PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT

PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT
BETWEEN
CYGNUS, INC.
AND
YAMANOUCHI PHARMACEUTICAL CO., LTD.
DATED
JULY 14, 1996


TABLE OF CONTENTS


PAGE


1. DEFINITIONS............................................................. 2


2. Grant of Distributorship................................................ 5
2.1. Exclusive Distributorship........................................ 5
2.2. Minor Improvement Product........................................ 6
2.3. Major Improvement Product........................................ 8
2.4. Meetings to Discuss Product Development.......................... 11
2.5. Right to Use Subdistributors..................................... 11
2.6. Sales Only in the Territory...................................... 12


3. Product Registration.................................................... 12


4. Obligations of Cygnus................................................... 14
4.1. Regulatory Submissions........................................... 14
4.2. Supply of Product................................................ 14
4.3. Quantity: Forecasts.............................................. 14
4.4. Delivery......................................................... 16
4.5. Acceptance and Rejection of Product in Case of Nonconformity..... 16
4.6. Inability to Supply.............................................. 16
4.7. Sample Products.................................................. 16
4.8. Technical Support................................................ 16
4.9. No Duty to Deliver if Product Terminated......................... 17


5. Obligations of Yamanouchi............................................... 17
5.1. General Obligations of Yamanouchi................................ 17
5.2. Korea............................................................ 17
5.3. Long Range Forecasts............................................. 18
5.4. Adjustments of Long Range Forecast, Quantity Forecast and Firm
Order............................................................ 18
5.5. Non-achievement of Long Range Forecast........................... 18
5.6. Marketing Obligations............................................ 18
5.7. Purchasing Requirements.......................................... 20


6. Payments................................................................ 20
6.1. Milestone Payments............................................... 20
6.2. Product Related Payments......................................... 20
6.3. Currency Conversion.............................................. 21
6.4. Payment Terms.................................................... 21
6.5. Taxes and Duties................................................. 21


7. Records and Audit Rights................................................ 22


8. Non-Competition......................................................... 23


i.


9. Adverse Reaction........................................................ 23


10. Export Law.............................................................. 23


11. Term and Termination.................................................... 24
11.1. Term............................................................. 24
11.2. Termination by Either Party for Cause............................ 24
11.3. Termination for Unsatisfactory Results........................... 25
11.4. Effect of Termination; Survivability of Certain Provisions....... 26
11.5. Termination Not Sole Remedy...................................... 27


12. Product Warranty and Warranty Disclaimers............................... 27
12.1. Cygnus Warranty.................................................. 27


13. Insurance............................................................... 28


14. Ownership............................................................... 29
14.1. Ownership........................................................ 29
14.2. Use of Non-Clinical and Clinical Data............................ 29


15. Confidentiality......................................................... 30


16. Trademarks.............................................................. 30
16.1. Trademark Registration........................................... 30
16.2. No Rights in Trademarks, Trade Names, Logos or Designations...... 31
16.3. After Termination or Expiration.................................. 32


17. Patent and Trademark Indemnification.................................... 32
17.1. Cygnus' Patent and Copyright Indemnity........................... 32
17.2. Limitation of Indemnity.......................................... 34
17.3. Settlement....................................................... 34


18. Limited Liability....................................................... 34


19. Infringement by Third Parties........................................... 35


20. Manufacturing in the Event of Bankruptcy................................ 35


21. General................................................................. 36
21.1. Amendment and Waiver............................................. 36
21.2. Governing Law and Legal Actions.................................. 36
21.3. Arbitration...................................................... 37
21.4. Headings......................................................... 38
21.5. Notices.......................................................... 38
21.6. Entire Agreement................................................. 38
21.7. Severability..................................................... 38
21.8. Basis of Bargain................................................. 38


ii.


21.9. Relationship of Parties.......................................... 38
21.10. Assignment....................................................... 39
21.11. Publicity and Press Releases..................................... 39
21.12. Force Majeure.................................................... 39
21.13. Remedies......................................................... 39


SCHEDULE A MILESTONE PAYMENTS


EXHIBIT A INITIAL GLUCOSE MONITORING PRODUCT


iii.


PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT


This Product Supply and Distribution Agreement (the "Agreement") is entered as of July ___, 1996 (the "Effective Date") by and between Cygnus, Inc. ("Cygnus"), a Delaware corporation, with its principal place of business at 400 Penobscot Drive, Redwood City, California 94063, and Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"), a Japanese corporation, with its principal place of business at 3-11, Nihonbashi-honcho 2-chome, Chuo-ku, Tokyo 103, Japan.


WHEREAS, Cygnus is a leading developer of non-invasive glucose monitoring systems and Cygnus owns (or is otherwise licensed or entitled to) certain Proprietary Rights (defined below) relating to the Products (defined below);


WHEREAS, Cygnus and Yamanouchi desire to commercially introduce the Products in the Territory (defined below);


WHEREAS, Yamanouchi has the capabilities and expertise to market, sell and distribute the Products in the Territory and Cygnus desires to maximize the long-term sales of the Products by developing new Products suitable for the market in the Territory in cooperation with Yamanouchi; and


WHEREAS, Cygnus and Yamanouchi are prepared to enter into a supply and distribution agreement on the terms and conditions set forth below;


NOW THEREFORE, in consideration of the mutual promises, undertakings and covenants herein expressed, the parties agree as follows:


1.
[*CONFIDENTIAL TREATMENT REQUESTED*]


1. DEFINITIONS.


1.1. "Affiliate Company" shall mean any company, corporation, or other business entity which owns or controls directly or indirectly, or is under common control with Cygnus or Yamanouchi, or which Cygnus or Yamanouchi owns or controls directly or indirectly by ownership of fifty percent (50%) or more of the outstanding voting stock of such corporation or business entity.


1.2. "Calculation Period" shall mean each of the following half year periods: April 1 through September 30 and October 1 through March 31.


1.3. "Component Products" shall mean with respect to any Initial Glucose Monitoring Product and Improved Glucose Monitoring Product, such products, parts or replacement components capable of sale or sold individually to consumers and including the Glucopad and the sensors described in Exhibit A.


1.4. "Contract Year" shall be for the first Contract Year, that annual period commencing on the first day of First Commercial Sale of the Initial Glucose Monitoring Product system in any country in the Territory. Subsequent Contract Years shall be annual periods commencing on the anniversaries of the first Contract Year.


1.5. "Delivery Date" shall mean a date for which delivery of a Product is properly requested in a purchase order.


1.6. "First Commercial Sale" shall mean, as to each Product, the first commercial sale by Yamanouchi.


1.7. "Fully Burdened Development Cost" of a Product means the following direct and indirect costs (as determined in accordance with generally accepted


2.
[*CONFIDENTIAL TREATMENT REQUESTED*]


accounting principles ("GAAP")), to the extent specifically attributable to an Improved Glucose Monitoring Product: *


1.8. "Improved Glucose Monitoring Products" shall mean (i) any and all systems for glucose monitoring which is based upon iontophoresis technology, except the Initial Glucose Monitoring Product system, and (ii) any Component Products thereof.


1.9. "Initial Glucose Monitoring Products" shall mean the glucose monitoring system and any Component Product thereof described and listed in Exhibit A as first approved for sale in the United States. * For each such change, * the modified version and any Component Product thereof shall be deemed the "Initial Territory Glucose Monitoring Product."


1.10. "Know-How" shall mean all know-how, techniques, trade secrets, practices, procedures, processes, inventions, methods, data, skill, experience, technology, test data, including but not limited to nonclinical data, special ability and information, including but not limited to improvements thereof relating to each Product.


1.11. "Long Range Forecast" shall have the meaning set forth in Section 5.3 of this Agreement.


1.12. "Major Improvement Product" shall mean any Improved Glucose Monitoring Product which (i) embodies or offers a substantial change in function or performance from existing Products, or (ii) incorporates any additional patent or patentable invention which has not been employed in any existing Product, or (iii) needs a clinical trial to obtain U.S regulatory approval for sale in the U.S. As used herein, a substantial change in function or performance will be deemed to exist for an entire product and the components thereof if such improvement exists in a major component


3.
[*CONFIDENTIAL TREATMENT REQUESTED*]


thereof, notwithstanding the absence of such improvements in the other components of the product system. Mere cosmetic or superficial changes do not constitute a substantial improvement in function or performance.


