Patent in such country.

10.3.4 Termination of this Agreement in its entirety by Avanir pursuant to Section 10.2.2 or by Concert pursuant to Section 10.2.3 or following a material breach by Avanir pursuant to Section 10.2.1 , shall give rise to the following:

(a) If requested by Concert, upon such termination, Avanir shall grant to Concert a non-exclusive, perpetual license, including the right to sublicense, under the Collaboration Patents to make, use, sell or offer for sale and import products containing D-DM. Such license shall be royalty-bearing to the extent set forth in clause (d) below and shall otherwise be fully paid-up and non-royalty bearing.

(b) If requested by Concert, upon such termination, Avanir shall grant to Concert a non-exclusive, perpetual license, including the right to sublicense, under Collaboration Technology to make, use, offer for sale, sell and import products containing D-DM. Such license shall be royalty-bearing to the extent set forth in clause (d) below and shall otherwise be fully paid-up and non-royalty bearing.

(c) If requested by Concert, upon such termination, Avanir shall grant to Concert a non-exclusive, perpetual license, including the right to sublicense, under any patent rights and technology, other than Collaboration Patents and Collaboration Technology, that are owned by Avanir or licensed to Avanir with the right to sublicense upon the terms hereof and that are incorporated into or embodied by any Licensed Product that is in Clinical Trials or has obtained Regulatory Approval at the time of termination, to develop, make, use, offer for sale, sell and import products containing D-DM. Such license shall be royalty-bearing to the extent set forth in clause (d) below and shall otherwise be fully paid-up and non-royalty bearing; provided , however , with respect to any such patent rights or technology licensed to Avanir, such patent rights shall only be included if Concert agrees to pay any royalties or other amounts payable to the licensor on account of the sublicensing thereof to Concert hereunder or Concert’s exploitation of the sublicensed subject matter.

 

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(d) The licenses set forth in the foregoing clauses (a), (b) and (c) shall be royalty bearing as follows: Concert shall pay Avanir a royalty on Net Sales (modifying such defined term to refer to sales by Concert, its Affiliates and sublicensees) of a product containing D-DM as follows:

(i) [**]% of such Net Sales if such termination occurs prior to completion of a Phase 2 Clinical Trial of a Licensed Product; or

(ii) [**]% of such Net Sales, up to a maximum cumulative royalty obligation equal to [**] Avanir’s reasonable and documented out-of-pocket expenses incurred by Avanir in developing the Licensed Product under this Agreement prior to such termination, if such termination occurs after completion of one or more Phase 2 Clinical Trial(s).

When no further royalties are payable pursuant to this clause (d), the licenses set forth in clauses (a), (b) and (c) above shall be fully paid-up, non-royalty-bearing, irrevocable and non-terminable. Concert shall be entitled to deductions against the royalties payable pursuant to this clause (d) of [**] percent ([**]%) of the royalties and other amounts payable to Third Parties with respect to patent rights owned or controlled by Third Parties that, in the absence of a license thereunder, could reasonably be or is determined to be infringed by the manufacture, use, offer for sale, sale or importation of any Licensed Product as it is formulated and manufactured as of the effective date of termination; provided, however, that such deductions shall not affect the maximum amount [**] that may become payable under clause (ii); provided further, that in no event will such deductions reduce by more than [**] percent ([**]%) the royalties otherwise due under clause (ii) during any royalty reporting period. All such royalties due from Concert pursuant hereto shall be accrued, reported and paid as if Concert were Avanir (and vice versa ) in Sections 6.4.5, 6.6, 6.7, and 6.9. Additionally, Concert shall and shall cause its Affiliates and sublicensees to keep records associated with the royalties due hereunder as if Concert were Avanir (and vice versa ) in Section 6.8.1 for a period of [**] years after the quarter in which the last royalty hereunder is accrued.

(e) Upon such termination, Avanir shall promptly provide to Concert a copy of all data and reports and assign to Concert all Regulatory Approvals, regulatory dossiers and regulatory materials for the Licensed Products and take actions with regulatory agencies, as requested by Concert, reasonably necessary to effect such transfer to Concert. Notwithstanding the foregoing, Concert shall not market, for a period of [**] years after termination, a Licensed Product that receives Regulatory Approval based on Phase 3 Clinical Trial data generated by Avanir prior to termination; provided that , on a country-by-country basis, the restriction set forth above in this sentence shall not apply in any country in which (i) whether prior to or after the effective date of termination, a generic version of Nuedexta ® receives or has received Regulatory Approval or (ii) as of the effective date of termination, a Licensed Product has received Regulatory Approval. For purposes of this section, “generic version of Nuedexta ® ” means, in the United States of America, the first commercial sale of a product with an A/B rating, as provided in the U.S. FDA Orange Book, for each product being commercialized by Avanir which is a combination of non-deuterated dextromethorphan and quinidine and in any other country, the first commercial sale of a substantially similar product.

 

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(f) Avanir shall, within [**] days after termination, (i) transfer to Concert Avanir’s supply of clinical trial materials and synthetic intermediates for Licensed Products, and (ii) use commercially reasonable efforts to provide to Concert a copy of Avanir’s promotional materials, manufacturing records, analytical methods, reference standards and degradation standards and other of Avanir’s documented technology and know-how licensed pursuant to Sections 10.3.4 (a), (b) and/or (c) to the extent used by Avanir in connection with Licensed Products at the time of termination and reasonably necessary or useful for Concert to continue development, manufacturing, seeking or obtaining Regulatory Approval, or commercialization of Licensed Products as performed by Avanir at the time of termination; in each case (i) and (ii) to the extent existing as of the date of termination and in the case of (i) at a price of Avanir’s reasonable and documented out-of-pocket cost for such materials plus [**] percent ([**]%).

(g) Avanir shall, at Avanir’s expense, complete Clinical Trials involving Licensed Products that are in progress as of the date of termination and that are non-cancellable or that must be completed for ethical reasons, and forward to Concert all final reports and underlying data from such activities. If upon termination Avanir cannot assign any of its agreements with a Third Party to conduct Clinical Trials, Concert cannot enter a new agreement with such Third Party or another Third Party to conduct such Clinical Trials, and Concert requests Avanir to continue to conduct such Clinical Trials beyond the period required in the preceding sentence, then Avanir will negotiate in good faith with Concert regarding commercially reasonable solutions that will permit Concert to have such Clinical Trials continued, such as having Avanir conduct them for some period of time at a commercially reasonable price. Avanir shall reasonably cooperate with Concert to effect all such transfers of reports, data and development activities to Concert.

(h) Avanir shall, if requested by Concert within [**] days after termination, assign to Concert, to the extent assignable without consent of the other party to the agreement and solely related to the Licensed Products, Avanir’s agreements with Third Parties for the procurement of services or supplies relating to the development, manufacture or commercialization of the Licensed Products.

(i) If Avanir possesses an inventory of commercial supply of Licensed Product upon termination, then, if Concert so requests within [**] days after termination, Avanir shall transfer to Concert Avanir’s inventory of Licensed Products that exists as of the time of such request, that is believed to be in good and saleable condition in its original, unopened package at the transfer price paid by Avanir to a Third Party for such inventory or at [**]% of Avanir’s direct manufacturing cost if Avanir manufactured the Licensed Product.

(j) Concert shall have the right to publish Clinical Trial results relating to Licensed Products as if Concert were Avanir in Section 3.5 (but without JSC oversight). Avanir shall not publish any such Clinical Trial results following termination without the consent of Concert, such consent not to be unreasonably withheld.

(k) Upon such termination, both Parties shall be deemed both a Discloser and Recipient of all Collaboration Technology and unpublished Collaboration Patents, all reports and data relating to any Licensed Product and all communications with Regulatory Authorities concerning any Licensed Product for purposes of Article 8 .

 

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(l) From and after the earlier of any notice of termination hereunder or the effective date of termination of this Agreement, Avanir and Avanir’s Affiliates shall refrain from making any public statement regarding any Licensed Product, unless (i) Avanir or its Affiliate is required to make such statement pursuant to applicable Law, (ii) such statement is made in a legally privileged manner, or (iii) Concert shall have approved any such statement in writing, such approval not to be unreasonably withheld.

(m) ALL INFORMATION AND MATERIALS SOLD OR OTHERWISE PROVIDED BY AVANIR PURSUANT TO THIS SECTION 10.3.4 ARE SOLD AND PROVIDED ON AN AS-IS, WHERE-IS, WITH ALL FAULTS BASIS AND WITHOUT ANY WARRANTY OF ANY KIND WHATSOEVER, ALL OF WHICH ARE HEREBY DISCLAIMED, INCLUDING WITHOUT’ LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE OR AGAINST INFRINGEMENT.

10.3.5 Termination of this Agreement for any reason (i) shall be without prejudice to Concert’s right to receive all payments accrued before the effective date of such termination, including all payments on Net Sales for Licensed Products sold after termination, and (ii) shall not release a Party hereto from any indebtedness, liability, right to damages or other obligation incurred hereunder by such Party before the date of termination.

10.3.6 The provisions of Articles 1, 8, 11 and 12 and Sections 3.6, 5.1, 5.4, 5.5, 6.7, 6.8, 6.9, 9.3 and 10.3 , as well as any other Sections or defined terms referred to in such Sections or necessary to give them effect shall survive termination or expiration of this Agreement and remain in force until discharged in full. Furthermore, any other provisions required to interpret and enforce the Parties’ rights and obligations or to wind up their outstanding obligations under this Agreement shall survive to the extent required.

ARTICLE 11

INDEMNIFICATION

11.1 Indemnification .

11.1.1 Concert shall indemnify, defend and hold Avanir and Avanir’s Representatives, harmless from any and all Losses incurred by any of them in connection with a claim by a Third Party as a result of:

 

  (i) the breach of any covenant of, or warranty or representation made by Concert under this Agreement; or

 

  (ii) the negligence, recklessness, or wilful misconduct of Concert or any of its Representatives; or

 

  (iii)

the development, manufacture, use, offer for sale, sale, importation or promotion of any Licensed Products by Concert or its Representatives

 

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  following termination of this Agreement and reversion of rights therein to Concert pursuant to Article 10 or of any other products made using any of the Collaboration Technology or Concert Technology or covered by any of the Collaboration Patents or Concert Patents, including without limitation any such Losses based on Third Party personal injury or product liability claims or Third Party infringement claims.

Notwithstanding the foregoing, Concert shall not be obligated to so indemnify, defend and hold Avanir and Avanir’s Representatives harmless to the extent that such Losses are caused by (a) the breach of any covenant of, or warranty or representation made by Avanir under this Agreement or (b) the gross negligence, recklessness or wilful misconduct of Avanir or any of its Representatives.

11.1.2 Avanir shall indemnify, defend and hold Concert and Concert’ Representatives, harmless from any and all Losses incurred by any of them in connection with a claim by a Third Party as a result of:

 

  (i) the breach of any covenant of, or warranty or representation made by Avanir under this Agreement; or

 

  (ii) the negligence, recklessness, or wilful misconduct of Avanir or any of its Representatives; or

 

  (iii) the development, manufacture, use, offer for sale, sale, importation or promotion of Licensed Products by Avanir or its Representatives under this Agreement or of any other products made using any of the Collaboration Technology or Concert Technology or covered by any of the Collaboration Patents or Concert Patents, including without limitation any such Losses based on Third Party personal injury or product liability claims or Third Party infringement claims.

Notwithstanding the foregoing, Avanir shall not be obligated to so indemnify, defend and hold Concert and Concert’ Representatives harmless to the extent that such Losses are caused by (a) the breach of any covenant of, or warranty or representation made by Concert under this Agreement or (b) the gross negligence, recklessness or wilful misconduct of Concert or any of its Representatives.

11.2 Indemnity Procedures .

11.2.1 In the event that any Third Party asserts a claim with respect to any matter for which a Party (the “ Indemnified Party ”) is entitled to indemnification under Section 11.1 (a “ Third Party Claim ”), then the Indemnified Party shall promptly notify the Party obligated to indemnify the Indemnified Party (the “ Indemnifying Party ”) thereof; provided that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then only to the extent that) the Indemnifying Party is prejudiced thereby.

 

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11.2.2 The Indemnifying Party shall have the right, exercisable by notice to the Indemnified Party within [**] days after receipt of notice from the Indemnified Party of the commencement of or assertion of any Third Party Claim, to assume direction and control of the defense, litigation, settlement, appeal or other disposition of the Third Party Claim (including the right to settle the claim solely for monetary consideration) with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party, and the Indemnifying Party may do so without prejudice to its right to dispute whether such claim involves a Third Party Claim subject to valid indemnification obligation hereunder. During such time as the Indemnifying Party is controlling the defense of such Third Party Claim, the Indemnified Party shall cooperate, and shall cause its Representatives to cooperate upon request of the Indemnifying Party and at Indemnifying Party’s cost, in the defense or prosecution of the Third Party Claim, including by furnishing such records, information and testimony and attending such conferences, discovery proceedings, hearings, trials or appeals as may reasonably be requested by the Indemnifying Party. In the event that the Indemnifying Party does not notify the Indemnified Party of the Indemnifying Party’s intent to defend any Third Party Claim within [**] days after notice thereof (including by affirmatively denying responsibility to defend the Third Party Claim), the Indemnified Party may (without further notice to the Indemnifying Party) undertake the defense thereof with counsel of the Indemnified Party’s choice and at the Indemnifying Party’s expense (including reasonable, out-of-pocket attorneys’ fees and costs and expenses of enforcement or defense). The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to join in (including the right to conduct discovery, interview and examine witnesses and participate in all settlement conferences), but not control, at its own expense, the defense of any Third Party Claim that the other Party is defending as provided in this Agreement.

11.2.3 The Indemnifying Party shall not, without the prior written consent of the Indemnified Party which shall not be unreasonably withheld, enter into any compromise or settlement that commits the Indemnified Party to take, or to forbear to take, any action. The Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third Party Claim involves equitable or other non-monetary relief, but shall not have the right to settle such Third Party Claim to the extent such Third Party Claim involves monetary damages without the prior written consent of the Indemnifying Party. Each of the Indemnifying Party and the Indemnified Party shall not make any admission of liability in respect of any Third Party Claim without the prior written consent of the other Party, and the Indemnified Party shall use reasonable efforts to mitigate losses arising from the Third Party Claim.

11.3 Limitation of Liability .

IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, INCLUDING LOSS OF PROFITS OR REVENUE, SUFFERED BY A PARTY OR ANY OF ITS RESPECTIVE REPRESENTATIVES. EXCEPT (i) TO THE EXTENT OF ANY SUCH DAMAGES MUST BE PAID TO A THIRD PARTY IN CONNECTION WITH A THIRD PARTY CLAIM, OR (ii) IN THE EVENT OF AN INTENTIONAL AND WILFUL BREACH IN BAD FAITH OF ANY REPRESENTATION, WARRANTY. COVENANT OR AGREEMENT CONTAINED IN THIS AGREEMENT BY THE OTHER PARTY.

 

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ARTICLE 12

MISCELLANEOUS

12.1 Governing Law; Arbitration.

(a) In accordance with Section 5.1 , inventorship of inventions and discoveries will be determined in accordance with U.S. patent laws and authorship of copyrighted works will be determined in accordance with U.S. copyright laws. Otherwise, this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to any rules of conflict of laws.

(b) If any controversy or claim arising out of or relating to this Agreement cannot first be resolved by the Parties within [**] days after written notice thereof, then, absent written agreement to the contrary, arbitration pursuant to the terms hereof shall be the sole and exclusive method of resolution of such dispute. Either Party may submit the controversy or claim to confidential binding arbitration in accordance with the JAMS Comprehensive Arbitration Rules and Procedures then in effect. The arbitration will be conducted by one arbitrator, mutually selected by the Parties; provided , however , that if the Parties fail to mutually select an arbitrator within [**] Business Days after the claim is submitted to arbitration, then the arbitrator shall be selected by JAMS in accordance with its Comprehensive Arbitration Rules and Procedures then in effect. The Parties agree to use commercially reasonable efforts to cause the arbitration hearing to be conducted within [**] days after the appointment of the arbitrator, and to use commercially reasonable efforts to cause the decision of the arbitrator to be furnished within [**] days after the conclusion of the arbitration hearing. The final decision of the arbitrator shall be provided in writing to the Parties and include (a) the dollar amount of any award or specific performance, if any, and (b) a determination as to whether either Party shall be required to bear and pay all or a portion of the other Party’s attorneys’ fees and other expenses relating to the arbitration. Judgment upon any award, judgment, decree or order rendered by the arbitrator may be entered in any court having competent jurisdiction. The place of the arbitration hearing shall be in the City of New York, New York and the language of the arbitration shall be English.

12.2 Bankruptcy . All rights and licenses granted under or pursuant to this Agreement by Concert are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction, licenses of right to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code. Each Party shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction. In the event of the commencement of a bankruptcy proceeding by or against a Party under the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction, the other Party shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in such other Party’s possession, shall be promptly delivered to it (i) upon any such commencement of a bankruptcy proceeding upon such other Party’s written request therefor, unless the Party subject to the bankruptcy proceeding elects to continue to perform all of its obligations under this

 

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Agreement, or (ii) if not delivered under clause (i) above, following the rejection of this Agreement by or on behalf of the Party subject to the bankruptcy proceeding upon written request therefor by the other Party.

12.3 Force Majeure .

Neither Party shall be held liable to the other Party nor be deemed to have defaulted under or breached the Agreement for failure or delay in performing any obligation under the Agreement to the extent such failure or delay is caused by or results from causes beyond the reasonable control of the affected Party, including embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, fire, floods, or other acts of God, or acts, omissions or delays in acting by any governmental authority (including by a Regulatory Authority, for any reason other than lack of due diligence, negligence or misconduct of the affected) or the other Party. The affected Party shall notify the other Party of such force majeure circumstances as soon as reasonably practical, and shall promptly undertake all reasonable efforts necessary to cure such force majeure circumstances.

12.4 Severability .

If any one or more of the provisions contained in this Agreement is held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless the absence of the invalidated provision(s) adversely affects the substantive rights of the Parties. The Parties shall in such an instance use their best efforts to replace the invalid, illegal or unenforceable provision(s) with valid, legal and enforceable provision(s) which, insofar as practical, implement the purposes of this Agreement.

12.5 Waivers .

Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party or Parties waiving such term or condition. Neither the waiver by any Party of any term or condition of this Agreement nor the failure on the part of any Party, in one or more instances, to enforce any of the provisions of this Agreement or to exercise any right or privilege, shall be deemed or construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement.

12.6 Entire Agreements; Amendments .

This Agreement sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and supersedes all agreements or understandings, verbal or written, made between Concert and Avanir before the date hereof with respect to the subject matter hereof, including the Nondisclosure Agreement between the Parties, dated April 5, 2011. All Confidential Information disclosed by Concert to Avanir before the Effective Date will be

 

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deemed to have been disclosed pursuant to this Agreement. Except for the Development Plan (which may be amended from time to time by the JSC subject to Section 2.1.5 ), none of the terms of this Agreement shall be amended, supplemented or modified except in writing signed by the Parties.

12.7 Construction .

Except where expressly stated otherwise in this Agreement, the following rules of interpretation apply to this Agreement: (i) “include”, “includes” and “including” are not limiting and mean include, includes and including, without limitation; (ii) definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms; (iii) references to an agreement, statute or instrument mean such agreement, statute or instrument as from time to time amended, modified or supplemented; (iv) references to a Person are also to its permitted successors and assigns; (v) references to an “Article”, “Section”, or “Exhibit” refer to an Article or Section of, or any Exhibit to, this Agreement unless otherwise indicated; (vi) the word “will” shall be construed to have the same meaning and effect as the word “shall” and vice versa; (vii) the word “any” shall mean “any and all” unless otherwise indicated by context; and (viii) the word “or” means in the alternative or together, i.e., “and/or”.

12.8 Assignment .

12.8.1 Except as provided in this Section 12.8 , this Agreement may not be assigned or otherwise transferred, nor may any right or obligation hereunder be assigned or transferred, by either Party without written consent of the other Party. Notwithstanding the foregoing, each Party may, without consent of the other Party, assign this Agreement and its rights and obligations hereunder in their entirety to an Affiliate or in connection with a Change of Control. Any attempted assignment not in accordance with this Section 12.8 shall be void. Any permitted assignee shall assume all assigned obligations of its assignor under this Agreement.

12.8.2 Concert shall not assign ownership (in whole or in part), in and to the Concert Patents or Concert Technology, in each case without the prior written consent of Avanir, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Concert may assign any such interest in whole or in part without such consent (i) to an Affiliate or (ii) in connection with a Change of Control; provided , however , that in each case, such assignment is in connection with a permitted assignment of this Agreement and to the same assignee as to which this Agreement is assigned, that such assignment is expressly made subject to the rights granted to Avanir under this Agreement, and that the assignee assumes in writing Concert’s obligations under this Agreement.

12.9 Subcontracting .

Either Party may subcontract any of its obligations under this Agreement with the prior written consent of the JSC; provided , however , that no such consent is required by Avanir after First IND. Except with sales agents and distributors of Avanir for commercialization of the Licensed Products, in any subcontract with a Third Party, such Party shall ensure that (i) that Third Party subcontractor is bound by obligations of confidentiality no less stringent than those

 

40


imposed on the Parties under this Agreement, (ii) all inventions, discoveries or materials created, identified, conceived, reduced to practice or developed by the Third Party subcontractor in the scope of its, his or her engagement with a party in connection with the subcontract agreement, and in furtherance of the Development Program, are appropriately documented and disclosed promptly to the subcontracting Party, and (iii) shall (a) grant to Concert, Avanir and their Representatives a right to inspect the subcontractor’s relevant records and facilities; (b) require the subcontractor to be in good standing with all applicable Governmental Authorities; (c) require the subcontractor to comply (as appropriate) with current good laboratory practices, current good manufacturing laboratory practices or other Laws to the extent applicable to the services or deliverables to be provided by the subcontractor; and (d) require that the subcontractor has no outstanding violations or citations that would or may impair the services or deliverables to be provided by such subcontractor.

12.10 Independent Contractor .

The relationship between Concert and Avanir is that of independent contractors. Concert and Avanir are not joint venturers, partners, principal and agent, employer and employee, and have no other relationship other than independent contracting Parties. The Parties’ obligations and rights in connection with the subject matter of this Agreement are solely and specifically as set forth in this Agreement, and the Parties acknowledge and agree that neither Party owes the other any fiduciary or similar duties or obligations by virtue of the relationship created by Agreement.

12.11 Notices .

All notices which are required or permitted hereunder shall be in writing and sufficient if delivered personally, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier), sent by nationally-recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

 

If to Concert:     

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, Massachusetts 02421

USA

Attn.: Chief Executive Officer

Facsimile: 1.781.674.5309

and copy to:     

WilmerHale

60 State Street

Boston, Massachusetts 02109

USA

Attn.: Steven D. Barrett, Esq.

Facsimile: 1.617.526.5000

If to Avanir:     

Avanir Pharmaceuticals, Inc.

20 Enterprise, Suite 200

Aliso Viejo, CA 92656

Attention: Sr. Vice President & Chief Business Officer

Facsimile: 1-949-643-6869

 

41


and copy to:     

Thomas A. Briggs

Jones Day

12265 El Camino Real, Suite 200

San Diego, California 92130

USA

Facsimile: 1.858.314.1150

or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such notice shall be deemed to have been given: (a) when delivered if personally delivered or sent by facsimile on a business day; (b) on the business day after dispatch if sent by nationally recognized overnight courier; or (c) on the fifth business day following the date of mailing if sent by mail.

12.12 Third Party Beneficiaries

None of the provisions of this Agreement shall be for the benefit of or enforceable by any Third Party, including any creditor of either Party. No Third Party shall obtain any right under any provision of this Agreement or shall by reason of any such provision make any claim in respect of any debt, liability or obligation (or otherwise) against either Party.

12.13 Performance by Representatives

To the extent that this Agreement imposes obligations on Representatives of a Party, such Party agrees to cause its Representatives to perform such obligations.

12.14 Binding Effect.

This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective heirs, successors and permitted assigns.

12.15 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. This Agreement may be executed by delivery of duly authorized and executed signature pages by facsimile.

 

42


<Signature page follows.>

 

43


IN WITNESS WHEREOF the Parties hereto have caused this Agreement to be executed by their duly authorized officers to be effective as of the Effective Date.

 

Concert Pharmaceuticals, Inc.     Avanir Pharmaceuticals, Inc.
By:  

/s/ Roger D. Tung

    By:  

/s/ Gregory J. Flesher

Name:   Roger D. Tung     Name:   Gregory J. Flesher
Title:   CEO & President     Title:   SVP & Chief Business Officer

 

44


Schedule 1.11

CONCERT PATENTS

 

COUNTRY

  

F&R REF.

  

FILED

  

SERIAL NO.

  

STATUS

  

TITLE

[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

 

45


Schedule 1.16

D-DM

“D-DM” means any compound having the structure of dextromethorphan, which is illustrated below, or a salt, solvate, or hydrate thereof, wherein for a given sample of the compound, the abundance of deuterium at one or more of the hydrogens of dextromethorphan is greater than the natural abundance of deuterium.

 

LOGO

The compound, or salt, solvate, or hydrate thereof, includes any polymorphic or amorphous form.

The term “D-DM” also includes [**].

 

46


Schedule 1.17

[**]

[**]

 

47


EXHIBIT A: DEVELOPMENT PLAN

(See attached.)

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of two pages were omitted. [**].

 

48


Exhibit A – Development Plan

Concert Resources (numbers shown are FTE hours)

 

Personnel

  

3/1/2012 – 8/31/2012

  

9/1/2012 – 2/28/2013

  

Total

[**]    [**]       [**]
[**]    [**]       [**]
[**]    [**]       [**]
[**]    [**]       [**]
[**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]

 

49

  Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Double asterisks denote omission.
  Exhibit 10.17

EXECUTION COPY

CONFIDENTIAL

DEVELOPMENT AND LICENSE AGREEMENT

This D EVELOPMENT AND L ICENSE A GREEMENT (the “ Agreement ”) is entered into as of February 26, 2013 (the “ Effective Date ”) by and between C ONCERT P HARMACEUTICALS , I NC ., a Delaware corporation, with its principal place of business at 99 Hayden Avenue, Suite 500, Lexington, MA 02421, USA (“ Concert ”), and J AZZ P HARMACEUTICALS I RELAND L IMITED , an Irish company, with its principal place of business at Fourth Floor, Connaught House, One Burlington Road, Dublin 4, Ireland (“ Jazz ”). Concert and Jazz are sometimes referred to herein individually as a “ Party ” and collectively as the “ Parties ”.

RECITALS

W HEREAS , Concert possesses certain intellectual property related to its proprietary deuterated sodium gamma-hydroxybutyrate drug candidates;

W HEREAS , Jazz is a specialty biopharmaceutical company with expertise in the development, marketing, and commercialization of pharmaceutical products; and

W HEREAS , Concert desires to grant Jazz an exclusive license, and Jazz desires to obtain a license, to develop and commercialize products containing deuterated sodium gamma-hydroxybutyrate or related compounds worldwide, all in accordance with the terms and conditions set forth herein.

N OW , T HEREFORE , in consideration of the foregoing premises and the mutual promises, covenants and conditions contained in this Agreement, the Parties agree as follows:

ARTICLE 1

DEFINITIONS

1.1 Acquiror ” has the meaning set forth in Section 1.4.

1.2 Affiliate ” means, with respect to a particular Party or other entity, a person, corporation, partnership, or other entity that controls, is controlled by or is under common control with such Party or other entity. For the purposes of this definition, the word “control” (including, with correlative meaning, the terms “controlled by” or “under common control with”) means the actual power, either directly or indirectly through one or more intermediaries, to direct or cause the direction of the management and policies of such entity, whether by the ownership of fifty percent (50%) or more of the voting stock of such entity, or by contract or otherwise.

1.3 Business Day ” means a day other than Saturday, Sunday or any day that banks in Dublin, Ireland or Lexington, Massachusetts, U.S. are required or permitted to be closed.

1.4 Change of Control ” means, with respect to a Party, (a) a merger or consolidation of such Party with a Third Party that results in the voting securities of such Party outstanding immediately prior thereto ceasing to represent at least fifty percent (50%) of the combined voting power of the surviving entity immediately after such merger or consolidation, or (b) a transaction or series of related transactions in which a Third Party, together with its Affiliates, becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the outstanding

 

1.


securities of such Party, or (c) the sale or other transfer to a Third Party of all or substantially all of such Party’s assets. The Third Party in any of (a), (b) or (c), and any of such Third Party’s Affiliates (other than the acquired Party and its Affiliates as in existence prior to the applicable transaction) are referred to collectively as the “Acquiror”.

1.5 Claims ” has the meaning set forth in Section 9.1.

1.6 Combination Product ” means: (a) a pharmaceutical product that consists of a Licensed Product and at least one other clinically effective active ingredient that is not a Licensed Product; or (b) any combination of a Licensed Product and another pharmaceutical product that contains at least one other clinically effective active ingredient that is not a Licensed Product, where such products are not formulated together but are sold together as a single product and invoiced as one product. The other clinically effective active ingredient(s) in clause (a) and the other pharmaceutical product(s) in clause (b) are each referred to as the “ Other Product(s) ”.

1.7 Commercialization ” means the marketing, promotion, sale and/or distribution of Licensed Products in the Territory, and all related manufacturing activities not included in the definition of Development. Commercialization shall include commercial activities conducted in preparation for Licensed Product launch. “ Commercialize ” has a correlative meaning.

1.8 Commercially Reasonable Efforts ” means, [**].

1.9 Concert Indemnitees ” has the meaning set forth in Section 9.2.

1.10 Confidential Information ” of a Party means any and all Information of such Party or any of such Party’s Affiliates that is disclosed to the other Party or any of the other Party’s Affiliates under this Agreement, whether in oral, written, graphic, or electronic form and such other Information identified elsewhere in this Agreement as the Confidential Information of such Party. In addition, (a) all Information disclosed by Concert pursuant to the Bilateral Nondisclosure Agreement between Concert and Jazz Pharmaceuticals, Inc. (“ JPI ”), an Affiliate of Jazz, dated December 6, 2010 (the “ Confidentiality Agreement ”) shall be deemed to be Concert’s Confidential Information disclosed hereunder, and all Information disclosed by JPI pursuant to the Confidentiality Agreement shall be deemed to be Jazz’s Confidential Information disclosed hereunder, and (b) all Confidential Information (as defined in the Feasibility Agreement) of Concert under the Feasibility Study Agreement between Concert and JPI, dated June 2, 2011 (the “ Feasibility Agreement ”), shall be deemed to be Concert’s Confidential Information disclosed hereunder, and all Confidential Information (as defined in the Feasibility Agreement) of JPI under the Feasibility Study Agreement shall be deemed to be Jazz’s Confidential Information disclosed hereunder; provided that any use or disclosure of any Information under clause (a) or (b) that is authorized under Article 10 shall not be restricted by, or be deemed a violation of, the Confidentiality Agreement or the Feasibility Agreement.

1.11 Control ” means, with respect to any material, Information, or intellectual property right, that a Party or its Affiliate (a) owns or (b) has a license (other than a license granted to such Party under this Agreement) to such material, Information, or intellectual property right and, in each case, has the ability to grant to the other Party access, a license, or a sublicense (as applicable) to the foregoing on the terms and conditions set forth in this Agreement without violating the terms of any then-existing agreement or other legally enforceable arrangement with any Third Party.

 

2.


1.12 Cover ” means, with respect to a claim of a Patent and a Licensed Product, that such claim would be infringed, absent a license, by the manufacture, use, offer for sale, sale or importation of such Licensed Product (considering claims of patent applications to be issued as then pending).

1.13 Covering Claim ” has the meaning set forth in Section 6.5(b).

1.14 Derivative ” means a compound that [**].

1.15 Develop ” or “ Development ” means all activities that relate to the development of Licensed Products or to (a) obtaining, maintaining or expanding Regulatory Approval of a Licensed Product, or (b) developing the ability to manufacture clinical and commercial quantities of a Licensed Product. This includes: (i) preclinical testing, toxicology, and clinical trials; (ii) preparation, submission, review, and development of data or information for the purpose of submission to a Governmental Authority to obtain, maintain or expand Regulatory Approval of a Licensed Product; and (iii) manufacturing process development and scale-up, bulk production and fill/finish work associated with the supply of a Licensed Product for preclinical testing and clinical trials, and related quality assurance and technical support activities.

1.16 Development Budget ” has the meaning set forth in Section 4.2(a).

1.17 Development Data ” has the meaning set forth in Section 4.7.

1.18 Development Invention ” has the meaning set forth in Section 7.1.

1.19 Development Patent ” means any Patent claiming a Development Invention.

1.20 Development Plan ” has the meaning set forth in Section 4.2(a).

1.21 Development Program ” has the meaning set forth in Section 4.2(a).

1.22 Diligent Efforts ” means, [**].

1.23 Dispute ” has the meaning set forth in Section 12.1.

1.24 Dollar ” means a U.S. dollar, and “ $ ” shall be interpreted accordingly.

1.25 D-GHB Compound ” has the meaning set forth in Schedule 1.25.

1.26 EMA ” means the European Medicines Agency or any successor entity.

1.27 EU ” or “ European Union ” means the European Union member states as then constituted. As of the Effective Date, the European Union member states are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom.

 

3.


1.28 Executive Officer ” means, with respect to Concert, its Chief Executive Officer or its Chief Operating Officer, and with respect to Jazz, its Executive Vice President, Research and Development or its Executive Vice President and Chief Commercial Officer.

1.29 FD&C Act ” means the U.S. Federal Food, Drug, and Cosmetic Act, as amended.

1.30 FDA ” means the U.S. Food and Drug Administration or any successor entity.

1.31 Field ” means the treatment of any and all human diseases and conditions.

1.32 First Commercial Sale ” means, with respect to a Licensed Product, the first sale on a commercial basis to a Third Party of such Licensed Product in a given regulatory jurisdiction after Regulatory Approval has been obtained in such jurisdiction for such Licensed Product.

1.33 FTE ” means the equivalent of a full-time Concert employee’s work, at least [**] hours per year, as adjusted to account for vacation and other permitted time off, for a twelve (12)-month period, performing activities under the Development Plan. Any such employee who works more than [**] hours per year performing activities under the Development Plan shall be considered one (1) (and no more) FTE. If any such employee works partially on work under the Development Plan and partially on other work in a calendar month, then the full-time equivalent to be attributed to such employee’s work hereunder shall be calculated based upon the percentage of such employee’s total work time in such calendar month that such employee spent working under the Development Plan divided by twelve (12). FTE efforts shall be limited to work of a scientific, technical or regulatory professional only and shall not include work by general corporate and non-technical administrative personnel. Concert shall track FTEs using its standard practice and normal systems and methodologies, all as accounted for and consistently applied according to U.S. generally accepted accounting principles (“ GAAP ”).

1.34 FTE Rate ” means the rate of FTE costs incurred by Concert, which for the purpose of this Agreement shall be [**] Dollars ($[**]) per FTE. For the avoidance of doubt, the FTE Rate excludes travel, hotel, and similar out-of-pocket expenses paid to Third Parties, and amounts paid to consultants (collectively, “ FTE-Related Costs ”).

1.35 Generic Product ” means, with respect to a Licensed Product in a particular regulatory jurisdiction, any pharmaceutical product that (a)(i) contains the same D-GHB Compound as such Licensed Product for the same route of administration as such Licensed Product and is approved by the Regulatory Authority in such country; or (ii) is A-Level Rated (defined below) with respect to such Licensed Product or otherwise approved by the Regulatory Authority in such country as a substitutable generic for such Licensed Product; and (b) is sold in such jurisdiction by a Third Party that is not a Sublicensee, is not authorized by, and did not purchase such product or its active pharmaceutical ingredients from, Jazz or its Affiliates or Sublicensees. For purposes of this definition, “ A-Level Rated ” means, for the U.S., “therapeutically equivalent” as determined by the FDA, applying the definition of “therapeutically equivalent” set forth in the preface to the then-current edition of the FDA publication “Approved Drug Products With Therapeutic Equivalence Evaluations” and, for outside the U.S., such equivalent determination by the applicable Regulatory Authority.

 

4.


1.36 GCP ” or “ Good Clinical Practices ” means the then-current good clinical practice standards, practices and procedures promulgated or endorsed by the FDA as set forth in the guidelines entitled “Guidance for Industry E6 Good Clinical Practice: Consolidated Guidance,” including related regulatory requirements imposed by the FDA and comparable regulatory standards, practices and procedures promulgated by the EMA or other Regulatory Authority applicable to the Territory, as they may be updated from time to time, including applicable quality guidelines promulgated under the ICH.

1.37 GLP ” or “ Good Laboratory Practices ” means the then-current good laboratory practice standards promulgated or endorsed by the FDA as defined in 21 C.F.R. Part 58, and comparable regulatory standards promulgated by the EMA or other Regulatory Authority applicable to the Territory, as they may be updated from time to time, including applicable quality guidelines promulgated under the ICH.

1.38 GMP ” or “ Good Manufacturing Practices ” means the then-current good manufacturing practices required by the FDA, as set forth in the FD&C Act and the regulations promulgated thereunder, for the manufacture and testing of pharmaceutical materials, and comparable laws and regulations applicable to the manufacture and testing of pharmaceutical materials promulgated by other Regulatory Authorities, as they may be updated from time to time.

1.39 Governmental Authority ” means any multi-national, federal, state, local, municipal, provincial or other governmental authority of any nature (including any governmental division, prefecture, subdivision, department, agency, bureau, branch, office, commission, council, court or other tribunal).

1.40 ICH ” means International Conference on Harmonisation.

1.41 IND ” means (a) an Investigational New Drug Application as defined in the FD&C Act and applicable regulations promulgated thereunder by the FDA, or (b) the equivalent application to the equivalent agency in any other regulatory jurisdiction, the filing of which is necessary to initiate or conduct clinical testing of a pharmaceutical product in humans in such jurisdiction.

1.42 Indemnified Party ” has the meaning set forth in Section 9.3.

1.43 Indemnifying Party ” has the meaning set forth in Section 9.3.

1.44 Indication ” means a separately defined, well-categorized class of human disease or condition for which a separate MAA (including any extensions or supplements) may be filed with a Regulatory Authority; [**].

1.45 Information ” means any data, results, technology, business or financial information or information of any type whatsoever, in any tangible or intangible form, including know-how, trade secrets, practices, techniques, methods, processes, inventions, developments, specifications, formulations, formulae, software, algorithms, marketing reports, expertise, technology, test data (including pharmacological, biological and chemical, biochemical, clinical test data and data resulting from non-clinical studies), CMC information, stability data and other study data and procedures.

 

5.


1.46 Initiation ” means, with respect to a clinical trial, first dosing of the first subject in such clinical trial.

1.47 Jazz Compound ” has the meaning set forth in Schedule 1.47.

1.48 Jazz Development Invention ” has the meaning set forth in Section 7.1.

1.49 Jazz Indemnitees ” has the meaning set forth in Section 9.1.

1.50 Joint Inventions ” has the meaning set forth in Section 7.1.

1.51 Joint Patents ” has the meaning set forth in Section 7.1.

1.52 Joint Patent Committee ” or “ JPC ” means the committee formed by the Parties as described in Section 3.2.

1.53 Joint Steering Committee ” or “ JSC ” means the committee formed by the Parties as described in Section 3.1.

1.54 Laws ” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, domestic or foreign.

1.55 Licensed Intellectual Property ” means the Licensed Know-How and Licensed Patents.

1.56 Licensed Know-How ” means all Information Controlled by Concert or its Affiliates as of the Effective Date or during the Term that is necessary or useful to develop, manufacture, use, offer for sale, sell or import any D-GHB Compound. Licensed Know-How includes all Joint Inventions, all Development Inventions that are solely owned by Concert, all data and results generated under the Feasibility Agreement, and all CONCERT Inventions and jointly-owned (by JPI and Concert) Inventions under the Feasibility Agreement (as such terms are defined in the Feasibility Agreement), in each case that are necessary or useful to develop, manufacture, use, offer for sale, sell or import any D-GHB Compound. [**].

1.57 Licensed Patent ” means any Patent that (a) is Controlled by Concert or its Affiliates as of the Effective Date or at any time during the Term, and (b) is necessary or useful to develop, manufacture, use, offer for sale, sell or import any D-GHB Compound. Licensed Patents include all Patents listed on Exhibit A . Licensed Patents also include all Joint Patents, all Development Patents that are solely owned by Concert, and all Patents owned by Concert that claim or disclose Inventions under the Feasibility Agreement (as Inventions is defined in the Feasibility Agreement), in each case that are necessary or useful to develop, manufacture, use, offer for sale, sell or import any D-GHB Compound. [**]

1.58 Licensed Product ” means any product containing a D-GHB Compound, including all forms, presentations, doses and formulations, the composition of matter, manufacture or use of which is claimed by or uses or embodies any Licensed Intellectual Property.

 

6.


1.59 Major European Country ” means any one of the United Kingdom, Germany, France, Italy and Spain.

1.60 Marketing Authorization Application ” or “ MAA ” means an application to the appropriate Regulatory Authority for approval to market a Licensed Product (but excluding Pricing Approval) in any particular jurisdiction, including an NDA in the U.S.

1.61 NDA ” means a New Drug Application, as defined in the FD&C Act, as amended, and applicable regulations promulgated thereunder by the FDA.

1.62 Net Sales ” means, with respect to any Licensed Product, the gross amounts invoiced by Jazz and its Affiliates and Sublicensees for sales of such Licensed Product in the Field to unaffiliated Third Parties, less the following deductions provided to unaffiliated entities and actually allowed and taken:

(a) cash, trade or quantity discounts, coupons, charge-back payments, including administrative fees in connection therewith, and rebates actually granted to trade customers, retail pharmacy chains, wholesalers, managed health care organizations, pharmaceutical benefit managers, insurers, group purchasing organizations and national, state, or local government;

(b) credits, rebates or allowances actually allowed upon prompt payment or on account of claims, damaged goods, rejections or returns of Licensed Products, including in connection with recalls, and the actual amount of any write-offs for bad debt (provided that any amount subsequently recovered will be treated as Net Sales);

(c) reasonable specialty distribution and dispensing fees in connection with Licensed Products, as calculated consistent with Jazz’s then-current calculation methodology for such fees, if any;

(d) freight, postage, shipping, transportation and insurance charges, in each case actually allowed or paid for delivery of Licensed Products; and

(e) taxes (other than income taxes), duties, tariffs, mandated contributions or other governmental charges levied on the sale of Licensed Products, including VAT, excise taxes and sales taxes.

Notwithstanding the foregoing, amounts received or invoiced by Jazz or its Affiliates or Sublicensees for the sale of Licensed Products among Jazz and its Affiliates and Sublicensees shall not be included in the computation of Net Sales hereunder; provided that such Licensed Products are intended for resale to non-Sublicensee Third Parties or for the purchaser’s internal use. Net Sales shall be accounted for in accordance with GAAP and the selling party’s standard accounting practices.

Notwithstanding the foregoing, “Net Sales” shall not include any amounts invoiced for sales of Licensed Products supplied for use in clinical trials of Licensed Products, or under early access, compassionate use, named patient, indigent access, patient assistance or other reduced pricing programs, provided that the applicable selling party does not receive any consideration for such sale(s) in excess of the cost of goods of the applicable Licensed Products.

 

7.


Net Sales for a Combination Product in a country shall be calculated as follows:

(i) If the Licensed Product and Other Product(s) each are sold separately in such country, Net Sales will be calculated by multiplying the total Net Sales (as described above) of the Combination Product by the fraction A/(A+B), where A is the public or list price in such country of the Licensed Product sold separately in the same formulation and dosage, and B is the (sum of the) public or list price(s) in such country of the Other Product(s) sold separately in the same formulation and dosage, during the applicable calendar year.

