Earn Out Agreement

EXHIBIT 10.7


EARN OUT AGREEMENT


This EARN OUT AGREEMENT, made and entered into this 25/th/ day of April, 1994, by and between Whitby, Inc. ("Whitby"), a Virginia Corporation with offices located at 1211 Sherwood Avenue, Richmond, Virginia 23261 and Discovery Therapeutics, Inc. ("Discovery"), a Delaware corporation with offices located at 911 East Leigh Street, Richmond, Virginia 23219.


Whereas, Discovery has agreed to pay Whitby as additional compensation for the purchase of the Capital Stock of Whitby Research, Inc. ("Whitby Research") a percentage of royalties and other compensation for certain Patents and Know-How.


NOW, THEREFORE, in consideration of the promises, representations and conditions herein contained, the parties hereto agree as follows:


ARTICLE I. ASSETS SUBJECT TO THE EARN OUT AGREEMENT ----------------------------------------------------


Section 1.01


The following compounds, processes, formulations and products are subject to the Earn Out Agreement:


(a) The compounds, processes, formulations and/or products covered by the Patents and/or Know-How of Whitby Research as of the date of the closing of the sale of the Whitby Research, Inc. stock including (i) all Patents, Patent applications and Patent applications in preparation, (ii) compounds synthesized by or for Whitby Research as listed in the Compound Library and (iii) molecules not currently in the Compound Library but covered by one or more Patents or Know-How are subject to this Earn Out Agreement.


(b) The Compound Library shall consist of three categories:


Category I Compounds included in approved INDs.


Category II Compounds for which data on functional pharmacology (whole
tissue assay) has been obtained.


Category III All other compounds in the library.


Discovery acknowledges and agrees that the Compounds and Patents listed in Appendix A and B of this Agreement is the entire list of such compounds and patents delivered to Discovery pursuant to the Purchase Agreement dated April 25, 1994, by and between Whitby and Discovery ("Purchase Agreement") and that no other compounds or patents are required to be delivered by Whitby, Inc. to Discovery.


-------------------------------------------------------------------------------- Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as *. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission. --------------------------------------------------------------------------------


(c) "Know-How" shall mean the formulation, methods of administration, specifications, data and information relating to clinical, pharmacological, toxicological, analytical and/or other tests and studies transferred to Discovery, as well as all other information or data disclosed to Discovery pursuant to the Purchase Agreement.


(d) "Patents" shall mean all patents, patent applications and patent applications in preparation that were transferred to Discovery pursuant to the Purchase Agreement and listed in Appendix B.


ARTICLE II. COMPENSATION --------------------------


Section 2.01


(a) Discovery Therapeutics will remit or will cause Whitby Research to remit to Whitby, Inc. a portion of any payment received for products or processes using the Patents and/or Know-How of Whitby Research listed in Article I of this Agreement. The amount remitted shall be according to the schedule in Appendix C of this Agreement and shall be payable within ten (10) days after the end of the calendar quarter during which the first sale, license, use or payment occurs and quarterly thereafter.


(b) All obligations of payment, for Patent royalties, fees and other patent related payments will cease upon expiration of the last Patent whose claims cover the product, process or compound in question. Obligations for the payment of Know-How fees will continue for 15 years after expiration of the last Patent whose claims cover the product, process, formulation or compound in question.


ARTICLE III. REPORTS AND RECORDS ---------------------------------


Section 3.01


Discovery Therapeutics shall keep and shall cause Whitby Research to keep full, true and accurate books of accounts containing all particulars that may be necessary for the purpose of establishing the basis for the payments to Whitby, Inc. and compliance with this Agreement including, but not limited to, the number of products, total revenue for products or processes, deductions applicable as provided in Appendix C and total payments due. Said books of accounts shall be kept at Discovery's principal place of business. Said books and the supporting data shall be open at all reasonable times and upon reasonable notice for five (5) years following the end of the calendar year to which they pertain, to the inspection of Whitby, Inc. or an independent certified public accountant retained by Whitby, Inc., for the purpose of verifying payments and compliance with this Agreement.


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ARTICLE IV. GENERAL PROVISIONS -------------------------------


Section 4.01 - Assignment


This Agreement shall not be assignable by either party hereto; provided, however, Whitby or Discovery may assign their respective rights and obligations hereunder to a transferee of either party's entire business by sale, merger, acquisition or otherwise, provided that the transferee assumes all the obligations of the assignor set forth herein, and the assignor remains responsible for the performance of its obligations under this Agreement.


Section 4.02 - Governing Law


This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia without reference to the choice of law principles thereof.


Section 4.03 - Notice


Any notice or communication required under this Agreement shall be in writing and shall be sent by (i) commercial courier or (ii) personal delivery or (iii) telecopy to the following addresses:


TO WHITBY: COPY TO: Steven M. Mayer, Esq.
Whitby, Inc. V.P. and General Counsel
1211 Sherwood Av ...