Product Development And Option Agreement

NOTE: Information in this document marked with an "[*]" has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

Exhibit 10.4


PRODUCT DEVELOPMENT AND OPTION AGREEMENT

BETWEEN

NOVARTIS PHARMA AG

AND

CELL GENESYS, INC.


[*] 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.

This Product Development and Option Agreement (hereinafter, the " Option Agreement") is made and entered into as of this 23rd day of July 2003 (hereinafter the " Effective Date") between Cell Genesys, Inc. a Delaware corporation (hereinafter "Cell Genesys"), and Novartis Pharma AG, a Swiss corporation (hereinafter " Novartis").


WITNESSETH

WHEREAS , Cell Genesys has developed expertise to undertake broad drug discovery programs in connection with the Field;

WHEREAS , Novartis and its Affiliates are engaged in the research, development, marketing, manufacture and distribution of pharmaceutical compounds that are safe and effective in treating or preventing human and animal diseases and conditions;

WHEREAS, Novartis and Cell Genesys have entered into the Patent Assignment and License Agreement, dated as of even date herewith, pursuant to which Novartis has transferred and licensed certain intellectual property related to the Field; and

WHEREAS , in connection with the transfer and license referred to above, both parties desire to enter into a collaboration, the objective of which is the development and commercialization of certain products in the Field.

NOW THEREFORE , in consideration of the mutual covenants set forth in this Option Agreement, the parties agree as follows:

ARTICLE I

DEFINITIONS

All capitalized terms used but not otherwise defined in this Option Agreement shall have the meanings set forth in the Definitions Appendix, attached hereto as Exhibit VII.


ARTICLE II

PRODUCT DEVELOPMENT PROGRAM


2.1. Product Development Program

(a) Subject to the terms and conditions set forth in this Option Agreement, Cell Genesys shall diligently engage in pre-clinical product development of the Development Products (including any derivatives or back-ups thereof as a Substitute Product as provided under Section 2.4) into Product Candidates. No later than one hundred and twenty (120) Days from the Effective Date, Cell Genesys shall submit to Novartis the product development plan for each Development Product ("PDP") detailing Cell Genesys' proposed Research Program, together with a budget proposal and plans to meet the Development Information criteria in connection therewith. Cell Genesys will entertain, in good faith, any comments and suggestions Novartis may have regarding the PDP. Consistent with the foregoing, Cell Genesys shall be solely responsible for the details (and implementation) of the finalized PDP. The PDP shall be attached hereto and made part hereof as Exhibit I. Subject to Section 2.4, Cell Genesys shall use diligent and commercially reasonable efforts consistent with sound and reasonable business practices and judgment to develop the Development Products into Product Candidates as soon as reasonably practicable, devoting not less than the same degree of attention and diligence to such efforts that it devotes to such activities for other of its products of comparable market potential. In determining whether Cell Genesys is in compliance with the foregoing provisions, there shall be taken into account the normal course of drug development programs in the pharmaceutical industry conducted with sound and reasonable business practices and judgment for compounds with a comparable market potential.

[*] 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.

(b) Cell Genesys shall commence and conduct the Research Program with respect to the Development Products in accordance with the PDP. Cell Genesys shall ensure that it submits an IND for each of the Development Products (other than for Terminated Development Products) and Substitute Products (if applicable) to applicable Regulatory Authorities. Cell Genesys shall promptly notify Novartis of any acceptance or any objection or rejection of the submitted IND by the applicable Regulatory Authorities. Cell Genesys shall use commercially reasonable efforts to overcome any such objection or rejection until final acceptance of such IND by the applicable Regulatory Authorities. During the course of the Research Program, Cell Genesys shall promptly inform Novartis of any planned or implemented material change to or deviations from the PDP, together with the reasons for such changes or deviations. In the event that Novartis objects to or makes any comments or suggestions to any such changes or deviations, Cell Genesys shall entertain such objections, comments or suggestions in good faith, and implement any such objection, comments or suggestions acceptable to Cell Genesys.

2.2. Information Exchange

(a) Liaison Meetings.