(ii) If the Licensed Product is sold independently of the Other Product(s) in such country, but the public or list price of the Other Product(s) cannot be determined, Net Sales will be calculated by multiplying the total Net Sales (as described above) of such Combination Product by the fraction A/C, where A is the public or list price in such country of such Licensed Product sold independently and C is the public or list price in such country of the Combination Product.

(iii) If the Other Product(s) are sold independently of the Licensed Product therein in such country, but the public or list price of such Licensed Product cannot be determined, Net Sales will be calculated by multiplying the total Net Sales (as described above) of such Combination Product by the fraction [1-B/C], where B is the (sum of the) public or list price(s) in such country of the Other Product(s) and C is the public or list price in such country of the Combination Product.

1.63 New Product Marks ” has the meaning set forth in Section 7.10.

1.64 Non-Exclusive Patent ” means, [**].

1.65 Patents ” means (a) pending patent applications, issued patents, utility models and designs; (b) reissues, substitutions, confirmations, registrations, validations, re-examinations, additions, continuations, continued prosecution applications, continuations-in-part, or divisions of or to any of the foregoing; and (c) extensions, renewals or restorations of any of the foregoing by existing or future extension, renewal or restoration mechanisms, including supplementary protection certificates or the equivalent thereof.

1.66 Patent Activities ” means activities related to the preparation, filing, prosecution and maintenance of the Licensed Patents and initiation of and participation in oppositions, reexaminations, reissues, interferences, nullity actions, invalidation actions and post-grant reviews.

1.67 Patent Countries ” means the countries set forth on Exhibit B .

1.68 Phase 1 Clinical Trial ” means a human clinical trial of a Licensed Product, the principal purpose of which is to evaluate safety in healthy individuals or patients, to determine pharmacokinetic parameters and other key pharmaceutical properties of the Licensed Product (including absorption, metabolism, and elimination), or to determine the appropriate range of doses to evaluate in further clinical trials, in each case as described in 21 C.F.R. § 312.21(a), as amended from time to time, or the corresponding foreign regulations.

 

8.


1.69 Phase 2 PoC Clinical Trial ” means a human clinical trial of a Licensed Product, the principal purpose of which is to evaluate the effectiveness and/or safety of such Licensed Product in the target patient population, as described in 21 C.F.R. § 312.21(b), as amended from time to time, or the corresponding foreign regulations, and which trial is intended to enable the initiation of a Pivotal Clinical Trial and to establish the dosing for such Pivotal Clinical Trial.

1.70 Pivotal Clinical Trial ” means a pivotal human clinical trial of a Licensed Product with a defined dose or a set of defined doses of such Licensed Product designed to ascertain efficacy and safety of such Licensed Product for the purpose of enabling the preparation and submission of an MAA to the competent Regulatory Authorities in a country of the Territory, as further defined in 21 C.F.R. § 312.21(c) for the U.S., as amended from time to time, or the corresponding foreign regulations.

1.71 Platform Licensed Patent ” means a Licensed Patent that Covers a D-GHB Compound and at least one deuterated compound that is not a D-GHB Compound.

1.72 Pricing Approval ” means such governmental approval, agreement, determination or decision establishing prices for a Licensed Product that can be charged and/or reimbursed in regulatory jurisdictions where the applicable Governmental Authorities approve or determine the price and/or reimbursement of pharmaceutical products.

1.73 Product Infringement ” has the meaning set forth in Section 7.5(a).

1.74 Product Marks ” has the meaning set forth in Section 7.10.

1.75 Regulatory Approval ” means all approvals (other than Pricing Approvals) of a Governmental Authority that are necessary for the commercial sale of a Licensed Product in the Field in a given country or regulatory jurisdiction.

1.76 Regulatory Authority ” means, in a particular country or jurisdiction, any applicable Governmental Authority involved in granting Regulatory Approval in such country or jurisdiction.

1.77 Regulatory Materials ” means regulatory applications, submissions, notifications, communications, correspondence, registrations, Regulatory Approvals and/or other filings made to, received from or otherwise conducted with a Regulatory Authority in order to Develop, manufacture, market, sell or otherwise Commercialize a Licensed Product in a particular country or jurisdiction.

1.78 Royalty Term ” has the meaning set forth in Section 6.5(b).

1.79 Sublicensee ” means any Third Party granted a sublicense by Jazz to the rights licensed to Jazz under Section 2.1(a) or 2.1(f).

 

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1.80 Successful Completion ” means with respect to a clinical trial, satisfaction of the criteria established by the JSC under Section 4.4(a) for such clinical trial.

1.81 Term ” has the meaning set forth in Section 11.1.

1.82 Territory ” means all countries of the world.

1.83 Third Party ” means any person or entity other than Concert or Jazz or an Affiliate of either Party.

1.84 Trademark ” means any word, name, symbol, color, shape, designation or device or any combination thereof, including any trademark, service mark, trade name, trade dress, brand name, product configuration, domain name, logo, design or business symbol, that functions as an identifier of source, origin or membership, whether or not registered, and all statutory and common law rights therein, and all registrations and applications therefor, together with all goodwill associated with, or symbolized by, any of the foregoing.

1.85 U.S. ” means the United States of America, including all possessions and territories thereof.

1.86 Valid Claim ” means (a) a claim of an issued, unexpired patent within the Licensed Patents that has not been revoked, disclaimed, abandoned or held invalid or unenforceable by a court or other body of competent jurisdiction in an unappealed or unappealable decision or (b) prior to the [**] anniversary of the Effective Date, a claim of any patent application within the Licensed Patents that either (i) is or claims priority to a Licensed Patent listed on Exhibit A as of the Effective Date or (ii) is a foreign counterpart of any of the foregoing in clause (b)(i).

1.87 Working Group ” has the meaning set forth in Section 3.1(e).

ARTICLE 2

LICENSES AND EXCLUSIVITY

2.1 License Grants for Licensed Products.

(a) License to Jazz . Subject to the terms and conditions of this Agreement, Concert hereby grants Jazz an exclusive (even as to Concert except as provided in the first sentence of Section 2.1(c) and in Section 2.1(d) below) license, with the right to sublicense through multiple tiers in accordance with Section 2.1(e), under the Licensed Know-How and Licensed Patents to make, have made, use, sell, have sold, offer for sale and import Licensed Products in the Field in the Territory.

(b) License to Concert . During the Term and subject to the terms and conditions of this Agreement, Jazz hereby grants Concert a non-exclusive license under Information and Patents Controlled by Jazz during the Term, solely to the extent necessary to conduct activities assigned to Concert under the Development Plan.

(c) Concert Retained Rights . Notwithstanding the rights granted to Jazz in Section 2.1(a), Concert retains the right to practice the Licensed Intellectual Property in the Field

 

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and in the Territory as necessary to conduct the activities assigned to Concert under the Development Plan in accordance with the terms of this Agreement. In addition, except for the rights granted to Jazz in Section 2.2, Concert retains all other rights in the Licensed Intellectual Property (i) outside the Field for all purposes; and (ii) inside the Field with respect to products other than Licensed Products.

(d) Metabolites . Notwithstanding the rights granted to Jazz in Section 2.1(a), Concert retains the right under the Licensed Intellectual Property to make, have made, use, sell, have sold, offer for sale and import any product (other than a Licensed Product) in the Field in the Territory wherein such product, when administered to a human, produces a metabolite that is also a metabolite of deuterated gamma-hydroxybutyrate, provided that such produced metabolite (i) is not therapeutically effective for any Indication for which deuterated gamma-hydroxybutyrate or gamma-hydroxybutyrate has been shown to be effective or (ii) is produced in insufficient quantities to be therapeutically effective for any such Indication.

(e) Sublicenses . Jazz shall have the right to grant sublicenses through multiple tiers, under any or all of the rights granted in Section 2.1(a) or 2.1(f), to its Affiliates and to Third Parties. Each agreement in which Jazz grants a sublicense under the Licensed Intellectual Property shall be consistent with the relevant terms and conditions of this Agreement. Any sublicense granted by Jazz to a Third Party under this Agreement shall be in writing and Jazz shall provide Concert with a copy of such sublicense agreement within [**] days after the execution thereof; provided that Jazz may redact from such copy any financial or commercially sensitive terms and any other terms not necessary for Concert to evaluate the compliance of such sublicense agreement with this Section 2.1(e). The existence and terms of each such sublicense agreement shall be the Confidential Information of Jazz. Jazz shall remain responsible for the performance of its Sublicensees, and shall insure that each Sublicensee complies with all applicable terms and conditions of this Agreement.

(f) Additional License to Jazz . Subject to the terms and conditions of this Agreement, Concert hereby grants Jazz a non-exclusive, royalty-free, fully paid license, with the right to sublicense through multiple tiers in accordance with Section 2.1(e), under the Non-Exclusive Patents, to make, have made, use, sell, have sold, offer for sale and import Licensed Products in the Field in the Territory; provided, however, that such license shall not apply to any Licensed Product that is approved as a generic product if such approval was based upon (i) the Acquiror’s Regulatory Approval or data for the applicable reference listed drug (the “RLD”) or (ii) a Third Party’s Regulatory Approval or data for the RLD, if such Third Party obtained its rights to the RLD, directly or indirectly, from the Acquiror.

2.2 License to Jazz for Jazz Compounds .

(a) License . Subject to the terms and conditions of this Agreement, Concert hereby grants Jazz an exclusive (even as to Concert except as provided in Section 2.2(b) below), royalty-free, fully-paid, perpetual, irrevocable license, with the right to sublicense through multiple tiers, under Concert’s interest in the Development Inventions and Development Patents, to make, have made, use, sell, have sold, offer for sale and import Jazz Compounds and products containing Jazz Compounds in the Territory, and otherwise to exploit the Development Inventions and Development Patents in connection with the development, manufacture and

 

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commercialization of Jazz Compounds and products containing Jazz Compounds. For clarity, under no circumstances shall Jazz owe any amounts to Concert pursuant to this Agreement on account of the development, manufacture or commercialization of Jazz Compounds or products containing Jazz Compounds.

(b) Metabolites . Notwithstanding the rights granted to Jazz in Section 2.2(a), Concert retains the right under Concert’s interest in the Development Inventions and Development Patents to make, have made, use, sell, have sold, offer for sale and import any product (other than a product containing a Jazz Compound) in the Field in the Territory wherein such product, when administered to a human, produces a metabolite that is also a metabolite of gamma-hydroxybutyrate, provided that such produced metabolite (i) is not therapeutically effective for any Indication for which deuterated gamma-hydroxybutyrate or gamma-hydroxybutyrate has been shown to be effective or (ii) is produced in insufficient quantities to be therapeutically effective for any such Indication.

2.3 Exclusivity . Concert hereby covenants that, during the Term, neither it nor its Affiliates will (a) grant or offer any license or other rights to a Third Party, or otherwise discuss or negotiate with a Third Party the terms of any such license or rights (provided that Concert and its Affiliates may offer, discuss or negotiate such license or rights after a notice of termination has been issued under Section 11.2 or 11.3), or (b) conduct any activities, whether independently or with or for the benefit of a Third Party, in each case (a) and (b) with respect to the research, development, manufacture or commercialization of any D-GHB Compound, any Licensed Product, any Derivative or any Jazz Compound in the Field in the Territory. [**] set forth in this Section 2.3 [**] with respect to (i) [**] or (ii) [**], provided that such [**] that is [**]. Notwithstanding the foregoing, [**] with respect to [**], provided that such [**].

2.4 No Implied Licenses . Except as explicitly set forth in this Agreement, neither Party shall be deemed by estoppel or implication to have granted the other Party any license or other right to any intellectual property of such Party.

ARTICLE 3

GOVERNANCE

3.1 Joint Steering Committee .

(a) Formation and Role . Promptly, and in any event within [**] days after the Effective Date, the Parties shall establish a joint steering committee (the “ Joint Steering Committee ” or “ JSC ”) to coordinate, oversee, review and discuss the Parties’ activities with respect to the Development of Licensed Products hereunder. For that purpose and to the extent reasonably necessary, the JSC will:

(i) coordinate the activities of the Parties under the Development Plan, including facilitating communications and discussions between the Parties with respect to the Development of Licensed Products under the Development Plan;

(ii) review, discuss and approve any proposed amendments or revisions to the Development Plan;

 

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(iii) oversee technology transfer from Concert to Jazz;

(iv) establish the criteria for Successful Completion of a Phase 1 Clinical Trial and Phase 2 PoC Clinical Trial pursuant to Section 4.4(a);

(v) determine whether the criteria for Successful Completion have been satisfied pursuant to Section 4.4(b);

(vi) establish such Working Groups as it deems necessary to achieve the objectives and intent of this Agreement; and

(vii) perform such other functions as appropriate to further the purposes of this Agreement, as expressly set forth in this Agreement or as determined by the Parties in writing.

The JSC shall have only the powers expressly assigned to it in this Section 3.1 and elsewhere in this Agreement, and shall have no power to amend, modify, or waive compliance with this Agreement.

(b) Members . Each Party shall initially appoint [**] representatives to the JSC, each of whom will be an officer or employee of the applicable Party (or in the case of Jazz, of Jazz or an Affiliate of Jazz) having sufficient seniority within such Party (or Affiliate of Jazz) to make decisions arising within the scope of the JSC’s responsibilities. The JSC may change its size from time to time by mutual consent of its members, and each Party may replace its representatives at any time upon written notice to the other Party. The JSC shall have a chairperson selected by [**]. The role of the chairperson shall be to convene and preside at the meetings of the JSC and to ensure the preparation of meeting minutes, but the chairperson shall have no additional powers or rights beyond those held by other JSC representatives. Either Party may, from time to time, invite additional employees or consultants (including employees or consultants of Jazz’s Affiliates) to attend JSC meetings; provided that such employees and consultants are subject to confidentiality obligations substantially the same as those set forth in Article 10.

(c) Meetings . The JSC shall meet at least [**], unless the Parties mutually agree in writing to a different frequency for such meetings, no further Development is contemplated or Jazz reduces the frequency pursuant to Section 3.3. Either Party may also call a special meeting of the JSC (by videoconference or teleconference) by providing at least [**] Business Days prior written notice to the other Party in the event such Party reasonably believes that a significant matter must be addressed prior to the next regularly scheduled meeting, and such Party shall provide the JSC, no later than [**] Business Days prior to the special meeting, with materials reasonably adequate to enable an informed decision. No later than [**] Business Days prior to any meeting of the JSC, the chairperson of the JSC shall prepare and circulate an agenda for such meeting; provided, however, that either Party may propose additional topics to be included on such agenda, either prior to or in the course of such meeting. The JSC may meet in person, by videoconference or by teleconference, as the Parties agree; provided that at least [**] (but no more than [**], unless agreed otherwise by the Parties) of the meetings of the JSC per calendar year shall be held in person, at locations chosen alternately by the Parties. Each Party shall bear the expense of its respective JSC members’ participation in JSC meetings. Meetings of

 

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the JSC shall be effective only if at least [**] of each Party is present or participating in such meeting. The chairperson of the JSC shall be responsible for preparing reasonably detailed written minutes of all JSC meetings that reflect, without limitation, all material decisions made at such meetings. The JSC chairperson shall send draft meeting minutes to each member of the JSC for review and approval within [**] Business Days after each JSC meeting. Such minutes shall be deemed approved unless one or more members of the JSC objects to the accuracy of such minutes within [**] Business Days of receipt.

(d) Decision Making . The JSC shall act by consensus except as described in this Section 3.1(d). The representatives from each Party will have, collectively, one (1) vote on behalf of that Party. The JSC shall strive to seek consensus in its actions and decision making process. If the JSC is unable to reach consensus on any issue for which it is responsible within [**] days after first considering such issue, then the JSC chairperson shall have the right to decide such matter and such decision shall be deemed to be a decision of the JSC; provided that the JSC chairperson shall not have the right to (i) determine whether or not any milestone event that would result in a payment obligation under Section 6.3 or 6.4 has been achieved; (ii) amend the Development Plan in a manner that imposes Development obligations on Concert beyond those in the then-current Development Plan without Concert’s written agreement to the scope of such development obligations; (iii) amend the Development Plan in a manner that would require Concert to perform activities for which Concert has not agreed to a budgeted amount therefor in the Development Budget; or (iv) resolve any matter in a manner that would require Concert to perform any act that Concert reasonably believes to be inconsistent with any Law or any approval, order, policy or guidelines of a Regulatory Authority or ethical requirements or guidelines.

(e) Working Groups . From time to time, the JSC may establish and delegate duties to other committees, sub-committees or directed teams (each, a “ Working Group ”) on an “as-needed” basis to oversee particular projects or activities, such as chemistry, manufacturing and controls, regulatory or clinical activities, which delegation shall be reflected in the minutes of the meetings of the JSC. Each such Working Group shall be constituted and shall operate as the JSC determines and shall report to the JSC. Each Working Group and its activities shall be subject to the oversight, review and approval of the JSC. In no event shall the authority of the Working Group exceed that specified for the JSC in Section 3.1(a). Any disagreement between the designees of Concert and of Jazz on a Working Group shall be referred to the JSC for resolution.

3.2 Joint Patent Committee .

(a) Formation and Role . Within [**] days after the Effective Date, the Parties shall establish a joint patent committee (the “ Joint Patent Committee ” or “ JPC ”) to discuss and determine the strategy for and implementation of the preparation, filing, prosecution and maintenance of the Licensed Patents, as described in and subject to the terms of Article 7. For that purpose and to the extent reasonably necessary, the JPC will:

(i) manage prosecution of the Licensed Patents as described and in accordance with the terms of Article 7, including the standards set forth in Section 7.4(a);

(ii) review invention disclosures in accordance with the terms of Section 7.2;

 

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(iii) provide advice, periodic updates and reports to the JSC regarding the Licensed Patents; and

(iv) perform such other functions as expressly set forth in this Agreement or as determined by the Parties in writing.

The JPC shall have only the powers expressly assigned to it in this Section 3.2 and elsewhere in this Agreement, and shall have no power to amend, modify, or waive compliance with this Agreement. The JPC shall not have the power to determine inventorship or ownership of any Development Invention.

(b) Members . Each Party shall appoint [**] to the JPC, who will have relevant expertise and sufficient seniority to make decisions arising within the scope of the JPC’s responsibilities. Each Party may replace its representative at any time upon written notice to the other Party. The JPC shall have a chairperson, who shall serve for a term of one year, and who shall be selected alternately, on an annual basis, by Concert or Jazz. The initial chairperson shall be selected by [**]. The role of the chairperson shall be to convene and preside at the meetings of the JPC and to ensure the preparation of meeting minutes, but the chairperson shall have no additional powers or rights beyond those held by the other JPC representative. Either Party may, from time to time, invite additional employees or consultants (including employees or consultants of any Affiliate of Jazz) to attend JPC meetings; provided that such employees and consultants are subject to confidentiality obligations substantially the same as those set forth in Article 10.

(c) Meetings . The JPC shall communicate on such dates and at such times as agreed upon by its members, but in no event less frequently than [**]. The JPC may meet in person, by videoconference or by teleconference, as the Parties agree. Each Party shall bear the expense of its respective JPC member’s participation in JPC meetings. Meetings of the JPC shall be effective only if the representative of each Party is present or participating in such meeting. The chairperson of the JPC shall be responsible for preparing reasonably detailed written minutes of all JPC meetings that reflect, without limitation, all material decisions made at such meetings. The JPC chairperson shall send draft meeting minutes to the other member of the JPC for review and approval within [**] Business Days after each JPC meeting. Such minutes shall be deemed approved unless the other member objects to the accuracy of such minutes within [**] Business Days of receipt.

(d) Decision Making . Any approval, determination or other action of the JPC shall require unanimous agreement of both members of the JPC except as described in this Section 3.2(d). If the JPC is unable to reach consensus on any issue for which it is responsible within [**] days after first considering such issue, or such shorter time as necessary to meet any applicable deadline to prevent abandonment of any Patent, then the matter shall be referred for resolution to a mutually acceptable independent Third Party expert with appropriate qualifications and experience in pharmaceutical patent prosecution. If the Parties fail to agree upon an expert within [**] Business Days after the end of such [**]-day (or shorter) period, then each Party shall select an independent Third Party individual with appropriate qualifications and experience in pharmaceutical patent prosecution, and the two selected individuals shall select an expert, with comparable independence, qualifications and experience, within [**] Business Days of selection of the two individuals. Such expert shall resolve the matter in accordance with this Section 3.2(d).

 

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Each Party shall submit its proposal for the applicable patent office submission or decision to the expert within [**] Business Days after designation of such expert, with a copy to the other Party. Neither Party shall communicate with the expert except by written communications copied to the other Party, or orally in the physical or telephonic presence of the other Party. The expert shall render a written decision within [**] Business Days after the deadline for submission of materials from the Parties. The decision of the expert shall be final and binding on the Parties with respect to the action in dispute and shall be deemed to be the decision of the JPC with respect thereto. The Parties agree that the content and fact of any and all such deliberations shall be the Confidential Information of each Party. The Parties shall share equally the costs of such expert.

3.3 Discontinuation of Participation on a Committee . Each of the JSC and JPC shall continue to exist until the first to occur of (a) the Parties mutually agreeing to disband such committee, (b) Concert providing to Jazz written notice of its intention to disband and no longer participate in such committee; provided that Concert may only exercise such right to disband a committee following the completion of the first Phase 1 Clinical Trial of a Licensed Product or, if later, completion of all activities assigned to Concert under the Development Plan; or (c) Jazz providing to Concert written notice of its intention to disband and no longer participate in such committee; provided that Jazz may only exercise such right to disband following the completion of all activities under the Development Plan. In addition, by providing Concert written notice, Jazz may, following the completion of the first Phase 2 PoC Clinical Trial of a Licensed Product, reduce the frequency of JSC meetings to [**] times per calendar year. After a committee is disbanded under clauses (a) or (c) of this Section 3.3, any decisions previously within the purview of such committee shall be decisions between the Parties under the terms of Section 3.1(d) or 3.2(d), as applicable, provided that in circumstances where the Parties fail to agree and the decision would be made by (i) the JSC chairperson pursuant to Section 3.1(d), then Jazz shall make such decision or (ii) the independent Third Party expert pursuant to Section 3.2(d), then such independent Third Party expert shall make such decision. After the JSC is disbanded under clause (b) of this Section 3.3, any decisions previously within the purview of the JSC shall be made by Jazz and references in this Agreement to the JSC shall thereafter be deemed to be references to Jazz. After the JPC is disbanded under clause (b) of this Section 3.3, any decisions previously within the purview of the JPC that pertain to a Licensed Patent that is not a Platform Licensed Patent shall be made by Jazz, and references in this Agreement to the JPC with respect to such Licensed Patents shall thereafter be deemed to be references to Jazz; provided that (A) such decisions shall be implemented by patent counsel selected by Jazz, (B) Concert shall have the right to review and comment on Jazz’s preparation, filing, prosecution and maintenance of such Licensed Patents, and Jazz will provide all relevant and material documents to Concert sufficiently

 

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in advance of any deadline such that Concert may reasonably exercise such comment right, (C) Jazz shall reasonably consider all such comments provided by Concert, and (D) to the extent that Jazz disagrees with any such comments provided by Concert with respect to any matter, such matter will be decided by an independent Third Party expert in accordance with the terms of Section 3.2(d). After the JPC is disbanded under clause (b) of this Section 3.3, any decisions previously within the purview of the JPC that pertain to a Platform Licensed Patent shall be made by Concert, and references in this Agreement to the JPC with respect to such Platform Licensed Patents shall thereafter be deemed to be references to Concert; provided that (1) such decisions shall be implemented by patent counsel selected by Concert, (2) Jazz shall have the right to review and comment on Concert’s preparation, filing, prosecution and maintenance of the Platform Licensed Patents, and Concert will provide all relevant and material documents to Jazz sufficiently in advance of any deadline such that Jazz may reasonably exercise such comment right, (3) Concert shall reasonably consider all such comments provided by Jazz, and (4) to the extent that Concert disagrees with any such comments provided by Jazz with respect to any matter, such matter will be decided by an independent Third Party expert in accordance with the terms of Section 3.2(d). In addition, Jazz shall have the right to disband either such committee in accordance with Section 13.7, in which case the terms of such section shall apply.

ARTICLE 4

DEVELOPMENT

4.1 Overview . The Parties agree to conduct Development of Licensed Products as provided in this Article 4 (including Section 4.3(a)), under the direction of the JSC and pursuant to the Development Plan.

4.2 Development Program .

(a) General . The Parties intend and agree to undertake a development program to Develop Licensed Products (such program, the “ Development Program ”) in accordance with the terms of this Article 4. All Development of Licensed Products under this Agreement will be conducted pursuant to a development plan (the “ Development Plan ”) that describes all Development activities to be conducted by the Parties in a [**] (or longer) period, including, to the extent applicable for the period included under such plan: (i) the proposed overall program of Development for Licensed Products in the Territory, including preclinical studies, toxicology, formulation, process development, supply, clinical studies, regulatory plans and other elements of obtaining Regulatory Approval(s) in the applicable country, (ii) the tasks allocated to each Party under the Development Program and estimated timelines for such tasks and responsibilities, and (iii) a detailed budget for all such tasks allocated to Concert (the “ Development Budget ”). In the event of any inconsistency between the Development Plan and this Agreement, the terms of this Agreement shall prevail.

(b) Initial Development Plan and Amendments . The Parties have agreed on the initial Development Plan (excluding the Development Budget) for the first [**] of the Development Program, a copy of which is attached hereto as Exhibit C . The JSC shall determine the Development Budget at the first JSC meeting and following the Parties’ receipt of estimates for services from Third Party subcontractors with respect to any activities included in the Development Plan that will be subcontracted to such Third Party subcontractors. From time to time (at least on [**] basis), the JSC shall prepare amendments, as appropriate, to the then-current Development Plan. Such amendments shall reflect any changes, re-prioritization of studies within, reallocation of resources with respect to, or additions to the Development Program, as well as an amendment of the Development Budget to address budget changes due to the addition or removal of activities from the Development Program or due to any change in the assumptions upon which a previously budgeted amount was based. Once approved by the JSC, each updated or amended Development Plan shall become effective and supersede the previous Development Plan as of the date of such approval or at such other time as decided by the JSC.

(c) Development Budget . Each activity in the Development Budget shall be identified as either (i) conducted by Concert’s employees or consultants (i.e., FTE costs at the FTE

 

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Rate and FTE-Related Costs) or (ii) conducted by a Third Party contractor approved by Jazz pursuant to Section 4.10. With respect to Third Party contractor activities, Jazz will have the right to approve each such contract and each statement of work thereunder prior to execution by Concert and such Third Party contractor. Jazz shall timely cooperate with Concert in reviewing and revising each draft Third Party contract and statement of work. Each such contract or statement of work that is approved by Jazz and that either allows for the budget therein to be increased with respect to any activity after execution or does not have a fixed budget with a maximum amount payable by Concert (each, a “ Subcontract ”) shall require the contractor to notify Concert promptly upon becoming aware of any anticipated increase in cost for any activity above the amount included in the Development Budget for such activity. Concert shall notify the JSC promptly upon receiving notice from any contractor under a Subcontract of any such anticipated budget overage. Thereafter, the JSC shall promptly meet (and in any event soon enough to allow for a decision to be made with minimal disruption to the applicable activities) to determine whether to increase the Development Budget for the applicable activity, to modify such activity, or other reasonable solution. The JSC shall amend the Development Plan, including the Development Budget, accordingly, such that if the JSC does not increase the budgeted amount for the applicable activity in the Development Budget as required for the contractor to complete such activity in accordance with the terms of the Subcontract, then (A) Concert shall not be obligated under the Development Plan to conduct that portion of such activity that the JSC determined not to fund and (B) if the JSC instructs Concert to terminate the Subcontract to avoid such additional costs, the Parties shall share equally any termination fees that the contractor is entitled to as a result of such termination.

4.3 Development Diligence and Standards of Conduct .

(a) Jazz shall use [**] to Develop and obtain Regulatory Approval of a Licensed Product in the Field in the Territory. Jazz shall not be in breach of the preceding sentence to the extent that any delay in conducting Development activities or seeking or obtaining Regulatory Approval relates to any delay or disruption in supply, or from an inability to timely obtain sufficient supply, of raw materials for Licensed Product, including deuterium oxide.

(b) Each Party shall carry out the tasks assigned to it under the Development Plan in a timely and effective manner; provided that neither Party shall be in breach of this Section 4.3(b) for failing to conduct timely any activity to the extent that any such failure or delay results: (i) from the other Party’s failure to conduct timely any activities assigned to such Party under the Development Plan; (ii) from the other Party unreasonably withholding or delaying its consent, if such withholding or delaying is a breach of such other Party’s obligations under this Agreement; (iii) from a clinical hold or a failure to obtain a necessary Regulatory Approval or other necessary license from a Governmental Authority, despite such Party’s diligent efforts to obtain such Regulatory Approval or license; or (iv) from a failure of such Party’s subcontractor to perform its obligations, despite such Party’s oversight and management of such subcontractor in accordance with best practices in the biopharmaceutical industry. In addition, each Party shall be excused from its obligations under this Section 4.3(b) as and to the extent provided in Section 13.3; and provided further that Jazz’s obligations under this Section 4.3(b) shall not exceed its obligations under Section 4.3(a). Each Party shall conduct its activities under the Development Plan in a good scientific manner and in compliance in all material respects with all applicable Laws, including applicable national and international guidelines such as ICH, GCP, GLP and GMP.

 

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4.4 Successful Completion .

(a) Criteria . In a timely manner prior to the anticipated Initiation of each of the first Phase 1 Clinical Trial and the first Phase 2 PoC Clinical Trial, the JSC shall establish the criteria for Successful Completion of each such clinical trial and shall amend the Development Plan to include such criteria. Such criteria shall be established by considering, for the applicable stage of Development, what criteria are reasonably necessary to advance the Licensed Product to the next stage of Development.

(b) Evaluation . Promptly after the availability of top-line data following completion of all subject visits in the first Phase 1 Clinical Trial or the first Phase 2 PoC Clinical Trial, the Party conducting such trial shall provide such top-line data to the JSC. Promptly after the availability of tabulated data for such trial, and in any event within [**] days after database lock for such trial, the Party conducting such trial shall provide such tabulated data to the JSC. Within [**] days after receipt of such tabulated data, the JSC shall convene an ad hoc meeting to evaluate such data, share any analyses of such data prepared during such [**]-day period, determine whether the criteria for Successful Completion have been satisfied, and decide whether or not to continue Development of the Licensed Product. Following the ad hoc JSC meeting to evaluate such data, if Successful Completion has occurred, the applicable milestone payment under Section 6.3 will be payable in accordance with the terms of Section 6.3.

4.5 Development Costs . Jazz shall reimburse Concert for the Development activities conducted by Concert under the Development Plan according to the terms of Section 6.2. Jazz shall be solely responsible for its own costs and expenses incurred in conducting its activities under the Development Plan.

4.6 Transfer of Licensed Know-How . Promptly after the Effective Date, Concert shall provide Jazz with complete and accurate copies of all material Licensed Know-How in existence as of the Effective Date. Upon Jazz’s reasonable request [**] and [**], and [**], Concert shall promptly provide Jazz with complete and accurate copies of all material Licensed Know-How and all Development Data generated since the last such transfer under this Section 4.6; [**] and [**].

4.7 Records and Reports; Development Data . Each Party shall maintain complete, current and accurate records of all Development activities conducted by it hereunder, and all data and other Information resulting from such activities. Such records shall fully and properly reflect all work done and results achieved in the performance of the Development activities in good scientific manner appropriate for regulatory and patent purposes. Each Party shall document all non-clinical studies and clinical trials conducted as part of the Development Program in formal written study records, and shall document all manufacturing activities for Licensed Products, in each case in accordance with applicable Laws, including applicable national and international guidelines such as ICH, GCP, GLP and GMP. Each Party shall provide the JSC with written reports detailing its Development activities under the Development Plan and the results of such activities at each regularly scheduled JSC meeting (or, if the JSC has been disbanded, each Party shall provide such reports to the other Party within [**] days after the end of [**] prior to completion of the first Phase 2 PoC Clinical Trial of a Licensed Product and [**] thereafter). The Parties shall discuss the status, progress and results of the Parties’ Development activities under

 

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the Development Plan at such JSC meetings. Jazz shall solely own all data, records and reports generated by or on behalf of Concert (solely or jointly with Jazz) in the conduct of Development activities under this Agreement (the “ Development Data ”), and Concert hereby assigns, and shall assign, to Jazz, all of its right, title and interest in and to the Development Data. Concert shall have the right to use and disclose the Development Data in accordance with the last sentence of Section 7.1. Concert shall provide Jazz with copies of all Development Data as provided in Section 4.6 above, or more frequently as reasonably requested by Jazz. Jazz shall have the right to obtain access to the originals of such Development Data to the extent necessary or useful for regulatory and patent purposes.

4.8 Technology Transfer . The Parties’ responsibilities for manufacturing Licensed Products for use in Development shall be as set forth in the Development Plan. At Jazz’s request, Concert shall transfer to Jazz or a Third Party manufacturer designated by Jazz all Licensed Know-How, and any contracts between Concert and a Third Party manufacturer of any Licensed Product (on Jazz’s request and to the extent assignable and solely related to a Licensed Product), as of the date of transfer that are necessary or reasonably useful for Jazz or such Third Party manufacturer (as appropriate) to replicate the process employed by or on behalf of Concert as of such date to manufacture Licensed Products, including all such Information related to processes and formulations of Licensed Products developed or used under the Development Plan. If any such contract is not solely related to a Licensed Product or is otherwise not assignable to Jazz, then Concert shall use reasonable efforts to cause the applicable Third Party manufacturer to enter into an agreement with Jazz for such manufacture on substantially the same terms, with respect to Licensed Products, as Concert’s agreement with such Third Party manufacturer. Concert shall use commercially reasonable efforts when negotiating any manufacturing agreements for Licensed Products to include a right to assign such agreement to Jazz. Prior to the commencement of any such technology transfer, the JSC shall prepare a technology transfer plan and budget, specifying the scope of the transfer, internal personnel time allocated by Concert and reasonable out-of-pocket costs to be incurred by Concert. The reasonable costs and expenses incurred by Concert, including any internal personnel costs, in carrying out such transfer in accordance with the budget established by the JSC shall be reimbursed by Jazz in accordance with Section 6.2. In addition, Concert shall make available to Jazz, on a reasonable consultation basis, advice of its technical personnel as may reasonably be requested by Jazz in connection with such transfer of Licensed Know-How or otherwise in connection with the Development of Licensed Products. Jazz agrees to reimburse Concert for the reasonable charges for the time and expenses of such personnel when consulting for Jazz.

4.9 Regulatory Responsibilities .

(a) The Parties intend that the Development Plan will set forth the regulatory strategy for seeking Regulatory Approvals and Pricing Approvals for Licensed Products in the Field in the Territory, as well as the Parties’ responsibilities for preparing Regulatory Materials for Licensed Products in the Field in the Territory.

(b) If Concert conducts any human clinical trial of a Licensed Product under the Development Plan, all regulatory activities with respect to such trial shall be subject to this Section 4.9(b). Concert shall be responsible for preparing and shall own all Regulatory Materials (including all INDs) for such Licensed Product that are submitted or received in connection with

 

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such clinical trial; provided that all data therein shall be considered Development Data and owned by Jazz in accordance with Section 4.7. Concert shall promptly (and in any event within [**] Business Days) provide Jazz with a copy of all Regulatory Materials it receives or submits for Licensed Products, shall consult with Jazz in the preparation of all Regulatory Materials for Licensed Products, including providing drafts sufficiently in advance of submission for Jazz to review and comment thereon and considering all such comments in good faith, and shall obtain Jazz’s approval, not to be unreasonably withheld, conditioned or delayed, of all Regulatory Materials prior to submission thereof. Concert shall obtain Jazz’s consent, not to be unreasonably withheld, conditioned or delayed, prior to requesting a meeting with any Regulatory Authority with respect to a Licensed Product and shall provide Jazz with reasonable advance notice of any scheduled meeting with any Regulatory Authority with respect to a Licensed Product, and Jazz shall have the right to participate in any such meeting to the extent permitted by applicable Laws.

(c) As soon as practicable after completion of the last human clinical trial of a Licensed Product conducted by Concert as contemplated in the Development Plan, Concert shall transfer and assign to Jazz ownership and possession of all Regulatory Materials for Licensed Products in the Field in the Territory. The Parties shall execute such documents and take such actions as are reasonably necessary to effectuate the foregoing transfer and assignment of such Regulatory Materials. Following such transfer, Jazz shall own all Regulatory Materials (including all INDs, NDAs, MAAs and Regulatory Approvals) for each Licensed Product in the Field in the Territory.

(d) Following the transfer of Regulatory Materials for Licensed Products under Section 4.9(c), Concert shall not (i) submit any Regulatory Materials for Licensed Products in the Field in the Territory or (ii) communicate with respect to the Licensed Products in the Field in the Territory with any Regulatory Authority, except in each case (i) and (ii) as expressly set forth in the Development Plan, requested by Jazz in writing or required to comply with applicable Laws, in which latter case Concert shall promptly notify Jazz of such requirement under applicable Laws and, to the extent practicable and permitted under applicable Laws, shall submit any proposed submission or communication to Jazz for prior approval or, if not practicable or permitted, shall provide Jazz with a copy or summary thereof as soon as reasonably practicable thereafter.

(e) Jazz shall keep the JSC (or Concert, after the JSC is disbanded) reasonably informed regarding Jazz’s (or its Affiliate’s or Sublicensee’s) regulatory activities with respect to Licensed Products pursuant to Section 4.7.

4.10 Subcontracts . Concert may perform its Development Program obligations under this Agreement through one or more subcontractors or consultants whose contract with Concert is approved by Jazz in writing in advance (which approval Jazz may not unreasonably withhold or delay), provided that in any event: (a) Concert shall remain responsible for the work allocated to, and payment to, such subcontractors and consultants as it selects to the same extent it would if it had done such work itself; (b) the subcontractor shall undertake in writing obligations of confidentiality and non-use regarding Confidential Information that are substantially the same as those undertaken by the Parties pursuant to Article 10 hereof; and (c) the subcontractor shall agree in writing to assign all intellectual property developed in the course of performing any such subcontracted work to Concert, unless otherwise approved by Jazz in connection with its approval of the contract with such subcontractor. Jazz shall timely cooperate with Concert in reviewing and approving or providing revisions to each contract provided by Concert for approval under this Section 4.10.

 

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4.11 Regulatory or Third Party Action or Inspection . Concert shall immediately notify Jazz as soon as Concert becomes aware of any Regulatory Authority inspections relating to any Licensed Product or activities under the Development Plan. Jazz shall have the right to be present at any such inspections and shall have the opportunity to provide, review and comment on any responses that may be required in accordance with Section 4.9. In the event Concert does not receive prior notice of any such inspection, Concert shall notify Jazz as soon as practicable after such inspection and shall provide Jazz with copies of all materials, correspondence, statements, forms and records received or generated pursuant to any such inspection. In addition to such obligations with respect to Regulatory Authority inspections, Concert shall promptly notify Jazz of any Information it receives regarding any threatened or pending action or communication by or from any Third Party, including a Regulatory Authority, that may materially affect the Development, manufacturing, Commercialization or regulatory status of a Licensed Product in the Field in the Territory.

4.12 Audits . At any time during Concert’s conduct of activities under the Development Plan, during normal business hours and upon reasonable prior notice, Jazz may send a reasonable number of qualified representatives of Jazz or its Affiliates to inspect or audit the facilities in which Concert or its Affiliates or, to the extent that Concert has the right to permit such access, subcontractors are conducting such activities in order to ensure compliance with applicable Laws; provided that Concert shall use commercially reasonable efforts to include in each agreement with a subcontractor the right for Jazz to inspect or audit the applicable facilities at a customary frequency. Concert and its Affiliates shall reasonably cooperate with and use reasonable efforts to cause any of its subcontractors to facilitate and cooperate with any such inspection or audit. Jazz shall review with Concert the results of any such audit or inspection.

ARTICLE 5

COMMERCIALIZATION

5.1 Commercialization Responsibilities . Jazz will have the exclusive right to conduct, and be solely responsible, to the extent required by Section 5.2, for all aspects of, the Commercialization of Licensed Products in the Field in the Territory, including: (a) developing and executing a commercial launch and pre-launch plan; (b) negotiating with applicable Governmental Authorities regarding the price and reimbursement status of Licensed Products; (c) marketing and promotion; (d) booking sales and distribution and performance of related services; (e) handling all aspects of order processing, invoicing and collection, inventory and receivables; (f) providing customer support, including handling medical queries, and performing other related functions; (g) conforming its practices and procedures to applicable Laws relating to the marketing, detailing and promotion of Licensed Products in the Territory; and (h) manufacturing of Licensed Products for commercial use. As between the Parties, Jazz shall bear all of its costs and expenses incurred in connection with such Commercialization activities.

5.2 Commercial Diligence . Jazz shall use [**] to Commercialize in the Field any Licensed Product for which it has obtained Regulatory Approval and, if necessary for commercial sale, Pricing Approval.

 

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5.3 Commercialization Reports . On [**] basis no later than [**] days after the [**], Jazz shall provide Concert with a summary of Jazz’s significant Commercialization activities with respect to each Licensed Product in the Territory since the last such report.

ARTICLE 6

COMPENSATION

6.1 Upfront Payment . Within [**] Business Days after the Effective Date, Jazz shall pay to Concert a one-time, non-refundable, non-creditable upfront payment of four million Dollars ($4,000,000).

6.2 Concert Development and Manufacturing Activities . Jazz shall fund (a) (i) all internal FTE costs (at the FTE Rate) and FTE-Related Costs, without markup, as incurred by Concert to conduct its activities under the Development Program in accordance with the Development Plan, to the extent that they do not exceed the budgeted amount (including the number of FTEs allocated) set forth in the Development Budget, as may be amended pursuant to Sections 4.2(b) and (c), for such activities by more than [**] percent ([**]%), and [**] of any such amounts in excess of [**] percent ([**]%) of the budgeted amount therefor and (ii) all other amounts reasonably paid by Concert to Third Parties, without markup, to conduct its activities under the Development Program in accordance with the Development Plan, to the extent that they do not exceed, by more than [**] percent ([**]%), the budgeted amount for such activities set forth in the Development Budget, as may be amended pursuant to Sections 4.2(b) and (c), and (b) all internal FTE costs (at the FTE Rate) and FTE-Related Costs and all amounts reasonably paid by Concert to Third Parties, without markup, in each case as incurred by Concert to conduct technology transfer activities under Section 4.8, to the extent that they do not exceed the budgeted amount (including the number of personnel allocated) set forth in the budget established by the JSC for such technology transfer. At least [**] days before the end of each [**] during the conduct of the Development Program, Concert shall provide Jazz with an estimate of all internal costs (at the FTE Rate) and all FTE-Related Costs Concert has incurred or expects to incur in such [**], and all amounts Concert has paid or expects to pay to Third Parties in such [**], without markup, to conduct the activities allocated to Concert under the Development Plan in accordance therewith or under Section 4.8 in accordance with the applicable budget. Within [**] days after the end of each month in which Concert incurs costs for which Jazz is required to pay Concert under this Section 6.2, Concert shall provide Jazz with an invoice and reasonable supporting documentation for such costs. Jazz shall pay each such invoice within [**] days after receipt thereof, except to the extent disputed by Jazz in good faith (in which case, Jazz shall pay any amount determined to be payable within [**] days after the resolution of such dispute); provided that Jazz shall not be required to pay any invoiced amounts for a particular activity that exceed the amounts Jazz is responsible for as set forth above in this Section 6.2. Jazz shall notify Concert if it disputes any portion of any such invoice prior to the due date for payment.

