Product Development Agreement

PRODUCT DEVELOPMENT AND


COMMERCIALIZATION AGREEMENT


BETWEEN


ARADIGM CORPORATION


AND


SMITHKLINE BEECHAM, PLC


DATED


SEPTEMBER 30, 1997


2
TABLE OF CONTENTS


PAGE 1. DEFINITIONS............................................................2
1.1 "Accessories"....................................................2
1.2 "AERx Device"....................................................2
1.3 "AERx System"....................................................2
1.4 "Affiliate"......................................................2
1.5 "Analgesic Drug".................................................2
1.6 "Approval Application"...........................................2
1.7 "Aradigm Patents"................................................2
1.8 "Budget".........................................................3
1.9 "Commercialization Committee"....................................3
1.10 "Confidential Information".......................................3
1.11 "Control"........................................................3
1.12 "Development"....................................................3
1.13 "Development Committee"..........................................4
1.14 "Development Costs"..............................................4
1.15 "Development Plan"...............................................4
1.16 "Diligent Efforts"...............................................4
1.17 "Drug Master File"...............................................4
1.18 "Drug Product"...................................................5
1.19 "FDA"............................................................5
1.20 "Field"..........................................................5
1.21 "Finished Form"..................................................5
1.22 "IND"............................................................5
1.23 "Information"....................................................5
1.24 "Initial Product"................................................5
1.25 "Initiation".....................................................5
1.26 "Invention"......................................................5
1.27 "Joint Invention"................................................5
1.28 "Joint Patents"..................................................6
1.29 "Major Market Country"...........................................6
1.30 "Manufacturing Costs"............................................6
1.31 "NDA"............................................................6
1.32 "Net Sales"......................................................6
1.33 "Patent".........................................................7
1.34 "Phase I Trial"..................................................8
1.35 "Phase II Trial".................................................8
1.36 "Phase III Trial"................................................8
1.37 "Product"........................................................8
1.38 "PSB"............................................................8
1.39 "Regulatory Approval"............................................8
1.40 "Sales Forecast".................................................9
1.41 "SB Patents".....................................................9
1.42 "SB Proprietary Drug"............................................9
1.43 "Specifications".................................................9
1.44 "Territory"......................................................9


i. 3


1.45 "Third Party"....................................................9
1.46 "Third Party Payments"...........................................9
1.47 "U.S.A.".........................................................9


2. PRODUCT DEVELOPMENT...................................................10
2.1 Development Overview............................................10
2.2 Overall Management of Development Efforts.......................10
2.3 Development Plans...............................................11
2.4 Budgets.........................................................12
2.5 Reports.........................................................14
2.6 Development Diligence...........................................14
2.7 Specifications; Modifications to AERx Device....................16
2.8 Data Management Service.........................................17
2.9 Use of Analgesic Drug Outside Pain Management...................17
2.10 [*].............................................................18


3. REGULATORY FILINGS....................................................18
3.1 Approval Applications...........................................18
3.2 Adverse Events..................................................20
3.3 Assignment of Approval Applications and Royalty
Payment to SB...................................................20


4. MILESTONE PAYMENTS....................................................21
4.1 Initial Milestone Payments......................................21
4.2 Milestone Payments for Certain Development Events...............22
4.3 Milestone Payments for Additional Systems.......................22
4.4 Additional Payment Conditions...................................23


5. DISTRIBUTION LICENSE AND MARKETING....................................24
5.1 Distribution License............................................24
5.2 Grant Back License..............................................25
5.3 Overall Management of Commercialization Efforts.................25
5.4 Marketing Plans.................................................25
5.5 Marketing Diligence.............................................26
5.6 Reports.........................................................29
5.7 Packaging and Labeling..........................................29
5.8 Restrictive Covenants...........................................29
5.9 Restrictions on Distributors and Dealers........................30


6. MANUFACTURING AND SUPPLY..............................................30
6.1 Manufacturing Rights............................................30
6.2 Bulk Drug Substance.............................................30
6.3 Clinical Supply.................................................31
6.4 Commercial Product Supply.......................................31
6.5 Forecasting and Ordering Mechanisms.............................31
6.6 Resolution of Supply Problems...................................33


* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


ii.


