Product Development & Distribution Plan

Confidential Materials omitted and filed separately with the
securities and Exchange Commission. Asterisks denote omissions.


Exhibit 10.1


EXECUTION COPY


PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT


This PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENT is entered into as of May 23, 2005 (the "Effective Date"), by and between Aspect Medical Systems, Inc., a Delaware corporation having a principal place of business at 141 Needham Street, Newton, Massachusetts 02464 ("AMS"), and Boston Scientific Corporation, a Delaware corporation having a principal place of business at One Boston Scientific Place, Natick, Massachusetts 01760 ("BSC").


Background


WHEREAS, AMS is interested in developing new applications of its brain-monitoring technology in the area of the diagnosis and treatment of neurological, psychiatric and pain disorders;


WHEREAS, BSC is willing to provide AMS certain funding in connection with such development efforts;


WHEREAS, the Board of Directors of AMS has amended the Rights Agreement dated November 29, 2004 by and between AMS and EquiServe Trust Company, N.A., as Rights Agent of AMS (the "Rights Plan"), pursuant to which rights under the plan would become exercisable if BSC acquires any shares of AMS' common stock such that, after such acquisition, BSC holds beneficial ownership of 29.5 percent or more of AMS' common stock or commences a tender offer for such stock; and


WHEREAS, AMS is willing to appoint BSC as the exclusive distributor for the products developed in connection with those efforts on the terms set forth herein.


NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, AMS and BSC agree as follows:


1. DEFINITIONS.


Capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings set forth below.


"AMS Field" means products designed for the early detection, diagnosis and management of patients with dementia caused by a neurological condition such as Alzheimer's disease, or with cognitive impairment that is likely a precursor to Alzheimer's disease.


"AMS Intellectual Property" shall mean all Intellectual Property which, at the relevant time of reference thereto, is owned by AMS or to which AMS through license or otherwise has or acquires rights; provided, however, that (i) "AMS Intellectual Property" shall specifically exclude Intellectual Property that may be licensed by BSC to AMS, and (ii) "AMS Intellectual Property" shall include Program Intellectual Property only if and to the extent provided in this Agreement.


"ASP" shall mean, with respect to any sales of any BIS-Screen Product and period of time, Net Sales of a Person during such period of time for the sale of such BIS-Screen Product, divided by the number of units of such BIS-Screen Product sold by such Person and its Affiliates during such period of time.


"Act" means the United States Food, Drug and Cosmetic Act and similar laws and regulations in foreign jurisdictions, all as may be amended from time to time.


"Affiliate" means with respect to any party, any Person or entity that, directly or indirectly, is controlled by, controls or is under common control with such party.


"Agreement" means this Agreement, including all Exhibits hereto (which are hereby incorporated by reference herein), as the same may be amended or supplemented from time to time in accordance herewith.


"Approved Major Category" means any Major Category in which the development of a BIS-Screen Product by AMS has been approved by the Steering Committee in accordance with the terms of Section 3.5(vi). For purposes of this Agreement, Depression (including the diagnosis of or detection of suicide ideation) shall be deemed an Approved Major Category as of the Effective Date.


"BIS-Screen Products" means any products that incorporate the BIS-Screen Technology in the BSC Field, provided, that BIS-Screen Products shall not include any BIS(R) consciousness monitoring products and related products (such as products designed for closed loop delivery of anesthesia, seizure detection, analgesia monitoring or other brain status indications) which are used contemporaneously and in conjunction with BIS(R) consciousness monitoring products, provided, that such BIS consciousness monitoring products and related products are not marketed or sold principally for use in the BSC Field. Any Specified [**] Product shall be a BIS-Screen Product.


"BIS-Screen Technology" means any EEG analysis technology developed by or for AMS, or to which AMS otherwise has the right to use as contemplated by this Agreement, which may be used for the diagnosis of neurological, psychiatric or pain disorders or screening or monitoring patient response to treatment options for such disorders.


"BSC Field" means all applications of the BIS-Screen Technology for the diagnosis of neurological, psychiatric or pain disorders or screening or monitoring patient response to treatment options for such disorders, provided, that the BSC Field shall not include applications specifically within the AMS Field.