6.3 Development Milestone Payments . Jazz shall notify Concert within [**] days after the first achievement by Jazz or its Affiliates or Sublicensees of the following development milestone events. Thereafter, Concert shall invoice Jazz for the corresponding milestone payment for each achieved milestone event, and Jazz shall pay each such invoice within [**] days after receipt thereof.

 

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Development Milestone Event

  

Milestone Payment

(i) Earlier of (a) the first Successful Completion of a Phase 1 Clinical Trial, following the ad hoc JSC meeting pursuant to Section 4.4(b) to evaluate the tabulated data from such trial or (b) Initiation of the first Phase 2 PoC Clinical Trial

   Four million Dollars ($4,000,000)

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]

[**]

   [**]
  

 

Total

  

Either

 

•         Fifty million five hundred thousand Dollars ($50,500,000) (if milestone (iv) above is achieved on or before [**])

 

or

 

•         Forty-three million Dollars ($43,000,000) (if milestone (iv) above is achieved on or after [**])

Each milestone payment is payable one time only, regardless of the number of times the corresponding event is achieved by a Licensed Product and regardless of the number of Licensed Products to achieve such event. Under no circumstances shall Jazz be obligated to pay Concert more than fifty million five hundred thousand Dollars ($50,500,000) pursuant to this Section 6.3. If a milestone event set forth in (ii) through (v) of the table above is achieved prior to the achievement of an earlier milestone set forth in (i) through (iv) of the table above, or if a milestone event set forth in (vi) and (vii) of the table above is achieved prior to the achievement of an earlier milestone set forth in (i), (ii) or (vi) of the table above, then payment for such earlier unachieved milestone payment shall be due and payable simultaneously with the payment of the later milestone event.

 

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6.4 Sales Milestones . Jazz shall make the non-refundable, non-creditable payments to Concert set forth in the table below upon the first achievement of each of the corresponding sales milestone events. Jazz shall make the sales milestone payments required by this Section 6.4 in accordance with Section 6.5(e) concurrently with Jazz’s payment of royalties for the calendar quarter in the calendar year in which such sales milestone events are first achieved. For clarity, the milestone payments in this Section 6.4 shall be additive such that if both milestones below are met in the same calendar year, Jazz shall pay both applicable payments to Concert for that calendar year. Each such sales milestone payment shall be payable one time only.

 

Sales Milestone Event

  

Milestone Payment

The aggregate Net Sales of Licensed Products in the Territory in a calendar year exceed [**] Dollars ($[**])

   [**] Dollars ($[**])

The aggregate Net Sales of Licensed Products in the Territory in a calendar year exceed [**] Dollars ($[**])

   [**] Dollars ($[**])
  

 

Total

   Seventy million Dollars ($70,000,000)
  

 

Under no circumstances shall Jazz be obligated to pay Concert more than seventy million Dollars ($70,000,000) pursuant to this Section 6.4.

6.5 Royalties .

(a) Royalty Rates . Subject to Sections 6.5(b)-(d) and 6.6(b)(ii), Jazz shall pay to Concert royalties on aggregate annual Net Sales of all Licensed Products in the Field in the Territory during the applicable Royalty Term, as calculated by multiplying the applicable royalty rate by the corresponding amount of incremental Net Sales of all Licensed Products in the Field in the Territory in each calendar year.

 

Royalty Tier

  

Annual Net Sales of Licensed Products in the Territory

   Royalty Rate  

1

  

For that portion of annual aggregate Net Sales of Licensed Products less than or equal to [**] Dollars ($[**])

     [** ]% 

2

  

For that portion of annual aggregate Net Sales of Licensed Products greater than [**] Dollars ($[**]) and less than or equal to [**] Dollars ($[**])

     [** ]% 

3

  

For that portion of annual aggregate Net Sales of Licensed Products greater than [**] Dollars ($[**])

     [** ]% 

For example, if aggregate annual Net Sales of all Licensed Products in the Field in the Territory is $[**] in a particular calendar year, then royalties payable by Jazz equal [**].

 

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(b) Royalty Term . Royalties shall be paid under this Section 6.5, on a country-by-country and Licensed Product-by-Licensed Product basis, on Net Sales during the period of time beginning on the First Commercial Sale of such Licensed Product in such country and continuing until the later of: (i) the expiration or abandonment of the last-to-expire Valid Claim in such country Covering such Licensed Product (a “ Covering Claim ” in such country for such Licensed Product); and (ii) ten (10) years after the First Commercial Sale of such Licensed Product in such country (the “ Royalty Term ”).

(c) [**] .

(i) Subject to Sections [**], and [**], Jazz [**] Concert [**] set forth in Section [**]. Thereafter, subject to Sections [**]; provided that, subject to Section [**] Jazz [**]. By way of example, [**] and Section [**], then [**].

(ii) [**] pursuant to Section [**] pursuant to Section [**] pursuant to Section [**] set forth in Section [**] as provided in Section [**] Section [**].

(d) Generic Reduction .

(i) If, in any country in the Territory during the Royalty Term for a Licensed Product, unit sales of all Generic Products with respect to such Licensed Product in such country in a calendar quarter exceed [**] percent ([**]%) of the sum of unit sales of such Licensed Product plus unit sales of all such Generic Products in such country, then the royalty rate for such Licensed Product in such country shall be reduced to [**] percent ([**]%) of the royalty rates (in each tier) that would otherwise have been applicable under Section 6.5(a) or 6.5(c)(i) for Net Sales of such Licensed Product in such country.

(ii) If, in any country in the Territory during the Royalty Term for a Licensed Product, unit sales of all Generic Products with respect to such Licensed Product in such country in a calendar quarter exceed [**] percent ([**]%) of the sum of unit sales of such Licensed Product plus unit sales of all such Generic Products in such country, then no royalties shall be due for Net Sales of such Licensed Product in such country during such calendar quarter and such Net Sales shall not be included when calculating the royalty tier thresholds in Section 6.5(a).

(iii) All such determinations of unit sales under this Section 6.5(d) shall be based upon a mutually acceptable calculation method using market share data provided by a reputable and mutually agreed upon provider, such as IMS Health.

(e) Royalty Reports and Payments .

(i) Within [**] days after the end of each of the first three calendar quarters of any calendar year, and within [**] days after the fourth calendar quarter of any calendar year, in each case for calendar quarters during the Royalty Term, Jazz shall deliver to Concert a statement, on a country-by-country and Licensed Product-by-Licensed Product basis, of the amount of gross sales and Net Sales of Licensed Products during the applicable calendar quarter, a calculation of the amount of royalty payment due on such sales for such calendar quarter, any applicable royalty offsets under Section 6.6(b)(ii), and a revised calculation of the payment due after the application of such offsets. Concurrently with each such report, Jazz shall pay to Concert all royalty payment and sales milestones payable by it under Sections 6.4 and 6.5.

 

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(ii) The royalty report [**] in Section [**] but not subject to Section [**] and [**] shall also [**] and [**].

6.6 Third Party Payments .

(a) Concert Obligations . Except to the extent reimbursed by Jazz pursuant to Section 6.2, Concert will be solely responsible for paying all amounts owed to Third Parties after the Effective Date pursuant to agreements between Concert and Third Parties with respect to Licensed Products.

(b) Licenses to Jazz.

(i) If either Party believes, in its reasonable discretion, that it is necessary for Jazz or its Affiliate or Sublicensee to obtain a license from a Third Party under such Third Party’s Patent(s) in order to manufacture, use, or sell a Licensed Product in the Field in the Territory during the Term, such Party shall notify the other Party. If such license is reasonably necessary, Jazz will be responsible for obtaining such license and Concert shall not interfere with Jazz’s efforts to obtain such license. Jazz shall keep Concert reasonably informed of all material developments in its negotiations with such Third Party and shall consider any reasonable comments of Concert in connection therewith in good faith. In negotiating the economic terms of such license, Jazz will not take into account its right pursuant to Section 6.6(b)(ii) to deduct amounts paid to such Third Party from royalties payable to Concert under this Agreement.

(ii) Jazz may deduct from any royalty payments to Concert under Section 6.5 with respect to any Licensed Product in any country any payments made by Jazz or its Affiliates or Sublicensees for any rights to Third Party Patents that are reasonably necessary to manufacture, use or sell Licensed Products in the Field in the Territory; provided, that under no circumstances will the royalties payable to Concert under Section 6.5(a) with respect to such Licensed Product in such country in any calendar quarter be reduced, as a result of this Section 6.6(b)(ii), below [**] percent ([**]%) of the royalties otherwise payable under Section 6.5. Jazz may carry forward to subsequent calendar quarters any deductions that it was not able to deduct as a result of the foregoing proviso.

6.7 Foreign Exchange . The rate of exchange to be used in computing the amount of currency equivalent in Dollars of Net Sales invoiced in other currencies shall be the rate used by Jazz in its financial reporting in accordance with GAAP or International Financial Reporting Standards, as applicable.

6.8 Manner and Place of Payment . All payments owed by Jazz under this Agreement shall be made by wire transfer in immediately available funds to a bank and account designated in writing by Concert.

6.9 Records; Audits . Jazz and its Affiliates and Sublicensees will maintain complete and accurate records in reasonably sufficient detail to permit Concert to confirm the accuracy of the calculation of royalty payments and the achievement of sales milestone events. Concert and its

 

27.


Affiliates will maintain complete and accurate records in reasonably sufficient detail to permit Jazz to confirm the accuracy of the calculation of FTEs, FTE-Related Costs and Third Party payments for Development or technology transfer payments made by Jazz under Section 6.2. Upon reasonable prior notice, such records shall be available during regular business hours for a period of [**] years from the end of the calendar year to which they pertain for examination, not more often than [**], by an independent certified public accountant selected by the auditing Party and reasonably acceptable to the audited Party, for the sole purpose of verifying the accuracy of the financial reports furnished by the other Party pursuant to this Agreement. Any such auditor shall enter into a confidentiality agreement with the audited Party and shall not disclose the audited Party’s Confidential Information, except to the extent such disclosure is necessary to verify the accuracy of the financial reports furnished by the audited Party or the amount of payments due by one Party to the other Party under this Agreement. Any amounts shown to be owed but unpaid shall be paid, and any amounts showed to be overpaid will be refunded, within [**] days from the accountant’s report. The auditing Party shall bear the full cost of such audit unless such audit discloses an underpayment or overcharge by the audited Party of more than [**] percent ([**]%) of the amount due in the audited period, in which case the audited Party shall bear the full cost of such audit.

6.10 Taxes .

(a) Taxes on Income . Each Party shall be solely responsible for the payment of all taxes imposed on its share of income arising directly or indirectly from the efforts of the Parties under this Agreement.

(b) Tax Cooperation . The Parties agree to cooperate with one another and use reasonable efforts to reduce or eliminate tax withholding or similar obligations in respect of royalties, milestone payments, and other payments made by Jazz to Concert under this Agreement. To the extent Jazz is required to deduct and withhold taxes on any payment to Concert, Jazz shall pay the amounts of such taxes to the proper Governmental Authority in a timely manner and promptly transmit to Concert an official tax certificate or other evidence of such withholding sufficient to enable Concert to claim such payment of taxes. Concert shall provide Jazz any tax forms that may be reasonably necessary in order for Jazz not to withhold tax or to withhold tax at a reduced rate under an applicable bilateral income tax treaty. Each Party shall provide the other with reasonable assistance to enable the recovery, as permitted by applicable Laws, of withholding taxes, value added taxes, or similar obligations resulting from payments made under this Agreement, such recovery to be for the benefit of the Party bearing such withholding tax or value added tax.

(c) Withholding Required . Notwithstanding the foregoing, if (i) Jazz (A) assigns its rights and obligations hereunder to an Affiliate or Third Party outside the United States or Ireland, or (B) exercises its rights under this Agreement through an Affiliate or Third Party outside the United States or Ireland, and (ii) in either case, solely by reason of such act by Jazz, Treaty Benefits (as defined below) that would have been available become unavailable with respect to any payment required to be made by Jazz to Concert pursuant to this Agreement, then each such payment shall be increased so that Concert receives the same net amount (after satisfaction of any withholding tax obligation on such payment, as so increased) it would have received if Treaty Benefits had been available with respect to such payment. Concert shall use

 

28.


commercially reasonable efforts to obtain available tax reductions, credits or refunds in respect of such payments. If Concert receives a refund or claims a tax credit with respect to any taxable year and relating to any amounts paid to it pursuant to this Section, then Concert shall pay Jazz an amount equal to such refund or equal to the actual reduction of Concert’s otherwise payable taxes for such year that results from such credit (but only to the extent of amounts received by Concert pursuant to this Section with respect to the taxes giving rise to such refund or credit) provided however that the determination of amounts payable by Concert shall be determined in good faith and in Concert’s sole discretion. Payments by Concert hereunder, if any, shall be paid promptly following the receipt of a refund or following the filing of the tax return on which a credit is claimed. If, with respect to the payments contemplated by this Section, any taxing authority disallows all or a portion of the applicable claimed credit or requires a return of all or any portion of the applicable refund (an “Adjustment”), then Jazz shall pay Concert an amount equal to the Adjustment. For the purposes of this Section 6.10(c), “Treaty Benefits” means an exemption from withholding tax equivalent to the exemption provided under the United States income tax treaty with Ireland.

ARTICLE 7

INTELLECTUAL PROPERTY MATTERS

7.1 Ownership of Inventions . Ownership of Information and inventions, whether or not patentable, made in the course of Concert’s performance (including through Affiliates and subcontractors) of activities under the Development Plan, including all intellectual property rights therein (collectively, “ Development Inventions ”) shall be as follows: (a) Jazz shall own all Development Inventions, whether made solely by employees, agents, or independent contractors of Concert or its Affiliates, or jointly by employees, agents or independent contractors of each Party or its Affiliates, that [**]. All Patents claiming patentable, jointly owned Joint Inventions shall be referred to herein as “ Joint Patents ”. Except to the extent either Party is restricted by the licenses granted to the other Party under this Agreement, each Party shall be entitled to practice, grant licenses to, assign and exploit the Joint Inventions and Joint Patents without the duty of accounting or seeking consent from the other Party. Concert hereby assigns to Jazz all of its and its Affiliates’ right, title and interest in and to the Jazz Development Inventions, and agrees to take such further actions reasonably requested by Jazz to evidence such assignment. Notwithstanding the foregoing, Jazz shall solely own all Development Data as provided in Section 4.7; provided that, notwithstanding Jazz’s ownership of Development Data, Concert shall have the right to use and disclose Development Data as reasonably necessary to file applications for and prosecute and maintain Licensed Patents in accordance with Section 7.4(b), provided that, prior to such use or disclosure of Development Data that has not already been made publicly available by Jazz, Concert presents such proposed use or disclosure and the reasons therefor to the JPC and Jazz’s representative to the JPC approves such proposed use or disclosure, such approval not to be unreasonably withheld or delayed.

7.2 Inventorship Procedure . The JPC shall, within a reasonable time after the Effective Date, establish and oversee a mutually agreeable procedure for (a) identifying Development Inventions, (b) determining inventorship of Development Inventions and (c) determining whether each such Development Invention is a Jazz Development Invention. Inventorship shall be determined in accordance with U.S. patent laws. All such determinations shall be documented to ensure that any divisional or continuation patent applications reflect appropriate inventorship and that Development Inventions and Development Patents are assigned to the appropriate assignee.

 

29.


7.3 Disclosure of Inventions . Concert shall promptly disclose to Jazz all Development Inventions, including any invention disclosures or similar documents submitted to it by its employees, agents or independent contractors describing Development Inventions, and all Information relating to such Development Inventions to the extent necessary or useful for the preparation, filing and maintenance of any Patent with respect to such Development Invention.

7.4 Prosecution of Patents .

(a) General Standards.

(i) In conducting any prosecution of Licensed Patents or Development Patents claiming Jazz Development Inventions under this Section 7.4, Jazz and its Affiliates shall not disparage any Licensed Patents in connection with its communications with any patent office or other Governmental Authority, it being understood that distinguishing over Licensed Patents that are prior art shall not in and of itself be considered disparaging. The foregoing sentence shall not apply with respect to (A) any Licensed Patent that Concert first asserts in an action or proceeding against Jazz or its Affiliates or (B) with respect to any disparagement made, by a Third Party that subsequently acquires or is acquired by Jazz or its Affiliates, prior to such acquisition.

(ii) In conducting any prosecution of Licensed Patents or Development Patents claiming Jazz Development Inventions under this Section 7.4, Concert and its Affiliates shall not disparage any Patents owned or controlled by Jazz that claim, disclose or otherwise relate to Jazz Compounds, in connection with its communications with any patent office or other Governmental Authority, it being understood that distinguishing over Patents that are prior art shall not in and of itself be considered disparaging. The foregoing sentence shall not apply with respect to (A) any Patent owned or controlled by Jazz, that Jazz first asserts in an action or proceeding against Concert or any of its Affiliates or (B) with respect to any disparagement made, by a Third Party that subsequently acquires or is acquired by Concert or its Affiliates, prior to such acquisition.

(b) Licensed Patents.

(i) Decisions regarding the preparation, filing, prosecution (including oppositions, reexaminations, reissues, interferences, nullity actions, invalidation actions and post-grant reviews) and maintenance of the Licensed Patents will be made by the JPC and implemented by patent counsel selected by Concert and reasonably acceptable to Jazz or, in the case of oppositions, reexaminations, reissues, interferences, nullity actions, invalidation actions and post-grant reviews, by patent counsel selected by Jazz and reasonably acceptable to Concert; provided that (x) if the JPC is disbanded in accordance with Section 3.3(a) or (c), such decisions shall be made by the Parties or, if the Parties fail to agree within the time period set forth in Section 3.2(d), by a Third Party expert in accordance with Section 3.2(d); (y) if the JPC is disbanded in accordance with Section 3.3(b), such decisions shall be made as provided in Section 3.3 with respect to such a disbandment of the JPC; and (z) if the JPC is disbanded in accordance with Section 13.7, such decisions shall be made as provided in Section 13.7. The Parties will require

 

30.


such patent counsel to: (A) provide the JPC with a copy of each patent application within the Licensed Patents as filed, together with its filing date and serial number, (B) keep the JPC advised of the status of all communications, actual and prospective filings and submissions regarding the Licensed Patents, (C) give the JPC an opportunity to review and comment on any such communications, filings and submissions proposed to be sent to any patent office and (D) file, prosecute and maintain each Licensed Patent in each Patent Country and in each other country requested by Jazz writing, in each case in accordance with the JPC’s instructions.

(ii) The Parties shall share equally the reasonable, documented, out-of-pocket expenses incurred by the Parties in conducting the Patent Activities for Licensed Patents in the Patent Countries. Jazz shall be solely responsible for the reasonable, documented, out-of-pocket expenses incurred by the Parties in conducting Patent Activities for Licensed Patents in each other country requested by Jazz in writing.

(iii) No later than [**] days before the end of each calendar quarter, Concert shall provide Jazz with an estimate of all out-of-pocket expenses Concert has incurred to date during such calendar quarter and expects to incur during the remainder of such calendar quarter for Patent Activities for which Jazz is solely responsible pursuant to Section 7.4(b)(ii), if Concert has incurred or expects to incur any such expenses. Within [**] days after the end of each calendar quarter, if applicable, Concert shall provide Jazz with an invoice for the portion of out-of-pocket expenses incurred by Concert for Patent Activities during such calendar quarter for which Jazz is solely responsible pursuant to Section 7.4(b)(ii), along with reasonable documentation therefor. Jazz shall pay such invoice within [**] days after receipt, except to the extent disputed by Jazz in good faith (in which case, Jazz shall pay any amount determined to be payable within [**] days after the resolution of such dispute); provided that Jazz may not dispute the amounts of any Third Party invoice to the extent that such invoice is for activities that Jazz agrees are subject to Section 7.4(b)(ii). Jazz shall notify Concert if it disputes any portion of any such invoice prior to the due date for payment.

(iv) No later than [**] days before the end of each calendar quarter, Concert shall provide Jazz with an estimate of all out-of-pocket expenses Concert has incurred to date during such calendar quarter and expects to incur during the remainder of such calendar quarter for Patent Activities for which the Parties share expenses pursuant to Section 7.4(b)(ii), if Concert has incurred or expects to incur any such expenses. Within [**] days after the end of each calendar quarter, if applicable, Concert shall provide Jazz with a statement setting forth all reasonable out-of-pocket expenses incurred by Concert with respect to Patent Activities during such calendar quarter for which the Parties share expenses pursuant to Section 7.4(b)(ii), along with reasonable documentation therefor. Within [**] days after receipt thereof, Jazz shall prepare and provide to Concert a statement setting forth all reasonable out-of-pocket expenses incurred by Jazz during such calendar quarter with respect to Patent Activities for which the Parties share expenses pursuant to Section 7.4(b)(ii) and the difference between such expenses and the expenses reported by Concert in its statement submitted pursuant to this Section 7.4(b)(iv), to the extent not disputed by Jazz in good faith (in which case, Jazz shall pay any amount determined to be payable within [**] days after the resolution of such dispute); provided that Jazz may not dispute the amounts of any Third Party invoice to the extent that such invoice is for activities that Jazz agrees are subject to Section 7.4(b)(ii). Such statement shall be accompanied by reasonable documentation for Jazz’s expenses included in such statement, and either (A) an invoice for one

 

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half of such difference, if the amount incurred by Jazz exceeds the amount incurred by Concert or (B) payment for one half of such difference, if the amount incurred by Concert exceeds the amount incurred by Jazz. Concert shall pay each such invoice under clause (A) within [**] days after receipt thereof, except to the extent disputed by Concert in good faith (in which case, Concert shall pay any amount determined to be payable within [**] days after the resolution of such dispute); provided that Concert may not dispute the amounts of any Third Party invoice to the extent that such invoice is for activities that Concert agrees are subject to Section 7.4(b)(ii). Each Party shall notify the other Party if it disputes any portion of the other Party’s statement within [**] days after receipt thereof.

(v) If Jazz decides that it is no longer interested in paying for the prosecution or maintenance of any Licensed Patent, it shall notify Concert in writing. Thereafter, Concert shall have the right to prosecute and/or maintain such Patent, at its sole expense, and such Patent shall cease to be a Licensed Patent.

(c) Jazz Development Patents . Jazz shall have the sole right to prepare, file, prosecute and maintain Development Patents that claim Jazz Development Inventions, at Jazz’s sole cost and expense.

(d) Cooperation . Each Party shall provide the other Party all reasonable assistance and cooperation, at the other Party’s request and expense, in the Patent Activities provided above in this Section 7.4, including providing any necessary powers of attorney, executing any other required documents or instruments for such prosecution, and making its personnel with appropriate scientific expertise available to assist in such efforts; provided that any out-of-pocket expenses incurred in connection with such assistance and cooperation with respect to Licensed Patents under the direction of the JPC shall be shared in accordance with Section 7.4(b).

7.5 Enforcement of Licensed Patents .

(a) Notification . If either Party becomes aware of (i) any existing or threatened infringement of the Licensed Patents in the Field in the Territory, which infringing activity involves (A) the using, making, importing, exporting, offering for sale or selling Licensed Products, or (B) the filing of an ANDA under Section 505(j) of the FD&C Act or an application under Section 505(b)(2) of the FD&C Act naming a Licensed Product as a reference listed drug and including a certification under Section 505(j)(2)(A)(vii)(IV) or 505(b)(2)(A)(iv), respectively, or (ii) a declaratory judgment action against any Licensed Patent in the Territory in connection with any infringement described in clause (i) (each of (i) and (ii), a “ Product Infringement ”), it shall promptly notify the other Party in writing to that effect.

(b) Enforcement Rights . Jazz shall have the first right, but not the obligation, to bring an appropriate suit or take other action against any person or entity engaged in, or to defend against, any Product Infringement, at Jazz’s cost and expense. If Jazz does not, within [**] days ([**] days in the case of a filing described in Section 7.5(a)(i)(B) above) after its receipt or delivery of notice under Section 7.5(a), commence a suit to enforce the applicable Patents, take other action to terminate such Product Infringement or initiate a defense against such Product Infringement, then upon Jazz’s prior written consent, not to be unreasonably withheld, Concert

 

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shall have the right, but not the obligation, to commence such a suit or take such an action or defend against such Product Infringement in the Territory at its own cost and expense. Neither Party shall settle any such suit or action in any manner that would negatively impact the Licensed Patents or that would limit or restrict the ability of Jazz to sell Licensed Products or Jazz Compounds anywhere in the Territory without the prior written consent of the other Party.

(c) Collaboration . Each Party shall take reasonably requested actions, at the other Party’s expense, to enable such Party to commence a suit or take other actions under Section 7.5(b) and shall provide to the enforcing Party reasonable assistance in such enforcement, at such enforcing Party’s request and expense, including joining such action as a party plaintiff if required by applicable Laws to pursue such action. The enforcing Party shall keep the other Party regularly informed of the status and progress of such enforcement efforts and shall reasonably consider the other Party’s comments on any such efforts. The non-enforcing Party shall be entitled to separate representation in such matter by counsel of its own choice and at its own expense, but such Party shall at all times cooperate fully with the enforcing Party.

(d) Expenses and Recoveries . The Party bringing or defending a claim, suit or action under Section 7.5(b) shall be solely responsible for any expenses incurred by such Party as a result of such claim, suit or action. If such Party recovers monetary damages in such claim, suit or action, such recovery shall be allocated first to the reimbursement of any expenses incurred by the Parties in such litigation (including, for this purpose, a reasonable allocation of expenses of internal counsel), and any remaining amounts shall be allocated as follows: [**].

(e) Infringement of Development Patents Claiming Jazz Compound . For any and all (i) infringement of any Development Patents that involves (A) the using, making, importing, exporting, offering for sale or selling Jazz Compounds or products containing Jazz Compounds, or (B) the filing of an ANDA under Section 505(j) of the FD&C Act or an application under Section 505(b)(2) of the FD&C Act naming a product containing a Jazz Compound as a reference listed drug and including a certification under Section 505(j)(2)(A)(vii)(IV) or 505(b)(2)(A)(iv), respectively, or (ii) declaratory judgment actions against any Development Patent in the Territory in connection with any infringement described in clause (i), Jazz shall have the sole right to bring an appropriate suit or to take other action against any person or entity engaged in such other infringement, or to defend such declaratory judgment action, in its sole discretion, and shall bear all related expenses and retain all related recoveries; provided, however, that Jazz shall update and reasonably consult with Concert about the infringement and suit or other action. Concert shall take reasonably requested actions, at Jazz’s expense, to enable Jazz to commence a suit or take other actions under this Section 7.5(e) and shall provide to Jazz reasonable assistance in such enforcement or defense, at Jazz’s request and expense, including joining such action as a party plaintiff if required by applicable Laws to pursue such action. Jazz shall not settle any such suit or action in any manner that would negatively impact the Development Patents or that would limit or restrict the ability to sell products Covered by the Development Patents anywhere in the Territory without the prior written consent of Concert.

7.6 Enforcement of Jazz Development Patents . Jazz shall have the sole right, but not the obligation, to bring an appropriate suit or other action against any person or entity allegedly infringing any Patents claiming Jazz Development Inventions and to defend against any declaratory judgment action against any such Patents. Concert shall provide reasonable assistance to Jazz in such enforcement or defense, at Jazz’s request and expense.

 

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7.7 Orange Book Listing . Upon a Party’s receipt of a notice of allowance (or equivalent) of an applicable Licensed Patent, Concert shall promptly provide Jazz with all information reasonably required by Jazz to list such Licensed Patent in the Orange Book maintained by the FDA or similar or equivalent patent listing source, if any, in other countries in the Territory (collectively, “ Orange Book and Equivalents ”). Jazz shall have the sole right to determine which Licensed Patent or other patent shall be included in the Orange Book for Licensed Products and products containing Jazz Compounds.

7.8 Patent Term Extensions . Concert will cooperate with Jazz, at Jazz’s request, in seeking and obtaining patent term extensions (including any pediatric exclusivity extensions as may be available) or supplemental protection certificates or their equivalents in any country with respect to any Licensed Patents and Licensed Products or products containing Jazz Compounds. If elections with respect to obtaining such patent term extensions are to be made, Jazz shall have the sole right to make such elections.

7.9 Personnel Obligations . Prior to beginning work under this Agreement relating to any Development of a Licensed Product, each employee, agent or independent contractor of Concert or its Affiliates shall be bound by invention assignment obligations that are consistent with the obligations of Concert in this Article 7, including without limitation: (a) promptly reporting any invention, discovery, process or other intellectual property right; (b) assigning to Concert, as applicable, all of his or her right, title and interest in and to any invention, discovery, process or other intellectual property right; (c) cooperating in the preparation, filing, prosecution, maintenance and enforcement of any Patent; (d) performing all acts and signing, executing, acknowledging and delivering any and all documents required for effecting the obligations and purposes of this Agreement; and (e) complying with obligations of confidentiality and non-use consistent with those contained in this Agreement.

7.10 Trademarks . Jazz and its Affiliates and Sublicensees shall have the right to brand the Licensed Products in the Territory using any Trademarks it determines appropriate for the Licensed Products, which may vary by country or within a country (the “ New Product Marks ”), provided that Jazz shall not, and shall ensure that its Affiliates and sublicensees will not, make any use of the trademarks or house marks of Concert (including Concert’s corporate name) or any trademark confusingly similar thereto. As between the Parties, Jazz shall own all rights in the New Product Marks and shall register and maintain, in its discretion and at its own cost and expense, the New Product Marks in the countries and regions in the Territory that it determines to be appropriate. Jazz shall have the sole right, in its discretion and at its expense, to defend and enforce the New Product Marks in the Territory.

 

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ARTICLE 8

REPRESENTATIONS AND WARRANTIES; COVENANTS

8.1 Mutual Representations and Warranties . Each Party hereby represents and warrants to the other Party as follows:

(a) Corporate Existence . As of the Effective Date, it is a company or corporation duly organized, validly existing, and in good standing under the Laws of the jurisdiction in which it is incorporated.

(b) Corporate Power, Authority and Binding Agreement . As of the Effective Date, (i) it has the corporate power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; (ii) it has taken all necessary corporate action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; and (iii) this Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, and binding obligation of such Party that is enforceable against it in accordance with its terms.

8.2 Additional Representations and Warranties of Concert . Concert represents and warrants as of the Effective Date and, as applicable, covenants to Jazz as follows:

(a) Title; Encumbrances . Concert is the sole owner of the entire right, title and interest in and to all patents, patent applications and other intellectual property rights included within the Licensed Intellectual Property, free and clear from any mortgages, pledges, liens, security interests, conditional and installment sale agreements or encumbrances of any kind, other than licenses granted to Third Parties that are not inconsistent with the rights and licenses granted to Jazz under this Agreement. Concert has the full and legal rights and authority to license to Jazz the Licensed Intellectual Property as provided in this Agreement;

(b) Exhibit A . Exhibit A is an accurate listing by owner, inventor(s), serial number, filing date, country, and status of all patents and patent applications owned or controlled by Concert as of the Effective Date that are necessary or useful for the development, manufacture, use, offer for sale, sale or import of D-GHB Compounds. Concert has not granted any licenses under any of the Licensed Patents listed on Exhibit A , and no Affiliate of Concert or Third Party has any right, title or interest in any of the Licensed Patents listed on Exhibit A ;

(c) Control . Concert Controls (i) all Patents owned, invented or licensed by Concert that are necessary or useful for the development, manufacture, use, offer for sale, sale or import of D-GHB Compounds and (ii) all Information owned, generated or licensed by Concert that is related to any D-GHB Compounds, and during the Term Concert shall not grant any rights or licenses to any Affiliate or Third Party that would result in such Patents (whether existing on the Effective Date or arising during the Term) not meeting the criteria necessary for inclusion in Licensed Patents or such Information (whether existing on the Effective Date or arising during the Term) not meeting the criteria necessary for inclusion in Licensed Know-How;

(d) Validity . There is no fact or circumstance known to Concert that would cause Concert to reasonably conclude that any issued patent included in the Licensed Patents is invalid or unenforceable;

(e) Inventorship . To Concert’s knowledge, the inventorship of each Licensed Patent is properly identified on each patent and patent application included within the Licensed Patents;

 

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(f) Good Standing . All official fees, maintenance fees and annuities for the Licensed Patents have been paid and all administrative procedures with Governmental Authorities have been completed for the Licensed Patents such that the Licensed Patents are subsisting and in good standing;

(g) Duty of Disclosure . Concert has complied with its duty of candor to the U.S. Patent and Trademark Office respecting the prosecution of all of the Licensed Patents;

(h) Notice of Infringement . It has not received any written notice or threat (whether written or oral) from any Third Party asserting or alleging that, nor, to Concert’s knowledge, has, any research, manufacture or development of Licensed Products by Concert prior to the Effective Date infringed the intellectual property rights of any Third Party;

(i) Notice of Misappropriation . It has not received any written notice or threat (whether written or oral) from any Third Party asserting or alleging, and there is no basis for any assertion or allegation, that any research, manufacture or development of Licensed Products by Concert prior to the Effective Date misappropriated the intellectual property rights of any Third Party;

(j) Prior Art . Concert is not aware of any reference or prior art that, in Concert’s reasonable judgment, would preclude the issuance of any claim in a Licensed Patent directed to a D-GHB Compound;

(k) No Conflicts . Concert has not entered, and shall not enter, into any agreement with any Third Party that is in conflict with the rights granted to Jazz under this Agreement, and has not taken and shall not take any action that would in any way prevent it from granting the rights granted to Jazz under this Agreement, or that would otherwise materially conflict with or adversely affect Jazz’s rights under this Agreement;

(l) Third Party Technology . To Concert’s knowledge, (i) the manufacture, Development and Commercialization of Licensed Products as currently contemplated to be formulated and manufactured in accordance with the Development Plan will not infringe or misappropriate any intellectual property rights of a Third Party, and (ii) there are no pending Third Party patent applications that, if issued with their published or currently pending claims, would be infringed by the manufacture, Development or Commercialization of Licensed Products as currently contemplated to be formulated and manufactured in accordance with the Development Plan;

(m) Third Party Infringement . To Concert’s knowledge, no Third Party is infringing or has infringed any Licensed Patents or is misappropriating or has misappropriated any Licensed Know-How;

(n) No Proceeding . There are no pending, and to Concert’s knowledge, no threatened, adverse actions, suits or proceedings (including interferences, reissues, reexaminations, cancellations, oppositions, nullity actions, invalidation actions or post-grant reviews) against Concert involving the Licensed Intellectual Property or Licensed Products;

 

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(o) Regulatory Communications . Concert has not received any communications from any Regulatory Authority describing any matters specific to a Licensed Product, or to any class of drugs (including deuterated compounds) to which a Licensed Product belongs, that may be necessary to be overcome in order to obtain Regulatory Approval of any Licensed Product, nor does Concert have any knowledge of any basis for such matters;

(p) Disclosure . Concert has disclosed to Jazz (i) all material written information in Concert’s possession or Control as of the Effective Date relating to Licensed Products, and (ii) all information of which it is aware or which is in its possession or Control that is material to evaluating the Licensed Patents (including information relating to the novelty, validity or sufficiency of the Licensed Patents and any challenges thereto), and all such information disclosed by Concert is, to Concert’s knowledge, true and correct;

(q) Trademarks . Concert does not Control as of the Effective Date, and will not Control during the Term, any Trademarks that are related to D-GHB Compounds; provided, however, that this Section 8.2(q) shall not restrict Concert from obtaining or maintaining Trademarks that are directed to its corporate name or logo or its generally applicable deuteration technology; and

(r) Platform Licensed Patents . There are no Platform Licensed Patents.

8.3 Mutual Covenants .

(a) No Debarment . In the course of the Development of the Licensed Product, neither Party shall use any employee or consultant who has been debarred by any Regulatory Authority or, to such Party’s knowledge, is the subject of debarment proceedings by a Regulatory Authority. Each Party shall notify the other Party promptly upon becoming aware that any of its employees or consultants has been debarred or is the subject of debarment proceedings by any Regulatory Authority.

(b) Compliance . Each Party and its Affiliates shall comply in all material respects with all applicable Laws in the Development and Commercialization of Licensed Products and performance of its obligations under this Agreement, including, to the extent applicable to such Party and its activities hereunder, the statutes, regulations and written directives of the FDA, the EMA and any Regulatory Authority having jurisdiction in the Territory, the FD&C Act, the Prescription Drug Marketing Act, the Federal Health Care Programs Anti-Kickback Law, 42 U.S.C. 1320a-7b(b), the statutes, regulations and written directives of Medicare, Medicaid and all other health care programs, as defined in 42 U.S.C. § 1320a-7b(f), the Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act, or any Law enacted pursuant to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions Convention, each as may be amended from time to time.

8.4 Disclaimer . EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, (A) NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR NON-MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS, ARE MADE OR GIVEN BY OR ON

 

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BEHALF OF A PARTY, AND (B) ALL REPRESENTATIONS AND WARRANTIES, WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE, ARE HEREBY EXPRESSLY EXCLUDED.

ARTICLE 9

INDEMNIFICATION

9.1 Indemnification by Concert . Concert shall defend, indemnify, and hold Jazz and its Affiliates and their respective officers, directors, employees, and agents (the “ Jazz Indemnitees ”) harmless from and against any and all damages or other amounts payable to a Third Party claimant, as well as any reasonable attorneys’ fees and costs of litigation incurred by such Jazz Indemnitees, resulting from any claims, suits, proceedings or causes of action brought by such Third Party (collectively, “ Claims ”) against such Jazz Indemnitee to the extent arising from or based on (a) the research or Development of Licensed Products by or on behalf of Concert or its Affiliates prior to the Effective Date, (b) performance by Concert, its Affiliates or Third Party subcontractors engaged by Concert of the activities allocated to Concert under the Development Plan, (c) the breach of any of Concert’s obligations, representations or warranties under this Agreement, or (d) the willful misconduct or negligent acts of Concert or its Affiliates. The foregoing indemnity obligation shall not apply to the extent that (i) the Jazz Indemnitees fail to comply with the indemnification procedures set forth in Section 9.3 and Concert’s defense of the relevant Claims is prejudiced by such failure, or (ii) any Claim arises from or is based on any activity set forth in Section 9.2(b) or 9.2(c) for which Jazz is obligated to indemnify the Concert Indemnitees under Section 9.2.

9.2 Indemnification by Jazz . Jazz shall defend, indemnify, and hold Concert and its Affiliates and their respective officers, directors, employees, and agents (the “ Concert Indemnitees ”) harmless from and against damages or other amounts payable to a Third Party claimant, as well as any reasonable attorneys’ fees and costs of litigation incurred by such Concert Indemnitees, resulting from any Claims against such Concert Indemnitee to the extent arising from or based on (a) the Development or Commercialization of Licensed Products by or on behalf of Jazz or its Affiliates or Sublicensees (other than by Concert or its Affiliates or Third Party subcontractors), (b) the breach of any of Jazz’s obligations, representations or warranties under this Agreement, or (c) the willful misconduct or negligent acts of Jazz or its Affiliates. The foregoing indemnity obligation shall not apply to the extent that (i) the Concert Indemnitees fail to comply with the indemnification procedures set forth in Section 9.3 and Jazz’s defense of the relevant Claims is prejudiced by such failure, or (ii) any Claim arises from or is based on any activity set forth in Section 9.1(c) or 9.1(d) for which Concert is obligated to indemnify the Jazz Indemnitees under Section 9.1.

9.3 Indemnification Procedures . The Party claiming indemnity under this Article 9 (the “ Indemnified Party ”) shall give written notice to the Party from whom indemnity is being sought (the “ Indemnifying Party ”) promptly after learning of such Claim. The Indemnified Party shall provide the Indemnifying Party with reasonable assistance, at the Indemnifying Party’s expense, in connection with the defense of the Claim for which indemnity is being sought. The Indemnified Party may participate in and monitor such defense with counsel of its own choosing at its sole expense; provided, however, the Indemnifying Party shall have the right to assume and conduct the defense of the Claim with counsel of its choice. The Indemnifying Party shall not

 

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settle any Claim without the prior written consent of the Indemnified Party, not to be unreasonably withheld, unless the settlement involves only the payment of money. So long as the Indemnifying Party is actively defending the Claim in good faith, the Indemnified Party shall not settle or compromise any such Claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume and conduct the defense of the Claim as provided above, (a) the Indemnified Party may defend against, consent to the entry of any judgment, or enter into any settlement with respect to such Claim in any manner the Indemnified Party may deem reasonably appropriate (and the Indemnified Party need not consult with, or obtain any consent from, the Indemnifying Party in connection therewith), and (b) the Indemnifying Party shall remain responsible to indemnify the Indemnified Party as provided in this Article 9.

9.4 Limitation of Liability . NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, OR INDIRECT DAMAGES ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, NOTHING IN THIS SECTION 9.4 IS INTENDED TO OR SHALL LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF ANY PARTY UNDER SECTION 9.1 OR 9.2 OR DAMAGES AVAILABLE FOR BREACH OF THE OBLIGATIONS SET FORTH IN ARTICLE 10.

9.5 Insurance . Each Party shall procure and maintain insurance, including product liability insurance, consistent with normal business practices of prudent companies similarly situated at all times during which any Licensed Product is being clinically tested in human subjects or commercially distributed or sold by such Party and for the [**] year period thereafter. It is understood that such insurance shall not be construed to create a limitation of either Party’s liability with respect to its indemnification obligations under this Article 9. Each Party shall provide the other Party with written evidence of such insurance upon request. Each Party shall provide the other Party with written notice at least [**] days prior to the cancellation or non-renewal of such insurance. Concert’s out-of-pocket costs incurred to obtain clinical trial insurance for clinical trials conducted by Concert pursuant to the Development Plan shall be included in the Development Budget and paid by Jazz to Concert pursuant to Section 6.2(a)(ii).

ARTICLE 10

CONFIDENTIALITY

10.1 Confidentiality . Each Party agrees that, during the Term and for a period of [**] years thereafter, it shall keep confidential and shall not publish or otherwise disclose and shall not use for any purpose other than as provided for in or permitted under this Agreement (which includes the exercise of any rights or the performance of any obligations hereunder) any Confidential Information of the other Party, except to the extent expressly authorized by this Agreement or otherwise agreed in writing by the Parties. The foregoing confidentiality and non-use obligations shall not apply to any portion of the other Party’s Confidential Information that the receiving Party can demonstrate by competent written proof:

(a) was already known to the receiving Party or any of its Affiliates, other than under an obligation of confidentiality, at the time of disclosure by the other Party;

 

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(b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party or any of its Affiliates;

(c) became generally available to the public or otherwise part of the public domain after its disclosure to the receiving Party or any of its Affiliates and other than through any act or omission of the receiving Party or any of its Affiliates in breach of this Agreement;

(d) was disclosed to the receiving Party or any of its Affiliates by a Third Party who has a legal right to make such disclosure and who did not obtain such information under obligations of confidentiality directly or indirectly to the other Party; or

(e) was independently discovered or developed by the receiving Party or any of its Affiliates without access to or aid, application or use of the other Party’s Confidential Information, as evidenced by a contemporaneous writing.

Notwithstanding the definition of “Confidential Information” in Article 1, (i) all Jazz Development Inventions and Development Data, whether generated by one Party or both Parties, shall be deemed the Confidential Information of Jazz and not the Confidential Information of Concert and Concert shall not be permitted to claim an exemption from the obligations set forth in this Section 10.1 on account of such Information satisfying the criteria set forth in subsection (a) or (e) and (ii) all Licensed Know-How that solely and specifically relates to Licensed Products shall be deemed to be both the Confidential Information of Jazz and the Confidential Information of Concert and Concert shall not be permitted to claim an exemption from the obligations set forth in this Section 10.1 on account of such Information satisfying the criteria set forth in subsection (a) or (e). Jazz shall nevertheless be permitted to use and disclose in confidence (and to permit its disclosees to use and further disclose in confidence) the Licensed Know-How in connection with all activities permitted pursuant to Sections 2.1(a), 2.1(e), 2.1(f) and 2.2(a).