4


6.7 Product Samples.................................................35
6.8 Delivery and Risk of Loss.......................................36
6.9 Quality of Manufacturing........................................36
6.10 Acceptance......................................................37
6.11 Manufacturing Facilities, Equipment and Licenses................38
6.13 Product Recall Procedures.......................................39


7. PRODUCT SUPPLY PAYMENTS...............................................41
7.1 Pricing of Clinical Materials...................................41
7.2 Purchase Price of Product.......................................42
7.3 Percentage of Sales.............................................42
7.4 Timing of Payments..............................................44
7.5 Withholding Taxes...............................................44
7.6 Compulsory Licenses.............................................45
7.7 Conversion of Net Sales.........................................45
7.8 Audit Rights....................................................45


8. WARRANTY AND PRODUCT SERVICE..........................................46
8.1 Warranty........................................................46
8.2 Disclaimer......................................................47
8.3 Product Help-Line...............................................47
8.4 Product Service.................................................47


9. INTELLECTUAL PROPERTY.................................................47
9.1 Ownership of Technology.........................................47
9.2 Prosecution and Maintenance of Patents; Abandonment.............48
9.3 Third Party Technology..........................................48
9.4 Intellectual Property Issues....................................49
9.5 Defense and Settlement of Third Party Patent Claims.............49
9.6 Third Party Claims Regarding Analgesic Drug.....................51
9.7 Payment for Third Party Licenses................................52
9.8 Enforcement of Aradigm Patent Rights............................53
9.9 Enforcement of Joint Patent Rights..............................54
9.10 Trademarks and Tradenames Generally.............................55
9.11 Trademark License...............................................55
9.12 Trademark Registration..........................................56
9.13 Goodwill and Use................................................56
9.14 Defense of Trademark Claim......................................56
9.15 Infringement of Product Mark....................................57
9.16 Trademark Litigation Indemnity..................................57


10. EXCHANGE OF INFORMATION, CONFIDENTIALITY AND PUBLICATION..............57
10.1 Exchange of Information.........................................57
10.2 Confidentiality.................................................58
10.3 Authorized Disclosure...........................................58


iii.


5


10.4 Publication.....................................................58
10.5 Confidentiality Issues in Bankruptcy............................59


11. REPRESENTATIONS & WARRANTIES..........................................59
11.1 Representations and Warranties of Aradigm.......................59
11.2 Representations and Warranties of SB............................60
11.3 Certain Additional Covenants....................................61


12. INDEMNIFICATION.......................................................61
12.1 Indemnification by Aradigm......................................61
12.2 Indemnification by SB...........................................62
12.3 Indemnity Procedure.............................................63
12.4 Limitation of Liability.........................................63
12.5 Liability Insurance.............................................63


13. DISPUTE RESOLUTION; ARBITRATION.......................................63
13.1 Dispute Resolution Process......................................63
13.2 Governing Law...................................................64


14. TERM OF AGREEMENT AND TERMINATION.....................................64
14.1 Term............................................................64
14.2 Termination For Material Breach.................................65
14.3 Termination by SB...............................................65
14.4 Termination For Bankruptcy......................................66
14.5 Consequences of Termination.....................................66
14.6 Accrued Rights, Surviving Obligations...........................66
14.7 Rights in Event of Bankruptcy...................................66


15. MISCELLANEOUS.........................................................67
15.1 Hart-Scott-Rodino Compliance....................................67
15.2 Press Releases; Disclosure of Agreement.........................67
15.3 Recordation.....................................................68
15.4 Entire Agreement; Amendment.....................................68
15.5 Assignment......................................................68
15.6 Notices.........................................................68
15.7 Severability....................................................69
15.8 Force Majeure...................................................69
15.9 Expenses........................................................69
15.10 Non-Waiver......................................................70
15.11 Disclaimer of Agency/Relationship of the Parties................70
15.12 Performance by Affiliates.......................................70
15.13 Further Actions.................................................70
15.14 Counterparts....................................................70
15.15 Official Language...............................................70
15.16 No Intellectual Property Rights Granted.........................71


iv.