"Contract Year" means the one-year period beginning on the first day of the first month immediately following the month in which the Effective Date occurs and ending on the first anniversary thereof, and each successive one-year period thereafter during the term of this Agreement.


2


"Confidential Information" means all data, specifications, training materials and other know-how related to the design, use, implementation, performance, manufacture, distribution or sale of the BIS-Screen Products, as well as all other information and data provided by either party to the other party hereunder in written or other tangible medium and marked as confidential, or if disclosed orally or displayed, identified as confidential prior to or at the time of disclosure and confirmed in writing as confidential within 10 days after disclosure, in each case except any portion thereof which: (i) is known to the receiving party before receipt thereof under this Agreement as evidenced by the receiving party's written records; (ii) is properly and lawfully disclosed to the receiving party by a third person who has the legal right to make such disclosure; (iii) is or becomes generally known in the trade through no fault of the receiving party; or (iv) is independently developed by the receiving party without use of such information, as evidenced by the receiving party's written records.


"Cost of Goods Sold" means, (a) with respect to any BIS-Screen Product manufactured by AMS or BSC, the cost of direct labor, materials, components and factory overhead, and related costs, in each case as determined in accordance with GAAP consistently applied, and (b) with respect to any BIS-Screen Product manufactured by a third party, the amount Distributor pays such third party for such BIS-Screen Product. Notwithstanding the foregoing, Cost of Goods Sold shall exclude, in any event, any Distribution Commission and shall include (regardless of whether or not recorded as part of Cost of Goods Sold on a Person's regularly-prepared financial statements) any royalties, to the extent that the inclusion of such amounts would otherwise be consistent with GAAP.


"Custom Third Party Product" is a BIS-Screen Product developed by AMS, after receipt of and in accordance with the approval of the Steering Committee in accordance with Section 3.5(b)(viii), without the use of the proceeds of any Development Payments, for the treatment of neurological, psychiatric or pain disorders.


"Development Period" means the five year period starting on the Effective Date of this Agreement and ending on the last day of the calendar month including the fifth anniversary thereof.


"Disposable Product" means a BIS-Screen Product that is intended for limited use, or a component of a larger BIS-Screen Product intended to be used for a limited number of uses. As an example, a separate sensor intended to be used a single time, or on a limited basis, which requires another device to collect, collate or interpret results collected by such sensor, would be considered a "Disposable Product."


"Distributor" shall mean BSC, in the case of any circumstances where BSC is distributing BIS-Screen Products manufactured by AMS hereunder, or AMS, in the case of any circumstances where AMS is distributing BIS-Screen Products manufactured by BSC hereunder.


"Excluded BIS-Screen Product" means any BIS-Screen Product (x) with respect to which the Product Completion Date occurs after the Product Cut-Off Date and which is not at a stage of


3


development, on or prior to the Product Cut-Off Date, such that a functional prototype that could be used in a clinical trial, including without limitation a Phase 1 or Phase 2 clinical trial, that could serve as the basis for Product Approval in the United States has been developed (any such BIS-Screen Products being referred to herein as "After-Developed Products"), (y) which may be used only for indications in Major Categories with respect to which BSC has previously exercised its Opt-Out Options, or (z) any Custom Third Party Products. Excluded BIS-Screen Products shall not include any Included BIS-Screen Products, including any BIS-Screen Products which become Included BIS-Screen Products as a result of a determination by the Steering Committee in accordance with Section 3.5(b)(xii).


"Existing [**] Program" means the existing development relationship which AMS is party to with a third party [**] manufacturer (the "Specified Third Party"), pursuant to which AMS has received a specified amount of funding to develop a new product (the "Specified [**] Product"), which may include BIS-Screen Technology, which Specified [**] Product is intended to provide a therapeutic option for the treatment of [**] through [**]. AMS hereby represents and warrants to BSC that AMS has not granted the Specified Third Party any rights to distribute or sell any Specified [**] Product or other product of AMS.


"FDA" means the United States Food and Drug Administration, or any successor entity.


"First BSC Sales Date" means the first day on which BSC sells a BIS-Screen Product which is generally available for end-user customers to an unaffiliated end-user customer or other distributor in the United States (other than "stocking" orders) following receipt of Product Approval and the commercial launch by BSC of such BIS-Screen Product.