10.2 Authorized Disclosure . Notwithstanding the obligations set forth in Section 10.1, a Party may disclose the other Party’s Confidential Information and the terms of this Agreement:

(a) to its Affiliates and its and their employees, agents, consultants, contractors, licensees or Sublicensees to the extent such disclosure is reasonably necessary for the sole purpose of performing its obligations or exercising its rights under this Agreement; provided that in each case, the disclosees are bound by written obligations of confidentiality and non-use consistent with those contained in this Agreement;

(b) to the extent such disclosure is reasonably necessary in filing or prosecuting (but as to the use of Development Data, subject to Section 7.1) patent applications (provided that the disclosing Party obtains the prior written approval of the other Party, such approval not to be unreasonably withheld) or preparing and submitting filings to or otherwise communicating with Regulatory Authorities in connection with a Licensed Product (provided that such disclosing Party is the Party responsible for such filings pursuant to Section 4.9); provided, however, that the receiving Party shall furnish only that portion of the Disclosing Party’s Confidential Information that is reasonably necessary or required to be furnished for such purposes;

(c) to the extent such disclosure is made in communications with existing or bona fide prospective or actual acquirers, merger partners, lenders or investors of the receiving

 

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Party for the sole purpose of such third party evaluating or consummating an actual or potential investment, loan, acquisition, merger or similar transaction; provided that in connection with such disclosure, such Party shall inform each disclosee of the confidential nature of such Confidential Information and ensure that each such disclosee is bound by obligations of confidentiality and non-use (except for the purpose explicitly contemplated in this Section 10.2(c));

(d) to the extent such disclosure is reasonably necessary to comply with applicable Laws promulgated or enforced by the U.S. Securities and Exchange Commission or regulations promulgated by applicable security exchanges, provided, however, that Section 10.4(d) shall apply with respect to any requirement to file a copy of this Agreement with the U.S. Securities and Exchange Commission or other Governmental Authorities; or

(e) to the extent such disclosure is reasonably necessary to comply with applicable Laws (other than those described in (d) above) or is required to be disclosed by court order, administrative subpoena or order of a governmental authority; in each case provided that the Party with such disclosure obligation shall promptly notify the other Party of such required disclosure and, if requested by the other Party in writing, shall use reasonable efforts to obtain, or to assist the other Party in obtaining, a protective order preventing or limiting the required disclosure.

10.3 Technical Publication .

(a) Concert may not publish peer reviewed manuscripts, or provide or engage in other forms of public disclosure including submission or publication of abstracts or other manuscripts and presentations, of results of studies carried out under the Development Plan, or otherwise pertaining to a Licensed Product, without the prior written consent of Jazz; provided that Concert shall have the right to publish, without Jazz’s prior written consent, data previously published or publicly disclosed by Jazz, provided that such data is, to Concert’s knowledge, accurately presented and proper attribution is given to Jazz.

(b) For the avoidance of doubt, Jazz shall have the right to publish and otherwise publicly disclose all Development Data, including Information concerning clinical trials of Licensed Products, including on clinicaltrials.gov; provided that with respect to publication of Development Data in a scientific journal, Jazz shall provide Concert written notice of such intended publication, along with a copy of such publication, [**] Business Days prior to such publication, and with respect to other public disclosures of Development Data, Jazz shall endeavor to notify Concert about such intended public disclosure as soon as is practicable.

10.4 Publicity .

(a) The Parties agree that the terms of this Agreement are the Confidential Information of both Parties. Notwithstanding the foregoing, either Party may disclose such terms as otherwise permitted in Section 10.2 or this Section 10.4.

(b) The Parties shall issue a joint press release of the execution of this Agreement and its terms in the form attached as Exhibit D (together with any mutually agreed modifications thereto), which shall be issued at a mutually agreed time after the Effective Date.

 

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(c) After release of such press release, if either Party desires to make a further press release or other public announcement concerning the material terms of this Agreement or any activities hereunder, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval (except as otherwise provided herein), except that in the case of a press release or governmental filing required by applicable Laws, the disclosing Party shall provide the other Party with such advance notice as it reasonably can and shall not be required to obtain approval therefor. Each such announcement shall contain appropriate references to the other Party if so requested. In addition, Concert shall have the right, with Jazz’s prior written consent, not to be unreasonably withheld or delayed, to issue press releases announcing the achievement of milestones under Section 6.3. A Party commenting on such a proposed announcement shall provide its comments, if any, within [**] Business Days after receiving the draft announcement for review. Notwithstanding anything in this Agreement to the contrary, neither Party shall be required to seek the permission of the other Party to repeat any information that has already been publicly disclosed by such Party, or by the other Party, in accordance with this Article 10, provided such information remains accurate as of such time.

(d) The Parties acknowledge that either or both Parties may be obligated to file under applicable Laws a copy of this Agreement with the U.S. Securities and Exchange Commission or other Governmental Authorities. Notwithstanding anything in this Agreement to the contrary, such Party shall be entitled to make such a required filing, provided that it requests confidential treatment of the commercial terms and sensitive technical terms included in this Agreement to the extent such confidential treatment is reasonably available to such Party. In the event a Party is required to make any such filing, such Party will provide the other Party with a copy of this Agreement marked to show provisions for which such Party intends to seek confidential treatment and shall reasonably consider and incorporate the other Party’s reasonable comments thereon to the extent consistent with the requirements of Laws as applicable to the filing Party, governing disclosure of material agreements and material information that must be publicly filed.

ARTICLE 11

TERM AND TERMINATION

11.1 Term . This Agreement shall become effective on the Effective Date and, unless earlier terminated pursuant to this Article 11, shall remain in effect on a Licensed Product-by-Licensed Product and country-by-country basis, until the expiration of the Royalty Term of such Licensed Product in such country (the “ Term ”). Upon the expiration of the Royalty Term for a Licensed Product in a particular country (but not the earlier termination of this Agreement), the licenses granted by Concert to Jazz under Section 2.1(a) with respect to such Licensed Product and such country shall become fully-paid, royalty free and exclusive.

11.2 Unilateral Termination by Jazz . Jazz may terminate this Agreement on a country-by-country basis or in its entirety, for any or no reason upon ninety (90) days prior written notice to Concert.

 

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11.3 Termination by Either Party for Material Breach .

(a) Material Breach . Subject to Section 11.3(b), each Party shall have the right to terminate this Agreement upon written notice to the other Party if such other Party materially breaches its obligations under this Agreement and, after receiving written notice from the non-breaching Party identifying such material breach in reasonable detail, fails to cure such material breach within [**] days from the date of such notice; provided that if such breach is not a payment breach and is not reasonably capable of cure within such [**]-day period, the breaching Party may submit a reasonable cure plan prior to the end of such [**]-day period, in which case the other Party shall not have the right to terminate this Agreement so long as the breaching Party cures such material breach within an additional [**] days.

(b) Disputed Breach . If the alleged breaching Party disputes in good faith the existence or materiality of a breach specified in a notice provided by the other Party in accordance with Section 11.3(a), and such alleged breaching Party provides the other Party written notice of such dispute within such [**] day period, then the non-breaching Party shall not have the right to terminate this Agreement under Section 11.3(a) for so long as the alleged breaching Party continues to dispute in good faith the existence or materiality of the alleged breach unless and until an arbitrator, in accordance with Article 12, has determined that the alleged breaching Party has materially breached the Agreement and failed to cure such breach within [**] days (or [**] days if such breach is not a payment breach and is not reasonably capable of cure within [**] days) from the date of such determination of material breach. It is understood and agreed that during the pendency of such dispute, all of the terms and conditions of this Agreement shall remain in effect and the Parties shall continue to perform all of their respective obligations hereunder.

11.4 Termination for Abandonment . Concert may terminate this Agreement on account of Jazz’s abandonment of all Development and Commercialization of all Licensed Products as follows:

(a) If the board of directors or the executive committee (or successor thereto) of Jazz makes a decision to permanently cease all Development and Commercialization of all Licensed Products (including by Jazz’s Affiliates and Sublicensees), then Concert may terminate this Agreement upon written notice to Jazz. Jazz shall notify Concert promptly upon making such decision; or

(b) If Jazz and its Affiliates and Sublicensees do not conduct any Activities (as defined below) with respect to the Development or Commercialization of any Licensed Products for a period of [**] consecutive days or more [**], then Concert may provide Jazz with a written notice of its intent to terminate this Agreement pursuant to this Section 11.4(b) and Concert may terminate this Agreement upon subsequent written notice to Jazz, which subsequent notice shall not be issued any sooner than [**] days after Jazz’s receipt of Concert’s initial notice pursuant to this Section 11.4(b) and shall not be issued if, after Jazz’s receipt of Concert’s initial notice but prior to the issuance of such subsequent notice, Jazz or its Affiliate or Sublicensee conducts any Activities with respect to the Development or Commercialization of any Licensed Products. For the purposes of this Section 11.4(b), “Activities” shall include [**] activities with respect to the Development or Commercialization of a Licensed Product, including without limitation [**] in the case of each of the foregoing, to the extent such activity, or such activities in the aggregate during the applicable time period, is or are non-trivial and performed for the purpose of progressing the Development or Commercialization of any Licensed Product. “Activities” also include [**]. For clarity, if such circumstances exist and [**] then Concert shall not have the right to send any notice pursuant to this Section 11.4(b) or to terminate this Agreement pursuant to this Section 11.4(b). In addition, if [**], and [**] or [**] and [**], then the [**] shall be deemed to be a period in which Jazz or its Affiliate or Sublicensee is conducting Activities with respect to the Development or Commercialization of any Licensed Products, and Concert shall not have the right to send any notice pursuant to this Section 11.4(b) or to terminate this Agreement pursuant to this Section 11.4(b) during any such period. For further clarity, if [**], then each period [**] the calculation of the [**] periods for the purposes of determining whether Concert has the right to send any notice pursuant to this Section 11.4(b) or to terminate this Agreement pursuant to this Section 11.4(b).

 

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11.5 Effects of Termination . Upon any termination (but not expiration) of this Agreement with respect to one or more countries or in its entirety, the following shall apply:

(a) Licenses .

(i) All licenses granted to Jazz or Concert under this Agreement shall terminate for the terminated countries (or if this Agreement is terminated in its entirety, for the Territory), except for the license granted in Section 2.2(a), which shall survive termination.

(ii) Upon Concert’s request within [**] days after the effective date of termination, (1) Jazz and Concert shall negotiate in good faith to agree upon commercially reasonable royalties to be paid by Concert to Jazz in consideration for the license set forth in part (2) of this Section 11.5(a)(ii) and (2) upon reaching such agreement, Jazz shall grant Concert a non-exclusive, royalty-bearing license, with the right to sublicense through multiple tiers, under the Joint Patents and other Patents Controlled by Jazz or any of its Affiliates (excluding Patents claiming Jazz Development Inventions) that claim Information and inventions made in the course of development of Licensed Products, to make, have made, use, sell, have sold, offer for sale and import Licensed Products in the Field in the terminated countries (or if this Agreement is terminated in its entirety, in the Territory).

(b) Confidential Information . All Licensed Know-How shall be deemed solely the Confidential Information of Concert.

(c) Publications .

(i) Concert, and not Jazz, shall thereafter have the right to publish those clinical trial and other results that are generated after the effective date of termination with respect to Concert’s development and commercialization activities relating to Licensed Products.

(ii) After termination of this Agreement in its entirety pursuant to Section 11.2, Jazz shall not publish clinical trial and other scientific results that concern a Licensed Product and that were generated during the term of this Agreement unless: (A) such results are presented in such publication in a factual and accurate manner that is not misleading; (B) such publication does not omit material Information in Jazz’s possession and control that would result in an interpretation of such results that is materially more favorable, with respect to the safety or efficacy of the Licensed Product, than the interpretation set forth in such publication; (C) such publication complies with applicable, then current industry standards; (D) Jazz submits a copy of such publication to Concert a reasonable time in advance of its intended publication; (E) Jazz implements all reasonable comments that are provided by Concert in a timely manner; and (F) Jazz obtains Concert’s prior written consent before publishing such publication, provided that (1) such consent shall not be unreasonably withheld or delayed and (2) such consent need not be obtained by Jazz where such publication is reasonably required by applicable Law, court order, administrative subpoena, or order of a Governmental Authority or reasonably necessary for compliance with industry norms regarding data dissemination. Further, following such termination, Jazz shall not issue any press releases or other public disclosure relating to the Licensed Products unless such press release or other public disclosure relating to the Licensed Products falls within an exception listed in Section 10.4, is reasonably necessary to comply with

 

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applicable Laws, or is required to be disclosed by court order, administrative subpoena or order of a governmental authority; provided, however, that the restrictions set forth in this Section 11.5(c)(ii) shall not be interpreted as limiting Jazz’s ability to issue press releases or other public disclosures regarding Jazz Compounds or disclosing customary, non-scientific information including the fact that this Agreement has been terminated or that Jazz is no longer developing or commercializing Licensed Products in the Field.

(d) Cessation of Development and Commercialization . In the event that Jazz terminates this Agreement with respect to a country or countries (but not in its entirety) pursuant to Section 11.2 during the Royalty Term for any Licensed Product in such country, Jazz shall not undertake any further development or commercial activities for such Licensed Product in the Field in such country during the Royalty Term therefor and Jazz shall no longer have any payment or diligence obligations with respect to such terminated country or countries; provided that, Jazz may subsequently continue or recommence its development or commercialization activities with respect to such Licensed Product in the Field in a terminated country during the Royalty Term for such Licensed Product in such country by providing Concert with notice thereof. If Jazz provides such notice [**] or [**] any receipt by Jazz of a notice from Concert pursuant to this Section 11.5(d) with respect to such Licensed Product in such country, then all of Jazz’s payment obligations to Concert under this Agreement with respect to such Licensed Product in such terminated country shall again apply to such continued or recommenced development or commercialization activities notwithstanding such termination, and Jazz’s licenses pursuant to Sections 2.1(a) and 2.1(f) with respect to such Licensed Product in such terminated country shall again apply with respect thereto notwithstanding Section 11.5(a)(i). Concert shall notify Jazz in writing promptly if Concert intends, within a reasonable period of time, to (i) initiate development or commercialization activities upon such Licensed Product in the Field in a terminated country or (ii) grant to a Third Party a license under the Licensed Intellectual Property to develop and commercialize such Licensed Product in the Field in a terminated country. Concert shall not initiate development or commercialization activities upon such Licensed Product in the Field in a terminated country or grant a license to a Third Party under the Licensed Intellectual Property to develop and commercialize such Licensed Product in the Field in a terminated country unless (A) Concert provides Jazz with notice pursuant to the preceding sentence and (B) Jazz does not, [**] its receipt of such notice, provide notice to Concert of Jazz’s intent to continue or recommence its development or commercialization activities with respect to such Licensed Product in the Field in a terminated country. If Jazz recommences its development or commercialization activities with respect to such Licensed Product in the Field in a terminated country during the Royalty Term for such Licensed Product in such country and provides notice to Concert thereof at any time that is [**] after Jazz’s receipt of a notice from Concert pursuant to this Section 11.5(d), then Jazz will not have any payment obligations to Concert under this Agreement or any licenses from Concert under this Agreement with respect to such Licensed Product in such terminated country. Notwithstanding Section 11.6, this Section 11.5(d) shall terminate and have no further force or effect upon any termination of this Agreement pursuant to Section 11.3 or 11.4.

(e) Other Obligations . Jazz’s obligations pursuant to Sections 4.3(a) and 5.2 shall terminate and, except for those payment obligations that accrued prior to termination, Jazz shall not have any obligations to make any payments to Concert after termination.

(f) Wind-Down . Upon receipt of a termination notice from Jazz during the conduct of the Development Program, Concert shall immediately commence winding down its activities under the Development Plan and shall use best efforts not to incur any additional Development expenses; provided that if this Agreement is terminated only with respect to certain countries, this Section 11.5(f) shall apply to activities with respect to such terminated countries only.

(g) Prosecution and Maintenance of Development Patents .

(i) Subject to the remainder of this Section 11.5(g)(i), Jazz shall have the first right to prepare, file, prosecute and maintain the Joint Patents in the terminated countries, at Jazz’s sole cost and expense. Jazz shall provide Concert reasonable opportunity to review and comment on such prosecution efforts regarding such Joint Patents, as follows. Jazz shall provide Concert with copies of all material communications from any patent authority regarding such Joint Patents, and shall provide Concert, for its review and comment, with drafts of any material filings or responses to be made to such patent authorities a reasonable amount of time in advance of submitting such filings or responses. Jazz shall consider in good faith and shall implement as appropriate any reasonable comments thereto provided by Concert in connection with the prosecution of such Joint Patents. If Jazz decides to cease the prosecution or maintenance of any such Joint Patent, it shall notify Concert in writing sufficiently in advance so that Concert may, at its discretion, assume the responsibility for the prosecution or maintenance of such Patents, at Concert’s cost and expense. If Concert assumes such responsibility, Concert shall provide Jazz with copies of all material communications from any patent authority regarding such Joint Patents, shall provide Jazz, for its review and comment, with drafts of any material filings or responses to be made to such patent authorities a reasonable amount of time in advance of submitting such

 

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filings or responses and shall consider in good faith and shall implement as appropriate any reasonable comments thereto provided by Jazz in connection with the prosecution of such Joint Patents.

(ii) Subject to the remainder of this Section 11.5(g)(ii), Concert shall have the first right to prepare, file, prosecute and maintain those Development Patents in the terminated countries that are solely owned by Concert, at its sole cost and expense. Concert shall provide Jazz reasonable opportunity to review and comment on such prosecution efforts regarding those Development Patents in the terminated countries that are solely owned by Concert and that are related to Jazz Compounds or products containing Jazz Compounds, or that are useful in connection with the development and commercialization of Jazz Compounds or products containing Jazz Compounds, (collectively, the “ Jazz-Related Post-Termination Patents ”) as follows. Concert shall provide Jazz with copies of all material communications from any patent authority regarding the Jazz-Related Post-Termination Patents, and shall provide Jazz, for its review and comment, with drafts of any material filings or responses to be made to such patent authorities a reasonable amount of time in advance of submitting such filings or responses. Concert shall consider in good faith and shall implement as appropriate any reasonable comments thereto provided by Jazz in connection with the prosecution of such Jazz-Related Post-Termination Patents, to the extent related to Jazz Compounds. If Concert decides to cease the prosecution or maintenance of any Jazz-Related Post-Termination Patents, it shall notify Jazz in writing sufficiently in advance so that Jazz may, at its discretion, assume the responsibility for the prosecution or maintenance of such Jazz-Related Post-Termination Patents, at Jazz’s cost and expense.

(iii) Each Party shall provide the other Party all reasonable assistance and cooperation, at the other Party’s request and expense, in the patent prosecution efforts provided above in this Section 11.5(g), including providing any necessary powers of attorney, executing any other required documents or instruments for such prosecution, and making its personnel with appropriate scientific expertise available to assist in such efforts.

(h) Enforcement of Development Patents .

(i) Section 7.5(e) shall survive termination and remain in effect with respect to all Development Patents.

(ii) If either Party becomes aware of any existing or threatened infringement of the Joint Patents in the terminated countries, it shall promptly notify the other Party in writing to that effect. With respect to any such infringement that is not subject to Section 7.5(e), the Parties will consult with each other regarding any actions to be taken with respect to such infringement, and unless the Parties agree otherwise in writing, each Party shall have the right to exercise all rights such Party has with respect to such infringement, at its sole expense, and to retain all resulting recoveries.

(i) Jazz Materials and Information . Concert will have rights to materials, Information, Regulatory Materials and intellectual property rights (other than the Patents included in the license to be granted pursuant to Section 11.5(a)(ii)) of Jazz related to the Licensed Products under those terms and conditions, including financial terms, as may be agreed by the Parties in writing (if at all) upon termination of this Agreement.

 

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11.6 Survival . Termination or expiration of this Agreement shall not affect any rights or obligations of the Parties under this Agreement that have accrued prior to the date of termination or expiration. Notwithstanding anything to the contrary, the following provisions shall survive any expiration or termination of this Agreement: Sections 2.2, 4.7 (sixth sentence only), 4.9(b) (proviso in second sentence only), 6.9, 6.10, 7.1, 7.4(c), 7.4(d) (solely with respect to Jazz’s Patent Activities pursuant to Section 7.4(c)), 7.5(e), 7.6, 8.4, 10.1, 10.2, 10.3(a), 10.4(a), 10.4(c), 11.5, 11.6, 12.2-12.11, 13.2, 13.4, 13.5, 13.6, 13.8, 13.10 and 13.11 and Article 9.

ARTICLE 12

DISPUTE RESOLUTION

12.1 Disputes . It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. In the event of any disputes, controversies or differences which may arise between the Parties out of or in relation to or in connection with this Agreement (other than disputes arising from the JSC for which Jazz has final decision-making authority, disputes arising from the JPC for which an independent Third Party expert has final decision-making authority, or disputes resolved pursuant to Section 12.11), including, without limitation, any alleged failure to perform, or breach, of this Agreement, or any issue relating to the interpretation or application of this Agreement (each, a “ Dispute ”), then upon the request of either Party by written notice, the Parties agree to meet and discuss in good faith a possible resolution thereof, which good faith efforts shall include at least one in-person meeting between the Parties’ respective Executive Officers. If the matter is not resolved within [**] days following the written request for discussions, either Party may then invoke the provisions of Section 12.2.

12.2 Arbitration . Any Dispute that is not resolved pursuant to Section 12.1, except for a dispute, claim or controversy under Section 12.10, shall be settled by binding arbitration administered by JAMS before one arbitrator pursuant to the Streamlined Arbitration Rules and Procedures of JAMS then in effect (the “ JAMS Rules ”), except as otherwise provided herein. The arbitration shall be governed by the U.S. Federal Arbitration Act, 9 U.S.C. §§ 1-16 (the “ Federal Arbitration Act ”), to the exclusion of any inconsistent state laws. The arbitration will be conducted in New York, New York, and the Parties consent to the personal jurisdiction of the U.S. federal courts, for any case arising out of or otherwise related to this arbitration, its conduct and its enforcement. The language to be used in the arbitral proceedings will be English. Any situation not expressly covered by this Agreement shall be decided in accordance with the JAMS Rules.

12.3 Governing Law . Resolution of all Disputes and any remedies relating thereto, shall be governed by and construed under the substantive laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.

12.4 Decision . The arbitrator shall issue a reasoned opinion following a full comprehensive hearing, no later than [**] months following the selection of the arbitrator as provided for in Section 12.2.

 

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12.5 Award . Any award shall be promptly paid in Dollars free of any tax, deduction or offset; and any costs, fees or taxes incident to enforcing the award shall, to the maximum extent permitted by law, be charged against the Party resisting enforcement. If as to any issue the arbitrator should determine under the applicable law that the position taken by a Party is frivolous or otherwise irresponsible or that any wrongdoing it finds is in callous disregard of law and equity or the rights of the other Party, the arbitrator shall also be entitled to award an appropriate allocation of the adversary’s reasonable attorney fees, costs and expenses to be paid by the offending Party, the precise sums to be determined after a bill of attorney fees, expenses and costs consistent with such award has been presented following the award on the merits. Each Party agrees to abide by the award rendered in any arbitration conducted pursuant to this Article 12, and agrees that, subject to the Federal Arbitration Act, judgment may be entered upon the final award in the Federal District Court in the Southern District of New York and that other courts may award full faith and credit to such judgment in order to enforce such award. The award shall include interest from the date of any damages incurred for breach of the Agreement, and from the date of the award until paid in full, at a rate fixed by the arbitrator.

12.6 Costs . Except as set forth in Section 12.5, each Party shall bear its own legal fees. The arbitrator shall assess his or her costs, fees and expenses against the Party losing the arbitration unless he or she believes that neither Party is the clear loser, in which case the arbitrator shall divide his or her fees, costs and expenses according to his or her sole discretion.

12.7 Injunctive Relief . Nothing in this Article 12 will preclude either Party from seeking equitable relief or interim or provisional relief from a court of competent jurisdiction, including a temporary restraining order, preliminary injunction or other interim equitable relief, concerning a dispute either prior to or during any arbitration if necessary to protect the interests of such Party or to preserve the status quo pending the arbitration proceeding.

12.8 Confidentiality . The arbitration proceeding shall be confidential and the arbitrator shall issue appropriate protective orders to safeguard each Party’s Confidential Information. Except as required by applicable Laws (including those promulgated or enforced by the U.S. Securities and Exchange Commission) or regulations promulgated by applicable security exchanges, no Party shall make (or instruct the arbitrator to make) any public announcement with respect to the proceedings or decision of the arbitrator without prior written consent of the other Party. The existence of any dispute submitted to arbitration, and the award, shall be kept in confidence by the Parties and the arbitrator, except as required in connection with the enforcement of such award or as otherwise required by applicable Laws (including those promulgated or enforced by the U.S. Securities and Exchange Commission) or regulations promulgated by applicable security exchanges.

12.9 Survivability . Any duty to arbitrate under this Agreement shall remain in effect and be enforceable after termination of this Agreement for any reason.

12.10 Patent and Trademark Disputes . Any dispute, controversy or claim relating to the scope, validity, enforceability or infringement of any patents or trademarks covering the manufacture, use, importation, offer for sale or sale of a Licensed Product shall be submitted to a court of competent jurisdiction in the country in which such patent or trademark rights were granted or arose.

 

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12.11 Post-Change of Control Disputes Concerning Licensed Know-How, Licensed Patents or Exclusivity.

(a) Licensed Know-How . If Jazz inquires in good faith with Concert regarding whether certain Information that has not been disclosed to Jazz pursuant to Section 4.6 is Licensed Know-How and Jazz has a reasonable basis for making such inquiry, then Concert shall respond promptly to Jazz’s inquiry. If Concert responds that any such Information is excluded from Licensed Know-How and Jazz is not satisfied with Concert’s response, then upon the request of Jazz, the Parties shall pick a mutually acceptable independent Third Party expert with appropriate qualifications and experience in pharmaceutical development and intellectual property matters to evaluate evidence presented by Concert pursuant to this Section 12.11(a) and determine whether such Information is excluded from Licensed Know-How. If the Parties fail to agree upon an expert within [**] Business Days after Jazz’s request, then each Party shall select an independent Third Party individual with appropriate qualifications and experience in pharmaceutical development and intellectual property matters, and the two selected individuals shall select an expert, with comparable independence, qualifications and experience, within [**] Business Days of selection of the two individuals. Concert shall promptly submit to the independent Third Party expert appointed pursuant to this Section 12.11(a) evidence as to whether such Information is Licensed Know-How; Concert shall supply such evidence in good faith, and shall not provide evidence that is, or is presented in a manner that is, inaccurate or misleading. [**]. Concert shall not omit any material evidence as to whether the Information is Licensed Know-How. The expert shall evaluate such evidence and determine within [**] Business Days of such submission whether such Information is Licensed Know-How and shall inform both Parties of her or his determination (without disclosing any Information to Jazz that is not Licensed Know-How), which shall be binding on the Parties with respect to the inclusion or exclusion of such Information in or from Licensed Know-How. The Parties shall share equally the costs of such expert.

(b) Licensed Patents . If a Change of Control of Concert occurs and Jazz subsequently brings to Concert’s attention a Patent [**] that Jazz believes may be a Licensed Patent, then Concert shall respond promptly to Jazz’s inquiry. If Concert responds to Jazz’s inquiry by asserting that the Patent is not a Licensed Patent because it is excluded from Licensed Patents pursuant to part (b)(i) of the last sentence of Section 1.57 and Jazz is not satisfied with Concert’s response, then at Jazz’s request the Parties shall pick a mutually acceptable independent Third Party expert with appropriate qualifications and experience in pharmaceutical development and intellectual property matters to evaluate evidence presented by Concert pursuant to this Section 12.11(b) and determine whether such Patent is excluded from Licensed Patents pursuant to part (b)(i) of the last sentence of Section 1.57. If the Parties fail to agree upon an expert within [**] Business Days after Jazz’s request, then each Party shall select an independent Third Party individual with appropriate qualifications and experience in pharmaceutical development and intellectual property matters, and the two selected individuals shall select an expert, with comparable independence, qualifications and experience, within [**] Business Days of selection of the two individuals. Concert shall promptly submit to the independent Third Party expert appointed pursuant to this Section 12.11(b) evidence as to whether such exclusions apply; Concert shall supply such evidence in good faith, and shall not provide evidence that is, or is presented in a manner that is, inaccurate or misleading. [**]. Concert shall not omit any material evidence as to whether the Patent is a Licensed Patent. The Third Party expert shall evaluate such evidence and

 

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determine within [**] Business Days of such submission whether the exclusions apply and shall inform both Parties of his or her determination, which shall be binding on the Parties with respect thereto. The Parties shall share equally the costs of such expert. For clarity, such expert shall not determine whether such Patent is reasonably required to manufacture, use, offer for sale, sell or import any D-GHB Compound.

(c) Exclusivity . If a Change of Control of Concert occurs and Jazz subsequently brings to Concert’s attention any research, development, manufacture or commercialization activities [**] wherein Jazz believes that such activities may violate the exclusivity obligations set forth in Section 2.3, then Concert shall respond promptly to Jazz’s inquiry. If Concert responds to Jazz’s inquiry by asserting that the activities are permitted pursuant to the proviso in the penultimate sentence of Section 2.3 and Jazz is not satisfied with Concert’s response, then at Jazz’s request the Parties shall pick a mutually acceptable independent Third Party expert with appropriate qualifications and experience in pharmaceutical research, development, manufacture or commercialization (as applicable) to evaluate evidence presented by Concert pursuant to this Section 12.11(c) [**]. If the Parties fail to agree upon an expert within [**] Business Days after Jazz’s request, then each Party shall select an independent Third Party individual with appropriate qualifications and experience in pharmaceutical research, development, manufacture or commercialization (as applicable), and the two selected individuals shall select an expert, with comparable independence, qualifications and experience, within [**] Business Days of selection of the two individuals. Concert shall promptly submit to the independent Third Party expert appointed pursuant to this Section 12.11(c) evidence as to whether the exclusions set forth in parts (A) and (B) of the proviso in the penultimate sentence of Section 2.3 apply with respect to such activities; Concert shall supply such evidence in good faith, and shall not provide evidence that is, or is presented in a manner that is, inaccurate or misleading. [**]. Concert shall not omit any material evidence as to whether the exclusions set forth in parts (A) and (B) of the proviso in the penultimate sentence of Section 2.3 apply with respect to such activities. The Third Party expert shall evaluate such evidence and determine within [**] Business Days of such submission whether such exclusions apply to such activities and shall inform both Parties of his or her determination, which shall be binding on the Parties with respect to such activities to the extent performed prior to the date of such determination. The Parties shall share equally the costs of such expert.

ARTICLE 13

MISCELLANEOUS

13.1 Entire Agreement; Amendment . This Agreement, including the Exhibits hereto, sets forth the complete, final and exclusive agreement and all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto with respect to the subject matter hereof and supersedes, as of the Effective Date, all prior and contemporaneous agreements and understandings between the Parties with respect to the subject matter hereof, including the Confidentiality Agreement and the Feasibility Agreement; provided that the provisions of the Feasibility Agreement specified therein as surviving termination thereof shall remain in effect, except for Section 6, which is hereby terminated. The foregoing shall not be interpreted as a waiver of any remedies available to either Party as a result of any breach, prior to the Effective Date, by the other Party of its obligations under the Confidentiality Agreement or the Feasibility Agreement. There are no covenants, promises, agreements, warranties,

 

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representations, conditions or understandings, either oral or written, between the Parties other than as are set forth in this Agreement. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party.

13.2 Rights in Bankruptcy .

(a) All rights and licenses granted under or pursuant to this Agreement by one Party to the other are, for all purposes of Title 11 of the United States Code (“ Title 11 ”), licenses of rights to “intellectual property” as defined in Title 11, and, in the event that a case under Title 11 is commenced by or against either Party (the “ Bankrupt Party ”), the other Party shall have all of the rights set forth in Section 365(n) of Title 11 to the maximum extent permitted thereby. During the Term, each Party shall create and maintain current copies to the extent practicable of all such intellectual property. Without limiting the Parties’ rights under Section 365(n) of Title 11, if a case under Title 11 is commenced by or against the Bankrupt Party, the other Party shall be entitled to a copy of any and all such intellectual property and all embodiments of such intellectual property, and the same, if not in the possession of such other Party, shall be promptly delivered to it (i) before this Agreement is rejected by or on behalf of the Bankrupt Party, within thirty (30) days after the other Party’s written request, unless the Bankrupt Party, or its trustee or receiver, elects within thirty (30) days to continue to perform all of its obligations under this Agreement, or (ii) after any rejection of this Agreement by or on behalf of the Bankrupt Party, if not previously delivered as provided under clause (i) above. All rights of the Parties under this Section 13.2 and under Section 365(n) of Title 11 are in addition to and not in substitution of any and all other rights, powers, and remedies that each party may have under this Agreement, Title 11, and any other applicable Laws. The non-Bankrupt Party shall have the right to perform the obligations of the Bankrupt Party hereunder with respect to such intellectual property, but neither such provision nor such performance by the non-Bankrupt Party shall release the Bankrupt Party from any such obligation or liability for failing to perform it.

(b) The Parties agree that they intend the foregoing non-Bankrupt Party rights to extend to the maximum extent permitted by law and any provisions of applicable contracts with Third Parties, including for purposes of Title 11, (i) the right of access to any intellectual property (including all embodiments thereof) of the Bankrupt Party or any Third Party with whom the Bankrupt Party contracts to perform an obligation of the Bankrupt Party under this Agreement, and, in the case of the Third Party, which is necessary for the Development, Regulatory Approval and manufacture of Licensed Products and (ii) the right to contract directly with any Third Party described in (i) in this sentence to complete the contracted work.

(c) Any intellectual property provided pursuant to the provisions of this Section 13.2 shall be subject to the licenses set forth elsewhere in this Agreement and the payment obligations of this Agreement, which shall be deemed to be royalties for purposes of Title 11.

(d) Notwithstanding anything to the contrary in Article 7, in the event that Concert is the Bankrupt Party and is no longer performing its applicable obligations under Article 7, Jazz may take appropriate actions in connection with the filing, prosecution, maintenance and enforcement of any Licensed Patent licensed to Jazz under this Agreement without being required to consult with Concert before taking any such actions, provided that such actions are consistent with this Agreement.

 

51.


13.3 Force Majeure . Both Parties shall be excused from the performance of their obligations under this Agreement to the extent that such performance is prevented by force majeure and the nonperforming Party promptly provides notice of the prevention to the other Party. Such excuse shall be continued so long as the condition constituting force majeure continues and the nonperforming Party takes reasonable efforts to remove the condition. For purposes of this Agreement, force majeure shall include conditions beyond the control of the Parties, including an act of God, war, civil commotion, terrorist act, labor strike or lock-out, epidemic, failure or default of public utilities or common carriers, destruction of production facilities or materials by fire, earthquake, storm or like catastrophe, and failure of plant or machinery (provided that such failure could not have been prevented by the exercise of skill, diligence, and prudence that would be reasonably and ordinarily expected from a skilled and experienced person engaged in the same type of undertaking under the same or similar circumstances). Notwithstanding the foregoing, a Party shall not be excused from making payments owed hereunder because of a force majeure affecting such Party. If a force majeure persists for more than ninety (90) days, then the Parties will discuss in good faith the modification of the Parties’ obligations under this Agreement in order to mitigate the delays caused by such force majeure.

13.4 Notices . Any notice required or permitted to be given under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be addressed to the appropriate Party at the address specified below or such other address as may be specified by such Party in writing in accordance with this Section 13.4, and shall be deemed to have been given for all purposes (a) when received, if hand-delivered or sent by confirmed facsimile or a reputable courier service, or (b) five (5) Business Days after mailing, if mailed by first class certified or registered airmail, postage prepaid, return receipt requested.

If to Concert:

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, Massachusetts 02421

USA

Attn.: Chief Executive Officer

Facsimile: 1.781.674.5309

With a copy (which shall not constitute notice) to:

WilmerHale LLP

60 State Street

Boston, MA 02109

Attention: Steven D. Barrett, Esq.

Telephone: (617) 526-6000

Facsimile: (617) 526-5000

 

52.


If to Jazz:

Jazz Pharmaceuticals Ireland Limited

Fourth Floor, Connaught House

One Burlington Road, Dublin 4

Ireland

Attention: Fintan Keegan, Director

Facsimile: +353.1.634.7850

With a copy to (which shall not constitute notice):

Jazz Pharmaceuticals, Inc.

3180 Porter Drive

Palo Alto, California 94304

USA

Attn: General Counsel

And a copy to (which shall not constitute notice):

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

USA

Attn: Marya A. Postner

Fax: 650-849-7400

13.5 No Strict Construction; Headings . This Agreement has been prepared jointly by the Parties and shall not be strictly construed against either Party. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. The headings of each Article and Section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular Article or Section. Except where expressly stated otherwise in this Agreement, the following rules of interpretation apply to this Agreement: (i) “include”, “includes” and “including” are not limiting and mean include, includes and including, without limitation; (ii) definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms; (iii) references to an agreement, statute or instrument mean such agreement, statute or instrument as from time to time amended, modified or supplemented; (iv) references to a person or entity are also to its permitted successors and assigns; (v) the use of any gender shall be applicable to all genders; (vi) the word “will” shall be construed to have the same meaning and effect as the word “shall” and vice versa; (vii) the word “any” shall mean “any and all” unless otherwise indicated by context; and (viii) the word “or” means in the alternative or together, i.e., “and/or”.

13.6 Assignment . Neither Party may assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that a Party may make such an assignment or transfer without the other Party’s consent to its Affiliates or to a Third Party successor to substantially all of the business of such Party to which this Agreement relates,

 

53.


whether in a merger, sale of stock, sale of assets or other transaction. Any successor or assignee of rights and/or obligations permitted hereunder shall, in writing to the other Party, expressly assume performance of such rights and/or obligations. Any permitted assignment shall be binding on the successors of the assigning Party. Any assignment or attempted assignment by either Party in violation of the terms of this Section 13.6 shall be null, void and of no legal effect.

13.7 Change of Control of Concert . Within [**] after the effectiveness of a Change of Control of Concert, Concert shall notify Jazz in writing of the occurrence of such Change of Control and shall identify its Acquiror and, to the extent not prohibited by confidentiality obligation, shall answer Jazz’s reasonable questions regarding such Change of Control. Following the effectiveness of a Change of Control of Concert, Jazz shall have the right (but not the obligation), to disband one or both of the JPC and the JSC, effective upon written notice to Concert (or on such later date as specified in such notice). Upon effectiveness of such disbanding of the JSC, Jazz shall have the right to make all decisions previously within the purview of the JSC at its sole discretion, without any obligation to consult with Concert, except that Jazz shall not have the right to amend the Development Plan in a manner that would have been restricted pursuant to Section 3.1(d) if the JSC had not been disbanded. Upon effectiveness of such disbanding of the JPC, Jazz shall have the right to control the preparation, filing, prosecution and maintenance of the Licensed Patents that are not Platform Licensed Patents and references in this Agreement to the JPC with respect to such Licensed Patents shall thereafter be deemed to be references to Jazz; provided that (a) Jazz shall use the same patent counsel that is then being used by the Parties in connection with such activities, unless Jazz has a reasonable basis for changing patent counsel (including competence, cost or conflict), (b) Concert shall have the right to review and comment on such efforts and to assume the prosecution and maintenance of any such Licensed Patents that Jazz decides to abandon, (c) Jazz shall take reasonable steps to prosecute and maintain such Licensed Patents, subject to applicable Laws, and (d) Jazz shall not narrow the scope of any claims in such Licensed Patents for the sole purpose of reducing Jazz’s royalty payments to Concert under Section 6.5. Upon effectiveness of such disbanding of the JPC, any decisions previously within the purview of the JPC that pertain to a Platform Licensed Patent shall be made by Concert, and references in this Agreement to the JPC with respect to such Platform Licensed Patents shall thereafter be deemed to be references to Concert; provided that (1) such decisions shall be implemented by patent counsel selected by Concert, (2) Jazz shall have the right to review and comment on Concert’s preparation, filing, prosecution and maintenance of such Platform Licensed Patents, and Concert will provide all relevant and material documents to Jazz sufficiently in advance of any deadline such that Jazz may reasonably exercise such comment right, (3) Concert shall reasonably consider all such comments provided by Jazz, and (4) to the extent that Concert disagrees with any such comments provided by Jazz with respect to any matter, such matter will be decided by an independent Third Party expert in accordance with the terms of Section 3.2(d).

13.8 Performance by Affiliates . Each Party may discharge any obligations and exercise any right hereunder through any of its Affiliates. Each Party hereby guarantees the performance by its Affiliates of such Party’s obligations under this Agreement, and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. Any breach by a Party’s Affiliate of any of such Party’s obligations under this Agreement shall be deemed a breach by such Party, and the other Party may proceed directly against such Party without any obligation to first proceed against such Party’s Affiliate.

 

54.


13.9 Further Actions . Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

13.10 Severability . If any one or more of the provisions of this Agreement is held to be invalid or unenforceable by any court of competent jurisdiction from which no appeal can be or is taken, the provision shall be considered severed from this Agreement and shall not serve to invalidate any remaining provisions hereof. The Parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable one such that the objectives contemplated by the Parties when entering this Agreement may be realized.

13.11 No Waiver . Any delay in enforcing a Party’s rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such Party’s rights to the future enforcement of its rights under this Agreement, except with respect to an express written and signed waiver relating to a particular matter for a particular period of time.

13.12 Independent Contractors . Each Party shall act solely as an independent contractor, and nothing in this Agreement shall be construed to give either Party the power or authority to act for, bind, or commit the other Party in any way. Nothing herein shall be construed to create the relationship of partners, principal and agent, or joint-venture partners between the Parties.

13.13 Counterparts . This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

{Signature page follows}

 

55.


In Witness Whereof , the Parties have executed this Development and License Agreement by their duly authorized officers as of the Effective Date.

 

J AZZ P HARMACEUTICALS I RELAND L IMITED     C ONCERT P HARMACEUTICALS , I NC .
By:  

/s/ Fintan Keegan

    By:  

/s/ Roger Tung

Name:  

Fintan Keegan

    Name:  

Roger Tung

Title:  

EVP TECH OPS

    Title:  

Chief Executive Officer

Signature Page to Development and License Agreement


LIST OF EXHIBITS:

 

Exhibit A:    Licensed Patents as of the Effective Date
Exhibit B:    Patent Countries
Exhibit C:    Initial Development Plan
Exhibit D:    Joint Press Release

LIST OF SCHEDULES:

Schedule 1.25 D-GHB Compound

Schedule 1.47 Jazz Compound


Exhibit A

Licensed Patents as of the Effective Date

Title / Inventors: [**]

 

Country

  

Application Number

  

Filing Date

  

Status

  

Attorney Docket #

[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]

Title / Inventor: [**]

           

Country

  

Application Number

  

Filing Date

  

Status

  

Attorney Docket #

[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]

Title / Inventors: [**]

           

Country

  

Application Number

  

Filing Date

  

Status

  

Attorney Docket #

[**]    [**]    [**]    [**]    [**]


Exhibit B

Patent Countries

[**]


Exhibit C

Initial Development Plan


Exhibit C: Initial Development Plan for D-GHB (Updated Feb 2013)

Timeline

[**]

 

1    CONFIDENTIAL   


Timeline Key Assumptions:

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of three pages were omitted. [**]

 

2    CONFIDENTIAL   


Estimated Budget FY13

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of two pages were omitted. [**]

 

3    CONFIDENTIAL   


Exhibit D

Joint Press Release

NEWS RELEASE

For Additional Information Contact:

Jazz Pharmaceuticals

Kathee Littrell (Investors)

+ 1 650 496 2717 (US)

+ 353 1 634 7887 (Ireland)

 

Concert Pharmaceuticals

Justine Koenigsberg (Investors)

781-674-5284

ir@concertpharma.com

Ami Knoefler (Media)

+ 1 650 496 2947 (US)

+ 353 1 638 1032 (Ireland)

 

Kathryn Morris (Media)

The Yates Network

845-635-9828

DRAFT ** NOT FOR IMMEDIATE RELEASE * confidential

Jazz Pharmaceuticals plc and Concert Pharmaceuticals Announce Worldwide

Licensing Agreement to Develop and Commercialize Deuterium-Modified

Sodium Oxybate

DUBLIN and Lexington, MA (February 26, 2013) - Jazz Pharmaceuticals plc (Nasdaq: JAZZ) and Concert Pharmaceuticals, Inc. today announced an exclusive license agreement that provides Jazz Pharmaceuticals worldwide rights to develop and commercialize Concert’s deuterium-modified sodium oxybate (D-SXB) compounds, including C-10323.