Each party will designate not more than four (4) employees to act as liaisons for purposes of this Option Agreement (such employees, the " Liaisons"). The Liaisons will be individuals with expertise in research and development, or other matters as each party may determine in its sole discretion. The identities of the initial Liaisons will be communicated by the parties to each other . The parties may change their Liaisons at any time by providing notice of such change pursuant to the notice provisions of this Option Agreement. The Liaisons shall meet periodically, but no less than semi-annually or as otherwise agreed between the parties, to (i) review the progress made by Cell Genesys under the Research Program, (ii) provide Novartis with the occasion to exchange with Cell Genesys comments and suggestions to the further research under the Research Program, (iii) provide the parties with the possibility to prepare for an eventual exercise of Novartis' Option for Product Candidates in order to allow for seamless and efficient further development. The Liaisons' meetings shall be documented with minutes which will be approved by Novartis and Cell Genesys.

(b) Other Research and Development Programs.

Additionally, from the Effective Date until the 7th anniversary thereof or the termination of this Option Agreement, whichever occurs first, the parties shall meet semi-annually whereby Cell Genesys shall also provide information to Novartis regarding its other research and development programs with respect to Other Products and Additional Products in the Field (collectively, "Other Research and Development Programs"). Prior to consummating any transaction with a Third Party for the development or commercialization of such Other Products or Additional Products (other than any Rejected Products), Cell Genesys shall offer Novartis the right to negotiate the rights to develop or commercialize such Other Products or Additional Products (other than any Rejected Products). Novartis shall indicate its interest no later than twenty (20) Days from such offer. Upon Novartis' notification to Cell Genesys indicating with interest, the parties shall enter into exclusive negotiations (for a period to be mutually agreed by the parties, but no less than a period of sixty (60) Days from the time of such notification, or as otherwise mutually agreed by the parties) to agree in good faith on the terms and conditions any such right of development or commercialization.

2.3. Conduct of Research and Development

Cell Genesys will work, at its own cost, diligently and use commercially reasonable and good faith efforts, consistent with prudent business judgment and consistent with pharmaceutical and biotechnology industry standards to implement the PDP, with qualified, experienced scientists, and in material compliance with the requirements of applicable laws and regulations in an effort to achieve its objectives efficiently and expeditiously. Cell Genesys shall maintain adequate laboratories, offices and other facilities to carry out the activities to be performed pursuant to the PDP. In conformity with standard pharmaceutical and biotechnology industry practices, the requirement of regulatory authorities and the terms and conditions of this Option Agreement, Cell Genesys shall prepare and maintain, or shall cause to be prepared and maintained, complete and accurate written records, accounts, notes, reports and raw data with respect to activities conducted pursuant to the PDP and, upon Novartis' written request, shall make legible copies of the aforesaid available to Novartis . Novartis shall have the right to freely use such primary data for archiving and regulatory purposes. Upon reasonable advance notice, both Novartis and Cell Genesys agree to make its employees and non-employee consultants reasonably available at their places of employment to consult with the other party on issues arising during the implementation of the PDP and in connection with any request from any regulatory agency, including, without limitation, regulatory, scientific, technical and clinical testing issues. Cell Genesys shall keep Novartis reasonably informed as to all relevant discoveries and technical developments (including any inventions) made under the PDP. Cell Genesys shall prepare and distribute to Novartis a reasonably detailed written summary report relating to progress regarding the PDP on an annual basis.

[*] 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.

2.4 Discontinuation; Substitute Product

During the course of the Research Program, Cell Genesys may, subject to its obligations of diligence and commercial reasonableness in Section 2.1 hereof, discontinue further research and development with respect to a particular Development Product ("Terminated Development Product"). Cell Genesys shall promptly notify Novartis of such discontinuance and the parties shall meet to discuss in good faith any Substitute Product for such Terminated Development Product. In the event that within twenty four (24) months from the date of termination of the Terminated Development Product, Cell Genesys, at its discretion, begins development of a Substitute Product, then Cell Genesys shall offer to Novartis such Substitute Product, and if Novartis accepts such Substitute Product, such Substitute Product shall be deemed a Development Product hereunder (including a PDP and a budget for such Substituted Product). Cell Genesys shall conduct development of such Substitute Product using commercially reasonable efforts to develop such Substitute Product into a Product Candidate. Cell Genesys shall reallocate any unused portion of the Fee allocated or budgeted for the Terminated Development Product to the remaining Development Products or Substitute Product under development.

With respect to any Substitute Development Costs for a specific Substitute Product, Novartis shall, upon the exercise of the Option (and the execution of the Development License and Commercialization Agreement in connection therewith) with respect to such Substitute Product, reimburse Cell Genesys [*] of such Substitute Development Costs for such Substitute Product, in a manner and time to be mutually agreed by the parties.