1.13. "Manufacturing Cost" means the aggregate of the following (as determined in accordance with generally accepted accounting principles): both direct and indirect costs specifically attributable to *


1.14. "Market Research" shall mean, with respect to each Product, market research to determine, among other things, market size, price, Product requirements and other appropriate market data.


1.15. "Minor Improvement Product" shall mean any Improved Glucose Monitoring Product that is not a Major Improvement Product.


1.16. "Non-Invasive Product" shall mean a glucose monitoring product that does not require sample extraction that penetrates the skin (other than an existing Product) for management of diabetes in humans.


1.17. "Payment Report" shall mean the report for every Calculation Period described in Section 6.2.3 of this Agreement.


1.18. "Product Launch" for a country shall mean the date such Product has received all necessary approvals and the first commercial sale of such Product has occurred in such country.


1.19. "Products" shall mean (i) any Initial Glucose Monitoring Product, (ii) any Improved Glucose Monitoring Product included in this Agreement pursuant to Sections 2.2 and 2.3 of this Agreement, and (iii) any Component Product.


4.
[*CONFIDENTIAL TREATMENT REQUESTED*]


1.20. "Proprietary Rights" shall mean all rights with respect to all patented or patentable material, including singularly or in groups, or subgroups, any component or ingredient thereof, medical, clinical, toxicological or other scientific data or information relating to the Products or the manufacture of the Products, trademarks, copyrights or copyrightable material, any Know-How and all business, technical and financial information disclosed by one party hereunder to the other. Such Proprietary Rights shall be deemed the confidential property of the disclosing party.


1.21. "Qualified Subdistributors" shall be a medical-device or pharmaceutical manufacturer or distributor of medical devices within the Territory selling to the same classes of customer within the Territory as Yamanouchi within the Territory.


1.22. "Submission" shall mean the filing of all materials specified by applicable governmental statutes and/or regulations as necessary to obtain approval for commercial sale within a particular country.


1.23. "Territory" shall mean Japan and Korea.


1.24. "Total Net Sales" for a period means *


1.25. "U.S. Regulatory Submission" shall mean a 510K or PMA submission (whichever the U.S. Food and Drug Administration determines to be applicable) to the U.S. Food and Drug Administration.


2. GRANT OF DISTRIBUTORSHIP.


2.1. EXCLUSIVE DISTRIBUTORSHIP. Subject to the terms and conditions of this Agreement and during the term hereof, Cygnus grants Yamanouchi an exclusive distributorship of the Products in the Territory.


5.
[*CONFIDENTIAL TREATMENT REQUESTED*]


2.2. MINOR IMPROVEMENT PRODUCT. If either Cygnus or Yamanouchi desire that a Minor Improvement Product be developed, either may make a written proposal (the "Proposal") to the other.


2.2.1. In the event either party wishes to make a Proposal it shall set forth (1) a description and proposed specifications of the product, (ii) if the Proposal is made by Cygnus, an estimate of the Fully Burdened Development Cost and details of the conditions for and amounts of milestone payments and (iii) a schedule for development. The party receiving the Proposal may accept or reject the Proposal. If, within * of sending of the Proposal, the receiving party has not provided notice in writing either (i) accepting the Proposal or (ii) offering a counter Proposal, the Proposal shall be deemed rejected. If the parties reach agreement, which must be evidenced in writing, and which must include express agreement upon the (i) description and proposed specifications; (ii) details of the conditions for and amounts of milestone payments totaling * and (iii) schedule for development, such Minor Improvement Product shall become a Product under this Agreement to be developed by Cygnus. Failure to reach such agreement within * of the giving of the first notice with respect to the Proposal shall be deemed a rejection of the Proposal. Yamanouchi shall make all milestone payments when due as provided in the agreement between the parties for such Minor Improvement Product. * All rights and obligations with respect to such accepted Minor Improvement Product shall be as provided in this Agreement for any Product. Cygnus shall have the right to make, have made, use, sell and to grant rights to any such accepted Minor Improvement Product outside the Territory. In the event the Proposal is rejected, Cygnus and Yamanouchi shall be prohibited during the


6.
[*CONFIDENTIAL TREATMENT REQUESTED*]


term of the Agreement from directly or indirectly manufacturing, distributing or offering for sale such Minor Improvement Product in the Territory and/or contracting with, licensing to or forming a venture with any third party for the purpose of manufacturing, selling, promoting, distributing or otherwise offering such Minor Improvement Product in the Territory; PROVIDED, HOWEVER there shall be no such restrictions upon Cygnus outside the Territory.