Sodium oxybate is the active ingredient in Xyrem ® , a prescription medicine marketed in the United States by Jazz Pharmaceuticals to treat two of the key symptoms of narcolepsy, a serious neurological disorder that affects approximately 157,000 people in the United States.

Under the agreement, Jazz Pharmaceuticals will have worldwide commercial rights to C-10323, as well as principal responsibility for ongoing development activities. Concert will receive an upfront payment and is eligible to receive additional milestone payments as well as tiered royalties based on potential worldwide sales of any D-SXB products.

“This collaboration reflects our deep commitment to patients with narcolepsy and to improving their care with safe and effective treatment options,” said Jeffrey Tobias, MD, executive vice president of research and development and chief medical officer of Jazz Pharmaceuticals. “Our agreement with Concert on the D-SXB program provides an excellent opportunity for us to explore the potential of deuterium technology in this important area. We look forward to advancing this program into clinical testing in order to further evaluate its potential to provide benefits for patients with narcolepsy.”

“Preclinical data indicate that selective deuterium incorporation can stabilize sodium oxybate in vivo and we are eager to see how this improvement in metabolic properties is reflected in the clinical performance of D-SXB,” said Roger Tung, Ph.D., president and chief executive officer of Concert Pharmaceuticals. “This collaboration with Jazz Pharmaceuticals allows us to progress our deuterium-modified sodium oxybate program with a partner that has extensive development and commercial experience and is a leader in the narcolepsy field.”


Through Concert’s DCE Platform® (Deuterated Chemical Entity), Concert has developed a number of deuterium-containing analogs of sodium oxybate. C-10323 has emerged as the lead compound based on in vivo preclinical testing that demonstrated prolonged pharmacokinetic profile and reduced variability as a result of its specific deuterium modification pattern. The companies plan to submit an investigational new drug (IND) application for C-10323 later this year.

About Jazz Pharmaceuticals

Jazz Pharmaceuticals plc is a specialty biopharmaceutical company focused on improving patients’ lives by identifying, developing and commercializing innovative products that address unmet medical needs. The company has a diverse portfolio of products in the areas of narcolepsy, oncology, pain and psychiatry. The company’s U.S. marketed products in these areas include: Xyrem® (sodium oxybate) oral solution, Erwinaze® (asparaginase Erwinia chrysanthemi ), Prialt® (ziconotide) intrathecal infusion, Luvox CR® (fluvoxamine maleate), FazaClo® (clozapine, USP) HD and FazaClo LD. Outside of the U.S., Jazz Pharmaceuticals also has a number of products marketed by its EUSA Pharma division. For further information, see www.jazzpharmaceuticals.com.

About Concert Pharmaceuticals

Concert Pharmaceuticals is a clinical stage biotechnology company focused on applying the company’s DCE Platform® (deuterated chemical entity platform) to create novel and differentiated small molecule drugs. Concert’s approach leverages decades of pharmaceutical and clinical experience to reduce the time, risk and expense needed to create important new medicines. The company has a broad research pipeline addressing renal disease, hematologic disorders, CNS disorders and other therapeutic areas. Founded in 2006, Concert has raised more than $110 million of venture and institutional capital. For more information on Concert Pharmaceuticals, please visit www.concertpharma.com .

About Xyrem

Xyrem® (sodium oxybate) oral solution is indicated for the treatment of cataplexy and excessive daytime sleepiness (EDS) in patients with narcolepsy and may be dispensed only to patients enrolled in the Xyrem Success Program®. Xyrem is the only product approved by the FDA for the treatment of cataplexy and EDS in narcolepsy, a serious neurological disorder. Xyrem was first approved in the U.S. in 2002. The Xyrem Success Program is a proprietary program to ensure the safe use of Xyrem and minimize the risk of abuse, misuse, and diversion of sodium oxybate. Xyrem is available only by prescription from physicians enrolled in the Xyrem Success Program and is distributed through a single central pharmacy directly to patients. The labeling for Xyrem contains a boxed warning about CNS depression, abuse, and misuse. In controlled clinical trials, the most common adverse reactions seen (incidence ³ 5% and twice the rate seen with placebo) in Xyrem-treated patients were nausea, dizziness, vomiting, somnolence, enuresis, and tremor.


“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This press release contains forward-looking statements, including, but not limited to, statements related to Jazz Pharmaceuticals’ future exploration of the deuterium-modified sodium oxybate (D-SXB) technology and development of D-SXB compounds, including C-10323, the future clinical testing of D-SXB to evaluate the compounds’ therapeutic and commercial potential, and the plan to submit an investigational new drug application for C-10323. These forward-looking statements are based on Jazz Pharmaceuticals’ current expectations and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with the timing and results of the exploration of the D-SXB technology; the companies’ ability to file an IND for C-10323 as currently contemplated; the uncertainty of clinical success and therapeutic value of D-SXB compounds, including C-10323; the uncertainty of regulatory approval; the difficulty in integrating the D-SXB products into the company’s product portfolio and the possibility that the company may fail to realize the anticipated benefits (commercial or otherwise) from this license; and those risks with respect to research and development and clinical trials detailed from time-to-time under the caption “Risk Factors” and elsewhere in Jazz Pharmaceuticals’ Securities and Exchange Commission filings and reports (Commission File No. 001-33500), including in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and future filings and reports by the company, including the Annual Report on Form 10-K for the year ended December 31, 2012. Jazz Pharmaceuticals undertakes no duty or obligation to update any forward-looking statements contained in this release as a result of new information, future events or changes in its expectations.

Concert Pharmaceuticals Inc., the CoNCERT Pharmaceuticals Inc. logo and DCE Platform are registered trademarks of Concert Pharmaceuticals, Inc.

# # #


SCHEDULE 1.25

D-GHB COMPOUND

“D-GHB Compound” means any and all forms of (a) the compound having the structure of gamma-hydroxybutyrate, which is illustrated below, (b) [**] or (c) any salt, free acid or base, solvate, ester, hydrate, or anhydrous form of any of the foregoing, in each case wherein for a typical sample of such compound, the abundance of deuterium at one or more of the hydrogen atoms thereof is greater than the natural abundance of deuterium.

 

LOGO

A D-GHB Compound also includes any solid forms, including crystalline or amorphous forms, co-crystals and polymorphs of any of the foregoing.


SCHEDULE 1.47

JAZZ COMPOUND

“Jazz Compound” means any and all forms of (a) the compound having the structure of gamma-hydroxybutyrate, which is illustrated below, (b) [**] or (c) any salt, free acid or base, solvate, ester, hydrate, or anhydrous form of any of the foregoing, in each case wherein for a typical sample of such compound, (i) the abundance of deuterium at each of the hydrogen atoms thereof is not greater than the natural abundance of deuterium and (ii) the abundance of one or more isotopes of carbon or oxygen at one or more of the carbon atoms or oxygen atoms, respectively, thereof may be less than, the same as, or greater than, the natural abundance of such isotopes.

 

LOGO

A Jazz Compound also includes any solid forms, including crystalline or amorphous forms, co-crystals and polymorphs of any of the foregoing.

 

Confidential Materials omitted and filed separately with the

Securities and Exchange Commission. Double asterisks denote omissions.

  Exhibit 10.18

EXECUTION VERSION

CONFIDENTIAL

M ASTER D EVELOPMENT AND L ICENSE A GREEMENT

B ETWEEN

C ONCERT P HARMACEUTICALS , I NC .,

C ELGENE I NTERNATIONAL S ÀRL ,

A ND

C ELGENE C ORPORATION

F OR

D EUTERATED P RODUCTS

D ATED A S O F

A PRIL 4, 2013


EXECUTION VERSION

CONFIDENTIAL

T ABLE OF C ONTENT S

 

     Page  

ARTICLE 1 DEFINITIONS

     1   

ARTICLE 2 PREFERRED PARTNER RIGHTS

     10   

ARTICLE 3 JOINT COMMITTEES AND REPORTING

     12   

ARTICLE 4 DEVELOPMENT PROGRAMS

     15   

ARTICLE 5 CERTAIN COVENANTS

     19   

ARTICLE 6 INTELLECTUAL PROPERTY OWNERSHIP AND LICENSES

     20   

ARTICLE 7 LICENSE FEES AND PAYMENTS

     22   

ARTICLE 8 PATENTS AND INFRINGEMENT

     33   

ARTICLE 9 CONFIDENTIALITY

     37   

ARTICLE 10 REPRESENTATIONS AND WARRANTIES

     39   

ARTICLE 11 OPTION

     43   

ARTICLE 12 TERM AND TERMINATION

     46   

ARTICLE 13 INDEMNIFICATION

     48   

ARTICLE 14 MISCELLANEOUS

     51   

Schedule 1.13 CONCERT FOREIGN PATENTS

     58   

SCHEDULE 1.16 CONCERT USA PATENTS

     61   

SCHEDULE 1.20 [**]

     63   

SCHEDULE 1.24 [**]

     64   

SCHEDULE 1.32 [**]

     65   

EXHIBIT A: DEVELOPMENT PLAN FOR [**] PRODUCTS

     66   


MASTER DEVELOPMENT AND LICENSE AGREEMENT

This Master Development and License Agreement (“ Agreement ”) dated as of this 4th day of April, 2013 (“ Effective Date ”), is between Concert Pharmaceuticals, Inc., a Delaware corporation having offices located at 99 Hayden Avenue, Suite 500, Lexington, Massachusetts 02421, USA (“ Concert ”), Celgene International Sàrl, a Swiss corporation located at Route de Perreux 1, 2017 Boudry, Switzerland (“ CIS ”), and Celgene Corporation, a Delaware corporation located at 86 Morris Avenue, Summit, New Jersey 07901, USA (“ Celgene USA ”). Each of Concert, CIS, and Celgene USA may be referred to hereinafter individually as a “ Party ” and together as the “ Parties .”

RECITALS

A. Concert is a pharmaceutical company with expertise in the research and development of Deuterated Products.

B. CIS and Celgene USA are pharmaceutical companies having the capability to pre-clinically research, develop, conduct clinical trials using, obtain regulatory approval for, manufacture, distribute, market and sell such products.

AGREEMENT

The Parties agree as follows:

ARTICLE 1

DEFINITIONS

The following capitalized terms, when used in this Agreement, shall have the meanings ascribed to them or referenced in this ARTICLE 1:

1.1 Accounting Standards ” means (i) GAAP (United States Generally Accepted Accounting Principles); or (ii) IFRS (International Financial Reporting Standards), in either case, consistently applied.

1.2 Affiliate ” means, with respect to a first Person, any other Person that directly or indirectly Controls, is Controlled by, or is under common Control with, such first Person.

1.3 Agreement ” has the meaning set forth in the preamble to this Agreement.

1.4 Blocking Third Party Patent Rights ” means, on a country-by-country basis, patent rights owned or controlled by a Third Party that, in the absence of ownership of such patent rights or a license thereunder, could reasonably be or is determined to be infringed by (i) the use, offer for sale, sale or importation of any Licensed Product or (ii) the manufacture of any drug substance within a Licensed Product. Notwithstanding the foregoing, the [**] Patent Rights shall be deemed not to be Blocking Third Party Patent Rights.

1.5 Business Day ” means a day other than a Saturday, Sunday, or bank or other public holiday in the United States.

 

1


1.6 Celgene ” means either Celgene USA or CIS individually or both of them collectively, as the context dictates.

1.7 Celgene USA ” has the meaning set forth in the preamble to this Agreement.

1.8 Change of Control ” means, with respect to a first Person, a single transaction or series of related transactions pursuant to which another Person or group of Persons who did not Control such first Person immediately before the transaction(s) do Control such first Person immediately after the transaction(s). A Change of Control will be presumed to occur to a first Person upon the occurrence of any of the following: (i) any other Person becomes the beneficial owner, directly or indirectly, of more than fifty percent (50%) of the voting securities of the first Person; (ii) the sale or other disposition of all or substantially all of the assets of the Person; (iii) a consolidation or merger of the first Person with any other Person, other than a merger or consolidation which would result in the voting securities of the first Person outstanding immediately prior thereto continuing to represent at least fifty percent (50%) of the total voting power represented by the voting securities of the Person outstanding immediately after such merger or consolidation.

1.9 CIS ” has the meaning set forth in the preamble to this Agreement.

1.10 Clinical Trial ” means a human clinical study that is designed to (i) investigate whether a Licensed Product is reasonably safe for continued testing, (ii) investigate the safety, efficacy, or pharmacokinetics of the Licensed Product for its intended use, and define warnings, precautions and adverse reactions that may be associated with the Licensed Product in the dosage range to be prescribed, or (iii) support Regulatory Approval of such Licensed Product or label expansion of such Licensed Product, in each case conducted by or on behalf of Celgene, its Affiliates, their respective sublicensees or any of their respective successors or assigns.

1.11 Commercially Reasonable Efforts ” means, with respect to the performing Party, the allocation of a commercially reasonable level of personnel and financial resources towards the subject act to be attempted, taking into account scientific and commercial factors, including, if and as applicable, issues of safety and efficacy, difficulty in developing or manufacturing the subject products, cost of and ability to manufacture the subject products in commercial quantities, comparative metrics between Deuterated Product and its Non-Deuterated Equivalent, availability or competitiveness of alternative Third Party products, the patent or other proprietary position of a product, the existence of patents or proprietary rights of a Third Party related to a product, the Regulatory Approval requirements involved, the existence, degree or absence of Regulatory Exclusivity, the anticipated or approved product labeling, the potential profitability of a product, the pricing or reimbursement approvals expected to be achieved or required, and any other relevant factors typically considered for a developmental product.

1.12 Concert ” has the meaning set forth in the preamble to this Agreement.

1.13 Concert Foreign Patents ” means all patents and patent applications owned by or licensed (with a right to sublicense to CIS as provided herein) to Concert at any time during the Term and claiming the composition, use, administration, manufacture of or a method involving a Deuterated Product, including the patents and applications listed on Schedule 1.13 and any

 

2


continuations, divisional, reissues, re-examinations, extensions, or foreign counterparts thereof, and any patents issuing from the priority application from which any of the foregoing was issued, excluding the Concert USA Patents.

1.14 Concert Patents ” means all Concert USA Patents and Concert Foreign Patents.

1.15 Concert Technology ” means all inventions, discoveries, data, trade secrets, information, compositions, materials (including chemical and biological materials), methods, processes, results, know-how and other information, owned by or licensed (with a right to sublicense to Celgene USA as provided herein) to Concert at any time during the Term and relating to Deuterated Products, excluding Concert Patents.

1.16 Concert USA Patents ” means all United States patents and United States patent applications owned by or licensed (with a right to sublicense to Celgene USA as provided herein) to Concert at any time during the Term and claiming the composition, use, administration, manufacture of or a method involving a Deuterated Product, including the patents and applications listed on Schedule 1.16 and any continuations, divisional, reissues, reexaminations, or extensions thereof in the USA, and any patents issuing in the USA or from the priority application from which any of the foregoing was issued.

1.17 Competitive Infringement ” has the meaning set forth in Section 8.4.1 .

1.18 Confidential Information ” means any information regarding the business and operations of a Party or any of its Affiliates, that is or has been disclosed (whether orally or in writing) by such Party or its Affiliates (“ Discloser ”) to the other Party or its Affiliates (“ Recipient ”) to the extent that such information is not (i) as of the date of disclosure to the Recipient, known to the Recipient (other than pursuant to an obligation of confidentiality to the Discloser); or (ii) disclosed in published literature, or otherwise generally known to the public through no breach by the Recipient of this Agreement; or (iii) obtained by the Recipient from a Third Party free from any obligation of confidentiality to the Discloser; or (iv) independently developed by the Recipient without use of the information disclosed to the Recipient by the Discloser.

1.19 Control ” including, its correlative meanings, “Controls”, “Controlled by” and “under common Control with” means the possession, directly or indirectly, of the power to direct or cause direction of the management or policies of another Person (whether through ownership of securities or other ownership interests, by contract or otherwise). A first Person shall be deemed to Control another Person if such first Person actually owns or has beneficial ownership of at least fifty percent (50%) of the voting securities or other comparable equity interests of such other Person or of the maximum amount of the voting securities or other comparable equity interests of such other Person permitted in accordance with applicable law if such maximum is fifty percent (50%) or less (whether directly, indirectly or pursuant to any option, warrant or other similar arrangement).

1.20 “[**]” means the compounds described on Schedule 1.20 .

1.21 “[**] Milestone Event ” has the meaning set forth in Section 7.2.1 .

 

3


1.22 “[**] Milestone Event Payment ” has the meaning set forth in Section 7.2.1 .

1.23 “[**] Product ” means a product (i) containing [**] and (ii) either (A) the manufacture, use, offer for sale, sale or importation of which is covered by a Valid Claim of any Concert Patent, (B) is developed, made, used or administered using a process covered by a Valid Claim of any Concert Patent, or (C) is developed, made, used, sold or otherwise exploited using any of the Concert Technology anywhere in the world.

1.24 “[**]” means the compounds described on Schedule 1.24 .

1.25 “[**] Milestone Event ” has the meaning set forth in Section 7.2.2 .

1.26 “[**] Milestone Event Payment ” has the meaning set forth in Section 7.2.2 .

1.27 “[**] Product ” means a product (i) containing [**] and (ii) either (A) the manufacture, use, offer for sale, sale or importation of which is covered by a Valid Claim of any Concert Patent, (B) is developed, made, used or administered using a process covered by a Valid Claim of any Concert Patent, or (C) is developed, made, used, sold or otherwise exploited using any of the Concert Technology anywhere in the world.

1.28 “[**] Option ” has the meaning set forth in Section 11.1.5 .

1.29 “[**] Option Milestone Event ” has the meaning set forth in Section 7.2.4 .

1.30 “[**] Option Milestone Event Payment ” has the meaning set forth in Section 7.2.4 .

1.31 “[**] Option Product ” means a product (i) containing [**]Option and (ii) either (A) the manufacture, use, offer for sale, sale or importation of which is covered by a Valid Claim of any Concert Patent, (B) is developed, made, used or administered using a process covered by a Valid Claim of any Concert Patent, or (C) is developed, made, used, sold or otherwise exploited using any of the Concert Technology anywhere in the world.

1.32 “[**]” means the compounds described on Schedule 1.32 .

1.33 “[**] Milestone Event ” has the meaning set forth in Section 7.2.3 .

1.34 “[**] Milestone Event Payment ” has the meaning set forth in Section 7.2.3 .

1.35 “[**] Product ” means a product (i) containing [**] and (ii) either (A) the manufacture, use, offer for sale, sale or importation of which is covered by a Valid Claim of any Concert Patent, (B) is developed, made, used or administered using a process covered by a Valid Claim of any Concert Patent, or (C) is developed, made, used, sold or otherwise exploited using any of the Concert Technology anywhere in the world.

1.36 Deuterated Product ” means a product containing a compound, wherein for a given sample of the compound, the abundance of deuterium at one or more of the hydrogens of the compound is greater than the natural abundance of deuterium and wherein the compound is [**], or, once Celgene has exercised the License Option with respect thereto, [**]Option.

 

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Notwithstanding the foregoing, if the License Option with respect to [**] and/or [**] expires unexercised, or if Celgene’s licenses to [**] Products, [**] Products, [**] Products and/or [**]Option Products terminate in accordance with ARTICLE 12, then those categories of products as to which Celgene no longer holds option or license rights shall cease to be Deuterated Products.

1.37 “[**] Patent Rights ” means (i) U.S. Patent Application Ser. No. [**] or its progeny and any foreign counterparts thereof; (ii) U.S. Patent Application Ser. No. [**] or its progeny and any foreign counterparts thereof; and/or (iii) any other patent right that covers [**] or [**] or any [**] Product or [**] Product and that is owned by or licensed to Celgene or its Affiliates pursuant to any assignment or license from [**] or any of its Affiliates or its progeny.

1.38 Development Plan ” means, with respect to each Licensed Product, a plan that sets forth the responsibilities of, and activities to be conducted by, each Party with respect to pre-clinical and clinical development of the subject Licensed Products. As of the Effective Date, the Development Plan for [**] Products is attached hereto as Exhibit A .

1.39 Development Program ” means, with respect to each Development Plan, the pre-clinical and clinical development activities conducted by (or to be conducted by) each Party pursuant to the Development Plan.

1.40 Discloser ” has the meaning set forth in the definition of Confidential Information.

1.41 Effective Date ” has the meaning set forth in the preamble to this Agreement.

1.42 EMA ” means the European Medicines Agency or any successor agency thereto.

1.43 EU ” means the European Union.

1.44 Exclusivity Position ” means, with respect to a biologic or compound, on a country-by-country basis, that a Party or such Party’s Affiliate owns or is the exclusive licensee of a Valid Claim that, in the absence of ownership thereof or a license thereunder, could reasonably be or are determined to be infringed by (i) the use, offer for sale, sale or importation of such biologic or compound or (ii) the manufacture of any drug substance containing such biologic or compound.

1.45 Existing Confidentiality Agreement ” has the meaning set forth in Section 14.6 .

1.46 FDA ” means the United States Food and Drug Administration or any successor agency thereto.

1.47 FDCA ” means the U.S. Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder.

1.48 First Phase 1 Completion ” means, with respect to each of the [**] Products, [**] Products, [**] Option Products, or [**] Products, the completion of the first Phase 1 Clinical Trial for such category of Licensed Products as set forth in the corresponding Development Plan for such Licensed Products, as indicated by the completion of a Final Phase 1 Study Report, whether or not the clinical objectives of the Clinical Trial are achieved. If First Phase 1 Completion occurs

 

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for a category before the products in such category become Licensed Products (i.e., with respect to [**] Products, [**]Option Products or [**] Products, before Celgene has exercised the License Option with respect thereto, First Phase 1 Completion shall be deemed to occur concurrently with Celgene’s exercise of the License Option for such category.

1.49 Final Phase 1 Study Report ” shall mean, as to a category of Licensed Products, a report summarizing, in reasonable detail and in accordance with any additional requirements specified in the Development Plan, the final results of a first Phase 1 Clinical Trial, and all data and material information obtained by performance of such first Phase 1 Clinical Trial. Such Final Phase 1 Study Report must include:

1.49.1 Results from a SAD (Single Ascending Dose) and MAD (Multiple Ascending Dose) study with cross-over design comparing Celgene clinical material with the deuterated form of same;

1.49.2 Pharmacokinetic studies from ascending doses for both the SAD and MAD study;

1.49.3 A list of all adverse events;

1.49.4 A definition of MTD (maximum tolerated dose); and

1.49.5 A description and evaluation of human metabolites.

1.50 Governmental Authority ” means any court, agency, department, authority or other instrumentality of any international, multinational or supra-national, national, regional, province, state, county, city or other political subdivision, including a Regulatory Authority.

1.51 HSR Act ” means the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended.

1.52 HSR Clearance ” means either (i) early termination of the applicable waiting period under the HSR Act with respect to the HSR Filings or (ii) expiration of the applicable waiting period under the HSR Act with respect to the HSR Filings.

1.53 HSR Filings ” means filings by the Parties with the United States Federal Trade Commission (“ FTC ”) and the Antitrust Division of the United States Department of Justice of a Notification and Report Form for Certain Mergers and Acquisitions (as that terms is defined in the HSR Act) with respect to the matters set forth in this Agreement.

1.54 IND ” means an Investigational New Drug Application submitted under the FDCA or an analogous application or filing with any analogous Regulatory Authority outside of the United States under any analogous foreign Law for the purposes of obtaining permission to conduct Clinical Trials in such jurisdiction.

1.55 Indemnified Party ” has the meaning set forth in Section 13.2 .

1.56 Indemnifying Party ” has the meaning set forth in Section 13.2 .

 

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1.57 Inventions ” has the meaning set forth in Section 14.9 .

1.58 Joint Patent Committee ” or “ JPC ” has the meaning set forth in Section 3.2 .

1.59 Joint Steering Committee ” or “ JSC ” has the meaning set forth in Section 3.1 .

1.60 Launch ” means the first commercial sale of a Licensed Product by Celgene, their Affiliate or their sublicensee to a Third Party in a country after receipt by Celgene, their Affiliate or their sublicensee of the first Regulatory Approval for such Licensed Product in such country.

1.61 Laws ” means all laws, statutes, rules, regulations, orders, judgments or ordinances of any Governmental Authority, as such may be revised from time to time.

1.62 License Option ” has the meaning set forth in Section 11.1.1.

1.63 License Option Extension Period ” has the meaning set forth in Section 11.1.6 .

1.64 License Option Term ” has the meaning set forth in Section 11.1.2 .

1.65 Licensed Products ” means [**] Products and, upon the exercise of the License Option set forth in ARTICLE 11, [**] Products, [**] Products, and/or [**]Option Products for which such License Option has been exercised. A Licensed Product shall continue to be a Licensed Product following expiration of all Valid Claims of Concert Patents covering the manufacture, use, offer for sale, sale or importation of such Licensed Product. For the avoidance of doubt, notwithstanding the license grants in Section 6.2 , [**] Products, [**] Products, and/or [**]Option Products shall not be deemed Licensed Products until Celgene has exercised the applicable License Option with respect to such [**] Products, [**] Products, and/or [**]Option Products.

1.66 Losses ” means any and all costs, expenses, claims, losses, liabilities, damages, fines, royalties, governmental penalties or punitive damages, deficiencies, interest, settlement amounts, awards, and judgments, including any and all reasonable, out-of-pocket costs and expenses properly incurred as a result of a claim (including reasonable, out-of-pocket attorneys’ fees and all other expenses reasonably incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened), in each case, net of any tax benefit or insurance recovery received in connection with any of the foregoing.

1.67 Major Market EU Country ” means the United Kingdom, France, Germany, Spain or Italy.

1.68 MHLW ” means the Ministry of Health, Labour and Welfare of Japan and any successor thereto.

1.69 NDA ” means a New Drug Application submitted to the FDA under the FDCA or an analogous application or filing with any analogous Regulatory Authority outside of the United States (including any supra-national agency such as the European Union) under any analogous foreign Law for the purpose of obtaining approval to market and sell a pharmaceutical product in such jurisdiction.

 

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1.70 Net Sales ” means, with respect to any Licensed Product, gross amounts invoiced by Celgene, their Affiliates or their sublicensees (each a “ Selling Party ”) to Third Parties (that are not sublicensees) for the sale or other commercial disposition of such Licensed Product anywhere within the Territory, including sales to wholesale distributors, less the following deductions actually incurred, allowed, paid, accrued or specifically allocated with respect to such sales or other commercial dispositions

(a) discounts (including trade, quantity and cash discounts) actually allowed, cash and non-cash coupons, retroactive price reductions, and charge-back payments and rebates granted to any Third Party (including to governmental entities or agencies, purchasers, reimbursers, customers, distributors, wholesalers, and group purchasing and managed care organizations or entities (and other similar entities and institutions));

(b) credits or allowances, if any, on account of price adjustments, recalls, claims, damaged goods, rejections or returns of items previously sold (including Licensed Product returned in connection with recalls or withdrawals) and amounts written off by reason of uncollectible debt, provided that if the debt is thereafter paid, the corresponding amount shall be added to the Net Sales of the period during which it is paid;

(c) rebates (or their equivalent), administrative fees, chargebacks and retroactive price adjustments and any other similar allowances granted by a Selling Party (including to governmental authorities, purchasers, reimburses, customers, distributors, wholesalers, and managed care organizations and entities (and other similar entities and institutions)) which effectively reduce the selling price or gross sales of the Licensed Product;

(d) insurance, customs charges, freight, postage, shipping, handling, and other transportation costs incurred by a Selling Party in shipping Licensed Product to a Third Party; and

(e) import taxes, export taxes, excise taxes (including annual fees due under Section 9008 of the United States Patient Protection and Affordable Care Act of 2010 (Pub. L. No. 111-48) and other comparable Laws), sales taxes, value-added taxes, consumption taxes, duties or other taxes levied on, absorbed, determined and/or imposed with respect to such sales (excluding income or net profit taxes or franchise taxes of any kind).

Sales or other commercial dispositions of Licensed Products between Celgene and their Affiliates and their sublicensees, and Licensed Products provided to Third Parties without charge, in connection with research and development, clinical trials, compassionate use, humanitarian and charitable donations, or indigent programs or for use as samples shall be excluded from the computation of Net Sales, and no payments will be payable on such sales or such other commercial dispositions, except where such an Affiliate or sublicensee is an end user of the Licensed Product.

If a Licensed Product is sold or otherwise commercially disposed of for consideration other than cash or in a transaction that is not at arm’s length between the buyer and the seller, then the gross amount to be included in the calculation of Net Sales shall be the amount that would have been invoiced had the transaction been conducted at arm’s length and for cash. Such amount that would have been invoiced shall be determined, wherever possible, by reference to the average selling price of the relevant Licensed Product in arm’s length transactions in the relevant country.

 

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Notwithstanding the foregoing, in the event a Licensed Product is sold as a Combination Product, Net Sales shall be calculated by multiplying the Net Sales of the Combination Product by the fraction A/(A+B), where A is the gross invoice price of the Licensed Product if sold separately in a country and B is the gross invoice price of the other product(s) included in the Combination Product if sold separately in such country. If no such separate sales are made by Celgene, their Affiliates or sublicensees in a country, Net Sales of the Combination Product shall be calculated in a manner to be negotiated and agreed upon by the Parties, reasonably and in good faith, prior to any sale of such Combination Product, which shall be based upon the relative value of the active components of such Combination Product.

As used in this definition, “ Combination Product ” means any product that comprises a Licensed Product sold in conjunction with another active component that is not a Licensed Product so as to be a combination product (whether packaged together or in the same therapeutic formulation). Pharmaceutical dosage form vehicles, adjuvants and excipients shall be deemed not to be “active ingredients.”

1.71 Non-Deuterated Equivalent ” means, (a) with respect to a [**] Product or [**]Option Product, another product containing a compound or stereoisomer thereof (i) that is an isotopologue of the primary deuterated molecule in such [**] Product or [**]Option Product and (ii) wherein, for a given sample of the compound, the abundance of deuterium at all of the hydrogens of the compound is the same as or approximately the same as the natural abundance of deuterium, or (b) with respect to a [**] Product or [**] Product, another product containing a compound that, except for being racemic, (i) is an isotopologue of the primary deuterated molecule in such [**] Product or [**] Product and (ii) wherein, for a given sample of the compound, the abundance of deuterium at all of the hydrogens of the compound is the same as or approximately the same as the natural abundance of deuterium.

1.72 Party ” and “ Parties ” have the meanings set forth in the preamble to this Agreement.

1.73 Person ” means any natural person, any form of for-profit or non-profit business entity recognized by any Governmental Authority, including any corporation, partnership, limited liability company, association, or trust, or any Governmental Authority.

1.74 Phase 1 Clinical Trial ” means, with respect to a Licensed Product, any Clinical Trial conducted in the U.S. and designed to fulfil the requirements of 21 C.F.R. § 312.21(a) or any comparable Clinical Trial conducted outside the U.S. and including the studies specifically identified in the Development Plan.

1.75 Phase 2 Clinical Trial ” means, with respect to a Licensed Product, any Clinical Trial conducted in the U.S. and designed to fulfil the requirements of 21 C.F.R. § 312.21(b) or any comparable Clinical Trial conducted outside the U.S.

1.76 Phase 3 Clinical Trial ” means, with respect to a Licensed Product, any Clinical Trial conducted in the U.S. and designed to fulfil the requirements of 21 C.F.R. § 312.21(c) or any comparable Clinical Trial conducted outside the U.S.

1.77 Quarterly Report ” has the meaning set forth in Section 2.2.1 .

 

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1.78 Recipient ” has the meaning set forth in the definition of Confidential Information.

1.79 Regulatory Approval ” means, with respect to any jurisdiction, any and all approvals or authorizations of a Regulatory Authority that are legally necessary for the commercial manufacture, distribution, use, marketing or sale of a pharmaceutical in such jurisdiction, including, as applicable, any associated regulatory or data exclusivity associated with such approvals or authorizations.

1.80 Regulatory Authority ” means, with respect to any jurisdiction, the Governmental Authority having responsibility for granting Regulatory Approvals in such country or jurisdiction, including the FDA in the U.S., the EMA in the European Union and the MHLW in Japan.

1.81 Regulatory Exclusivity ” means any period of regulatory data protection or market exclusivity or similar regulatory protection afforded by the Regulatory Authorities in a country, including any such periods listed in the FDA’s Orange Book or periods under national implementations of Article 10(1)(a)(iii) of Directive 2001/EC/83, and all international equivalents, and any exclusivity afforded by restrictions on the granting by a Regulatory Authority of Regulatory Approval to market a generic product.

1.82 Representatives ” means with respect to a Party, such Party’s Affiliates, and each of their respective officers, directors, managers, employees, consultants, contractors, subcontractors, sublicensees and agents.

1.83 Royalty Term ” has the meaning set forth in Section 7.3.1 .

1.84 Tax ” or “ Taxes ” has the meaning set forth in Section 7.9.1 .

1.85 Term ” has the meaning set forth in Section 12.1 .

1.86 Territory ” means worldwide.

1.87 Third Party ” means any person or entity other than Celgene or Concert or their respective Affiliates.

1.88 Third Party Claim ” has the meaning set forth in Section 13.2 .

1.89 Valid Claim ” means either (i) an issued, unexpired patent claim of a patent that has not been permanently declared invalid or unenforceable by a Governmental Authority of competent jurisdiction or (ii) a pending claim within a patent application that has not been pending more than [**] years from the date of filing of the first patent application to which such pending claim claims priority and that has not been irrevocably determined to be unpatentable by a Governmental Authority of competent jurisdiction.

ARTICLE 2

PREFERRED PARTNER RIGHTS

2.1 Information Package . Subject to Section 2.4, during the License Option Term, but, for the avoidance of doubt, ending once Celgene has exercised all of its License Options if

 

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such exercises occur prior to the end of the License Option Term, prior to meetings of Concert’s Board of Directors, Concert shall provide Celgene with copies of all materials that prior to such meetings Concert provides to non-director board-observers; provided, however, that Concert, at its sole discretion, can exclude access to such information if it determines that it is advisable for reasons of confidentiality or potential conflicts of interest or to preserve the attorney-client privilege or for similar reasons.

2.2 Financial Reports . Subject to Section 2.4 , during the License Option Term, but, for the avoidance of doubt, ending once Celgene has exercised all of its License Options if such exercises occur prior to the end of the License Option Term, Concert agrees to furnish Celgene with the following:

2.2.1 Within [**] days after the end of each fiscal quarter ending March 31, June 30 and September 30, an unaudited consolidated financial report of Concert (a “ Quarterly Report ”), which report shall be prepared in accordance with GAAP (except that it may (x) be subject to normal year-end audit adjustments and (y) not contain all notes thereto which may be required in accordance with GAAP) and be certified by any of the Chief Executive Officer, the Chief Financial Officer or the Chief Operating Officer of Concert to have been so prepared, the certification being for the sole purpose of certifying that the report was prepared in accordance with this Section 2.2.1 . The Quarterly Report shall include the following:

(i) an incomes statement for such quarter, together with a cumulative income statement from the first day of the then-current fiscal year to the last day of such quarter;

(ii) a balance sheet as of the last day of such quarter; and

(iii) a statement of cash flows for such quarter.

2.2.2 Within [**] days after the end of each fiscal year of Concert, preliminary financial statements of Concert, and within [**] days after the end of each fiscal year of Concert, audited financial statements of Concert, which preliminary and audited financial statements shall (i) include an income statement for such fiscal year, a balance sheet as of the last day thereof, and statements of stockholders’ equity and cash flows for such fiscal year, and (ii) each be prepared in accordance with GAAP. The audited financial statements shall be certified by independent certified public accountants of recognized international standing reasonably satisfactory to the Investors and shall be accompanied by such accountants’ annual management letter, if any.

2.2.3 If for any period Concert shall have any subsidiary whose accounts are consolidated with those of Concert, then in respect of such period the financial statements delivered pursuant to the foregoing Section 2.2.1 and Section 2.2.2 shall be the consolidated and consolidating financial statements of Concert and all such consolidated subsidiaries.

2.3 Notice of Litigation and Defaults . Subject to Section 2.4, during the License Option Term, but, for the avoidance of doubt, ending once Celgene has exercised all of its License Options if such exercises occur prior to the end of the License Option Term, promptly after the occurrence thereof, Concert shall (i) notify Celgene of the initiation of any action, suit, proceeding, or governmental inquiry against Concert involving a claim for more than $[**] or for injunctive relief; and (ii) notify Celgene of any default by Concert under any agreement for borrowed money

 

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in excess of $[**] or any other material agreement of any kind. In each case, such notice shall be delivered together with a reasonably detailed description of the action taken or proposed to be taken by Concert with respect thereto.

2.4 Restrictions on Access to Information . The rights granted under Sections 2.1 through 2.3 will be subject to the following restrictions:

2.4.1 Concert may provide access to information and materials as provided in Sections 2.1 through 2.3 which have been redacted to remove information on Concert development programs that are the subject of collaboration or license agreements or information regarding ongoing business development activities between Concert and Third Parties, and may refuse to provide information about such programs.

2.4.2 Concert will have no obligation to provide any information pursuant to Sections 2.1 through 2.3 during any period when no Licensed Product is undergoing any clinical and pre-clinical development activities.

2.4.3 Concert will have no obligation to provide any information pursuant to Section 2.2 or 2.3 during any period in which Concert is a publicly traded company.

2.4.4 Concert will have no obligation to provide any information pursuant to Sections 2.1 through 2.3 following a Change of Control of Concert, if following such Change of Control no shareholder of Concert prior to such Change of Control (other than the Person acquiring Control of Concert) retains, following such Change of Control, the right to designate a director of Concert or board observer rights by virtue of its continued shareholdings in Concert following such Change of Control.

2.4.5 All information provided to Celgene by Concert pursuant to Sections 2.1 through 2.3 shall be treated as Confidential Information of Concert. Celgene hereby acknowledges that it is aware (and that prior to their receipt of any Confidential Information its Representatives will be advised) of the United States and other applicable securities laws regarding the use of material, non-public information, including restrictions on trading.

ARTICLE 3

JOINT COMMITTEES AND REPORTING

3.1 Joint Steering Committees .

3.1.1 The Parties will establish a separate committee (the “ Joint Steering Committee ” or the “ JSC ”) to review each Development Program and oversee progress of the activities conducted thereunder and facilitate the sharing of information among the Parties with respect to such activities.

3.1.2 Each JSC shall be comprised of [**] of Celgene USA, [**] of CIS, and [**] of Concert. Each Party shall make its designation of its Representatives for the [**] Products Development Program within [**] Business Days following the Effective Date and for the [**] Products, [**] Products and [**]Option Products Development Programs, promptly after the exercise of the applicable License Option with respect thereto. Each Party may substitute one or

 

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more of its Representatives, in its sole discretion, effective upon notice to the other Parties of such change. A Representative of a Party serving as a member of one JSC may serve on any or all of the other JSCs. Prior to First Phase 1 Completion, [**] Representative shall be the chairperson of each JSC. Following First Phase 1 Completion, [**] Representative shall be the chairperson of each JSC.

3.1.3 Each JSC shall meet within [**] days after the Effective Date, or at such further time as agreed by the mutual consent of the Parties, and, thereafter, [**]; provided that following the completion of the first Phase 1 Clinical Trial of a Licensed Product, Celgene may, upon written notice to Concert, reduce the number of such required meetings of the JSC with oversight of such Licensed Product to [**]. The chairperson of the JSC shall be responsible for calling meetings of the JSC and for leading the meetings. Each Party may have in attendance one or more other non-voting employees or other Representatives from time to time, by written consent of the Parties, with such consent not to be unreasonably withheld or delayed, subject to any such Representative’s written agreement to comply with requirements of confidentiality and non-use at least as stringent as those set forth in ARTICLE 9. The location of meetings of the JSC shall alternate between Celgene USA’s principal place of business and Concert’s principal place of business, or as otherwise agreed by the Parties. The JSC may also meet by means of a telephone conference call or videoconference. The chairperson may convene a special meeting of the JSC for the purpose of resolving disputes of the JSC.

3.1.4 The Parties shall each bear their own costs and expenses related to their participation in the JSCs.

3.1.5 A JSC has the authority to amend or replace its corresponding Development Plan from time to time, provided that any such amended or replacement Development Plan shall be consistent with Celgene’s obligations under Section 5.1 , but shall have no authority to amend this Agreement. If the JSC’s amendments to the Development Plan result in additional expenses, the JSC shall discuss in good faith which Party shall be responsible for such additional expenses, subject to Section 3.3.2(ii) .

3.1.6 Each JSC shall be disbanded and its activities hereunder terminated within [**] days after completion of its corresponding Development Program, unless otherwise mutually agreed by the Parties.

3.2 Joint Patent Committee .

3.2.1 The Parties will establish a committee (the “ Joint Patent Committee ” or the “ JPC ”) to (i) discuss all patent matters relating to the Concert Patents that cover Licensed Products; (ii) ensure each Party has a reasonable opportunity to review, comment and cooperate in the preparation, prosecution, maintenance, and enforcement of the Concert Patents that cover Licensed Products; and (iii) discuss updates provided to the JPC by Concert during the License Option Term with respect to the status of Concert Patents that cover [**] Products and [**] Products.

3.2.2 The JPC shall be comprised of [**] of Celgene USA, [**] of CIS, and [**] of Concert. Each Party shall make its designation of its Representatives within [**] Business Days

 

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following the Effective Date, and each Party may substitute one or more of its Representatives, in its sole discretion, effective upon notice to the other Party of such change. [**] Representative shall be the chairperson of the JPC.

3.2.3 The chairperson of the JPC shall call meetings of the JPC as needed and upon the request of either Party. The location of meetings of the JPC shall alternate between Celgene USA’s principal place of business and Concert’s principal place of business, or as otherwise agreed by the Parties. The JPC may also meet by means of a telephone conference call or videoconference by mutual agreement of the Parties.

3.2.4 The Parties shall each bear their own costs and expenses related to their participation in the JPC.

3.3 Committee Decisions .

3.3.1 The intent of the Parties is for each JSC and the JPC to use reasonable efforts to achieve, and then act, by consensus of the members of the JSC or JPC, as applicable, on all issues properly before the committee for decision. In voting on all matters properly before the JSC or JPC, Celgene shall collectively have one vote, to be cast by the Celgene USA member, and Concert shall have one vote. Each Party acknowledges that the members of a Committee represent the Party that has appointed them and agrees that the other Party’s members may act and vote in a manner that the Committee member deems is in the best interest of the Party that it represents.

3.3.2 If a JSC or the JPC is unable to reach consensus on an issue properly before it, then any Party may escalate the dispute for potential resolution by agreement of a designee of Celgene USA (who may act on behalf of CIS) and the Chief Executive Officer or Chief Operating Officer of Concert on behalf of Concert. Celgene USA will identify its designee no later than the first meeting of a JSC or the JPC. If such individuals are not able to reach consensus on such issue within [**] days after referral to them, then any Party may escalate the dispute for potential resolution by agreement of the President of Celgene USA (who may act on behalf of CIS) and the CEO of Concert. If such individuals are not able to reach consensus on such issue within [**] days after referral to them, then:

(i) Any Party may refer such dispute among the JPC to a third party patent expert mutually agreeable to the Parties and bound by requirements of confidentiality and non-use at least as stringent as those set forth in ARTICLE 9.