6


PRODUCT DEVELOPMENT AND


COMMERCIALIZATION AGREEMENT


THIS PRODUCT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (the "Agreement") is made and entered into by and between ARADIGM CORPORATION, a California corporation having its principal place of business at 26219 Eden Landing Road, Hayward, California 94545 ("Aradigm"), and SMITHKLINE BEECHAM, PLC, a United Kingdom corporation having a principal place of business at New Horizons Court, Brentford, Middlesex, TW8 9EP England ("SB"), as of September 30, 1997 (the "Effective Date"). Aradigm and SB may be referred to herein as a "Party" or, collectively, as "Parties."


BACKGROUND


A. Aradigm has developed and owns the rights to a drug delivery system known as the AERx(TM) Pain Management System. This system may be capablE of delivering certain properly formulated analgesic drugs via inhalation to treat pain. To date, Aradigm has committed its own resources to complete Phase I testing of an AERx-morphine sulfate product and 28-day pre-clinical pulmonary toxicology studies with respect to such product and has discussed the regulatory requirements of such AERx system with the FDA.


B. Aradigm desires to enter into a collaborative relationship to support the completion of human clinical development of such AERx system for its use in the delivery of certain analgesic drugs for use in both inpatient and outpatient pain management settings and to commercialize the AERx system, once appropriate regulatory approval has been achieved, in conjunction with such analgesic drugs.


C. SB has substantial experience in the distribution, marketing and sale of pharmaceuticals. SB is willing to support Aradigm's efforts to complete development of the AERx system for its use in delivering certain analgesic drugs and obtain worldwide regulatory approval to market Aradigm's AERx system in conjunction with such analgesic drugs for pain management, in order to obtain exclusive marketing rights to such AERx system.


D. The Parties desire to enter into an agreement establishing the development and supply terms under which, at the direction of a development committee and a commercialization committee to be formed by the Parties, (a) Aradigm will be responsible (i) for completing development of the AERx device and drug packet for use in the delivery of certain analgesic drugs for pain management, (ii) for collaborating with SB on conducting the required clinical trials and obtaining the necessary marketing approvals, with SB's cooperation and certain financial support, and (iii) for manufacturing and supplying to SB the approved AERx system and formulated analgesic drugs in finished form, and (b) SB will collaborate with Aradigm in conducting such clinical trials and will have exclusive, worldwide rights to market and sell such AERx system and drugs for use in pain management. Contemporaneously with this Agreement, the Parties are also entering into a Stock Purchase Agreement pursuant to which SB shall purchase from Aradigm up to $10 million in Aradigm equity.


1 7


NOW, THEREFORE, in consideration of the foregoing and the covenants and promises contained in this Agreement, the Parties agree as follows:


1 DEFINITIONS.


As used herein, the following capitalized terms shall have the following meanings when used in this Agreement, and all terms defined in the singular shall have the same meanings when used in the plural (and vice versa, as appropriate), unless otherwise specified:


1.1 "ACCESSORIES" means the removable mouthpiece for the AERx DEVICE, constituting the airway and patient mouthpiece which can be removed from the AERx DEVICE for cleaning or replacement, and other accessories for the AERx DEVICE.


1.2 "AERX DEVICE" means the durable hand-held device developed by Aradigm for the delivery of ANALGESIC DRUGS by inhalation and known as the "AERx device", as such device may be modified pursuant to the Agreement.


1.3 "AERX SYSTEM" means an AERx DEVICE, a particular DRUG PRODUCT intended for use with such AERx DEVICE, and related ACCESSORIES intended for use with such AERx DEVICE, whether, in each case, in DEVELOPMENT and/or after REGULATORY APPROVAL.