2.5. Subcontractors

Cell Genesys may perform some of its obligations under the Research Program through one or more competent subcontractors, provided that (i) Cell Genesys shall first notify Novartis of its intent to engage such subcontractor, (ii) none of Novartis' rights hereunder are diminished or otherwise adversely affected as a result of such subcontracting, and (iii) the subcontractor undertakes in writing obligations of confidentiality and non-use regarding Confidential Information which are substantially the same as those undertaken by Cell Genesys pursuant to this Option Agreement. Cell Genesys will at all times be responsible for the performance and payment of such subcontractor.

2.6. Conflict of Interest

During the term of the Option Agreement, in order to avoid any conflict of interest, Cell Genesys and Novartis hereby agrees to cooperate in the Field with each other by informing each other without delay if one party intends to take up a collaboration project with a Third Party that might cover or affect the Field, in whole or in part.


ARTICLE III

PAYMENTS AND ROYALTIES


3.1. Payment

At the Effective Date, Novartis shall make a non-refundable cash payment to Cell Genesys in the amount of twenty eight and a half million US Dollars (USD $28,500,000) (hereinafter the " Fee"). Novartis shall make this payment to a Cell Genesys account communicated by Cell Genesys to Novartis . Cell Genesys shall use the Fee solely and exclusively to pay for development costs directly attributable to and incurred in connection with the Research Program with respect to the Development Products and Substitute Products (if applicable) and the budget set forth in the PDP. The parties hereto agree that within ninety (90) Days after the end of the first and second anniversary of the Closing, Cell Genesys shall provide Novartis a statement setting out in reasonable detail such development costs associated with the Research Program with respect to the Development Products and Substitute Products (if applicable). Except as expressly provided in this Option Agreement, Novartis shall have no further obligation to provide any additional financing to Cell Genesys in connection with the Research Program with respect to the Development Products and Substitute Products (if applicable).

[*] 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.

Cell Genesys covenants that the Fee paid by Novartis hereunder shall be deposited and remain in a bank account other than an account with Fleet National Bank, and that the Fee (or any portion thereof) shall not be in anyway, directly or indirectly, serve as collateral for any obligations of Cell Genesys (including, without limitation, having a security interest or a lien held by a Third Party on the Fee).

3.2 Option Payment

For each Product Candidate that Novartis exercises its Option in accordance with Article IV, upon the execution of the Development License and Commercialization Agreement for such Product Candidate, Novartis shall make a non-refundable, one-time payment to Cell Genesys of [*] for each such Product Candidate.

3.3 Royalties for Refused Product Candidate and Other Products

For each Refused Product Candidate or Other Product sold by Cell Genesys or any Third Party licensee or sublicensee of Cell Genesys, Cell Genesys shall pay Novartis the amount of [*] of the Adjusted Net Sales of such Refused Product Candidate or Other Product.

3.4 Royalties for Additional Products

For each Additional Product sold by Cell Genesys or any Third Party licensee or sublicensee of Cell Genesys, Cell Genesys shall pay Novartis the amount of [*] of the Adjusted Net Sales of such Additional Product.

3.5 Royalties for China

Notwithstanding anything to the contrary hereunder, for each Product sold by Cell Genesys or any Third Party licensee or sublicensee of Cell Genesys in China, Cell Genesys shall pay to Novartis the amount of [*] of the Adjusted Net Sales of such Product.

3.6 Payment and Sales Reports

Royalties pursuant to Sections 3.3, 3.4 and 3.5 shall be payable to Novartis by Cell Genesys on a quarterly basis. Cell Genesys shall, within forty-five (45) Days after the end of each applicable calendar quarter, pay Novartis such royalties for such quarter by wire transfer from Cell Genesys to an account designated by Novartis, following wire transfer instructions specified by Novartis periodically to Cell Genesys. Together with such payment, Cell Genesys shall furnish or cause to be furnished to Novartis on a quarterly basis a Sales Report covering the applicable calendar quarter. With respect to sales of the aforementioned Products invoiced in U.S. Dollars, the Adjusted Net Sales amounts and the amounts due to Novartis hereunder shall be expressed in U.S. Dollars. With respect to sales of the products invoiced in a currency other than U.S. Dollars, the Adjusted Net Sales and amounts due to Novartis hereunder shall be expressed in the domestic currency of the party making the sale, together with the U.S. Dollar equivalent of the amount payable to Cell Genesys, calculated using a monthly exchange rate as reported in the Wall Street Journal at the last Business Day of such month for the translation of foreign currency sales into U.S. Dollars.