"First Other Distributor Sales Date" means the first day on which any distributor other than BSC, including AMS or any third party distributor engaged after a determination of the Steering Committee to engage such distributor in accordance with Section 3.5(b)(xi), sells an Included BIS-Screen Product (other than a Specific [**] Product) which is generally available for end-user customers to an end-user customer or other distributor in the United States (other than "stocking" orders) following receipt of Product Approval and the commercial launch by such person of such BIS-Screen Product.


"Foreign Regulatory Authority" means a Regulatory Authority other than the FDA.


"GAAP" means United States generally accepted accounting principles.


"Included BIS-Screen Product" means any BIS-Screen Product (x) with respect to which the Product Completion Date has occurred on or prior to the Product Cut-Off Date, (y) which is at a stage of development, on or prior to the Product Cut-Off Date, such that a functional prototype that could be used in a clinical trial, including without limitation a Phase 1 or Phase 2 clinical trial, that could serve as the basis for Product Approval has been substantially developed, or (z) which has otherwise been designated as an Included BIS-Screen Product by the Steering Committee in accordance with Section 3.5(b)(xii). Included BIS-Screen Products shall not


4


include any BIS-Screen Products which may be used only for indications in Major Categories with respect to which BSC has exercised its Opt-Out Options.


"Intellectual Property" shall mean intellectual property or proprietary rights of any description including without limitation (i) the Patent Rights, copyrights, industrial designs, trademarks, service marks, logos, trade dress or trade name, (ii) related registrations and applications for registration, (iii) trade secrets, (iv) inventions, discoveries, improvements, modifications, know-how, technique, methodologies, works of authorship, design or data, whether or not patented, patentable, copyrightable or reduced to practice, including but not limited to any inventions, discoveries, improvements, modifications, know-how, technique, methodologies, works of authorship, designs or data embodied or disclosed in any: (1) computer source code (human readable format) and object code (machine readable format); (2) specifications; (3) manufacturing, assembly, test, installation, service and inspection instructions and procedures; (4) engineering, programming, service and maintenance notes and logs; (5) technical, operating and service and maintenance manuals and data; (6) hardware reference manuals; and (7) user documentation, help files or training materials, and (v) good will related to any of the foregoing.


"Major Category" means with respect to the BIS-Screen Products, any particular disease state or other significant application in the BSC Field. For purposes of this Agreement, [**] and [**] (including screening for [**] in connection with [**]), shall each be deemed a separate Major Category within the BSC Field.


"Manufacturer" means AMS, in any circumstances where AMS is manufacturing BIS-Screen Products for distribution by BSC hereunder, and BSC, in any circumstances where BSC is manufacturing BIS-Screen Products for distribution by AMS hereunder.


"Net Sales" of a Person means the aggregate amount of net sales recorded by such Person or any of its Affiliates from the sale or license of a BIS-Screen Products in the Territory, in accordance with generally accepted accounting principles, consistently applied by such Person across all similar product lines, if any, in connection with the preparation of such Person's audited financial statements. All sales of BIS-Screen Products invoiced in a currency other than U.S. Dollars shall be converted to U.S. Dollars on a monthly basis in accordance with BSC's standard practice prior to calculating the Net Sales of such BIS-Screen Products. In no event shall the Net Sales of any Person with respect to any BIS-Screen Products be reduced by any Distribution Commission that may be payable by any Person with respect to sales of such BIS-Screen Product.


When a BIS-Screen Product is sold by a Person in connection with or as a component of other components or products, then the computation of Net Sales shall be based on the relative average prices charged during the applicable quarter for the BIS-Screen Product and the other components or products when separately invoiced or priced. In the event the BIS-Screen Product and the other components or products were not separately invoiced or priced during the applicable quarterly period, the Net Sales computation shall be based on the relative fair market price which such Person would have charged for the BIS-Screen Product and other components


5


or products to an unrelated purchaser in an arm's length transaction.


"Opt-Out Period" means, with respect to any Major Category, the period beginning on the Effective Date and ending on the last day of the fifth (5th) Contract Year or, if later, the date which is six (6) months following the date on which the first Product Completion Date for a BIS-Screen Product in such Major Category has occurred.