1.4 "AFFILIATE" means a corporation, partnership, entity, person, firm, company, or joint venture, whether de jure or de facto, that controls, is controlled by or is under the common control with the referenced Party. For the purposes of this definition the word "control" (including, with correlative meaning, the terms "controlled by" or "is under the common control with") means (a) ownership directly or indirectly of at least fifty percent (50%) of the voting stock of the applicable entity, or such lesser percentage that is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction, or (b) the actual, demonstrated ability to control the management and operations of the applicable entity.


1.5 "ANALGESIC DRUG" means morphine, fentanyl, hydromorphone, oxycodone and methadone, and any other natural opiate or synthetic opioid compound or opioid agonist, antagonist or mimetic compound that is or, based on testing in appropriate models, is likely to be useful in the management of pain, except as the foregoing definition may be modified to add certain compounds as provided in Section 2.10 and/or to exclude certain compounds as provided in Section 2.9.


1.6 "APPROVAL APPLICATION" means the appropriate application(s), together with all documents, data and information concerning an AERx SYSTEM or any part thereof (including a specific DRUG PRODUCT) required to be included with such application, that is necessary to obtain REGULATORY APPROVAL to use, import, distribute, market and/or sell such AERx SYSTEM (or DRUG PRODUCT, as applicable) in a particular country.


1.7 "ARADIGM PATENTS" means all PATENTS in the FIELD owned or CONTROLLED during the term of the Agreement by Aradigm or an AFFILIATE of Aradigm


2 8


that generically or specifically claim or cover the manufacture, import, use, sale, or offer for sale of an AERx SYSTEM, AERx DEVICE, DRUG PRODUCT, ACCESSORY, or ANALGESIC DRUG contained in a DRUG PRODUCT and any intermediate used in the preparation thereof. Attached hereto as Exhibit A is a list of ARADIGM PATENTS existing as of the Effective Date, which Exhibit A shall be updated by ARADIGM on at least a semiannual basis during the term of the Agreement, provided, however, that unintentional omission of PATENTS from such Exhibit A shall not constitute a breach of the Agreement.


1.8 "BUDGET" shall have the meaning ascribed in Section 2.4(b) of the Agreement.


1.9 "COMMERCIALIZATION COMMITTEE" means the committee formed pursuant to Section 5.3.


1.10 "CONFIDENTIAL INFORMATION" means, with respect to a Party, INFORMATION that is disclosed by such Party to the other Party pursuant to this Agreement, and that is identified or acknowledged in writing to be confidential at the time of disclosure if disclosed in tangible form or within thirty (30) days after disclosure, to the extent practicable, if disclosed orally; provided, however, that CONFIDENTIAL INFORMATION shall not include any INFORMATION that:


(A) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party;


(B) was available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party by the other Party;


(C) became available to the public or otherwise part of the public domain after its disclosure to the receiving Party by the other Party, other than through any act or omission of the receiving Party in breach of this Agreement;


(D) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a THIRD PARTY who had no obligation to the other Party not to disclose such information to others; or


(E) was subsequently and independently developed by employees or others on behalf of the receiving Party or its AFFILIATES without use of any CONFIDENTIAL INFORMATION disclosed to the receiving Party or such others by the other Party.


1.11 "CONTROL" means, with respect to a material, INFORMATION or intellectual property right, possession by a Party of the ability to grant access to or a license or sublicense as provided for herein under such material, INFORMATION or right without violating the terms of any agreement or other arrangements with any THIRD PARTY existing at the time such Party would be first required hereunder to grant the other Party such access or license or sublicense.


1.12 "DEVELOPMENT" means conducting, pursuant to the applicable DEVELOPMENT PLAN, any needed work in completing the design and engineering


3 9


development of an AERx SYSTEM, AERx DEVICE, DRUG PRODUCT or ACCESSORY including, without limitation, modifications or changes made pursuant to Section 2.7, and any necessary in vitro, in vivo and clinical studies on the AERx SYSTEM; developing analytical methods, including acceptance test methods, relating to the AERx SYSTEMS; and preparing, submitting and prosecuting, as set forth in Section 3.1, all APPROVAL APPLICATIONS, as necessary to obtain REGULATORY APPROVAL of each such AERx SYSTEM for sale in the selected countries throughout the TERRITORY.