(ii) Any such dispute among a JSC will be decided by the chairperson of the JSC; provided however , that (A) no such decision may require any Party whose Representative is not the chairperson of the JSC to provide resources beyond those such Party is required to provide pursuant to this Agreement, as it exists on the Effective Date or as subsequently amended by mutual written agreement of the Parties after the Effective Date, and (B) no such decision may be inconsistent with the express terms of ARTICLE 1 through ARTICLE 14 of this Agreement, be used to unilaterally amend this Agreement (except for the Development Plan in accordance with the foregoing process), or resolve any dispute among the Parties as to their respective rights and obligations under this Agreement (except for disputes among the members of the JSC on issues properly before the committee for decision as provided in this Section 3.3.2(ii)) .

 

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3.4 Discontinuation of Participation on a Committee . Unless earlier disbanded pursuant to Section 3.1.6 with respect to a JSC, each of the JSCs and the JPC shall continue to exist until the first to occur of (i) the Parties mutually agreeing to disband such committee, or (ii) a Party providing the other Parties written notice of its intention to disband and no longer participate in such committee; provided that (A) [**] may only exercise such right to disband a committee following the completion of the first Phase 1 Clinical Trial of a Licensed Product; (B) [**] may only exercise such right to disband a committee following the completion of the first Phase III Clinical Trial of a Licensed Product; and (C) if all JSCs have not been disbanded, the JPC shall continue to exist for the purpose of discussing patent matters relating to the Concert Patents that cover Licensed Products for which a JSC continues to exist. After a committee is disbanded under clause (i) or (ii) of this Section 3.4 , any decisions previously within the purview of such committee shall be decisions between the Parties and must be mutually agreed; provided that after First Phase 1 Completion any disputes between the Parties regarding a matter previously within the purview of such committee shall be decided by [**], but shall be subject to the limitations set forth in clauses (A) and (B) of Section 3.3.2(ii) . In addition, after a JSC is disbanded under this Section 3.4 and before the first commercial sale of a Licensed Product that was subject to such JSC’s oversight, no more than [**], Concert may request, and Celgene shall use Commercially Reasonable Efforts to provide Concert within [**] days after such request, a reasonably detailed written update with respect to Celgene’s activities related to the applicable Licensed Product. Concert shall have the opportunity to reasonably seek further explanation or clarification of matters covered in such updates and to provide observations and suggestions to Celgene regarding the subject matter thereof, and Celgene shall use Commercially Reasonable Efforts to provide such explanation or clarification and shall consider such observations and suggestions in good faith.

ARTICLE 4

DEVELOPMENT PROGRAMS

4.1 Disclosure of Technology .

Within [**] days after the Effective Date, Concert will use Commercially Reasonable Efforts to disclose to Celgene or their designated Affiliate all Concert Technology controlled by Concert as of the Effective Date that may be reasonably necessary or useful to Celgene to develop, manufacture, seek or obtain Regulatory Approval for, or commercialize Licensed Products, [**] Products, and [**] Products and efficiently exploit the rights and licenses granted to Celgene under this Agreement with respect to Licensed Products, [**] Products, and [**] Products. In addition, from time-to-time throughout the Term, and at any time during the Term at the reasonable request of Celgene, Concert will use Commercially Reasonable Efforts to disclose to Celgene or their designated Affiliate all Concert Technology required to be disclosed to Celgene pursuant to Section 6.2.4 ; provided that in no event shall Concert be required to disclose Concert Technology with respect to [**] Products and [**] Products more than [**] and following the expiration of the License Option Term Concert shall only be obligated to disclose Concert Technology with respect to Licensed Products. Without limiting the foregoing, Concert will, to the extent in the possession of Concert’s internal and external U.S. patent attorney(s) or agent(s) that have been involved in prosecution of the Concert Patents and Concert employees that have been involved in the prosecution of the Concert Patents, use Commercially Reasonable Efforts to, at the reasonable request of Celgene, disclose to Celgene for each of the Concert Patents which cover Licensed Products, [**] Products, and [**] Products: invention disclosures, prior art search results and

 

15


related memoranda and patentability opinions or evaluations, validity and enforceability searches and opinions or evaluations, freedom to operate searches and opinions or evaluations, and correspondence with and interview notes or other notes regarding communications with any of the inventor(s), in each case where such information relates to Licensed Products, [**] Products, and [**] Products; provided that following the expiration of the License Option Term Concert shall only be obligated to disclose such information and materials with respect to Licensed Products. To the extent not provided before the Effective Date, Concert will use Commercially Reasonable Efforts to provide the foregoing that exists on the Effective Date within [**] days after the Effective Date. With respect to any such new information created after the Effective Date, where such information relates to Licensed Products, Concert shall use Commercially Reasonable Efforts to provide it within [**] days after request by Celgene therefor no more than [**]. Should the Licensed Products increase during the Term by Celgene’s exercise of a License Option pursuant to Section 11.1 , Concert shall use Commercially Reasonable Efforts to disclose to Celgene or their designated Affiliate all Concert Technology controlled by Concert as of the date of exercise of the License Option that may be reasonably necessary or useful to Celgene to develop, manufacture, seek or obtain Regulatory Approval for, or commercialize the added Licensed Products, and efficiently exploit the rights and licenses granted to Celgene under this Agreement with respect to such added Licensed Product, within [**] days after the date of exercise of the License Option. Prior to the exercise by Celgene of a Licensed Option with respect to [**] Products, [**] Products or [**]Option Products, during the License Option Term and no more than [**], Celgene may request, and Concert shall use Commercially Reasonable Efforts to provide within [**] days after such request, a reasonably detailed written update with respect to Concert’s activities related to such [**] Products, [**] Products or [**]Option Products; provided that Concert shall only be required to provide updates with respect to [**]Option Products that Concert knows, without any duty of inquiry, contain molecules eligible for selection as [**]Option pursuant to Section 11.1.5(i) .

4.2 Purpose, Conduct, and Costs of Development Programs .

4.2.1 The goal as of the Effective Date is to: (i) complete pre-clinical research of [**] Products; (ii) evaluate the potential to advance one or more [**] Product(s) through clinical research; and (iii) conduct at least one Phase 1 Clinical Trial for a [**] Product.

4.2.2 As among the Parties, Concert shall be responsible for pre-clinical and clinical development activities through and including First Phase 1 Completion for [**] Products and all costs and expenses associated therewith. After First Phase 1 Completion with respect to each [**] Product, as among the Parties, except as otherwise specified in clause (ii) below or in Section 4.2.4, (i) Celgene shall be responsible for all activities conducted with respect to such [**] Product and all costs and expenses associated therewith; and (ii) Concert shall be responsible for such any additional Phase 1 Clinical Trials for [**] Products the Parties mutually agree that Concert will conduct, and costs and expenses associated therewith to the extent the Parties may mutually agree, as set forth in the Development Plan for [**] Products.

4.2.3 As among the Parties, Concert shall be responsible for pre-clinical and clinical development activities for [**] Products, [**] Products, and [**]Option Products, and all costs and expenses associated therewith, until the later of First Phase 1 Completion and exercise of the License Option set forth in ARTICLE 11 for such [**] Products, [**] Products, and/or

 

16


[**]Option Products, as appropriate, but shall have no obligation to conduct any such pre-clinical and clinical development activities for any such category of products unless and until Celgene exercises the License Option as to such category of products and such activities are set forth in a Development Plan as set forth in Section 4.2.4 . After the later of First Phase 1 Completion and exercise of the License Option set forth in ARTICLE 11 for such [**] Products, [**] Products, and/or [**]Option Products, as appropriate, as among the Parties, except as specified in Section 4.3 , Celgene shall be responsible for all activities conducted with respect to such [**] Products, [**] Products, and/or [**]Option Products, as appropriate, and all costs and expenses associated therewith.

4.2.4 Promptly following the exercise by Celgene of the License Option set forth in ARTICLE 11 for [**] Products, [**] Products, and/or [**]Option Products, as appropriate, the Parties shall mutually agree to a Development Plan for the applicable Licensed Products which covers the Parties’ activities through First Phase 1 Completion for such Licensed Products; provided , however , that such Development Plan must, unless otherwise agreed to by the Parties, provide that Concert shall be responsible for pre-clinical and clinical development activities through and including First Phase 1 Completion for the applicable Licensed Products and all costs and expenses associated therewith.

4.3 Pre-Clinical, Clinical and Commercial Supply of Licensed Products .

4.3.1 Concert shall be solely responsible for manufacturing, or having manufactured by its designees, all pre-clinical and clinical supply of any [**] Products necessary to conduct their respective Development Programs until First Phase 1 Completion, and if a second Phase 1 Clinical Trial is conducted for a [**] Product, then until completion and delivery of the final study report for such second Phase 1 Clinical Trial. Concert shall be solely responsible for all costs and expenses associated with the foregoing.

4.3.2 Except as provided in Section 4.3.1 , Celgene shall be solely responsible for manufacturing, or having manufactured by its designees, all clinical supply of any Licensed Products, but Concert shall use Commercially Reasonable Efforts to assist Celgene or their designated Affiliate in manufacturing or having manufactured Licensed Products.

4.4 Regulatory Affairs .

4.4.1 As among the Parties, Celgene shall have the sole right to apply for and secure Regulatory Approvals for the Licensed Products that may be available under the Law of any country, including any data or market exclusivity periods, and shall be responsible for preparing, seeking, submitting and maintaining all INDs, NDAs and other regulatory filings and Regulatory Approvals for each Licensed Product, including preparing all reports necessary as part of a regulatory filing or Regulatory Approval and for all communications with Regulatory Authorities, in each case in the name of Celgene or their Affiliate or sublicensee. Concert shall in good faith cooperate with Celgene and such Affiliates and sublicensee(s) and take reasonable actions, at Celgene’s expense, to assist Celgene and such Affiliates and sublicensee(s) in obtaining such Regulatory Approvals in each country, including providing data within the Concert Technology in the form as may be requested by Celgene from time to time for disclosure to Regulatory Authorities.

 

17


4.4.2 Each Party shall immediately notify the other Party upon receiving information concerning any serious adverse event involving a Licensed Product and shall provide to such other Party, unless prohibited by applicable Law or contract with a Third Party, a copy of: (i) all relevant adverse event reports which it submits to any Regulatory Authority in respect of the Licensed Product, and (ii) any other information relating to such adverse event as the other Party may reasonably request to comply with its pharmacovigilance obligations with respect to Licensed Products.

4.4.3 The Parties shall, as appropriate, execute and file with the applicable Regulatory Authority a transfer of research obligations or similar document in connection with any Clinical Trial of a Licensed Product that is conducted by Concert in accordance with Section 4.2 , including as appropriate to enable contract research organizations to perform activities for which they are engaged for any such Clinical Trial.

4.5 Publication of Clinical Trial Results .

Notwithstanding anything to the contrary in ARTICLE 9, Celgene may publish any data, including any data within the Concert Technology, resulting from Clinical Trials conducted hereunder on a Licensed Product (including data generated by Concert under a Development Program) in Celgene’s discretion; provided that Celgene shall provide Concert a copy of any such publication, which may be in draft form, prior to such publication for Concert’s advance review thereof.

4.6 Development Recordkeeping and Access .

Concert will prepare and maintain, and shall require all approved subcontractors to keep, accurate records and books relating to the progress and status of its activities under each Development Plan and otherwise in relation to the development of Licensed Products. From time-to-time throughout the Term (but not more than [**]), upon reasonable advance notice by Celgene, Concert will disclose to or permit direct access to, during regular business hours, Celgene, Celgene’s designated Affiliate or Celgene’s designated Third Party to all records, books and data of Concert, its Affiliates and, to the extent Concert has the ability to so disclose or permit direct access, their subcontractors related to the foregoing.

4.7 Compliance with Laws .

Each Party shall, and shall cause its Affiliates and its and their respective Representatives and subcontractors to, use Commercially Reasonable Efforts to comply strictly with all applicable Laws in connection with the Development Program, including, as applicable, the FDCA and associated rules and regulations, including current Good Clinical Practices, current Good Laboratory Practices, and current Good Manufacturing Practices, the United States Health Insurance Portability and Accountability Act of 1996 and its applicable rules and regulations, the U.S. Occupational Safety and Health Act and its applicable rules and regulations, the Foreign Corrupt Practices Act, anti-bribery laws, and foreign equivalents thereto.

 

18


ARTICLE 5

CERTAIN COVENANTS

5.1 Diligence Obligation of Celgene

5.1.1 Following First Phase 1 Completion with respect to the [**] Products, Celgene shall use Commercially Reasonable Efforts to attempt to develop, achieve Regulatory Approval for, and commercialize such Licensed Products, until such time when relevant comparative metrics taken as a whole between such Licensed Products and their Non-Deuterated Equivalents have established, in Celgene’s reasonable discretion, that such Licensed Products are not substantial improvements over their Non-Deuterated Equivalents. If Celgene determines that such Licensed Product is not a substantial improvement over their Non-Deuterated Equivalents, Celgene will provide written notice of this determination to Concert.

5.1.2 Upon and after the exercise of a License Option, and following First Phase 1 Completion with respect to the Licensed Product(s) that are the subject of the License Option, Celgene shall use Commercially Reasonable Efforts to attempt to develop, achieve Regulatory Approval for, and commercialize the Licensed Product(s) that are the subject of the License Option, until such time when relevant comparative metrics taken as a whole between such Licensed Products and their Non-Deuterated Equivalents have established, in Celgene’s reasonable discretion, that such Licensed Products are not substantial improvements over their Non-Deuterated Equivalents. If Celgene determines that such Licensed Products are not a substantial improvement over their Non-Deuterated Equivalents, Celgene will provide written notice of this determination to Concert.

5.2 Exclusivity .

5.2.1 Concert shall not, and Concert shall cause its Affiliates not to, research, develop or commercialize any Licensed Product other than as permitted in connection with this Agreement.

5.2.2 Concert shall not, and Concert shall cause its Affiliates not to, grant or offer to grant a license under any Concert Patents or Concert Technology, or work independently or with or for the benefit of itself or any Third Party, with respect to the research, development or commercialization of any Licensed Product, other than as expressly contemplated by this Agreement.

5.2.3 From the Effective Date until [**] years after the Effective Date Concert shall not, and Concert shall cause its Affiliates not to, (i) commercialize any [**] Product or (ii) grant or offer to grant a license under any Concert Patents or Concert Technology, or work independently or with or for the benefit of itself or any Third Party, with respect to the commercialization of any product containing [**].

5.2.4 From the Effective Date until [**] years after the Effective Date Concert shall not, and Concert shall cause its Affiliates not to, (i) commercialize any [**] Product or (ii) grant or offer to grant a license under any Concert Patents or Concert Technology, or work independently or with or for the benefit of itself or any Third Party, with respect to the commercialization of any product containing [**].

 

19


5.2.5 From the Effective Date until [**] years after the Effective Date Concert shall not, and Concert shall cause its Affiliates not to, without the advance written consent of Celgene either (i) commercialize any product that is eligible for selection as a [**]Option Product or (ii) grant or offer to grant a license under any Concert Patents or Concert Technology, or work independently or with or for the benefit of itself or any Third Party, with respect to the commercialization of any product that is eligible for selection as a [**]Option Product, in each case of (i) and (ii) limited to those products that Concert knows, without any duty of inquiry, contain molecules eligible for selection as [**]Option pursuant to Section 11.1.5(i) .

ARTICLE 6

INTELLECTUAL PROPERTY OWNERSHIP AND LICENSES

6.1 Ownership Of New Technology and Patents .

6.1.1 Inventorship of all inventions and discoveries conceived, reduced to practice, discovered or made pursuant to this Agreement, whether or not patentable, shall be determined in accordance with U.S. patent laws.

6.1.2 As among the Parties, ownership of all inventions and discoveries conceived, reduced to practice, discovered or made or created during the Term of this Agreement shall be determined consistent with inventorship, as determined pursuant to Section 6.1.1 .

6.1.3 Each Party shall (i) execute all further instruments to document, record or perfect the Party’s respective ownership consistent with this ARTICLE 6 as reasonably requested by the other Parties, and shall cause its respective Representatives to do the same, and (ii) make its Representatives available to the other Parties and their Representatives as reasonably requested in connection with the owner’s protection thereof, including seeking patents.

6.2 Concert Grants .

6.2.1 As of the Effective Date, subject to the terms and conditions of this Agreement, Concert grants to Celgene USA (i) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert USA Patents, to develop, make, use, offer for sale, sell and import Licensed Products worldwide; (ii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert USA Patents, to develop, make, use, offer for sale, sell and import [**] Products worldwide; and (iii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert USA Patents, to develop, make, use, offer for sale, sell and import [**] Products worldwide; provided that Celgene USA shall not (a) sublicense the rights granted under clauses (ii) and (iii) or otherwise exercise the rights granted under clauses (ii) and (iii) prior to the exercise of the License Option with respect to [**] Products or [**] Products, as applicable.

6.2.2 As of the Effective Date, subject to the terms and conditions of this Agreement, Concert grants to CIS (i) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert Foreign Patents, to make, use, offer for sale, sell and import Licensed Products worldwide; (ii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert

 

20


Foreign Patents, to develop, make, use, offer for sale, sell and import [**] Products worldwide; and (iii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under the Concert Foreign Patents, to develop, make, use, offer for sale, sell and import [**] Products worldwide; provided that CIS shall not (a) sublicense the rights granted under clauses (ii) and (iii) or otherwise exercise the rights granted under clauses (ii) and (iii) prior to the exercise of the License Option with respect to [**] Products or [**] Products, as applicable.

6.2.3 As of the Effective Date, subject to the terms and conditions of this Agreement, Concert grants to Celgene USA and CIS (i) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under Concert’s rights in the Concert Technology, to develop, make, use, offer for sale, sell and import Licensed Products worldwide; (ii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under Concert’s rights in the Concert Technology, to develop, make, use, offer for sale, sell and import [**] Products worldwide; and (iii) an exclusive (including exclusive of Concert), royalty-bearing license, including the right to sublicense, under Concert’s rights in the Concert Technology, to develop, make, use, offer for sale, sell and import [**] Products worldwide; provided that Celgene USA and CIS shall not (a) sublicense the rights granted under clauses (ii) and (iii) or otherwise exercise the rights granted under clauses (ii) and (iii) prior to the exercise of the License Option with respect to [**] Products or [**] Products, as applicable.

6.2.4 If Concert first obtains a license after the Effective Date from any Third Party for any patents or technology that is/are reasonably necessary for the exploitation of Licensed Products and that include(s) the right to sublicense consistent with Section 6.2.1 , 6.2.2 , or 6.2.3, then Concert shall notify Celgene accordingly, including any royalties and other amounts that would be payable to the Third Party associated with the sublicensing thereof to Celgene hereunder, Celgene may elect, by written notice to Concert within [**] days following Concert’s notification to Celgene of such license, to obtain a sublicense thereunder. If Celgene so elects, the subject patents or technology shall be deemed Concert USA Patents, Concert Foreign Patents or Concert Technology, as applicable, and, subject to Section 7.5.1 , thereafter Celgene shall be responsible for all associated royalties and other amounts due to the Third Party for Celgene’s exercise of the sublicensed rights. Notwithstanding anything to the contrary herein, unless Celgene elects to include such patents or technology licensed by Concert from Third Parties after the Effective Date in the Concert USA Patents, Concert Foreign Patents or Concert Technology, as applicable, as set forth in this Section 6.2.4 , such patents and technology shall be excluded from the Concert USA Patents, Concert Foreign Patents and Concert Technology and shall not be sublicensed to Celgene hereunder.

6.3 Celgene Grants .

6.3.1 As of the Effective Date, subject to the terms and conditions of this Agreement, Celgene USA grants to Concert a non-exclusive, royalty-free, license, under all patents and patent applications owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Patents) to Celgene USA, to develop, make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program or Section 4.2.4 .

 

21


6.3.2 As of the Effective Date, subject to the terms and conditions of this Agreement, CIS grants to Concert a non-exclusive, royalty-free license, under all patents and patent applications owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Patents) to CIS, to develop, make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program or Section 4.2.4 .

6.3.3 As of the Effective Date, subject to the terms and conditions of this Agreement, Celgene USA grants to Concert a non-exclusive, royalty-free, license, under all technology owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Technology) to Celgene USA, to develop, make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program or Section 4.2.4 .

6.3.4 As of the Effective Date, subject to the terms and conditions of this Agreement, CIS grants to Concert a non-exclusive, royalty-free, license, under all technology owned by or licensed (with a right to sublicense to Concert as provided herein, including the Concert Technology) to CIS, to develop, make, use, and import Licensed Products solely to the extent required by Concert to fulfil its obligations under the Development Program or Section 4.2.4 .

6.4 Reservation of Rights .

Except as expressly stated in this Agreement, no rights or licenses are granted under this Agreement by either Party or its Affiliates under any intellectual property of such Party or its Affiliates to the other Party or its Affiliates, whether by implication, estoppel or otherwise, and all such rights not expressly granted are hereby reserved by each Party and its Affiliates. Notwithstanding the exclusive licenses granted to Celgene pursuant to Section 6.2, Concert retains the right to practice under the Concert Patents and Concert Technology to perform (and to sublicense Third Parties to perform) its obligations under this Agreement.

ARTICLE 7

LICENSE FEES AND PAYMENTS

7.1 License and Access Fee .

7.1.1 Within [**] days after the Effective Date, Celgene USA shall pay to Concert a one-time, non-refundable, non-creditable upfront license fee of Seventeen Million and Five Hundred Thousand United States Dollars ($17,500,000.00).

7.1.2 Within [**] days after the Effective Date, CIS shall pay to Concert a one-time, non-refundable, non-creditable upfront license fee of Seventeen Million and Five Hundred Thousand United States Dollars ($17,500,000.00).

7.2 Development Milestone Payments .

7.2.1 Celgene shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 7.2.1 below as a “Development Milestone” in

 

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connection with a [**] Product (each such event, a “[**] Milestone Event ”) other than with respect to the [**] Milestone Event for First Phase 1 Completion, for which Concert shall notify Celgene in writing within [**] Business Days following the occurrence of the [**] Milestone Event for First Phase 1 Completion. Subject to Sections 7.2.5 and 7.2.6 , Celgene shall pay to Concert the “Milestone Payment” set forth in Table 7.2.1 below corresponding to a [**] Milestone Event within [**] days after the occurrence of such [**] Milestone Event (each such payment, a “[**] Milestone Event Payment ”). Celgene USA shall pay to Concert the [**] Milestone Event Payments associated with [**]; CIS shall pay to Concert the [**] Milestone Event Payments associated with (A) [**], or (B) [**], and Celgene USA and CIS [**] pay to Concert [**] percent ([**]%) of the remaining [**] Milestone Event Payments.

 

Table 7.2.1 : [**] Products Development Milestones

 

[**] Development Milestones

   Milestone
Payment - 1 st
Indication
(in millions)
    Milestone
Payment - 2 nd
Indication
(in millions)
    Milestone
Payment - 3 rd
Indication
(in millions)
    Milestone
Payment - 4 th
or further
Indication
(in millions)
 

(a) First Phase 1 Completion

   $ 8.00      $ 0.00      $ 0.00      $ 0.00   

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal - [**] Development Milestones

   $ 133.00      $ 82.50      $ 55.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

7.2.2 If Celgene has exercised its option pursuant to Section 11.1.3, then: (i) Celgene shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 7.2.2 below as a “Development Milestone” in connection with a [**] Product, (each such event, a “[**] Milestone Event ”) other than with respect to the [**] Milestone Event for [**], for which Concert shall notify Celgene in writing within [**] Business Days following the occurrence of such [**] Milestone Event for [**]; and (ii) subject to Sections 7.2.5 and 7.2.6 , Celgene shall pay to Concert the “Milestone Payment” set forth in Table 7.2.2 below corresponding to a [**] Milestone Event within [**] days after the occurrence of such [**] Milestone Event (each such payment, a “[**] Milestone Event Payment ”). Celgene USA shall pay to Concert the [**] Milestone Event Payments associated with [**]; CIS shall pay to Concert the [**] Milestone Event Payments associated with (A) [**] or (B) [**]; and Celgene USA and CIS [**] pay to Concert [**] percent ([**]%) of the remaining [**] Milestone Event Payments.

 

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Table 7.2.2: [**] Products Development Milestones

 

[**] Development Milestones

   Milestone
Payment - 1 st
Indication
(in millions)
    Milestone
Payment - 2 nd
Indication
(in millions)
    Milestone
Payment - 3 rd
Indication
(in millions)
    Milestone
Payment - 4 th
or further
Indication
(in millions)
 

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal - [**] Development Milestones

   $ 133.00      $ 82.50      $ 55.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

7.2.3 If Celgene has exercised its option pursuant to Section 11.1.4, then: (i) Celgene shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 7.2.3 below as a “Development Milestone” in connection with a [**] Product, (each such event, a “[**] Milestone Event ”) other than with respect to the [**] Milestone Event for [**], for which Concert shall notify Celgene in writing within [**] Business Days following the occurrence of such [**] Milestone Event for [**]; and (ii) subject to Sections 7.2.5 and 7.2.6, Celgene shall pay to Concert the “Milestone Payment” set forth in Table 7.2.3 below corresponding to a [**] Milestone Event within [**] days after the occurrence of such [**] Milestone Event (each such payment, a “[**] Milestone Event Payment ”). Celgene USA shall pay to Concert the [**] Milestone Event Payments associated with [**]; CIS shall pay to Concert the [**] Milestone Event Payments associated with (Ai) [**] or (B) [**]; and Celgene USA and CIS [**] pay to Concert [**] percent ([**]%) of the remaining [**] Milestone Event Payments.

 

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Table 7.2.3: [**] Products Development Milestones

 

[**] Development Milestones

   Milestone
Payment  1 st
Indication
(in millions)
    Milestone
Payment  2 nd
Indication
(in millions)
    Milestone
Payment  3 rd
Indication
(in millions)
    Milestone
Payment  4 th
or further
Indication
(in millions)
 

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal - [**] Development Milestones

   $ 133.00      $ 82.50      $ 55.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

7.2.4 If Celgene has exercised its option pursuant to Section 11.1.5, then: (i) Celgene shall notify Concert within [**] Business Days of the occurrence of each of the following events indicated in Table 7.2.4 below as a “Development Milestone” in connection with a [**]Option Product, (each such event a “[**] Option Milestone Event Payment ”) other than with respect to the [**]Option Milestone Event for [**], for which Concert shall notify Celgene in writing within [**] Business Days following the occurrence of such [**] Option Milestone Event for [**]; and (ii) subject to Sections 7.2.5 and 7.2.6 , Celgene shall pay to Concert the “Milestone Payment” set forth in Table 7.2.4 below corresponding to a [**]Option Milestone Event within [**] days after the occurrence of such [**]Option Milestone Event (each such payment, a “[**] Option Milestone Event Payment ”). Celgene USA shall pay to Concert the [**]Option Milestone Event Payments associated with [**]; CIS shall pay to Concert the [**]Option Milestone Event Payments associated with (A) [**] or (B) [**]; and Celgene USA and CIS [**] pay to Concert [**] percent ([**]%) of the remaining [**]Option Milestone Event Payments.

 

Table 7.2.4: [**]Option Products Development Milestones

 

[**]Option Development Milestones

   Milestone
Payment  1 st
Indication
(in millions)
    Milestone
Payment  2 nd
Indication
(in millions)
    Milestone
Payment 3 rd
Indication
(in millions)
    Milestone
Payment  4 th
or further
Indication
(in millions)
 

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**

[**]

     [**     [**     [**     [**
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal - [**] Option Development Milestones

   $ 133.00      $ 82.50      $ 55.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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7.2.5 Celgene shall not be required to make any payment for receipt of Regulatory Approval in a specific jurisdiction for a second or further indication for any [**] Product, [**] Product, [**] Product, or [**]Option Product if, at the time of filing for Regulatory Approval in such jurisdiction for such second or further indication, Celgene or their Affiliates have received Regulatory Approval in such jurisdiction for a Non-Deuterated Equivalent of such [**] Product, [**] Product, [**] Product, or [**]Option Product for such second or further indication.

7.2.6 If any Development Milestone described in row (b), (c), (d) or (e) of Table 7.2.1, 7.2.2, 7.2.3 or 7.2.4 above occurs before or concurrently with the Development Milestone described in row (a) of such table, Celgene shall also pay the Milestone Payment set forth in row (a) of such table when such later Milestone Payment is paid, regardless of whether the Development Milestone described in row (a) has been achieved. In addition, if the Development Milestone described in row (a) of Table 7.2.2, 7.2.3 or 7.2.4 is achieved prior to the exercise of the License Option with respect to the applicable Licensed Product, the Milestone Payment set forth in row (a) of the applicable table shall be due concurrently with the payment of the applicable License Option exercise fees set forth in Section 11.1.2 .

7.2.7 For the avoidance of doubt, if any [**] Product, [**] Product, [**] Product, or [**]Option Product is moved from a later to an earlier line setting (e.g., from third-line therapy to second-line therapy), such move will not be considered an additional indication, no milestone events will be triggered, and no milestone payments will be due as a result of such move.

7.3 Royalty Payments on Sales .

7.3.1 Celgene shall pay to Concert royalties on Net Sales of each Licensed Product, on a country-by-country basis, until the latest of (i) the last to expire Valid Claim of the Concert Patents covering the manufacture, use, offer for sale, sale or importation of the Licensed Product in the country, (ii) the expiration of Regulatory Exclusivity for the Licensed Product in the country, or (iii) ten (10) years after Launch of the Licensed Product in the country (“ Royalty Term ”). Upon expiration of the applicable Royalty Term, provided that all payments are made by Celgene to Concert in accordance with Section 12.3.1 , the license granted for such Licensed Product in such country shall be deemed fully paid up, irrevocable and non-terminable during and after the Term as set forth in Section 12.3.1 .

7.3.2 Subject to Sections 7.3.6 and 7.5.1, as to Net Sales of [**] Products made during the Royalty Term, Celgene shall pay to Concert as follows:

(i) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(ii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

 

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(iii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iv) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(v) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) in each calendar year.

Celgene USA shall pay to Concert royalties attributable to Net Sales of [**] Products in the United States; CIS shall pay to Concert royalties attributable to Net Sales of [**] Products in all other jurisdictions.

7.3.3 If Celgene has exercised its option pursuant to Section 11.1.3 , then, subject to Sections 7.3.6 and 7.5.1 , as to Net Sales of [**] Products made during the Royalty Term, Celgene shall pay to Concert as follows:

(i) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(ii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iv) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(v) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) in each calendar year.

Celgene USA shall pay to Concert royalties attributable to Net Sales of [**] Products in the United States; CIS shall pay to Concert royalties attributable to Net Sales of [**] Products in all other jurisdictions.

7.3.4 If Celgene has exercised its option pursuant to Section 11.1.4, then, subject, then, subject to Sections 7.3.6 and 7.5.1 , as to Net Sales of [**] Products made during the Royalty Term, Celgene shall pay to Concert as follows:

(i) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

 

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(ii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iii) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iv) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(v) [**]% of worldwide Net Sales for the portion of Net Sales of [**] Products greater than [**] U.S. Dollars ($[**]) in each calendar year.

Celgene USA shall pay to Concert royalties attributable to Net Sales of [**] Products in the United States; CIS shall pay to Concert royalties attributable to Net Sales of [**] Products in all other jurisdictions.

7.3.5 If Celgene has exercised its option pursuant to Section 11.1.5, then, subject to Sections 7.3.6 and 7.5.1 , as to Net Sales of [**]Option Products made during the Royalty Term, Celgene shall pay to Concert as follows:

(i) [**]% of worldwide Net Sales for the portion of Net Sales of [**]Option Products less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(ii) [**]% of worldwide Net Sales for the portion of Net Sales of [**]Option Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iii) [**]% of worldwide Net Sales for the portion of Net Sales of [**]Option Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(iv) [**]% of worldwide Net Sales for the portion of Net Sales of [**]Option Products greater than [**] U.S. Dollars ($[**]) and less than or equal to [**] U.S. Dollars ($[**]) in each calendar year; plus

(v) [**]% of worldwide Net Sales for the portion of Net Sales of [**]Option Products greater than [**] U.S. Dollars ($[**]) in each calendar year.

Celgene USA shall pay to Concert royalties attributable to Net Sales of [**]Option Products in the United States; CIS shall pay to Concert royalties attributable to Net Sales of [**]Option Products in all other jurisdictions.

7.3.6 On a Licensed Product-by-Licensed Product and country-by-country basis, the royalty rates set forth above in Sections 7.3.2 through 7.3.5 shall be reduced to [**]% of the otherwise applicable rate as to Net Sales occurring during any period within the Royalty Term when no issued Valid Claim of a Concert Patent or Regulatory Exclusivity covers the manufacture, use, offer for sale, sale or importation of such Licensed Product in such country.

 

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7.3.7 Celgene shall provide a report to Concert with the Net Sales of each Licensed Product in each country and shall make the royalty payments and sales milestones payments described in Sections 7.3 and 7.4 within [**] Business Days after the end of the each calendar quarter of the Royalty Term, provided, however, that such report and payment shall be made after the last fiscal quarter of each fiscal year of Celgene USA within the first to occur of: (a) [**] days after Celgene USA’s public year-end earnings announcement or (b) [**] days after such fiscal quarter. Such royalty reports shall provide, on a Licensed Product-by-Licensed Product and country-by-country basis, invoiced amounts during the reporting period, deductions from such invoiced amounts by allowable category applied in the calculation of Net Sales during the reporting period, Net Sales during the reporting period, and the calculation of the resulting royalty payment due through the end of the reporting period.

7.4 Sales Milestone Payments.

7.4.1 Concert shall be entitled to a payment (a “Sales Milestone Payment”) of [**] dollars ($[**]) within [**] days after the end of the calendar quarter in which cumulative Net Sales of all [**] Products in all countries in a given calendar year first equal or exceed [**] dollars ($[**]). For the avoidance of doubt, Celgene shall only be required to pay such Sales Milestone Payment once during the Term of this Agreement. Celgene USA shall pay to Concert that percentage of such Sales Milestone Payment equal to the percentage of Net Sales of all [**] Products in the United States in the calendar quarters of the calendar year in which the Sales Milestone Payment was triggered; CIS shall pay to Concert the remainder of such Sales Milestone Payment.

7.4.2 Concert shall be entitled to Sales Milestone Payments of (i) [**] dollars ($[**]) within [**] days after the end of the calendar quarter in which cumulative Net Sales of all [**] Products in all countries in a given calendar year first equal or exceed [**] dollars ($[**]); and (ii) [**] dollars ($[**]) within [**] days after the end of the calendar quarter in which cumulative Net Sales of all [**] Products in all countries in a given calendar year first equal or exceed [**] dollars ($[**]). For the avoidance of doubt, Celgene shall only be required to pay such Sales Milestone Payments once during the Term of this Agreement. Celgene USA shall pay to Concert that percentage of such Sales Milestone Payments equal to the percentage of Net Sales of all [**] Products in the United States in the calendar quarters of the calendar year in which such Sales Milestone Payments were triggered; CIS shall pay to Concert the remainder of such Sales Milestone Payments. The Sales Milestone Payment set forth in this Section 7.4.2 shall be reduced to [**] percent ([**]%) of the otherwise applicable Sales Milestone Payment if the earliest acceptance for filing for Regulatory Approval in any of the US, the EU, a Major Market EU Country, or Japan for a [**] Product is not achieved on or before [**].

7.4.3 Concert shall be entitled to a Sales Milestone Payment of [**] dollars ($[**]) within [**] days after the end of the calendar quarter in which cumulative Net Sales of all [**] Products in all countries in a given calendar year first equal or exceed [**] dollars ($[**]). For the avoidance of doubt, Celgene shall only be required to pay such Sales Milestone Payment once during the Term of this Agreement. Celgene USA shall pay to Concert that percentage of

 

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such Sales Milestone Payment equal to the percentage of Net Sales of all [**] Products in the United States in the calendar quarters of the calendar year in which the Sales Milestone Payment was triggered; CIS shall pay to Concert the remainder of such Sales Milestone Payment.

7.5 Payment Offsets.

7.5.1 If, after the Effective Date, on a Licensed Product-by-Licensed Product and country-by-country basis, (i) Celgene or their Affiliate determines in good faith that in order to avoid infringement of any Blocking Third Party Patent Rights not licensed to it hereunder it is necessary to obtain a license from any Third Party(ies) to exploit any Licensed Product(s) in one or more country(ies), (ii) Celgene or their Affiliate is required by an order, judgment or similar action of a Governmental Authority to pay royalties or other amounts for the exploitation of any Licensed Product(s) in one or more country(ies) due to infringement of Blocking Third Party Patent Rights, or (iii) Celgene elects to include patents or technology relating to Licensed Product(s) licensed by Concert from Third Parties after the Effective Date in the Concert Patents or Concert Technology as set forth in Section 6.2.4 , then Celgene may deduct from the any amounts otherwise due pursuant to Section 7.3 for such Licensed Product(s) in such country(ies) or any amounts due pursuant to Sections 7.2 or 7.4 , [**] percent ([**]%) of any royalties or other amounts payable by Celgene or their Affiliates to such Third Party(ies) with respect to such Licensed Product(s) in such country(ies). If such amount to be deducted would reduce by more than [**] percent ([**]%) the royalties otherwise due during a royalty reporting period or any milestone payment due, then Celgene may deduct such amount so as to pay [**] percent ([**]%) of the royalties otherwise due during a royalty reporting period or a milestone payment due and apply the balance of such deduction to future royalties and milestone payments due (subject to the same limitation).

7.5.2 Celgene may deduct from the any amounts otherwise due pursuant to Sections 7.2 through 7.4 , [**]%) of all of its and its Affiliates’ costs and expenses reasonably incurred in connection with any Third Party inter partes interferences, oppositions, nullity, cancellation, invalidation or other proceedings with a Third Party involving the Concert Patents pursuant to Sections 8.1.2 and 8.1.3 , but excluding any such action or proceeding involving the [**] Patent Rights. If such amount to be deducted would reduce by more than [**] percent ([**]%) the royalties otherwise due during a royalty reporting period or any milestone payment due, then Celgene may deduct such amount so as to pay [**] percent ([**]%) of the royalties otherwise due during a royalty reporting period and all milestone payments otherwise due and apply the balance of such deduction to future royalties and milestone payments due (subject to the same limitation).

7.5.3 In no event shall the deductions permitted by Sections 7.5.1 and 7.5.2, in the aggregate, reduce the royalties otherwise due as to any Licensed Product during any royalty reporting period or any milestone payment due with respect to any Licensed Product by more than [**] percent ([**]%); provided, however, that if the amounts to be deducted as set forth in Sections 7.5.1 and 7.5.2 would reduce by more than [**] percent ([**]%) the royalties otherwise due as to any Licensed Product during any royalty reporting period or any milestone payment due with respect to any Licensed Product, Celgene may deduct such amounts so as to pay [**] percent ([**]%) of the royalties otherwise due during a royalty reporting period and all milestone payments otherwise due and apply the balance of such deductions to future royalties and milestone payments due (subject to the same limitation).

 

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7.6 Overlapping Classification of Products.

If a Licensed Product is defined as falling within two or more categories of Licensed Products, then Celgene shall pay each Milestone Payment or Sales Milestone Payment for such Licensed Product when the applicable milestone event is first achieved, but shall only pay such Milestone Payment or Sales Milestone Payment once for such Licensed Product irrespective of the number of categories of Licensed Product into which such Licensed Product falls.

7.7 Method of Payments.

Each payment hereunder shall be made in United States Dollars by check or electronic funds transfer in immediately available funds to such bank account as Concert shall designate in writing to Celgene.

7.8 Inspection of Records.

7.8.1 During the Term and for at least [**] years thereafter, Celgene shall, and shall cause their Affiliates and sublicensees to, keep accurate books and records setting forth the Net Sales of each Licensed Product in each country. Celgene shall, and shall cause their Affiliates and sublicensees to, permit Concert, using independent certified public accountants engaged by Concert and approved by Celgene (not to be unreasonably withheld), to examine such books and records at any reasonable time, upon reasonable notice; provided , however , that Celgene and their Affiliates and sublicensees shall not be required to produce for inspection any such records relating to any period prior to the [**] then most recently ended calendar years. The foregoing right of examination may be exercised only [**] period of the Term and [**] year period after the Term. Celgene or their Affiliate or sublicensee may require such accountants to enter into a reasonably acceptable confidentiality agreement, and in no event shall such accountants disclose to Concert any information, other than such as relates to the accuracy of the corresponding payments required to be made under this Agreement. The opinion of said independent accountants regarding such reports and related payments shall be binding on the Parties, other than in the case of manifest error. Concert shall bear the cost of any such examination and review; provided , however , that if the examination shows an underpayment of any amounts due of more than both (i) [**] percent ([**]%) of the amount due for an applicable calendar year and (ii) [**] U.S. Dollars ($[**]), then Celgene shall promptly reimburse Concert for Concert’s reasonable out-of-pocket expenses actually incurred in connection with such examination, to be split [**] Celgene USA and CIS. Celgene shall promptly pay to Concert the amount of any underpayment of amounts due revealed by any such examination, including interest in accordance with Section 7.10 .

7.9 Tax Matters.

7.9.1 “ Tax ” or “ Taxes ” shall mean all taxes, charges, duties, fees, levies or other assessments, including income, excise, property, sales, consumption, use, value added, profits, license, withholding (with respect to compensation or otherwise), payroll, employment, net worth, capital gains, transfer, stamp, social security, environmental, occupation and franchise taxes, imposed by any Governmental Authority, and including any interest, penalties and additions attributable thereto, and all amounts payable pursuant to an agreement or arrangement with respect to taxes.

 

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7.9.2 The Parties agree to cooperate and produce on a timely basis any Tax forms or reports reasonably requested by the other Party in connection with any payment made under this Agreement. Each Party further agrees to provide reasonable cooperation to the other Party, at the other Party’s expense, in connection with any official or unofficial Tax audit or contest relating to payments made by the other Party under this Agreement.

7.9.3 Any payments made by a Party pursuant to this Agreement shall not be reduced on account of any Taxes unless required by applicable Law. Concert shall be responsible for paying any and all Taxes (other than withholding taxes required to be paid by Celgene under applicable Law) levied on account of, or measured in whole or in part by reference to, any payments it receives. Celgene shall deduct or withhold from the payments any Taxes that Celgene is required to deduct or withhold under applicable Law. Notwithstanding the foregoing, if Concert is entitled under any applicable Tax treaty to a reduction in the rate of, or the elimination of, applicable withholding Tax, it may deliver to Celgene or the appropriate Governmental Authority (with the assistance of Celgene to the extent that such assistance is reasonably required and is requested in writing) the prescribed forms necessary to reduce the applicable rate of withholding or to relieve Celgene of its obligation to withhold Tax, and Celgene shall apply the reduced rate of withholding, or dispense with withholding, as the case may be, provided that Celgene has received evidence, in a form reasonably satisfactory to Celgene, of Concert’s delivery of all applicable forms (and, if necessary, its receipt of appropriate governmental authorization) at least [**] days before the time that the payments are due. If, in accordance with the foregoing, Celgene withholds any amount, it shall (i) timely remit to Concert the balance of such payment; (ii) timely remit the full amount withheld to the proper Governmental Authority; and (iii) send to Concert written proof of remittance of the full amount withheld within [**] days following remittance.