"Patent Rights" means all patents, patent applications and rights to file patent applications that relate to any BIS-Screen Product or its manufacture, sale, use, design, import and are licensed to, owned or controlled by AMS now or in the future and, in each case, any reissues or extensions thereof and any foreign counterparts, divisions, continuations or continuations-in-part of any applications or substitutes therefor.


"Permitted Licenses" means any license of BIS-Screen Technology or Program Intellectual Property in the BSC Field, or the right to manufacture, market or sell BIS-Screen Products in the BSC Field, granted by AMS to a third party with the express approval of the Steering Committee.


"Person" means an individual, corporation, partnership, limited partnership, limited liability company, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof.


"Product Approvals" means, for any country or other jurisdiction in the Territory, those regulatory approvals and/or clearances required for importation, exportation, promotion, pricing, marketing and sale of any BIS-Screen Products in such country or other jurisdiction for use in one or more Major Category.


"Product Completion Date" will be deemed to have occurred for a BIS-Screen Product if each of the following conditions has been satisfied for such BIS-Screen Product : (a) such BIS-Screen Product shall have received final Product Approval in the United States for a specific indication; (b) AMS (if it has exercised the Manufacturing Option with respect to such BIS-Screen Product), BSC (if it shall have exercised the Manufacturing Option with respect to such BIS-Screen Product) or a third party manufacturer selected by the Steering Committee, has demonstrated the ability to manufacture and deliver units of such BIS-Screen Product in commercial quantities at least equaling BSC's reasonable internal forecast for the subsequent six (6) months, assuming an immediate market launch; (c) the sale of such BIS-Screen Product has not been enjoined by any court of competent jurisdiction as a result of the any claim by a third-party that the development, manufacture, marketing, sale or use of such BIS-Screen Product infringes or violates any Intellectual Property rights of such third-party; and (d) the Steering Committee shall have determined the Product Specifications for such BIS-Screen Product in accordance with Section 3.5(b)(vii).


"Product Cut-Off Date" means [**].


6


"Product Specifications" means with respect to any BIS-Screen Product, the specifications for such BIS-Screen Product which shall be developed by AMS, after consultation with BSC, prior to the Product Completion Date for such BIS-Screen Product and approved by the Steering Committee.


"Program" means the development of BIS-Screen Products by AMS pursuant to this Agreement.


"Program Intellectual Property" means individually and collectively all Intellectual Property that is conceived, created, discovered, developed, or reduced to practice or tangible medium of expression by one or more employees or consultants of AMS and/or one or more employees or consultants of BSC at any time after the Effective Date in connection with the conduct of the Program.


"Regulatory Authority" means any national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity in the Territory, including without limitation, the FDA, or any entity delegated authority by any such governmental entity, including for example any notified body.


"Reimbursement Approvals" means governmental and other approvals in any country or jurisdiction in the Territory, for a buyer to claim reimbursement at any level for the purchase of the BIS-Screen Products, from private or public health insurance organizations in such country or jurisdiction in the Territory.


"Territory" means all countries, and each of their respective territories and possessions, of the world.


"Trademarks" means the trademarks owned or controlled by AMS that may be used from time to time with respect to the BIS-Screen Products.


Other Defined Terms. Each of the following terms shall have the respective meaning ascribed to such term in the section of this Agreement set forth opposite such term below:


"After-Developed Product".................................................. Definition of Excluded
BIS-Screen Product "AMS"...................................................................... Introductory paragraph "AMS Development Obligations".............................................. Section 3.1 "AMS Distribution Election"................................................ Section 5.1(d) "BSC"...................................................................... Introductory paragraph "BSC Intellectual Property"................................................ Section 8.2(a) "Continuous Improvement Option"............................................ Section 3.4 "Coordinator".............................................................. Section 3.5(a) "Development Funding Obligation" Section 2.1 "Development Payment"...................................................... Section 2.2