ARTICLE IV

LICENSE OPTION

4.1. Product Candidate

During the course of the Research Program, when and if Cell Genesys has completed a Proof of Concept Study with respect to a Product Candidate, Cell Genesys shall promptly notify Novartis of this fact and shall provide Novartis all of the Development Information (as defined in Section 4.2. below) with respect to such Product Candidate.

[*] 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.

4.2 Development Information


Cell Genesys shall provide Novartis with the following with respect to each Product Candidate (collectively, the "Development Information"):

(a) the results of Proof of Concept Study, and the information required under Exhibit III attached to this Option Agreement, including, without limitation, true and correct copies of all INDs submitted to the applicable Regulatory Authorities in connection therewith;


(b) all other material information known to Cell Genesys about the proposed Product Candidate which shall include, without limitation, all data relating to a Product Candidate, all results of the Proof of Concept Study, written information on registered interaction with Regulatory Authorities and any studies and materials on health and safety , including analysis results and raw data from the pre- clinical development studies ;


(c) any previously undisclosed information with respect to Cell Genesys Technology relating to the Product Candidate;


(d) knowledge of Cell Genesys regarding Third Party IP rights necessary to commercialize the Product Candidate; and


(e) [*] an amount of any biological or chemical substance as is reasonably necessary for Novartis to exercise its Option. Such substance shall be accompanied by a certificate of analysis and shall contain no warranty other than that of conformity with the certificate of analysis.

4.3 Acceptance of Development Information

Upon receipt of the Development Information for Cell Genesys, Novartis shall have the right to review the Development Information and, within reasonable time (not to be later than thirty (30) Days), to request for additional Development Information necessary to exercise the Option. Novartis shall have the right to perform its own tests on such Product Candidate and Cell Genesys shall make all reasonable effort to cooperate with Novartis in connection with such tests.

4.4 Option Period

Upon the receipt of all Development Information (including supplemental Development Information requested by Novartis), Novartis shall have a period of sixty (60) Days therefrom to exercise the Option (the "Option Period" ). Should Novartis reasonably determine during the Option Period, that the Development Information is not complete, the expiration of the Option Period will be suspended until Cell Genesys complies with such determination, or until any dispute thereof is resolved. Unless Cell Genesys disputes whether the Development Information is not complete, Cell Genesys shall perform such activities as identified with particularity by Novartis to correct any of such shortcomings and resubmit to Novartis the required Development Information. During the time from the notice of Novartis to Cell Genesys of this non-satisfaction and until Cell Genesys resubmits to Novartis the Development Information, the Option Period shall be stayed. Notwithstanding anything to the contrary hereunder, unless otherwise agreed by the parties, in no event shall the Option Period for a particular Product Candidate (together with all extensions thereof) exceed one hundred and twenty (120) Days from the initial receipt of the Development Information for the relevant Product Candidate.

4.5 Exclusive Option

During the Option Period , Novartis shall have the exclusive right and option (the "Option") to select any and all Product Candidates proposed to Novartis by Cell Genesys hereunder for further development and commercialization, under the terms and conditions set forth in the Development License and Commercialization Agreement . During the Option Period (including any extensions thereof) or until Novartis has provided written notice to Cell Genesys that it will elect not to exercise its right and option hereunder, whichever occurs first, Cell Genesys shall not grant any licenses with respect to the Product Candidate to any Third Party other than a license in respect to the territories of China. After expiration of the Option Period (if an Option is not timely taken by Novartis) or, if earlier, on receipt of such written notice from Novartis not to exercise the Option, Cell Genesys shall be free to grant licenses and to assign any and all of its rights with respect to a Product Candidate to any Third Party, subject to any other restrictions in the Transaction Documents.

[*] 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.

4.6. Extension of Option Period

Novartis may further propose to Cell Genesys by written notice delivered during the Option Period, that the Option Period for the Product Candidate be extended for additional studies or data generation for a specified time to permit Novartis, at its expense, to conduct such additional studies of the Product Candidate as may be specified in the notice. Cell Genesys shall discuss this request with Novartis and the parties shall reach a mutual agreement in good faith with respect to the requested extension of the Option Period and the conduct of additional studies. At the request of Novartis, Cell Genesys shall supply Novartis with such amounts of the biological or chemical substances as reasonably necessary for Novartis to conduct such additional studies during the Option Period. Such reference substance shall be accompanied by a certificate of analysis and shall contain no warranty other than that of conformity with the certificate of analysis.