7.9.4 Notwithstanding Section 7.9.3 , if, as a result of any change in the corporate status or location of Celgene USA or CIS, or the permitted assignment of this Agreement by Celgene USA or CIS, withholding taxes in addition to those that would be due in the absence of such change or assignment become due on payments from Celgene USA, CIS, or its permitted assignee to Concert that would not have been due absent such change in corporate status or location or permitted assignment, in whole or in part, then Celgene USA or CIS, as appropriate, will deduct withholding taxes in accordance with Section 7.9.3 , but will, in addition to the sums otherwise payable under this Agreement, pay to Concert such further sum as will ensure that, after deduction of withholding taxes on all such sums, the net amount received by Concert equals the amount that Concert would have received had the additional withholding taxes not been deducted.

7.10 Late Payments. Any undisputed amount owed Celgene to Concert under this Agreement that is not paid on or before the date such payment is due shall bear interest at a rate per annum equal to the lesser of (i) the prime or equivalent rate per annum quoted by The Wall Street Journal, eastern U.S. edition, on the first Business Day after such payment is due, plus [**] percent ([**]%), or (ii) the highest rate permitted by applicable Law, calculated on the number of days such payments are paid after such payments are due and compounded monthly. In addition, Celgene shall reimburse Concert for all reasonable costs, including attorneys’ fees and legal expenses, incurred in the collection of late payments.

 

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ARTICLE 8

PATENTS AND INFRINGEMENT

8.1 Prosecution of Concert Patents.

8.1.1 Until Concert receives the first Milestone Payment pursuant to Section 7.2 with respect to a Licensed Product, Concert will be responsible for preparation, filing, prosecution and maintenance of all Concert Patents related to such category of Licensed Products at Concert’s own cost and expense. Through the JPC, Concert shall provide Celgene quarterly updates regarding the status of such prosecution and maintenance of Concert Patents related to [**] Product and [**] Product and reasonable opportunities to comment on the prosecution and maintenance of the Concert Patents related to any Licensed Product, and Concert shall reasonably consider all such comments unless implementation of such comments would unduly limit the scope of the Concert Patents related to such Licensed Product.

8.1.2 After Concert receives the first Milestone Payment pursuant to Section 7.2 with respect to a Licensed Product, Celgene USA will be responsible for preparation, filing, prosecution and maintenance of all Concert USA Patents related to such category of Licensed Products at Celgene USA’s own cost and expense. Additionally, from and after the Effective Date, Celgene USA will be responsible for the representation of the Concert USA Patents involved in any inter partes interferences, oppositions, nullity, cancellation, invalidation or other proceedings involving the Concert USA Patents and may deduct the costs associated therewith as provided in Section 7.5.2 . Through the JPC, Celgene USA shall provide Concert reasonable opportunities to comment on but, subject to Section 8.2.1 , not approve the preparation, filing, prosecution and maintenance of the Concert USA Patents and the representation of the Concert USA Patents in such inter partes proceedings. Celgene USA shall not, without Concert’s prior written consent, which may not be unreasonably withheld, voluntarily narrow or agree to the narrowing of the claims of any Concert USA Patents after they have been allowed or issued or, except as reasonably necessary or advisable in order to overcome an examiner’s rejection and with the goal of obtaining the best patent protection for the applicable Licensed Product, prior to allowance or issuance.

8.1.3 After Concert receives the first Milestone Payment pursuant to Section 7.2 with respect to a Licensed Product, CIS will be responsible for preparation, filing, prosecution and maintenance of all Concert Foreign Patents related to such category of Licensed Products at CIS’s own cost and expense. Additionally, from and after the Effective Date, CIS will be responsible for the representation of the Concert Foreign Patents involved in any inter partes interferences, oppositions, nullity, cancellation, invalidation or other proceedings involving the Concert Foreign Patents and may deduct the costs associated therewith as provided in Section 7.5.2 . Through the JPC, CIS shall provide Concert reasonable opportunities to comment on but, subject to Section 8.2.2 , not approve the preparation, filing, prosecution and maintenance of the Concert Foreign Patents and the representation of the Concert Foreign Patents in such inter partes proceedings. CIS shall not, without Concert’s prior written consent, which may not be unreasonably withheld, voluntarily narrow or agree to the narrowing of the claims of any Concert Foreign Patents after they have been allowed or issued or, except as reasonably necessary or advisable in order to overcome an examiner’s rejection and with the goal of obtaining the best patent protection for the applicable Licensed Product, prior to allowance or issuance.

 

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8.2 Abandonment of Concert Patent

8.2.1 If Celgene USA intends to cease prosecution or maintenance of any Concert USA Patent (without filing any substitute application), it will notify Concert of such intent at least [**] days in advance of any deadline that would prejudice Concert’s rights under this Section 8.2.1 . Concert then shall have the opportunity to prepare, prosecute or maintain such Concert USA Patent at Concert’s own expense.

8.2.2 If CIS intends to cease prosecution or maintenance of any Concert Foreign Patent (without filing any substitute application), it will notify Concert of such intent at least [**] days in advance of any deadline that would prejudice Concert’s rights under this Section 8.2.2 . Concert then shall have the opportunity to prepare, prosecute or maintain such Concert Foreign Patent at Concert’s own expense.

8.2.3 If Concert intends to cease prosecution or maintenance of any Concert Patent (without filing any substitute application), it will notify Celgene of such intent at least [**] days in advance of any deadline that would prejudice Celgene’s rights under this Section 8.2.3 . Celgene then shall have the opportunity to prepare, prosecute or maintain such Concert Patent, and Concert will assign such Concert Patent to Celgene USA or CIS at Celgene’s direction. Expenses for prosecution or maintenance of such Concert Patent will thereafter be borne by Celgene.

8.2.4 If Concert determines that it will not file a patent application with respect to any material Invention that is specific to the composition, use, administration, manufacture of or a method involving a Deuterated Product, Concert will notify Celgene of such intent at least [**] days in advance of any deadline that would prejudice Celgene’s rights under this Section 8.2.4 . Celgene then shall have the opportunity to prepare, file, prosecute or maintain such patent application, and Concert will assign all rights in such Invention and patent application to Celgene USA or CIS at Celgene’s direction. Expenses for preparation, filing, prosecution and maintenance of such patent application will thereafter be borne by Celgene.

8.3 Trademarks

8.3.1 Celgene USA has the sole right and responsibility for registration, preparation, filing, prosecution, maintenance and enforcement of all United States trademarks for the Licensed Products in Celgene USA’s discretion and at Celgene USA’s own cost and expense

8.3.2 CIS has the sole right and responsibility for registration, preparation, filing, prosecution, maintenance and enforcement of all trademarks for the Licensed Products, other than United States trademarks, in CIS’s discretion and at CIS’s own cost and expense.

8.4 Enforcement of Concert Patents

8.4.1 Each Party will promptly notify the other in the event of any actual, threatened or suspected infringement of any Concert Patents by Third Party products that compete with any Licensed Product (“ Competitive Infringement ”).

8.4.2 Celgene USA shall have the first right, but not the obligation, to institute litigation to enforce the Concert USA Patents in connection with any Competitive Infringement.

 

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Any such litigation shall be at Celgene USA’s sole cost and expense. If required in order to establish Celgene USA’s standing to sue under any applicable Laws, Concert, upon request of Celgene USA, agrees to timely join in any such litigation, at Celgene USA’s expense, and in any event to cooperate with Celgene USA at Celgene USA’s expense. The Parties shall consult with respect to potential strategies for terminating such Competitive Infringement without litigation. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 8.4.2 may be undertaken by Celgene USA without the consent of Concert if such settlement, stipulated judgment or other voluntary final disposition would require Concert to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect Concert’s rights under this Agreement or any of the Concert USA Patents. Any recovery for Competitive Infringement will be allocated first to pay any and all of Celgene USA’s and Concert’s reasonable costs and expenses relating to the action and the remainder will be shared between Celgene USA and Concert with Celgene USA receiving [**] percent ([**]%) and Concert receiving [**] percent ([**]%) of such remainder.

8.4.3 If Celgene USA fails to bring an action with respect to, or to terminate, a Competitive Infringement (involving a Concert USA Patent) within the sooner of (i) [**] days following the notice of alleged infringement or (ii) [**] days after being notified in the case of an action brought under the Hatch-Waxman Act or similar Laws applicable to follow-on biologic products, then Concert shall have the right, but not the obligation, to institute litigation in connection therewith, and any such litigation shall be at Concert’s sole cost and expense. If required in order to establish Concert’s standing to sue under any applicable Laws, Celgene USA, upon request of Concert, agrees to timely join in any such litigation, at Concert’s expense, and in any event to cooperate with Concert at Concert’s expense. The Parties shall consult with respect to potential strategies for terminating such infringement without litigation and Concert may not enter into settlements, stipulated judgments or other arrangements respecting such infringement that would conflict with the exclusive license granted to Celgene USA hereunder without the prior written consent of Celgene USA. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 8.4.3 may be undertaken by Concert without the written consent of Celgene USA if such settlement, stipulated judgment or other voluntary final disposition would require Celgene USA to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect Celgene USA’s rights under this Agreement or any of the Concert USA Patents. Any recoveries relating to Concert’s actions under this Section 8.4.3 will be allocated first to pay any and all of Celgene USA’s and Concert’s reasonable costs and expenses relating to the action and the remainder will be shared between Celgene USA and Concert with Concert receiving [**] percent ([**]%) and Celgene USA receiving [**] percent ([**]%) of such remainder.

8.4.4 The Parties shall reasonably cooperate in any litigation asserting infringement of the Concert Patents. Such cooperation includes asserting, and not waiving, the joint defense privilege with respect to any communications among the Parties pursuant to this Agreement to the greatest extent permissible in accordance with Law. If Celgene USA lacks standing to sue to enforce any of the Concert USA Patents in accordance with Celgene USA’s rights under Section 8.4.2 and the transfer to Celgene USA of sole ownership of the Concert USA Patent(s) is the only means available for conferring such standing upon Celgene USA (e.g., if Concert’s agreement to be joined as a Party to the enforcement action would not enable Celgene USA to enforce such Concert USA Patents), then Concert agrees to assign its interest in such

 

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Concert USA Patent(s) to Celgene USA, (i) subject to a license back to Concert of all rights thereunder not already licensed to Celgene USA under Section 6.2.1; (ii) provided that upon conclusion of such litigation, Celgene USA will assign back to Concert its interest in the subject Concert USA Patent(s) subject to the licensees granted in Section 6.2.1 ; and (iii) such assigned Concert USA Patent(s) shall continue to be treated as Concert USA Patent(s) for all other purposes hereunder.

8.4.5 CIS shall have the first right, but not the obligation, to institute litigation to enforce the Concert Foreign Patents in connection with any Competitive Infringement. Any such litigation shall be at CIS’s sole cost and expense. If required in order to establish CIS’s standing to sue under any applicable Laws, Concert, upon request of CIS, agrees to timely join in any such litigation, at CIS’s expense, and in any event to cooperate with CIS at CIS’s expense. The Parties shall consult with respect to potential strategies for terminating such Competitive Infringement without litigation. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 8.4.5 may be undertaken by CIS without the consent of Concert if such settlement, stipulated judgment or other voluntary final disposition would require Concert to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect Concert’s rights under this Agreement or any of the Concert Foreign Patents. Any recovery for Competitive Infringement will be allocated first to pay any and all of CIS’s and Concert’s reasonable costs and expenses relating to the action and the remainder will be shared between CIS and Concert with CIS receiving [**] percent ([**]%) and Concert receiving [**] percent ([**]%) of such remainder.

8.4.6 If CIS fails to bring an action with respect to, or to terminate, a Competitive Infringement (involving a Concert Foreign Patent) within the sooner of (i) [**] days following the notice of alleged infringement or (ii) [**] days after being notified in the case of an action brought under any ex-U.S. equivalent of the Hatch-Waxman Act or such other Laws, then Concert shall have the right, but not the obligation, to institute litigation in connection therewith, and any such litigation shall be at Concert’s sole cost and expense. If required in order to establish Concert’s standing to sue under any applicable Laws, CIS, upon request of Concert, agrees to timely join in any such litigation, at Concert’s expense, and in any event to cooperate with Concert at Concert’s expense. The Parties shall consult with respect to potential strategies for terminating such infringement without litigation and Concert may not enter into settlements, stipulated judgments or other arrangements respecting such infringement that would conflict with the exclusive license granted to CIS hereunder without the prior written consent of CIS. No settlement, stipulated judgment or other voluntary final disposition of a suit under this Section 8.4.6 may be undertaken by Concert without the written consent of CIS if such settlement, stipulated judgment or other voluntary final disposition would require CIS to be subject to an injunction, admit wrong-doing, make a monetary payment or would otherwise materially adversely affect CIS’s rights under this Agreement or any of the Concert Foreign Patents. Any recoveries relating to Concert’s actions under this Section 8.4.6 will be allocated first to pay any and all of CIS’s and Concert’s reasonable costs and expenses relating to the action and the remainder will be shared between CIS and Concert with Concert receiving [**] percent ([**]%) and CIS receiving [**] percent ([**]%) of such remainder.

8.4.7 The Parties shall reasonably cooperate in any litigation asserting infringement of the Concert Foreign Patents. Such cooperation includes asserting, and not

 

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waiving, the joint defense privilege with respect to any communications among the Parties pursuant to this Agreement to the greatest extent permissible in accordance with Law. If CIS lacks standing to sue to enforce any of the Concert Foreign Patents in accordance with CIS’s rights under Section 8.4.7 and the transfer to CIS of sole ownership of the Concert Foreign Patent(s) in the subject jurisdiction is the only means available for conferring such standing upon CIS (e.g., if Concert’s agreement to be joined as a Party to the enforcement action would not enable CIS to enforce such Concert Foreign Patents), then Concert agrees to assign its interest in such Concert Patent(s) in such jurisdiction to CIS, (i) subject to a license back to Concert of all rights thereunder not already licensed to CIS under Section 6.2.2; (ii) provided that upon conclusion of such litigation, CIS will assign back to Concert its interest in the subject Concert Foreign Patent(s) subject to the licensees granted in Section 6.2.2 ; and (iii) such assigned Concert Foreign Patent(s) shall continue to be treated as Concert Foreign Patent(s) for all other purposes hereunder.

ARTICLE 9

CONFIDENTIALITY

9.1 Confidential Information.

9.1.1 All Concert Technology and unpublished Concert Patents constitute the Confidential Information of Concert. All (A) reports prepared, data generated, or information created by any Party pursuant to the Development Program and Section 4.2.4, and (B) all communications with Regulatory Authorities concerning any product containing [**], or [**]Option which, at the time of such communication, was a Licensed Product, are the Confidential Information of CIS, if such reports or communications exclusively relate to matters outside of the United States, or Celgene USA otherwise, for which CIS or Celgene USA as appropriate shall be deemed the Discloser and Concert the Recipient regardless of which Party actually first disclosed such information to the other. Moreover, with respect to Concert Technology that solely and specifically relates to a Licensed Product or, during the License Option Term, a [**] Product or [**] Product, notwithstanding that Concert is the Discloser of the Concert Technology, Concert shall also be deemed a Recipient thereof, and Celgene a Discloser thereof, for purposes of this ARTICLE 9 during the Term. Subject to Section 9.1.3 , during the Term and for [**] years thereafter, Recipient will keep confidential, and will cause its Representatives to keep confidential, all of the Discloser’s Confidential Information that is disclosed to it under this Agreement. The Recipient agrees to take such action, and to cause its Representatives to take such action, to preserve the confidentiality of the Discloser’s Confidential Information as it would customarily take to preserve the confidentiality of the Recipient’s own similar types of Confidential Information.

9.1.2 The Recipient shall, and shall cause its respective Representatives (i) to use the Discloser’s Confidential Information only as expressly permitted in this Agreement and (ii) subject to Section 9.1.3 , not to disclose the Discloser’s Confidential Information to any Third Parties without the prior written consent of the other Party, except as expressly permitted in this Agreement.

9.1.3 Notwithstanding anything to the contrary in this ARTICLE 9 , the Recipient and its Representatives may disclose the Discloser’s Confidential Information (A) in connection with the exercise of rights granted to or retained by it hereunder: (i) to Governmental Authorities to

 

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the extent necessary to obtain or maintain INDs or Regulatory Approvals; provided, however , that Concert and its Representatives shall make no use of any Confidential Information of Celgene, other than, during the License Option Term, Concert Technology that does not relate to a Licensed Product, for the purpose of obtaining or maintaining any INDs or Regulatory Approvals, unless Celgene has approved such use of such Confidential Information of Celgene; (ii) to outside consultants, contractors, advisory boards, managed care organizations, and non-clinical and clinical investigators; provided, however , that the Recipient (except for Concert with respect to Concert Technology that does not relate to a Licensed Product, as to which Concert shall retain reasonable discretion as to how it manages the confidentiality of such Concert Technology) shall enter into a confidentiality agreement with the consultant, contractor, advisory board, managed care organization or investigator before disclosing any of the Discloser’s Confidential Information; (iii) in connection with prosecuting or defending litigation; provided, however , that the Recipient or Representative shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information; (iv) in connection with the filing, prosecution or maintenance of Concert Patents, including for compliance with any rules or regulations of any patent office, such as 37 C.F.R. § 1.56, as amended from time to time; and (v) in connection with the resolution of disputes under this Agreement; provided, however , that such Recipient shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information; and (B) (i) in connection with filings required by securities laws and regulations and the rules and regulations of any securities exchanges upon which the Recipient’s securities are traded; provided, however , that such Recipient shall use reasonable efforts to limit the dissemination of such information, including by use of protective orders and the like, as such Recipient would use for its own similar types of Confidential Information; and (ii) to actual or potential investors, lenders, acquirers, merger partners and professional advisors; provided, however , that the Recipient shall enter into a confidentiality agreement with the investor, lender, acquirer, merger partner or, other than attorneys and accountants who are bound to confidentiality under applicable ethical rules, professional advisor before disclosing any of the Discloser’s Confidential Information.

9.2 Publications.

Neither Concert nor any of its Affiliates shall publish or publicly disclose the results generated during the course of performing the Development Plans, or otherwise in the course of development activities with respect to Licensed Products or, during the License Option Term, [**] Products or [**] Products, conducted by any Party under this Agreement, without the prior written consent of Celgene.

9.3 Publicity.

9.3.1 The Parties shall, following the Effective Date, agree on a press release, in form and substance reasonably acceptable to both Parties, announcing the existence of this Agreement. Unless otherwise agreed by the Parties, such press release shall be issued, following Celgene’s approval that such press release may be issued, as either a joint press release issued by both Parties or by one or both of the Parties individually. Following the initial press release announcing the existence of this Agreement, (i) with Celgene’s prior written consent, Concert may

 

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issue press releases concerning this Agreement and Licensed Products; (ii) Celgene may issue press releases concerning this Agreement and Licensed Products at any time without consent of Concert; provided that at least [**] Business Days prior to issuing such press release, Celgene shall provide Concert a copy of such press release and shall consider in good faith any comments provided by Concert with respect to such press release; and (iii) both Parties may refer publicly to information regarding this Agreement and Licensed Products that has previously been publicly disclosed in compliance with the terms of this Agreement.

9.3.2 Notwithstanding the foregoing, each Party shall have the right to issue press releases or make other public disclosures regarding this Agreement, to the extent reasonably necessary to comply with applicable securities exchange listing requirements or other applicable Laws; provided however that the announcing Party shall determine, in consultation with legal counsel, whether such disclosure is required under such securities exchange listing requirements or other applicable Laws, and if so required, shall take reasonable steps to minimize such disclosure while remaining in compliance with such requirements and/or applicable Laws.

9.3.3 Each Party shall give the other Party a reasonable opportunity to review those portions of all filings with the United States Securities and Exchange Commission (or any stock exchange, including Nasdaq, or any similar regulatory agency in any country other than the United States) describing the terms of this Agreement (including any filings 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 the provisions of this Agreement for which confidential treatment should be sought.

ARTICLE 10

REPRESENTATIONS AND WARRANTIES

10.1 Concert Representations and Warranties.

Concert hereby represents and warrants to Celgene that as of the Effective Date:

10.1.1 Concert has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement by Concert have been duly and validly authorized and approved by proper corporate action on the part of Concert, and Concert has taken all other action required by Law, its certificate of incorporation, by-laws or other organizational documents to authorize such execution, delivery and performance. Assuming due authorization, execution and delivery on the part of Celgene, this Agreement constitutes a legal, valid and binding obligation of Concert, enforceable against Concert in accordance with its terms, except as enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

10.1.2 The execution and delivery of this Agreement by Concert and the performance by Concert contemplated hereunder does not conflict with, or constitute a breach or default under, any of its charter or organizational documents, any Law, order or governmental rule or regulation applicable to Concert, or any material agreement, contract, commitment or instrument to which Concert is a Party.

 

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10.1.3 There is no action, claim, complaint, demand, suit, proceeding (including interference, opposition, cancellation or other ex parte or inter partes proceeding), arbitration, grievance, citation, summons, subpoena, request for information by a Governmental Authority, inquiry or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, in law or in equity, pending or, to the knowledge of Concert, threatened against Concert or any of its Affiliates relating to the Concert Technology, the Concert Patents, or the transactions contemplated by this Agreement. Concert has not received any written notice alleging that any of the Concert Technology or Concert Patents are invalid or unenforceable, are not owned by Concert or conflict with the Intellectual Property rights of any Person.

10.1.4 Concert has disclosed or made available to Celgene, (i) all material scientific and technical information in Concert’s possession and control, including any material publications, posters and pharmacokinetics data, relating to [**] Products, [**] Products, and [**] Products or their manufacture or use as such exists, and (ii) all material information relating to Concert Patents or Concert Technology. Without limiting the foregoing, Concert has disclosed or made available to Celgene all invention disclosures, prior art search results and related memoranda and patentability opinions (except as may pertain to the [**] Patent Rights) or evaluations, validity and enforceability searches and opinions or evaluations, freedom to operate searches and opinions or evaluations, and correspondence with and interview notes or other notes regarding communications with any of the inventor(s) and all other such material information in the possession of Concert (including all material facts and publications that could constitute prior art, whether discovered before or after filing of the subject patent application) that, in such attorney(s)’, agent(s)’, or employees’ reasonable judgment likely would be relevant to any Governmental Authority’s consideration of whether any of the Concert Patents are patentable/unpatentable, valid/invalid or enforceable/unenforceable.

10.1.5 The scientific, technical and other information relating to the Concert Patents, Concert Technology, [**] Products, [**] Products, and [**] Products disclosed or made available by Concert to Celgene has been true and correct in all material respects and includes any materially adverse information known to Concert or its Affiliates. No IND except for an IND for a [**] Product, has been filed by Concert or, to its knowledge, any Third Party for any [**] Product, [**] Product, or [**] Product with any Regulatory Authority in any country. Neither Concert nor any of its Affiliates nor, to Concert’s knowledge, a Representatives (in their capacity as such) is currently:

(i) working to file on their own behalf,

(ii) advising or consulting with any Person in preparation for or in connection with filing,

(iii) holding an investment in (other than the acquisition of less than five percent (5%) of the voting securities of a publicly traded entity) or providing debt financing to any Person that is preparing to file, or

(iv) assisting or encouraging any Person in connection with, a submission to a Regulatory Authority in any country for any [**] Product, [**] Product or [**] Product.

 

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10.1.6 Except as otherwise disclosed to Celgene, to the knowledge of Concert, the manufacture, use, sale, offer for sale, import or other exploitation of [**] Products, [**] Products, and [**] Products, as formulated and manufactured by Concert or at Concert’s direction, does not infringe the patent rights of any Third Party. The use, reproduction or disclosure of the Concert Technology to Celgene pursuant to the terms of this Agreement with respect to [**] Products, [**] Products and [**] Products as they are currently formulated and manufactured by Concert or at Concert’s direction, does not infringe, misappropriate or otherwise violate the trade secret rights or copyrights of any other Person. Concert has not received any notice alleging that the manufacture, use, sale, offer for sale, import or other exploitation of any of the [**] Products, [**] Products, and [**] Products, as formulated and manufactured by Concert or at Concert’s direction, infringes or will infringe the patent rights of any Third Party.

10.1.7 Concert has the right to grant to Celgene all rights in the Concert Patents and Concert Technology relating to [**] Products, [**] Products and [**] Products that are being granted to Celgene under this Agreement upon the terms set forth herein. Concert has not granted any license or sublicense to any rights in the Concert Patents or Concert Technology relating to [**] Products, [**] Products and [**] Products to any Third Party that are in conflict with the rights granted to Celgene in this Agreement.

10.1.8 Schedule 1.13 sets forth, with the owner, country(ies) or region, registration and application numbers and dates indicated, as applicable, all Concert Patents relating to [**] Products, [**] Products and [**] Products that have issued or that have been applied for and are pending issuance with any Governmental Authority. All fees, taxes, annuities and other payments associated with filing, prosecuting, issuing, recording, registering or maintaining Concert Patents relating to [**] Products, [**] Products and [**] Products have been paid in full in a timely manner to the proper Governmental Authority. Each Concert Patent listed or required to be listed thereon is owned solely by Concert, is active, and, to Concert’s knowledge, each such Concert Patent that is issued is valid and enforceable, and the ownership of the entire right, title and interest in each Concert Patent listed or required to be listed in Schedule 1.13 is recorded with the applicable Governmental Authority solely in the name of Concert. Except as otherwise disclosed to Celgene, Concert’s internal and external U.S. patent attorney(s) and agent(s) that have been involved in prosecution of the Concert Patents relating to [**] Products, [**] Products and [**] Products and Concert’s employees that have been involved in the prosecution of the Concert Patents relating to [**] Products, [**] Products and [**] Products are not aware of any information that, in their reasonable judgment, would likely render any of the granted Concert Patents invalid or unenforceable. Concert has complied with all duties of candor owed to patent offices with respect to the Concert Patents.

10.1.9 Concert has taken reasonable and customary measures to maintain and protect, as applicable, the confidentiality of Concert Technology related to [**] Products, [**] Products and [**] Products.

10.1.10 All current and former employees of Concert who are or were involved in the design, creation, conception, reduction to practice or development of Concert Technology or Concert Patents related to [**] Products, [**] Products and [**] Products or who were provided the chemistry of the [**] Products, [**] Products, and [**] Products that were manufactured using the Concert Technology or are claimed by the Concert Patents, have executed written contracts (i)

 

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obligating them to protect the confidential Concert Technology related to [**] Products, [**] Products and [**] Products, (ii) specifying that all work performed by them on behalf of Concert related to [**] Products, [**] Products and [**] Products is “work made for hire” under U.S. copyright laws or that they are otherwise obligated to assign to Concert all copyrights in such works, and (iii) specifying that Concert solely owns all other intellectual property rights in the Concert Technology and Concert Patents related to [**] Products, [**] Products and [**] Products that was developed by such employees in the course of their employment with Concert.

10.1.11 Concert has not been granted a license from any Person under any intellectual property contained within or necessary to exploit the Concert Technology or Concert Patents related to the [**] Products, [**] Products or [**] Products.

10.2 Celgene USA Representations and Warranties.

Celgene USA hereby represents and warrants to Concert that as of the Effective Date:

10.2.1 Celgene USA has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement by Celgene USA have been duly and validly authorized and approved by proper corporate action on the part of Celgene USA, and Celgene USA has taken all other action required by Law, its certificate of incorporation, by-laws, or other organizational documents to authorize such execution, delivery and performance. Assuming due authorization, execution and delivery on the part of Concert, this Agreement constitutes a legal, valid and binding obligation of Celgene USA, enforceable against Celgene USA in accordance with its terms, except as enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

10.2.2 The execution and delivery of this Agreement by Celgene USA and the performance by Celgene USA contemplated hereunder does not and will not violate any Laws or any order of any court or Governmental Authority, except for such violations that would not have an adverse effect on the ability of Celgene USA to perform its obligation under this Agreement.

10.2.3 Except as disclosed in public filings made by Celgene with Governmental Authorities, including but not limited to Celgene USA’s 10-K form filed with the United States Securities and Exchange Commission, there is no action, claim, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to the knowledge of Celgene USA, threatened against Celgene USA or any of its Affiliates relating to the transactions contemplated by this Agreement.

10.3 CIS Representations and Warranties.

CIS hereby represents and warrants to Concert that as of the Effective Date:

10.3.1 CIS has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement by CIS have been duly and validly authorized and approved by proper corporate action on the part of CIS, and CIS has taken all other action required by Law, its certificate of

 

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incorporation, by-laws, or other organizational documents to authorize such execution, delivery and performance. Assuming due authorization, execution and delivery on the part of Concert, this Agreement constitutes a legal, valid and binding obligation of CIS, enforceable against CIS in accordance with its terms, except as enforceability may be limited by applicable equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors’ rights generally.

10.3.2 The execution and delivery of this Agreement by CIS and the performance by CIS contemplated hereunder does not and will not violate any Laws or any order of any court or Governmental Authority, except for such violations that would not have an adverse effect on the ability of CIS to perform its obligation under this Agreement.

10.3.3 Except as disclosed in public filings made by Celgene with Governmental Authorities, including but not limited to Celgene USA’s 10-K form filed with the United States Securities and Exchange Commission, there is no action, claim, demand, suit, proceeding, arbitration, grievance, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, in law or in equity, pending or, to the knowledge of CIS, threatened against CIS or any of its Affiliates relating to the transactions contemplated by this Agreement.

10.4 DISCLAIMER.

EXCEPT AS OTHERWISE EXPRESSLY STATED IN SECTIONS 10.1, 10.2 , O R 10.3 , NO PARTY MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO ANY PRODUCTS, TECHNOLOGY, INTELLECTUAL PROPERTY RIGHTS OR ANY OTHER SUBJECT MATTER UNDER THIS AGREEMENT. EXCEPT AS OTHERWISE PROVIDED IN SECTIONS 10.1, 10.2 , AND 10.3 , EACH PARTY EXPRESSLY DISCLAIMS ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT.

ARTICLE 11

OPTION

11.1 License Option.

11.1.1 Celgene shall have the right to elect to extend this Agreement up to three times, the first extension to include either (i) [**], (ii) [**], or (iii) one additional deuterated molecule as described in Section 11.1.5 (i) or 11.1.5 (ii), the second extension to include either of the two molecules not chosen in the first extension, and the third extension to include the molecule not chosen in the second extension in accordance with this Section 11.1 (each such election, a “ License Option ”).

 

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11.1.2 Celgene may exercise each License Option by providing written notice to Concert of such election prior to the [**] anniversary of the Effective Date (“ License Option Term ”), such notice to include whether Celgene is extending this Agreement to include (x) [**], (y) [**], or (z) one additional deuterated molecule as described in Section 11.1.5(i) or 11.1.5(ii) . If Celgene notifies Concert that it is exercising a License Option, within [**] days of notification:

(i) Celgene USA shall pay to Concert a one-time, non-refundable and non-creditable option exercise and upfront license fee of (a) fifteen million United States Dollars ($15,000,000), for exercise of the License Option for [**]; (b) fifteen million United States Dollars ($15,000,000), for exercise of the License Option for [**]; and (c) five million United States Dollars ($5,000,000) for exercise of the License Option for one additional deuterated molecule as described in Section 11.1.5(i) or 11.1.5(ii) ; and

(ii) CIS shall pay to Concert a one-time, non-refundable and non-creditable option exercise and upfront license fee of (a) fifteen million United States Dollars ($15,000,000), for exercise of the License Option for [**]; (b) fifteen million United States Dollars ($15,000,000), for exercise of the License Option for [**]; and (c) five million United States Dollars ($5,000,000) for exercise of the License Option for one additional deuterated molecule as described in Section 11.1.5(i) or 11.1.5(ii) .

11.1.3 If Celgene exercises the License Option and extends the Agreement to include [**] Products shall be deemed added to the list of Licensed Products.

11.1.4 If Celgene exercises the License Option and extends the Agreement to include [**] Products shall be deemed added to the list of Licensed Products.

11.1.5 If Celgene exercises the License Option and extends the Agreement to include one additional deuterated molecule in connection with such License Option exercise, Celgene shall select such one additional deuterated molecule by, and subject to, either:

(i) providing written notice to Concert, promptly following Celgene’s exercise of the License Option, that Celgene has selected a deuterated molecule in their sole discretion for which (x) Celgene or their Affiliates has an Exclusivity Position relating to the deuterated molecule’s Non-Deuterated Equivalent; (y) prior to the earliest time at which Celgene or their Affiliates had the Exclusivity Position in Section 11.1.5(i)(x) , Concert did not have an Exclusivity Position for such deuterated molecule; and (z) Concert has not entered into binding written agreement granting a Third Party rights in such deuterated molecule, in which case (A) “[**] Option ” shall mean such deuterated molecule, an isomer (including stereoisomer) or isotopologue thereof, a salt or solvate (including hydrate) of any of the foregoing, or a deuterated metabolite of any of the foregoing that is administered in a therapeutically effective amount; (B) “[**]Option” shall also include any solid forms, including any crystalline or amorphous forms, co-crystals, and polymorphs of any compound of the foregoing; and (C) [**]Option Products shall be deemed added to the list of Licensed Products following Celgene’s exercise of the Licensed Option with respect thereto; or

(ii) providing written notice to Concert, promptly following Celgene’s exercise of the License Option, that Celgene would like to select a deuterated molecule by mutual agreement of the Parties. Following Celgene’s delivery of such notice, (A) the Parties shall mutually agree to an additional deuterated molecule, (B) “[**] Option ” shall mean such deuterated molecule, an isomer (including stereoisomer) or isotopologue thereof, a salt or solvate (including hydrate) of any of the foregoing, or a deuterated metabolite of any of the foregoing that is administered in a therapeutically effective amount; (C) “[**]Option” shall also include any solid forms, including any crystalline or amorphous forms, co-crystals, and polymorphs of any

 

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compound of the foregoing; and (D) [**]Option Products shall be deemed added to the list of Licensed Products following Celgene’s exercise of the License Option with respect thereto. Notwithstanding the foregoing or anything to the contrary herein, if Celgene provides written notice to Concert that Celgene desires to exercise the License Option to select a deuterated molecule as [**]Option pursuant to this Section 11.1.5(ii) , and at such time Concert does not have an existing program from which Concert is willing to permit and Celgene is willing to accept the selection of a deuterated molecule as [**]Option, the Parties shall in good faith seek to identify by mutual agreement a new program pursuant to which Concert would seek to generate a deuterated molecule for designation as [**]Option.

11.1.6 HSR . If Celgene reasonably desires to exercise the License Option with respect to [**]Option and the Parties determine in good faith prior to the expiration of the License Option Term that the exercise of the License Option with respect to [**]Option requires HSR Filings under the HSR Act, Celgene shall provide Concert written notice of exercise of the License Option with respect to [**]Option prior to the end of the License Option Term, which notice shall include Celgene’s irrevocable binding commitment to complete the exercise of the License Option with respect to [**]Option, subject only to HSR Clearance, and the License Option Term shall automatically be extended for an additional [**] days (the “ License Option Extension Period ”) in order to allow time for the Parties to obtain HSR Clearance with respect to such exercise of the License Option. If the exercise of the License Option with respect to [**]Option does not comply with the requirements of Section 11.1.5 and this Section 11.1.6 , including, for example, because it includes other conditions to the completion of the exercise of the License Option other than the grant of HSR Clearance, then the License Option with respect to [**]Option shall expire at the end of the License Option Term (without extension) unless Celgene exercises the License Option with respect to [**]Option in compliance with Section 11.1.5 and this Section 11.1.6 prior to such expiration of the License Option Term. If, following a conditional option exercise notice as described above, HSR Clearance is obtained within the License Option Term, as extended, such option exercise shall be deemed effective upon HSR Clearance. If, following a conditional option exercise notice as described above, HSR Clearance is not obtained within the License Option Term, as extended, such option exercise shall not become effective and the License Option shall expire as to [**]Option upon the expiration of the License Option Term, as extended. Each Party shall be responsible for its own costs and expenses, including attorneys’ fees, incurred by such Party in connection with the preparation and filing of submissions to the FTC under the HSR Act and in responding to any Second Request or other action by the FTC under the HSR Act; provided, however , that Celgene shall be responsible for all filing fees, If HSR Filings are required, each Party shall use Commercially Reasonable Efforts to prepare and file its respective HSR Filing as promptly as is practicable.

11.1.7 If Celgene exercises the License Option and extends this Agreement to include [**], or [**]Option, Concert shall promptly following Celgene’s exercise of the License Option transfer all right, title and interest in any INDs, NDAs and other regulatory filings and Regulatory Approvals for [**] Products, [**] Products, or [**]Option Products, as applicable, to Celgene or their Affiliate or sublicensee, as directed by Celgene.

 

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11.2 Termination of Rights.

11.2.1 The licenses granted to Celgene pursuant to Sections 6.2.1(ii) and (iii) , 6.2.2(ii) and (iii)  and 6.2.3(ii) and (iii)  shall terminate and be of no effect in the event that Celgene has not exercised the License Option prior to the expiration of the License Option Term with respect to [**] Products, [**] Products and/or [**]Option Products for which such licenses were granted.

11.2.2 In the event that Celgene exercises the License Option with respect to [**]Option, following such exercise the obligations and restrictions imposed on Concert hereunder with respect to products containing molecules that were (i) previously eligible for selection as [**]Option but (ii) were not selected as [**]Option, including without limitation under Sections 4.1 and 5.2.5 , shall no longer apply.

ARTICLE 12

TERM AND TERMINATION

12.1 Term.

12.1.1 This Agreement shall be effective as of the Effective Date and, unless terminated sooner pursuant to Section 12.2 , shall remain in effect until the later of (i) the seventh (7 th ) anniversary of the Effective Date and (ii) expiration of all Royalty Terms applicable to Licensed Products in each country in the Territory. The Agreement shall expire, on a Licensed Product-by-Licensed Product and country-by-country basis, following the duration of the Royalty Term applicable to such Licensed Product in each country.

12.1.2 The period from the Effective Date until expiration or termination (for any reason) of this Agreement in its entirety is the “ Term ” of this Agreement.

12.2 Termination Rights.

12.2.1 If Celgene USA or CIS materially breaches or materially defaults in the performance or observance of any of its obligations under this Agreement with respect to a particular Licensed Product, Concert may terminate this Agreement with respect to such Licensed Product, but not with respect to any other Licensed Product, as follows: (i) upon [**] days notice as to breaches of payment obligations hereunder if Celgene USA or CIS, as appropriate, has not cured the breach within such [**] day notice period; (ii) except as to payment breaches and breaches specified in clause (iii) below, upon [**] days notice if Celgene USA or CIS, as appropriate, has not cured the breach within such [**] day notice period; and (iii) if the breach is not a payment breach and was not deliberate, but cannot be cured within [**] days of Concert’s notice of breach, if Celgene USA or CIS, as appropriate, has not cured the breach within [**] days of Concert’s notice of breach, unless Celgene USA or CIS, as appropriate, has discontinued the breaching act, has used Commercially Reasonable Efforts to cure the breach to the extent possible within such [**] day period and has used Commercially Reasonable Efforts to further cure such breach to the extent possible and to prevent further occurrences of such breach; provided, however, that if Celgene USA or CIS, as appropriate, is deemed to be in material breach or default in the performance or observance of any of its obligations under this Agreement due to the actions (or failure to act where a duty to act exists) of any of its sublicensees, then the foregoing right of termination (A) may not be exercised if the breach is curable and Celgene USA or CIS, as

 

46


appropriate, is using Commercially Reasonable Efforts to have the breach cured and, if such Commercially Reasonable Efforts do not result in such cure, provides notice of termination of the sublicense prior to or at the end of or promptly after the cure period and thereafter terminates such sublicense in accordance with such notice, (B) may not be exercised if the breach was not deliberate, but cannot be cured within [**] days of notice of breach, if the sublicensee has discontinued the breaching act, has used Commercially Reasonable Efforts to cure the breach to the extent possible within such [**] day period and has used Commercially Reasonable Efforts to further cure such breach to the extent possible and to prevent further occurrences of such breach, and (C) if terminable, shall be limited to termination of rights hereunder equivalent to the scope of the corresponding sublicense granted to such sublicensee(s). Notwithstanding the foregoing, Concert may not terminate this Agreement if Celgene is disputing in good faith the cause for termination and the Parties are seeking to resolve or adjudicate the dispute or if Celgene cures such cause within [**] days after an adjudication that Concert has the right to terminate.

12.2.2 Celgene may terminate this Agreement with respect to any particular Licensed Product, or category of Licensed Products, or in its entirety, by providing sixty (60) days prior written notice to Concert.

12.3 Effects of Termination.

12.3.1 Upon expiration of the Royalty Term as to a Licensed Product in a country and payment of all royalties associated with Net Sales of such Licensed Product in such country (but not termination of this Agreement prior to such expiration and payment) and all development milestone payments associated with such Licensed Product that become payable prior to expiration of such Royalty Term, the licenses granted hereunder to Celgene USA or CIS for such Licensed Product in such country shall be deemed fully paid-up, irrevocable and non-terminable during and after the Term. For the avoidance of doubt, nothing in this Section 12.3.1 shall limit Celgene’s obligations to pay royalties and other amounts owed to Third Party licensors with respect to rights sublicensed to Celgene in accordance with Section 6.2.4 .

12.3.2 Upon termination of this Agreement in its entirety or with respect to a Licensed Product or category of Licensed Products pursuant to Sections 12.2.1 or 12.2.2 , the following shall apply with respect to such terminated Licensed Product(s):

(i) the licenses granted to Celgene USA and CIS under the Concert Patents and Concert Technology for such Licensed Product(s) shall terminate and revert to Concert, subject to Section 12.3.1 above;

(ii) the exclusivity provisions of Section 5.2 shall terminate and be of no further effect with respect to such Licensed Product(s);

(iii) Celgene shall return, or at Concert’s request, destroy all copies of Concert Confidential Information and/or Concert Technology disclosed or provided to Celgene hereunder with respect to such Licensed Product(s);

(iv) Concert shall have the right to publish Clinical Trial results and other results generated in its development and commercialization activities relating to the terminated Licensed Product(s); provided that Concert shall not have the right to publish any

 

47


Confidential Information of Celgene, including but not limited to clinical trial results or other data generated during the license term for such terminated Licensed Product(s). Celgene shall not issue any press releases or other public disclosure relating to the terminated Licensed Product(s).

(v) from and after the earlier of any notice of termination hereunder or the effective date of termination of this Agreement, Celgene and Celgene’s Affiliates shall refrain from making any public statement regarding any terminated Licensed Product, unless (A) Celgene or its Affiliate is required to make such statement pursuant to applicable Law, (B) such statement is made in a legally privileged manner, or (C) Concert shall have approved any such statement in writing, such approval not to be unreasonably withheld.

12.3.3 Termination of this Agreement, in its entirety or with regard to a particular Licensed Product, for any reason (i) shall be without prejudice to Concert’s right to receive all payments accrued before the effective date of such termination, including all payments on Net Sales for Licensed Products, and (ii) shall not release a Party hereto from any indebtedness, liability, right to damages or other obligation incurred hereunder by such Party before the date of termination.

12.3.4 The provisions of ARTICLE 1, ARTICLE 9, ARTICLE 13 and ARTICLE 14 and Sections 6.1, 6.4, 7.7, 7.8, 7.9, 7.10, 10.4, and 12.3 , as well as any other Sections or defined terms referred to in such Sections or necessary to give them effect shall survive termination or expiration of this Agreement and remain in force until discharged in full. Furthermore, any other provisions required to interpret and enforce the Parties’ rights and obligations or to wind up their outstanding obligations under this Agreement shall survive to the extent required.