7


"Distribution Commission".................................................. Sections 5.5 and 5.6 "Distribution Term"........................................................ Section 5.1(b) "Effective Date"........................................................... Introductory paragraph "GMP"...................................................................... Section 7.7 "Indemnifying Party"....................................................... Section 11.2 "Indemnitees".............................................................. Section 11.2 "Losses"................................................................... Section 11.1 "Manufacturing Option"..................................................... Section 4.1 "Option Exercise Date"..................................................... Section 4.1 "Opt-Out Options".......................................................... Section 5.1(b) "Payment Year"............................................................. Section 2.2 "Product Information"...................................................... Section 9.1 "QSR"...................................................................... Section 7.7 "Resource Plan"............................................................ Section 2.4 "Rights Plan".............................................................. Recitals "Specified [**] Product"................................................... Definition of Excluded
BIS-Screen Product "Specified Third Party".................................................... Definition of Excluded
BIS-Screen Product "Steering Committee"....................................................... Section 3.5(a) "Supply Forecast".......................................................... Section 6.1 "Transfer Price"........................................................... Sections 5.5 and 5.6


2 FUNDING COMMITMENT.


2.1 Funding Obligation by BSC. Subject to Section 2.4 and the terms and conditions of this Agreement, BSC agrees to provide AMS twenty-five million dollars ($25,000,000) (the "Development Funding Obligation"), to assist in the funding of AMS' efforts to develop BIS-Screen Products in Approved Major Categories.


2.2 Payment Date. The Development Funding Obligation shall be paid to AMS in separate payments of five million dollars ($5,000,000.00) (each, a "Development Payment"), with the first such payment to be made on May 31, 2005, and each of the four remaining payments to be made on or about May 31st of each of the four calendar years beginning with 2006 (each, a "Payment Year"), by wire transfer of immediately available funds within thirty (30) days of delivery by AMS to BSC of a written request therefor.


2.3 Acceleration of Payments. AMS may, from time to time during any Payment Year, request an acceleration of part of the Development Payment for a subsequent Payment Year, subject to an aggregate maximum of an additional two and a half million dollars ($2,500,000.00) for any Payment Year. BSC shall be entitled to accept or decline any such request for an acceleration of part of a Development Payment in its sole discretion. In the event BSC agrees to accelerate a portion or portions of a Development Payment for any Payment Year, the obligation of BSC to make a Development Payment for that year shall be reduced by all


8


amounts of such Development Payment accelerated to prior Payment Years, and in no event shall BSC be required to make Development Payments, in the aggregate, that exceed the Development Funding Obligation.


2.4 Use of Proceeds. Attached as Exhibit A hereto is a "Resource Plan" specifying AMS' current planned use of proceeds for the Development Payments. The Resource Plan shall be updated no less than annually by the Steering Committee in accordance with Section 3.5(b)(ix). AMS shall be required to use no less than eighty percent (80%) of the aggregate amount of the Development Payments paid to AMS during the Development Period to pay the fully burdened costs incurred by AMS in developing BIS-Screen Products in any Approved Major Categories during such period in accordance with the terms of the then-current Resource Plan, and shall be entitled to use up to twenty per cent (20%) of the aggregate amount of the proceeds of the Development Payments paid to AMS during the Development Period to pay the fully burdened costs incurred by AMS in developing BIS-Screen Products in the AMS Field, or in Major Categories which are not Approved Major Categories. The proceeds of the Development Payments may not be used for any other purpose. Without limiting the foregoing, AMS may not use the proceeds of any Development Payment in connection with the Existing [**] Program, or for the development of Custom Third Party Products. To the extent that AMS does not, prior to the end of the Development Period, spend the entire amount of the Development Payments paid to AMS during the Development Period in accordance with this Section 2.4, AMS shall be required to spend the balance of such amounts in accordance with the provisions of this Section 2.4 prior to the Product Cut-Off Date. For purposes of this Agreement, such fully burdened costs shall include the sum of all AMS direct labor (incurred at a rate to reflect both direct and indirect costs) and other direct costs (such as clinical trial expenses, consultants, etc.) for research & product development, regulatory clearances and clinical trials, market assessment and development, ongoing product support, recruiting and corporate and public communications relating to the Program, legal and audit expenses relating to the Program, as applicable, and for refining and continuously improving the BIS-Screen Products in the BSC Field, or in the AMS Field, as applicable.


3 DEVELOPMENT.


3.1 AMS Development Obligations; Development Costs. During the Development Period, AMS shall use its commercially reasonable efforts in light of the feasibility of obtaining rel ...