1.13 "DEVELOPMENT COMMITTEE" means the committee formed pursuant to Section 2.2.


1.14 "DEVELOPMENT COSTS" means, with respect to DEVELOPMENT of any PRODUCT, the [*] of conducting such DEVELOPMENT, including the costs of labor [*] materials, outside consultants, and overhead amounts allocable to such DEVELOPMENT efforts, and also including the costs incurred by SB under this Agreement in obtaining or purchasing from Aradigm clinical trial supplies of the AERx SYSTEM, AERx DEVICE, DRUG PRODUCT, placebos, and ACCESSORIES, but excluding costs and expenses of [*] In no event shall DEVELOPMENT COSTS include THIRD PARTY PAYMENTS.


1.15 "DEVELOPMENT PLAN" means the detailed written work plan prepared by the DEVELOPMENT COMMITTEE and approved by each of the Parties, pursuant to Section 2.3, for the DEVELOPMENT of a particular AERx SYSTEM with the goal of achieving REGULATORY APPROVAL of such AERx SYSTEM and of optimizing marketing and commercialization in accordance with the terms of this Agreement, as such plan may be amended from time to time as provided in Section 2.3.


1.16 "DILIGENT EFFORTS" means efforts no less than the applicable Party applies to the development, manufacture or commercialization of its own compounds or products with similar regulatory requirements and market potential.


1.17 "DRUG MASTER FILE" means the submission (or the applicable part thereof), together with all INFORMATION contained therein, submitted to the FDA in the U.S.A., or to the appropriate governing health authority in another country in the TERRITORY, providing information on the manufacturing facilities and manufacturing processes for making an AERx SYSTEM (or component thereof), including, without limitation, activities relating to manufacturing, processing, formulating, packaging and storage to be conducted by or under the direction of Aradigm or its AFFILIATES, which INFORMATION may be used to support REGULATORY APPROVAL of the AERx SYSTEM (or component thereof) in the U.S.A. or such other country. For purposes of this Agreement, the DRUG MASTER FILE shall include, without limitation, chemistry, manufacturing and control information, as defined in the FDA regulations at 21 CFR Section 314.50(d).


* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.


4. 10


1.18 "DRUG PRODUCT" means an AERx unit packet containing one or more ANALGESIC DRUGS appropriately formulated and packaged for delivery by the AERx DEVICE, whether for use in clinical trials, for promotional sampling, or for commercial purposes under this Agreement; "DRUG PRODUCT" also includes a cassette or cartridge or any other configuration, if any, that contains multiple unit dose packets of the formulated ANALGESIC DRUG.


1.19 "FDA" means the United States Food and Drug Administration, or the successor thereto.


1.20 "FIELD" means patient-controlled pulmonary administration of ANALGESIC DRUGS to humans.


1.21 "FINISHED FORM" means packaged and labeled and ready for sale to and use by the ultimate end user.


1.22 "IND" means the appropriate Investigational New Drug application, together with all documents, data and other information concerning the AERx SYSTEM that are required to be included in such application, filed or submitted with the FDA in the U.S.A., or the equivalent application to the appropriate governing health authority of any other country in the TERRITORY, for the purpose of obtaining approval or authority to commence or continue human clinical trials in such country for the purpose of seeking general marketing approval.


1.23 "INFORMATION" means information and data of any type whatsoever, in any tangible or intangible form, including without limitation inventions, practices, methods, techniques, specifications, formulations, formulae, knowledge, know-how, skill, experience, test data including pharmacological, biological, chemical, biochemical, toxicological and clinical test data, analytical and quality control data, stability data, studies and procedures, and patent and other legal information or descriptions, and inclu ...