ARTICLE 13

INDEMNIFICATION

13.1 Indemnification.

13.1.1 Concert shall indemnify, defend and hold Celgene and Celgene’s Representatives, harmless from any and all Losses incurred by any of them in connection with a claim by a Third Party as a result of:

(i) the breach of any covenant of, or warranty or representation made by Concert under this Agreement; or

(ii) the negligence, recklessness, or wilful misconduct of Concert or any of its Representatives; or

(iii) Concert’s, its Affiliates’, and its and those licensees’ (except Celgene) development, manufacture, use, offer for sale, sale, importation or promotion of any products made using any of the Concert Technology or covered by any of the Concert Patents, including without limitation any such Losses based on Third Party personal injury or product liability claims or Third Party infringement claims or based on activities conducted by Concert and its Representatives under each Development Program or activities outside this Agreement.

 

48


Notwithstanding the foregoing, Concert shall not be obligated to so indemnify, defend and hold Celgene and Celgene’s Representatives harmless to the extent that such Losses are caused by (a) the breach of any covenant of, or warranty or representation made by Celgene under this Agreement, (b) the gross negligence, recklessness or wilful misconduct of Celgene or any of its Representatives, or (c) Celgene’s and its Representatives’ activities conducted under each Development Program.

13.1.2 Celgene USA shall indemnify, defend and hold Concert and Concert’ Representatives, harmless from any and all Losses incurred by any of them in connection with a claim by a Third Party as a result of:

(i) the breach of any covenant of, or warranty or representation made by Celgene USA under this Agreement; or

(ii) the negligence, recklessness, or wilful misconduct of Celgene USA or any of its Representatives; or

(iii) the development, manufacture, use, offer for sale, sale, importation or promotion of Licensed Products by Celgene USA or its Representatives under this Agreement, including without limitation any such Losses based on Third Party personal injury or product liability claims or Third Party infringement claims or based on activities conducted by Celgene USA and its Representatives under each Development Program.

13.1.3 Notwithstanding the foregoing, Celgene USA shall not be obligated to so indemnify, defend and hold Concert and Concert’ Representatives harmless to the extent that such Losses are caused by (a) the breach of any covenant of, or warranty or representation made by Concert under this Agreement, (b) the gross negligence, recklessness or wilful misconduct of Concert or any of its Representatives, or (c) Concert’s and its Representatives’ activities conducted under each Development Program.

13.1.4 CIS shall indemnify, defend and hold Concert and Concert’ Representatives, harmless from any and all Losses incurred by any of them in connection with a claim by a Third Party as a result of:

(i) the breach of any covenant of, or warranty or representation made by CIS under this Agreement; or

(ii) the negligence, recklessness, or wilful misconduct of CIS or any of its Representatives; or

(iii) the development, manufacture, use, offer for sale, sale, importation or promotion of Licensed Products by CIS or its Representatives under this Agreement, including without limitation any such Losses based on Third Party personal injury or product liability claims or Third Party infringement claims or based on activities conducted by CIS and its Representatives under each Development Program.

Notwithstanding the foregoing, CIS shall not be obligated to so indemnify, defend and hold Concert and Concert’ Representatives harmless to the extent that such Losses are caused by (a) the

 

49


breach of any covenant of, or warranty or representation made by Concert under this Agreement, (b) the gross negligence, recklessness or wilful misconduct of Concert or any of its Representatives, or (c) Concert’s and its Representatives’ activities conducted under each Development Program.

13.2 Indemnity Procedures.

13.2.1 In the event that any Third Party asserts a claim with respect to any matter for which a Party (the “ Indemnified Party ”) is entitled to indemnification under Section 13.1 (a “ Third Party Claim ”), then the Indemnified Party shall promptly notify the Party obligated to indemnify the Indemnified Party (the “ Indemnifying Party ”) thereof; provided that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then only to the extent that) the Indemnifying Party is prejudiced thereby.

13.2.2 The Indemnifying Party shall have the right, exercisable by notice to the Indemnified Party within [**] days after receipt of notice from the Indemnified Party of the commencement of or assertion of any Third Party Claim, to assume direction and control of the defense, litigation, settlement, appeal or other disposition of the Third Party Claim (including the right to settle the claim solely for monetary consideration) with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party, and the Indemnifying Party may do so without prejudice to its right to dispute whether such claim involves a Third Party Claim subject to valid indemnification obligation hereunder. During such time as the Indemnifying Party is controlling the defense of such Third Party Claim, the Indemnified Party shall cooperate, and shall cause its Representatives to cooperate upon request of the Indemnifying Party and at Indemnifying Party’s cost, in the defense or prosecution of the Third Party Claim, including by furnishing such records, information and testimony and attending such conferences, discovery proceedings, hearings, trials or appeals as may reasonably be requested by the Indemnifying Party. In the event that the Indemnifying Party does not notify the Indemnified Party of the Indemnifying Party’s intent to defend any Third Party Claim within [**] days after notice thereof (including by affirmatively denying responsibility to defend the Third Party Claim), the Indemnified Party may (without further notice to the Indemnifying Party) undertake the defense thereof with counsel of the Indemnified Party’s choice and at the Indemnifying Party’s expense (including reasonable, out-of-pocket attorneys’ fees and costs and expenses of enforcement or defense). The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to join in (including the right to conduct discovery, interview and examine witnesses and participate in all settlement conferences), but not control, at its own expense, the defense of any Third Party Claim that the other Party is defending as provided in this Agreement.

13.2.3 The Indemnifying Party shall not, without the prior written consent of the Indemnified Party which shall not be unreasonably withheld, enter into any compromise or settlement that commits the Indemnified Party to take, or to forbear to take, any action. The Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third Party Claim involves equitable or other non-monetary relief, but shall not have the right to settle such Third Party Claim to the extent such Third Party Claim involves monetary damages without the prior written consent of the Indemnifying Party. Each of the Indemnifying Party and the Indemnified

 

50


Party shall not make any admission of liability in respect of any Third Party Claim without the prior written consent of the other Party, and the Indemnified Party shall use reasonable efforts to mitigate losses arising from the Third Party Claim.

13.3 Limitation of Liability.

IN NO EVENT SHALL ANY PARTY BE LIABLE UNDER THIS AGREEMENT FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, INCLUDING LOSS OF PROFITS OR REVENUE, SUFFERED BY A PARTY OR ANY OF ITS RESPECTIVE REPRESENTATIVES, EXCEPT (i) TO THE EXTENT OF ANY SUCH DAMAGES MUST BE PAID TO A THIRD PARTY IN CONNECTION WITH A THIRD PARTY CLAIM, OR (ii) IN THE EVENT OF AN INTENTIONAL AND WILFUL BREACH IN BAD FAITH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT CONTAINED IN THIS AGREEMENT BY THE OTHER PARTY.

ARTICLE 14

MISCELLANEOUS

14.1 Governing Law; Disputes.

14.1.1 Except as provided in Section 6.1 , this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to any rules of conflict of laws.

14.1.2 Except as provided in Section 3.3 , if any controversy or claim arising out of or relating to this Agreement cannot first be resolved by the Parties within [**] days after written notice thereof, then a Party must submit the controversy or claim to confidential non-binding mediation before a mediator mutually selected by the Parties. The Parties shall use Commercially Reasonable Efforts to cause the mediation hearing to be conducted within [**] months after the appointment of the mediator, and to use Commercially Reasonable Efforts to cause the recommendation of the mediator to be furnished within [**] after the conclusion of the mediation hearing. The recommendation of the mediator shall be provided in writing to the Parties.

14.1.3 If the Parties are not able to resolve their dispute within [**] months after the issuance of the mediator’s report provided pursuant to Section 14.1.2 , then either Party may institute litigation in any court of competent jurisdiction. The recommendations of the mediator and all activities, statements, papers, testimony or other materials disclosed or generated in connection with the mediation shall be subject to Fed. R. Civ. Proc. 403 and all similar state or foreign rules, and the Parties agree that none of the foregoing may be used by either Party in any such litigation.

14.1.4 Notwithstanding anything in Sections 3.3 , 14.1.2 , or 14.1.3 , the Parties shall each have the right to apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other similar interim or conservatory relief, as necessary, pending resolution under the procedures described in Sections 3.3 , 14.1.2 , or 14.1.3 .

 

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14.1.5 The Parties obligations under this Agreement are unique. If the Parties were to breach their obligations pursuant to this Agreement, including but not limited to ARTICLE 9 , the Parties each acknowledge that it would be extremely impracticable to measure the resulting damages. Accordingly, the Parties, in addition to any other available rights or remedies, may sue in equity for, and be entitled to, specific performance of this Agreement, without posting of a bond, and the Parties expressly waive the defense that a remedy in damages will be adequate.

14.2 Bankruptcy. All rights, options and licenses granted under or pursuant to this Agreement by Concert are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction, licenses of rights to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code. Each Party shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction, including Celgene’s right to exercise each License Option. In the event of the commencement of a bankruptcy proceeding by or against a Party under the U.S. Bankruptcy Code or any analogous provisions in any other country or jurisdiction, the other Parties shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in such other Parties’ possession, shall be promptly delivered to it (i) upon any such commencement of a bankruptcy proceeding upon another Party’s written request therefor, unless the Party subject to the bankruptcy proceeding elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under clause (i) above, following the rejection of this Agreement by or on behalf of the Party subject to the bankruptcy proceeding upon written request therefor by another Party.

14.3 Force Majeure.

No Party shall be held liable to another Party nor be deemed to have defaulted under or breached the Agreement for failure or delay in performing any obligation under the Agreement to the extent such failure or delay is caused by or results from causes beyond the reasonable control of the affected Party, including embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, fire, floods, or other acts of God, or acts, omissions or delays in acting by any governmental authority (including by a Regulatory Authority, for any reason other than lack of due diligence, negligence or misconduct of the affected) or another Party. The affected Party shall notify the other Parties of such force majeure circumstances as soon as reasonably practical, and shall promptly undertake all reasonable efforts necessary to cure such force majeure circumstances.

14.4 Severability.

If any one or more of the provisions contained in this Agreement is held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless the absence of the invalidated provision(s) adversely affects the substantive rights of the Parties. The Parties shall in such an instance use their best efforts to replace the invalid, illegal or unenforceable provision(s) with valid, legal and enforceable provision(s) which, insofar as practical, implement the purposes of this Agreement.

 

52


14.5 Waivers.

Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party or Parties waiving such term or condition. Neither the waiver by any Party of any term or condition of this Agreement nor the failure on the part of any Party, in one or more instances, to enforce any of the provisions of this Agreement or to exercise any right or privilege, shall be deemed or construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement.

14.6 Entire Agreements; Amendments.

This Agreement sets forth the entire agreement and understanding among the Parties as to the subject matter hereof and supersedes all agreements or understandings, verbal or written, made between Concert and Celgene before the date hereof with respect to the subject matter hereof, including the Mutual Confidentiality Agreement between Concert and Celgene USA, dated November 16, 2011 (“ Existing Confidentiality Agreement ”). All Confidential Information disclosed by Concert to Celgene pursuant to the Existing Confidentiality Agreement will be deemed to have been disclosed pursuant to this Agreement. Except for the Development Plan (which may be amended from time to time by the JSC subject to Section 3.1.5 ), none of the terms of this Agreement shall be amended, supplemented or modified except in writing signed by the Parties.

14.7 Construction.

Except where expressly stated otherwise in this Agreement, the following rules of interpretation apply to this Agreement: (i) “include”, “includes” and “including” are not limiting and mean include, includes and including, without limitation; (ii) definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms; (iii) references to an agreement, statute or instrument mean such agreement, statute or instrument as from time to time amended, modified or supplemented; (iv) references to a Person are also to its permitted successors and assigns; (v) references to an “Article”, “Section”, “Exhibit” or “Schedule” refer to an Article or Section of, or any Exhibit or Schedule to, this Agreement unless otherwise indicated; (vi) the word “will” shall be construed to have the same meaning and effect as the word “shall” and vice versa; (vii) the word “any” shall mean “any and all” unless otherwise indicated by context; (viii) the word “or” means in the alternative or together, i.e., “and/or” and (ix) the terms “dollars” and “$” shall mean dollars of the United States of America, unless otherwise indicated.

14.8 Assignment.

14.8.1 Except as provided in this Section 14.8 , this Agreement may not be assigned or otherwise transferred, nor may any right or obligation hereunder be assigned or transferred, by either Party without written consent of each other Party. Notwithstanding the foregoing, each Party may, without consent of another Party, assign this Agreement and its rights

 

53


and obligations hereunder in their entirety to an Affiliate or in connection with a Change of Control. Any attempted assignment not in accordance with this Section 14.8 shall be void. Any permitted assignee shall assume all assigned obligations of its assignor under this Agreement.

14.8.2 Concert shall not assign ownership (in whole or in part), in and to the Concert Patents or Concert Technology, in each case without the prior written consent of Celgene, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Concert may assign any such interest in whole or in part without such consent (i) to an Affiliate or (ii) in connection with a Change of Control; provided, however , that in each case, such assignment is in connection with a permitted assignment of this Agreement and to the same assignee as to which this Agreement is assigned, that such assignment is expressly made subject to the rights granted to Celgene under this Agreement, and that the assignee assumes in writing Concert’s obligations under this Agreement.

14.9 Subcontracting.

Celgene may subcontract any of its obligations under this Agreement without the prior written consent of Concert. Concert may subcontract any of its obligations under this Agreement; provided that Concert first provides Celgene written notice of its intent to subcontract such obligation(s) and identifies the subcontractor that will perform such obligation(s). Each Party shall ensure that, as to any subcontract under which the Third Party subcontractor will have access to any Confidential Information relating to a Licensed Product, the Third Party subcontractor is bound by obligations of confidentiality no less stringent than those imposed on such Party under this Agreement. Each Party shall ensure that, as to any subcontract under which a manufacturing consultant, contract manufacturer or other Third Party subcontractor is engaged to carry out activities that may generate inventions, discoveries, improvements or intellectual property relating to a Deuterated Product (“ Inventions ”), (i) all Inventions created, identified, conceived, reduced to practice or developed by the Third Party subcontractor in the scope of its, his or her engagement in connection with the subcontract agreement are appropriately documented and disclosed promptly to the subcontracting Party, and (ii) unless otherwise specifically agreed by the Parties, such Inventions that are specific to a Deuterated Product are either assigned to the subcontracting Party or exclusively licensed to the subcontracting Party, on a fully paid-up, royalty-free basis, with a right to sublicense through multiple tiers, and all other such Inventions are licensed to the subcontracting Party, on a fully paid-up, royalty-free basis, with a right to sublicense through multiple tiers, with respect to the Deuterated Product. In addition, to the extent necessary or desirable, or potentially necessary or desirable, for the development of the applicable Deuterated Product, each Party shall ensure that the applicable subcontract shall (A) grant the subcontracting Party a right to inspect the subcontractor’s relevant records and facilities; (B) require the subcontractor to be in good standing with all applicable Governmental Authorities; (C) require the subcontractor to comply (as appropriate) with current good laboratory practices, current good manufacturing laboratory practices or other Laws to the extent applicable to the services or deliverables to be provided by the subcontractor; and (D) require that the subcontractor has no outstanding violations or citations that would or may impair the services or deliverables to be provided by such subcontractor.

 

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14.10 Independent Contractor.

The relationship between Concert and Celgene is that of independent contractors. Concert and Celgene are not joint venturers, partners, principal and agent, employer and employee, and have no other relationship other than independent contracting Parties. The Parties’ obligations and rights in connection with the subject matter of this Agreement are solely and specifically as set forth in this Agreement, and the Parties acknowledge and agree that neither Party owes the other any fiduciary or similar duties or obligations by virtue of the relationship created by Agreement.

14.11 Notices.

All notices which are required or permitted hereunder shall be in writing and sufficient if delivered personally, sent by facsimile (and promptly confirmed by personal delivery, registered or certified mail or overnight courier), sent by nationally-recognized overnight courier or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:

 

If to Concert:

  

Concert Pharmaceuticals, Inc.

99 Hayden Avenue, Suite 500

Lexington, Massachusetts 02421

USA

Attn.: Chief Executive Officer

Facsimile: 1.781.674.5309

and copy to:

  
  

WilmerHale LLP

60 State Street

Boston, MA 02109

Attention: Steven D. Barrett, Esq.

Telephone: (617) 526-6000

Facsimile: (617) 526-5000

If to Celgene:

  

Celgene Corporation

86 Morris Avenue

Summit, New Jersey 07901

USA

Attn: President, Global Research and Early Development

Facsimile: 1.908.673.2766

and copy to:

  

Celgene Corporation

86 Morris Avenue

Summit, New Jersey 07901

USA

Attn: General Counsel

Facsimile: 1.908.673.2771

and copy to:

  

Celgene International Sàrl

Route de Perreux 1

2017 Boudry

Switzerland

Attn: General Counsel

Facsimile: 1.908.673.2771

 

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and copy to:

  

Thomas A. Briggs

Jones Day

12265 El Camino Real, Suite 200

San Diego, California 92130

USA

Facsimile: 1.858.314.1150

or to such other address as the Party to whom notice is to be given may have furnished to the other Party in writing in accordance herewith. Any such notice shall be deemed to have been given: (i) when delivered if personally delivered or sent by facsimile on a business day; (ii) on the business day after dispatch if sent by nationally recognized overnight courier; or (iii) on the fifth business day following the date of mailing if sent by mail.

14.12 Third Party Beneficiaries

None of the provisions of this Agreement shall be for the benefit of or enforceable by any Third Party, including any creditor of any Party. No Third Party shall obtain any right under any provision of this Agreement or shall by reason of any such provision make any claim in respect of any debt, liability or obligation (or otherwise) against either Party.

14.13 Performance by Representatives

To the extent that this Agreement imposes obligations on Representatives of a Party, such Party agrees to cause its Representatives to perform such obligations.

14.14 Binding Effect.

This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective heirs, successors and permitted assigns.

14.15 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. This Agreement may be executed by delivery of duly authorized and executed signature pages by facsimile.

IN WITNESS WHEREOF the Parties hereto have caused this Agreement to be executed by their duly authorized officers to be effective as of the Effective Date.

<Signature page follows.>

 

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Concert Pharmaceuticals, Inc.     Celgene Corporation
By:  

/s/ Roger Tung

    By  

/s/ Robert Hugin

Name:   Roger Tung, Ph.D.     Name:   Robert Hugin
Title:   President and CEO     Title:   Chairman and CEO
      Celgene International Sàrl
      By  

/s/ Robert Hugin

      Name:   Robert Hugin
      Title:   Managing Officer

 

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Schedule 1.13

CONCERT FOREIGN PATENTS

[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

[**]

   [**]    [**]    [**]    [**]    [**]

 

58


[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

 

59


[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

 

60


SCHEDULE 1.16

CONCERT USA PATENTS

[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

[**]

[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

 

61


[**]

 

Country

  

Title

   Serial Number    Filing Date    Inventor(s)    Status
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]
[**]    [**]    [**]    [**]    [**]    [**]

 

62


SCHEDULE 1.20

[**]

[**].

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of two pages were omitted.

 

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SCHEDULE 1.24

[**]

[**].

 

64


SCHEDULE 1.32

[**]

[**].

 

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EXHIBIT A: DEVELOPMENT PLAN FOR [**] PRODUCTS

Changes to the Development Plan will be made based on [**]

[**]

Confidential Materials omitted and filed separately with the Securities and Exchange Commission. A total of three pages were omitted.

 

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Exhibit 10.21

 

LOGO

January 16, 2014

D. Ryan Daws

Concert Pharmaceuticals Inc.

99 Hayden Avenue, Suite 500

Lexington, MA 02421

Dear Mr. Daws:

This agreement sets forth the terms of your employment as Chief Financial Officer of Concert Pharmaceuticals, Inc. (the “ Company ” or “ Concert ” and, with you, the “ Parties ”) reporting to the Company’s Chief Executive Officer, effective as of January 20, 2014 (the “ Effective Date ”). You agree to perform the duties of your position and such other duties as the Company’s Board of Directors (the “ Board ”) may reasonably assign to you from time to time.

At Concert you will develop strategies for company financing and represent the Company on financial and corporate strategy matters in dealings with investors and analysts, including the IPO and other public offerings the Company may pursue. You will serve as a key advisor to the Chief Executive Officer and Board of Directors and assist with the development and execution of the overall strategy and direction of the Company. Also, you will lead all financial operations of the company, including financial planning and budgeting, accounting and reporting, and investment management. In addition, as the Company may require, you will lead business development activities in collaboration with Concert’s senior management team.

1. Salary . You will receive annualized base salary of $280,000.00 per year, payable in accordance with the regular payroll practices of the Company and less applicable taxes and withholdings, as in effect from time to time. The base salary shall be subject to increase from time to time by the Compensation Committee of the Board (the “ Compensation Committee ”) in its exclusive discretion.

2. Bonus . During your employment, you are eligible for an annual discretionary performance bonus in addition to your base salary. Bonus compensation in any year, if any, will be based on your performance and/or that of the Company, in accordance with a general bonus program to be established by the Board (and administered by the Compensation Committee) and will be payable not later than two and one-half months following the calendar year, except as the bonus program may from time to time provide.

In addition, the Company will pay you a one-time signing bonus of ninety-seven thousand dollars ($97,000.00) in a lump sum. This signing bonus will be paid in the first payroll after the Effective Date. If your employment ends within the first 12 months after your date of employment because of your voluntary resignation (other than on a resignation for Good Reason) or because the Company terminates your employment for Cause, you agree to reimburse Concert the ninety-seven thousand dollar signing bonus, net of any taxes the Company withheld on such bonus, within two months following such termination.


3. Benefits; Vacation . You will be entitled to participate in all employee benefit plans from time to time in effect for employees of the Company generally. Your participation will be subject to the terms of the applicable plan documents and generally applicable Company policies. Benefits are subject to change at any time at the Company’s sole discretion. You will be eligible to accrue three weeks paid vacation in each calendar year (or such greater amount as is generally made available in accordance with the Company’s policies from time to time in effect), in addition to holidays observed by the Company. Vacation may be taken at such times and intervals as you shall determine, subject to the business needs of the Company, and otherwise shall be subject to the policies of the Company, as in effect from time to time.

Subject to approval by the Compensation Committee, which has expressed support for the terms of this offer, you will be awarded an option to purchase seven hundred thousand (700,000) shares of the common stock of the Company (with the number adjusted for any stock splits before the date of grant) at an exercise price equal to the then current fair market value of the Company’s common stock, as determined in good faith by the Board of Directors (the “ Option ”), pursuant to the Company’s standard form of option award agreement and subject to all terms thereof, but which will not be inconsistent with the terms of this letter agreement. The grant will be made and priced in connection with the effectiveness of the Company’s initial public offering. If the public offering does not go effective by April 1, 2014, the grant will be made on or within five business days after April 1, 2014 and will be priced using the most recent valuation obtained for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (“ Section 409A ” of the “ Code ”) (unless the Compensation Committee determines that such valuation cannot still then be reasonably used for purposes of Section 409A). One quarter of the shares subject to the Option shall vest as of the first anniversary of the Effective Date, provided that you remain employed by the Company on such date. The remaining three quarters of the shares subject to the Option will vest ratably, on a quarterly basis, on the last date of each of the next 12 quarters thereafter, provided that you remain in the Company’s employ at each such vesting date. The Company agrees that the granting of the Option is a material provision of this Agreement and that the failure to make a grant in accordance with the terms of this paragraph would be a material breach for purposes of Section 7(d)(ii) below.

4. Expense Reimbursement . The Company will pay or reimburse you for all and customary reasonable out-of-pocket business expenses incurred or paid by you in the performance of your duties and responsibilities for the Company, subject to any maximum annual limit and other restrictions on such expenses set by the Company and to such reasonable substantiation and documentation as the Company may specify. Any such reimbursement that would constitute nonqualified deferred compensation subject to Section 409A shall be subject to the following additional rules: (i) no reimbursement of any such expense shall affect your right to reimbursement of any other such expense in any other taxable year; (ii) reimbursement of the expense shall be made, if at all, not later than the end of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursement shall not be subject to liquidation or exchange for any other benefit.

 

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5. Confidentiality Agreement . You agree that you will execute on the Effective Date and comply with the Company’s standard Employee Confidentiality, Non-competition and Proprietary Information Agreement (copy attached, the “ Confidentiality Agreement ”) and complete an I-9 Employment Verification Form on or within three days following the Effective Date. It is understood and agreed that a breach by you of the Confidentiality Agreement shall constitute a material breach of this Agreement.

6. At-Will; Timing for Termination; Accrued Benefits . This employment letter is not intended to create or constitute an employment agreement or contract (express or implied) between you and the Company for a fixed term. It is also important for you to understand that Massachusetts is an “at will” employment state. This means that you will have the right to terminate your employment relationship with the Company at any time for any reason, although you are requested to give at least two weeks’ notice. Similarly, the Company will have the right to terminate its employment relationship with you at any time for any reason. You may terminate your employment hereunder for Good Reason (as defined below) by providing notice to the Company of the condition giving rise to the Good Reason no later than 30 days following the occurrence of the condition, by giving the Company 30 days to remedy the condition and by terminating employment for Good Reason within 30 days thereafter if the Company fails to remedy the condition. Upon your termination, the Company will pay on the date of termination any base salary earned but not paid through the date of termination and pay for any vacation time accrued but not used to that date. In addition, the Company will pay you any bonus that has been awarded to you and earned, but not yet paid on the termination of your employment (together with the preceding sentence, the “ Accrued Benefits ”). In the event of any termination of your employment, other than a termination under Section 7 or as provided for COBRA under Section 7(c), the Company shall have no obligation to you under this Agreement other than with respect to the Accrued Benefits.

7. Termination without Cause; Termination for Good Reason .

(a) Severance Pay . A termination by you for Good Reason, or any termination of your employment by the Company (other than for Cause, as defined below, death, or inability to perform as a result of physical or mental infirmity (“ disability ”)) shall entitle you to six months of severance pay (the “ Severance Pay ”) and the other compensation provided in this section, as well as to the Accrued Benefits. The Severance Pay shall be calculated on the basis of your base salary as of the date the Company gives you notice of your termination and shall be exclusive of any bonus or benefit payments. The Company will provide the Severance Pay in the form of salary continuation in accordance with the normal payroll practices of the Company, beginning with the Company’s next regular payroll period following the Effective Release Date (as defined below), with the first payment including any amounts that would have been paid between the termination date and the Effective Release Date if the payments had commenced on the termination date and with the remaining payments made proportionately over the remainder of the six month severance period. The receipt of any severance benefits provided for under this Section 7 or otherwise shall be dependent upon your delivery to the Company, within 60 days following the date of termination of employment, of an effective general release of claims in a form promptly provided by the Company; provided, however, that if the last day of the 60 day period falls in the calendar

 

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year following the year of your date of termination, the severance payments shall be paid or commence on the first payroll period of such subsequent calendar year following the Effective Release Date. The date on which your release of claims becomes effective is the “ Effective Release Date .”

(b) Effect of Change of Control . If a Change of Control (as defined below) occurs that is a 409A Change of Control Event (as defined below) and if, within one year following such Change of Control, the Company or any successor thereto terminates your employment other than for Cause, or you terminate your employment for Good Reason, then, in lieu of installments, the Severance Pay will be paid in a single lump sum in the Company’s next regular payroll period following the Effective Release Date (subject to the same delay provided above where the 60 day period ends in the following year); provided, however, that the payments will instead be made in installments as provided in the preceding section if the Change of Control is not also a 409A Change of Control Event. A “ 409A Change of Control Event ” is a “change in the ownership or effective control” of the Company or “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Treasury Regulation § 1.409A-3(i)(5). In addition, if a Change of Control occurs and if, within one year following such Change of Control, (a) the Company or any successor thereto terminates your employment other than for Cause or your employment ends on death or disability, or (b) you terminate your employment for Good Reason, then all stock options held by you at such time shall immediately vest in full, notwithstanding any contrary provision in any agreement evidencing any such stock option.

(c) COBRA . In addition to Severance Pay, if you are participating in the Company’s group health plan and/or dental plan at the time your employment ends and you exercise the right to continue participation in those plans under the federal law known as COBRA, or any successor law and if your employment has ended for a reason other than resignation without Good Reason or termination for Cause, the Company will continue to pay the full premium for such coverage that is applicable for active and similarly-situated employees who receive the same type of coverage (single, family, or other) until the earlier of (i) the end of the 12th month after your employment ends or (ii) the date your COBRA continuation coverage expires, unless the Company’s providing payments for COBRA will violate the nondiscrimination requirements of applicable law, in which case this benefit will not apply.

(d) Definitions .

i. For purposes of this Agreement, “ Cause ” shall include (i) your conviction or plea of guilty or nolo contendre to a crime involving moral turpitude which adversely affects your ability to perform your obligations to the Company or the business activities, reputation, goodwill or image of the Company or to a felony, (ii) your deliberate dishonesty or breach of fiduciary duty which could be reasonably expected to or does cause material loss, damage or injury to the Company, (iii) your material breach of the terms of this agreement or your failure or refusal to carry out any material tasks assigned to

 

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you by the Company in accordance with the terms hereof, which breach or failure (only as to those susceptible to cure) continues for a period of more than ten days after your receipt of written notice thereof and which could be reasonably expected to or does cause material loss, damage or injury to the Company, (iv) the commission by you of any act of fraud, embezzlement or deliberate disregard of a rule or policy of the Company known to you or contained in a policy and procedure manual provided to you which could be reasonably expected to or does cause material loss, damage or injury to the Company, or (v) the material breach or threatened breach by you of any of the provisions of the Confidentiality Agreement which could be reasonably expected to or does cause material loss, damage or injury to the Company. (“ Company ,” for purposes of this section, shall include the Company and any Company subsidiary.)

ii. “ Good Reason ” shall mean, without your consent: (i) material diminution in the nature or scope of your responsibilities, duties or authority, provided that neither of the following (x) or (y) shall constitute Good Reason: (x) the Company’s failure to continue your appointment or election as a director or officer of any of its Affiliates nor (y) any diminution in the nature or scope of your responsibilities, duties or authority that is reasonably related to a diminution of the business of the Company or any of its Affiliates, other than any such diminution resulting from the sale or transfer of any or all of the assets of the Company or any of its Affiliates; (ii) a material reduction in your base salary other than one temporary reduction of not more than 120 days and not in excess of 20% of your base salary in connection with and in proportion to a general reduction of the base salaries of the Company’s executive officers; (iii) relocation of your office more than 35 miles from Lexington, Massachusetts; or (iv) material breach by the Company of any material provision of this Agreement or any other service-providing agreement between the Company or any of its Affiliates and you.

iii. “ Change of Control ” shall mean (i) the acquisition of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly by any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), of securities of the Company representing a majority or more of the combined voting power of the Company’s then outstanding securities, other than an acquisition of securities for investment purposes pursuant to a bona fide financing of the Company; (ii) a merger or consolidation of the Company with any other corporation in which the holders of the voting securities of the Company prior to the merger or consolidation do not own more than 50% of the total voting securities of the surviving corporation; (iii) the sale or disposition by the Company of all or substantially all of the Company’s assets other than a sale or

 

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disposition of assets to an entity whose equity interests are held, directly or indirectly, entirely by the same persons and in the same proportions as the equity interests of the Company; or (iv) a change in the composition of the Board that results, during any one year period, in the Continuing Directors’ no longer constituting a majority of the Board (or, if applicable, the board of directors of a successor corporation to the Company), where the term “ Continuing Director ” means at any date a member of the Board (x) who was a member of the Board on the Effective Date or (y) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however , that there shall be excluded from this clause (y) any individual whose initial assumption of office after the Effective Date occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board.

8. Withholdings; Section 409A . Anything to the contrary notwithstanding, (a) all payments required to be made by the Company hereunder to you shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation, and (b) if and to the extent any portion of any payment, compensation or other benefit provided to you in connection with your employment termination is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A and you are a specified employee as defined in Section 409A(a)(2)(B)(i), as determined by the Company in accordance with its procedures, by which determination you hereby agree that you are bound, such portion of the payment, compensation or other benefit shall not be paid before the earlier of (i) the expiration of the six month period measured from the date of your “separation from service” (as determined under Section 409A) or (ii) the tenth day following the date of your death following such separation from service (the “ New Payment Date ” ). The aggregate of any payments that otherwise would have been paid to you during the period between the date of separation from service and the New Payment Date shall be paid to you in a lump sum in the first payroll period beginning after such New Payment Date, and any remaining payments will be paid on their original schedule. For purposes of this Agreement, (i) each amount to be paid or benefit to be provided shall be construed as a separate identified payment for purposes of Section 409A, (ii) neither you nor the Company shall have the right to accelerate or defer any payment or benefit hereunder unless permitted or required by Section 409A, and (iii) any payments that are due within the “short term deferral period” as defined in Section 409A or paid in a manner consistent with Treas. Reg. § 1.409A-1(b)(9)(iii) shall not be treated as deferred compensation unless applicable law requires otherwise. The terms of this employment letter are intended to be compliant with, or exempt from, Section 409A; provided, however, that the Company shall have no liability to you or to any other person in the event that the employment letter terms are determined not to be so compliant or exempt.

 

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9. Parachute Taxation . The Company will make any payments due to you without regard to whether Section 280G of the Code would limit or preclude the deductibility of such payments (or any other payments or benefits) and without regard to whether such payments would subject you to the federal excise tax levied on certain “excess parachute payments” under Section 4999 of the Code; provided, however, that if the Total After-Tax Payments (as defined below) would be increased by the reduction or elimination of any payment and/or other benefit (including the vesting of any equity awards), then the amounts payable under this Agreement or otherwise will be reduced or eliminated as follows, as determined by the Company, in the following order: (i) nonacceleration of any stock options whose exercise price is at or above the fair market value of the Company’s common stock as determined in the discretion of the Compensation Committee (taking into account, as appropriate, the proceeds that would be received in connection with the event covered by Section 4999) (“ Underwater Options ”), (ii) nonacceleration of any stock options other than Underwater Options, (iii) any vesting or distribution of restricted stock or restricted stock units, (iv) any other taxable benefits, (v) any nontaxable benefits, and (vi) the cash severance due under Section 7(a) above. Within each category described in clauses (i), (ii), and (iii), reductions or eliminations shall be made in reverse order beginning with vesting or distributions that are to be paid the farthest in time from the date of the event covered by Section 4999. The Company’s independent, certified public accounting firm will determine whether and to what extent payments or vesting under this Agreement are required to be reduced in accordance with the preceding sentence. If there is an underpayment or overpayment under this Agreement (as determined after the application of this paragraph), the amount of such underpayment or overpayment will be immediately paid to you or refunded by you, as the case may be, with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. For purposes of this Agreement, “ Total After-Tax Payments ” means the total of all “parachute payments” (as that term is defined in Section 280G(b)(2) of the Code) made to you or for your benefit (whether made under the Agreement or otherwise), after reduction for all applicable federal taxes (including the tax described in Section 4999 of the Code).

10. Miscellaneous .

(a) Notices . All notices required or permitted under this Agreement must be in writing and will be deemed effective upon personal delivery or three business days following deposit in a United States Post Office, by certified mail, postage prepaid, or one business day after it is sent for next-business day delivery via a reputable nationwide overnight courier service addressed in the case of notice to the Company at its then principal headquarters (with copies to the Chairman of the Board and the Company’s General Counsel, which will not constitute notice), and in the case of notice to you to the current address on file with the Company. Either Party may change the address to which notices are to be delivered by giving notice of such change to the other Party in the manner set forth in this Section 10(a).

(b) No Mitigation . You are not required to seek other employment or otherwise mitigate the value of any severance benefits contemplated by this Agreement, nor will any such benefits be reduced by any earnings or benefits that you may receive from any other source. Notwithstanding any other provision of this Agreement, any sum or sums paid under this Agreement will be in lieu of any amounts to which you may otherwise be entitled under the terms of any severance plan, policy, program, agreement or other arrangement sponsored by the Company or an affiliate of the Company.

 

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(c) Waiver of Jury Trial . TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, THE PARTIES HEREBY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR OTHER PROCEEDING ARISING IN WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE RELEASE IT CONTEMPLATES, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE PARTIES AGREE THAT ANY PARTY MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO WAIVE THEIR RIGHTS TO TRIAL BY JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR TO ANY OF THE MATTERS CONTEMPLATED UNDER THIS AGREEMENT, RELATING TO YOUR EMPLOYMENT, OR COVERED BY THE CONTEMPLATED RELEASE.

(d) Severability. Each provision of this Agreement is intended to be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Moreover, if an arbitrator or a court of competent jurisdiction determines any of the provisions contained in this Agreement to be unenforceable because the provision is excessively broad in scope, whether as to duration, activity, geographic application, subject or otherwise, it will be construed, by limiting or reducing it to the extent legally permitted, so as to be enforceable to the extent compatible with then applicable law to achieve the intent of the Parties.

(e) Assignment. This Agreement will be binding upon and will inure to the benefit of (i) your heirs, beneficiaries, executors and legal representatives upon your death and (ii) any successor of the Company. Any such successor of the Company will be treated as substituted for the Company under the terms of this Agreement for all purposes. The Company may assign this Agreement without your consent, and such an assignment will not terminate your employment for purposes of triggering your entitlement to severance. You specifically agree that any assignment may include rights under the Confidentiality Agreement without requiring your consent. As used herein, “ successor ” will mean any person, firm, corporation or other business entity that 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 and its subsidiaries. None of your rights to receive any form of compensation payable under this Agreement will be assignable or transferable except through a testamentary disposition or by the laws of descent and distribution upon your death or as provided in Section 10(k). Any attempted assignment, transfer, conveyance or other disposition of any interest in your rights to receive any form of compensation hereunder, except as provided in the preceding sentence, will be null and void.

 

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(f) No Oral Modification, Waiver, Cancellation or Discharge. This Agreement may only be amended, canceled or discharged or any obligations thereunder waived through a writing signed by you and the Board or any duly authorized executive officer of the Company.

(g) No Conflict of Interest . You confirm that you have fully disclosed to the Company and its affiliates, to the best of your knowledge, any circumstances under which you, your immediate family and other persons who reside in your household have or may have a conflict of interest with the Company. You further agree to fully disclose to the Company any such circumstances that might arise during your employment upon your becoming aware of such circumstances.

(h) Other Agreements . You hereby represent that your performance of all the terms of this Agreement and the performance of your duties as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by you in confidence or in trust prior to your employment with the Company. You also represent that you are not a party to or subject to any restrictive covenants, legal restrictions, policies, commitments or other agreements in favor of any entity or person that would in any way preclude, inhibit, impair or limit your ability to perform your obligations under this Agreement, including noncompetition agreements or nonsolicitation agreements, and you further represent that your performance of the duties and obligations under this Agreement does not violate the terms of any agreement to which you are a party. You agree that you will not enter into any agreement or commitment or agree to any policy that would prevent or unreasonably hinder your performance of duties and obligations under this Agreement.

(i) Disclosure of this Agreement . You acknowledge that the Company may provide persons or entities who may employ or engage you with a copy of the Confidentiality Agreement (or portions thereof) to highlight your continuing obligations to the Company. You also acknowledge that the Company may be obligated to disclose this Agreement or any portion thereof to satisfy applicable laws and regulations. You too are permitted to share a copy of the Confidentiality Agreement (or portions thereof) to the extent necessary to highlight your continuing obligations to the Company.

(j) Survivorship. The respective rights and obligations of the Company and you hereunder will survive any termination of your employment to the extent necessary to preserve the intent of such rights and obligations.

(k) Beneficiaries. You will be entitled, to the extent applicable law permits, to select and change the beneficiary or beneficiaries to receive any compensation or benefit payable hereunder upon your death by giving the Company written notice thereof in a manner consistent with the terms of any applicable plan documents. If you die, severance then due or other amounts due hereunder will be paid to your designated beneficiary or beneficiaries or, if none are designated or none survive you, your estate.

 

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(l) Company Policies . References in this Agreement to Company policies and procedures are to those policies and procedures in effect at the Effective Date, as the Company may amend them from time to time.

(m) Governing Law; Dispute Resolution . This Agreement must be construed, interpreted, and governed in accordance with the laws of the Commonwealth of Massachusetts without reference to rules relating to conflict of law. The Parties agree that the Federal Arbitration Act, 9 U.S.C. §1 et seq. and the American Arbitration Association’s National Rules for the Resolution of Employment Disputes (the “ National Rules ”) apply to the interpretation and enforcement of this Agreement. In case of any controversy, dispute, or claim directly or indirectly arising out of or related to this Agreement, or the breach thereof, or relating to your employment (including claims relating to employment discrimination), except as expressly excluded herein, each Party agrees to give the other Party notice of an intent to seek arbitration under this Agreement and 10 days to reach a resolution. Should resolution of any controversy or claim not be reached following provision of notice and a reasonable opportunity to cure, then the Parties agree that any controversy or claim arising out of or relating to this Agreement, including the arbitrability of the dispute itself, shall be settled by one arbitrator in accordance with the National Rules in effect at the time the arbitration demand is filed or such other rules as may be mutually agreed to by the Parties. The dispute will be arbitrated in Boston, Massachusetts, absent mutual agreement of the Parties to another venue. Any claim or controversy not submitted to arbitration in accordance with this Section 10(m) (other than as provided under the Confidentiality Agreement) will be waived, and thereafter no arbitrator, arbitration panel, tribunal, or court will have the power to rule or make any award on any such claim or controversy. In determining a claim or controversy under this Agreement and in making an award, the arbitrator must consider the terms and provisions of this Agreement, as well as all applicable federal, state, or local laws. The award rendered in any arbitration proceeding held under this Section 10(m) will be final and binding and judgment upon the award may be entered in any court having jurisdiction thereof. Claims for workers’ compensation or unemployment compensation benefits are not covered by this Section 10(m). Also not covered by this Section 10(m) are claims by the Company or by you for temporary restraining orders, preliminary injunctions or permanent injunctions (“ equitable relief ”) in cases in which such equitable relief would be otherwise authorized by law or pursuant to the Confidentiality Agreement. The Company will be responsible for paying any filing fee of the sponsoring organization and the fees and costs of the arbitrator; provided, however, that if you initiate the claim, you will contribute an amount equal to the filing fee you would have incurred to initiate a claim in the court of general jurisdiction in the Commonwealth of Massachusetts. Each party will pay for its own costs and attorneys’ fees, if any, provided that the arbitrator or court, as applicable, may award reasonable costs and expenses in favor of the prevailing party. The Company and you agree that the decision as to whether a party is the prevailing party in an arbitration, or a legal proceeding that is commenced in connection therewith, will be made in the sole discretion of the arbitrator or, if applicable, the court. Any action, suit or other legal proceeding with respect to equitable relief that is excluded from arbitration above must be commenced only in a court of the Commonwealth of Massachusetts (or, if appropriate, a federal court located within the Commonwealth of Massachusetts), and the Company

 

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and you each consent to the jurisdiction of such a court. With respect to any such court action, the Parties hereto (i) submit to the personal jurisdiction of such courts; (ii) consent to service of process by the means specified under Section 10(a); and (iii) waive any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction, inconvenient forum, or service of process.

(n) Interpretation. The parties agree that this Agreement will be construed without regard to any presumption or rule requiring construction or interpretation against the drafting party. References in this Agreement to “include” or “including” should be read as though they said “without limitation” or equivalent forms. References to “day” or “days” are to calendar days, unless the Agreement specifically refers to “business” days.

(o) Entire Agreement. This Agreement and any documents referred to herein represent the entire agreement of the Parties and will supersede any and all previous contracts, arrangements or understandings between the Company and you relating to matters covered by this Agreement.

Signatures on Following Page

 

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    Very truly yours,
   

/s/ Roger D. Tung

    Roger D. Tung
    President and Chief Executive Officer
Agreed and Accepted:    
Signature:    

/s/ D. Ryan Daws

   

1/20/2014

D. Ryan Daws     Date:

 

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Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated November 5, 2013 (except as it relates to Note 16, as to which the date is January 31, 2014), in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-193335) and related Prospectus of Concert Pharmaceuticals, Inc.

/s/ Ernst & Young LLP

Boston, Massachusetts

January 31, 2014