2.2.2. Yamanouchi may elect to terminate the development work for any Minor Improvement Product as set forth below by providing written notice of termination to Cygnus. In the event, Yamanouchi can demonstrate (i) that following completion of Cygnus' development work on a Minor Improvement Product, the Minor Improvement Product has actually failed to meet the agreed upon specifications and that such failure substantially and materially impairs the commercial value of the Minor Improvement Product; (ii) that following actual payment * or (iii) that Cygnus has actually failed to meet the deadline for completion of development and that the additional time required to complete development will substantially and materially impair the commercial value of the Minor Improvement Product, Yamanouchi may give notice of termination for cause ("Termination for Cause"). In the event of Termination for Cause * Upon Cygnus' determination that it has developed a product which reasonably meets the agreed upon specifications, Cygnus shall give notice of completion to Yamanouchi. Yamanouchi's right to give notice of termination shall expire within * of receipt of such notice. Upon the expiration of such * period, Yamanouchi shall be required to use reasonable efforts to obtain regulatory approval (if required) and launch the Minor Improvement Product as soon as reasonably practicable.


7.
[*CONFIDENTIAL TREATMENT REQUESTED*]


2.2.3. Cygnus may elect to terminate development work for any Minor Improvement Product if it in good faith determines that there is a substantial risk that (i) it will be unable to meet the agreed upon specifications or * (iii) that it will be unable to meet the agreed upon schedule for development. In such event, Cygnus may give Yamanouchi notice in writing terminating the project to develop such Minor Improvement Product. Following notice of termination, *


2.2.4. In the event either Yamanouchi or Cygnus terminate a Minor Improvement Product development project, Cygnus and Yamanouchi shall be prohibited during the term of the Agreement from directly or indirectly manufacturing, distributing or offering for sale such Minor Improvement Product in the Territory and/or contract licensing with, licensing to, or forming a venture with any third party for the purpose of manufacturing, selling, promoting, distributing or otherwise offering such Minor Improvement Product in the Territory; PROVIDED, HOWEVER, there shall be no such restriction upon Cygnus outside the Territory.


2.2.5. In the event that Yamanouchi has launched a Minor Improvement Product in the Territory and Cygnus launches a product outside the Territory, which is identical in each and every respect with the launched Minor Improvement Product, *


2.3. MAJOR IMPROVEMENT PRODUCT. If either party wishes to develop, manufacture or sell a Major Improvement Product, it may make a written proposal (the "Proposal") therefor to the other. Any such Proposal shall set forth the following: (i) a description and proposed specification of the product; (ii) if the Proposal is made by Cygnus, * payments with conditions for each payment and the amount thereof (each


8.
[*CONFIDENTIAL TREATMENT REQUESTED*]


payment conceived to be made in advance of performing the development work contemplated thereunder and in an amount estimated to cover *; and (iii) a schedule for development. In the event Cygnus has already commenced a Major Improvement Product as of the Effective Date of the Agreement, Cygnus shall make a Proposal in the first meeting set forth in Section 2.4 and in such case the Proposal shall set forth * in addition to items (i) through (iii) above. Following the making of any such Proposal, the receiving party shall have * from the sending of the Proposal to either (i) give written notice of acceptance or (ii) offer a counter-Proposal. If notice of acceptance or a counter-Proposal is not given within the * the Proposal shall be deemed rejected. If the parties reach agreement, which must be evidenced in writing and which must include agreement upon the (i) description and proposed specifications; and (ii) the details of the conditions for and the amounts of * and (iii) a schedule for development. Such Major Improvement Product shall become a Product under this Agreement to be developed by Cygnus. Failure to reach such agreement within * of the giving of the first notice with respect to the Proposal, shall be deemed a rejection of the Proposal.


2.3.1. In the event a Proposal given under the above Section 2.3 is accepted, Yamanouchi shall make all milestone payments when due as provided in the agreement between the parties. * All rights and obligations with respect to such accepted Major Improvement Product shall be as provided for any Product in this Agreement. Cygnus shall have the right to make, have made, use, sell and to grant rights to any such accepted Major Improvement Product outside the Territory.