4.7. Exercise of Option


Novartis may exercise its Option and accept a Product Candidate for further development and commercialization by delivery to Cell Genesys, within the Option Period, by providing to Cell Genesys a written notice of exercise (an " Exercise Notice" ), specifying the Product Candidate as to which the Option is being exercised . No later than ten (10) Days after such Exercise Notice is received by Cell Genesys, (i) both parties shall be obliged to duly execute the Development License and Commercialization Agreement, and (ii) Cell Genesys shall provide Novartis with updated Exhibit I to the Development License and Commercialization Agreement. For the avoidance of doubt, it shall be understood that the terms and conditions of the Development License and Commercialization Agreement shall not be changed or amended, except as provided for in this Section 4.7, and that the obligation of both parties to duly execute the Development License and Commercialization Agreement is entered into with the full knowledge that the terms may not be changed or amended and that the obligation to have each party to sign the Development License and Commercialization Agreement as attached are valid and enforceable by the other party . In the event that Novartis fails to exercise the Option with respect to a particular Product Candidate prior to the expiration of the Option Period (and extensions thereof) or indicates expressly that it shall not exercise the Option with respect to a particular Product Candidate, such Product Candidate shall be deemed a "Refused Product Candidate."


ARTICLE V

AUDITS


5.1. Audit Right

During the term of this Option Agreement and for a period of three (3) years thereafter, Cell Genesys and its Affiliates shall keep accurate, necessary and proper books and records, including financial records, relating to its obligations under, and compliance with, the terms of this Option Agreement, and Novartis shall have the right to conduct audits of such records in accordance with this Article V. Novartis, or through representatives appointed by Novartis and reasonably acceptable to Cell Genesys, shall have the right, at reasonable times and upon reasonable notice, but not more often than two (2) times each calendar year, to examine such books and records as may be necessary (a) to determine the correctness of any report or payment made under this Option Agreement, (b) to determine the consistency of actual expenditures relating to the PDP, (c) to determine compliance by Cell Genesys with the terms and conditions for use of such expenditures as stipulated throughout this Option Agreement versus the actual expenditures of the Fee, and (d) to determine compliance by Cell Genesys of any other financial obligations under this Option Agreement. Cell Genesys and its Affiliates shall cooperate fully with Novartis and its representatives in connection with such audit.

5.2 Cost of Audit

Novartis shall bear the full cost and expense of the audit conducted under this Article V, unless (i) a discrepancy in excess of the greater of two percent (2%) of royalties or USD $100,000, whichever is greater, in favor of Novartis is discovered, or (ii) Cell Genesys misstated wilfully the financial data it reported to Novartis. In that event, Cell Genesys shall bear the full cost and expense of such audit (which cost and expense, together with all amounts in discrepancy, shall be paid to Novartis promptly upon notice thereof).

[*] 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.

ARTICLE VI

CONFIDENTIALITY


The parties acknowledge and agree that all Confidential Information disclosed by one party to the other party shall be subject to the Confidentiality Appendix, attached hereto as Exhibit VIII.


ARTICLE VII

INDEMNIFICATION


7.1. Indemnification by Cell Genesys

Cell Genesys will defend, indemnify and hold Novartis and its Affiliates, and their employees, officers and directors, harmless against all Losses that are based on or arise out of:

(a) the breach for Losses arising out of the handling of the Development Products and Substitute Products by Cell Genesys or its Affiliates under any of its obligations, covenants, representations or warranties set forth in this Option Agreement;


(b) the gross negligence or wilful misconduct of Cell Genesys and its Affiliates, and their employees, officers and directors, in the performance of obligations or exercise of rights under this Option Agreement ; and


(c) Cell Genesys' or its Affiliates' violation of any applicable law or regulation;


provided, however, that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the grossly negligent or wilful misconduct of Novartis and its Affiliates, and their employees, officers and directors.

7.2. Indemnification by Novartis

Novartis will defend, indemnify and hold Cell Genesys and its Affiliates, and their employees, officers and directors harmless against all Losses that is based on or arises out of:

(a) the breach by Novartis of any of its obligations, covenants, representations or warranties set forth in this Option Agreement;


(b) the gross negligence or wilful misconduct of Novartis and its Affiliates, and their employees, officers and directors in the performance of obligations or exercise of rights under this Option Agreement ; and


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