9.
[*CONFIDENTIAL TREATMENT REQUESTED*]


2.3.2. Either party may terminate a Major Improvement Product by giving notice thereunder. In the event of termination, Yamanouchi shall be obligated to pay * through the date of notice of termination. Cygnus shall submit an invoice following notice of termination showing * In the event of termination by Cygnus, if Cygnus recommences work on the terminated Major Improvement Product, it shall make a new Proposal therefor under Section 2.3.


2.3.3. In the event that a Proposal is rejected or deemed rejected, or the development project is terminated by Yamanouchi under Section 2.3.2, Cygnus shall be free itself, or with a third party to develop, manufacture, distribute or sell or otherwise exploit the Major Improvement Product (and all future modifications to or evolutions thereof) within or outside the Territory. PROVIDED, HOWEVER, with respect to a rejected or deemed rejected Proposal or a Major Improvement Product for which development was terminated by Yamanouchi under Section 2.3.2, if Cygnus receives a proposal or offer from a third-party to sell, distribute or otherwise exploit such Major Improvement Product in the Territory, Cygnus shall give notice thereof to Yamanouchi, prior to concluding a binding agreement with the third-party. Such notice shall set forth all monetary consideration to be received under the proposal or offer from the third-party and the amount of Cygnus' Fully Burdened Development Cost incurred to date and Cygnus' estimate of the Fully Burdened Development Cost to complete development. Upon receipt of such notice, Yamanouchi shall have * to make a "Qualifying Offer." A "Qualifying Offer" shall be equal to * In the event Cygnus elects to distribute such previously rejected or deemed rejected Major Improvement Product in the Territory itself or through wholesalers, Cygnus shall give notice thereof to Yamanouchi, who shall


10.
[*CONFIDENTIAL TREATMENT REQUESTED*]


have * to make a Qualifying Offer. A Qualifying Offer where Cygnus is to distribute itself or through wholesalers must be equal to * In the event Cygnus elects to distribute such previuosly rejected or deemed rejected Major Improvement Product in the Territory itself or through wholesalers, Cygnus shall give notice thereof to Yamanouchi who shall have * to make a Qualifying Offer. A Qualifying Offer where Cygnus is to distribute itself or through wholesalers must be equal to * In the event Yamanouchi shall fail to make a Qualifying Offer fully meeting the requirements set forth in this section within * of the receipt of notice by Yamanouchi, in the case of a proposal by a third-party, Cygnus shall be free to conclude an agreement with respect to such Major Improvement Product or, in the case of distribution itself or with wholesalers, to commence such activity.


2.4. MEETINGS TO DISCUSS PRODUCT DEVELOPMENT. The parties shall meet every six months, or more often by agreement of both parties, to discuss product development. In such meetings, the parties may discuss the concepts of new products, estimated budgets for the development thereof and the timing of Launch.


2.5. RIGHT TO USE SUBDISTRIBUTORS. Yamanouchi may submit a request to Cygnus that Yamanouchi be allowed to utilize Qualified Subdistributors. Such request must be accompanied by a consent on the part of the proposed Qualified Subdistributor to be bound by all of the terms of this Agreement including the audit provisions set forth in Section 7. Such request shall not become effective without Cygnus' prior written approval which shall not be unreasonably withheld; PROVIDED, HOWEVER, that no approval is required in the event that Yamanouchi designates an Affiliate Company as a Qualified Subdistributor. Notwithstanding the giving of consent to a Qualified Subdistributor hereunder, Yamanouchi shall remain directly and primarily obligated to Cygnus with respect to Products received and sold by any Qualified Subdistributor including all payments, forecasts and marketing obligations.


11.
[*CONFIDENTIAL TREATMENT REQUESTED*]


2.6. SALES ONLY IN THE TERRITORY. Yamanouchi shall market, sell and distribute the Products only to persons or entities taking delivery in and located in the Territory.


3. PRODUCT REGISTRATION.


3.1. Yamanouchi shall be responsible, at its sole cost and expense, for * Yamanouchi shall use its reasonable efforts to make its Submission in each country in the Territory on the Initial Territory Glucose Monitoring Product or any Improved Glucose Monitoring Product included in this Agreement as soon as reasonably possible; PROVIDED, HOWEVER, in the case of the Initial Territory Glucose Monitoring Product, Yamanouchi shall u ...