Manufacturing Services Agreement Between Patheon Inc. And Axcan Pharma Inc.

Exhibit 10.7

[ ** ] = PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED FROM THIS EXHIBIT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS AGREEMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

Manufacturing Services Agreement

between

PATHEON INC. and

AXCAN PHARMA INC.

October 1, 2003

TABLE OF CONTENTS

ARTICLE 1 - INTERPRETATION 1

1.1

Definitions 1

1.2

Currency 4

1.3

Sections and Headings 4

1.4

Singular Terms 4

1.5

Schedules 4

ARTICLE 2 - PATHEON' S OBLIGATIONS 4

2.1

Manufacturing Services 4

2.2

Standard of Performance 7

ARTICLE 3 - CLIENT' S OBLIGATIONS 7

3.1

Payment 7

3.2

Active Pharmaceutical Ingredient 7

3.3

API and Finished Product Testing 7

3.4

Axcan Affiliates 8

ARTICLE 4 - CONVERSION FEES AND COMPONENT COSTS 8

4.1

Fees and Component Costs 8

4.2

Subsequent Years' Pricing 8

4.3

Adjustments to Pricing 9

4.4

Adjustments Due to Technical Changes 10

4.5

Multi-Country Packaging Requirements 10

ARTICLE 5 - ORDERS, DELIVERY, INVOICING, PAYMENT, PRODUCT DEFICIENCIES 11

5.1

Orders and Forecasts 11

5.2

Reliance by Patheon 11

5.3

Minimum Orders 12

5.4

Shipments 12

5.5

Invoices and Payment 12

5.6

Product Deficiencies 13

ARTICLE 6 - CO-OPERATION 13

6.1

Review 13

6.2

Product Recalls and Returns 14

6.3

Customer Questions and Complaints 14

6.4

Records and Accounting by Patheon 15

6.5

Inspection 15

6.6

Access 15

6.7

FDA Filings 15


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ARTICLE 7 - TERM AND TERMINATION 16 7.1

Initial Term 16 7.2

Termination for Cause 16 7.3

Product Discontinuation 17 7.4

Obligations on Termination 17

ARTICLE 8 - REPRESENTATIONS, WARRANTIES AND COVENANTS 18 8.1

Authority 18 8.2

Non-Infringement 18 8.3

Permits 18 8.4

Compliance with Laws 19 8.5

No Warranty 19

ARTICLE 9 - REMEDIES AND INDEMNITIES 19 9.1

Consequential Damages 19 9.2

Limitation of Liability 19 9.3

Patheon 20 9.4

Client 20

ARTICLE 10 - CONFIDENTIALITY 21 10.1

Confidentiality 21

ARTICLE 11 - DISPUTE RESOLUTION 21 11.1

Commercial Disputes 21 11.2

Technical Dispute Resolution 21

ARTICLE 12 - MISCELLANEOUS 22 12.1

Intellectual Property 22 12.2

Insurance 22 12.3

Independent Contractors 22 12.4

No Waiver 23 12.5

Assignment 23 12.6

Force Majeure 23 12.7

Additional Product 23 12.8

Notices 23 12.9

Severability 24 12.10

Entire Agreement 24 12.11

No Third Party Benefit or Right 25 12.12

Execution in Counterparts 25 12.13

Governing Law 25


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MANUFACTURING SERVICES AGREEMENT THIS MANUFACTURING SERVICES AGREEMENT (the " Agreement" ) dated the day of November, 2004 with effect as of the 1 st day of October, 2003 BETWEEN: PATHEON INC., a corporation existing under the laws of Canada, (hereinafter referred to as " Patheon" ),

- and - AXCAN PHARMA INC. a corporation existing under the laws of Canada, (hereinafter referred to as the " Client" ).

THIS AGREEMENT WITNESSES THAT in consideration of the rights conferred and the obligations assumed herein, and for other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each party), and intending to be legally bound the parties agree as follows: ARTICLE 1 - INTERPRETATION

1.1 Definitions .

The following terms shall, unless the context otherwise requires, have the respective meanings set out below and grammatical variations of such terms shall have corresponding meanings:

" Active Pharmaceutical Ingredient" or " API" means the materials listed on Schedule B hereto;

" Affiliate" means:

(a) a business entity which owns, directly or indirectly, a controlling interest in a party to this Agreement, by stock ownership or otherwise; or (b) a business entity which is owned by a party to this Agreement, either directly or indirectly, by stock ownership or otherwise; or (c) a business entity, the majority ownership of which is directly or indirectly common to the majority ownership of a party to this Agreement; " API Value" has the meaning specified in Section 9.2(a);


- 1 -

" Business Day" means a day other than a Saturday, Sunday or a day that is a statutory holiday in the province of Ontario or the province of Que9bec, Canada;

" cGMPs" means current Good Manufacturing Practices as described in:

(a) Division 2 of Part C of the Food and Drug Regulations (Canada); and

(b) Parts 210 and 211 of Title 21 of the United States Code of Federal Regulations,

together with the latest Health Canada and FDA guidance documents pertaining to manufacturing and quality control practice, all as updated, amended and revised from time to time; " Components" means, collectively, all packaging components, raw materials and ingredients (including labels, product inserts and other labelling for the Products), required to be used in order to produce the Products in accordance with the Specifications, other than the Active Pharmaceutical Ingredient;

" Confidentiality Agreement" means the agreement relating to the non-disclosure of confidential information between Patheon and the Client dated January 11, 2002; " Deficiency Notice" shall have the meaning ascribed thereto in Section 5.6(a); " Effective Date" means the date first hereinabove mentioned; " EXW" means " Ex works" , as that term is defined in INCOTERMS 2000; " Facility" means the manufacturing facility of Patheon, located at 865 York Mills Road, Toronto, Ontario, M3B 1Y5 where manufacturing of the Products under this Agreement shall take place;

" FDA" means the United States government department known as the Food and Drug Administration;

" Firm Orders" has the meaning specified in Section 5.1(b); " Health Canada" means the section of the Canadian government known as Health Canada and includes, among other departments, the Therapeutic Products Directorate and the Health Products and Food Branch Inspectorate;

" Intellectual Property" includes, without limitation, rights in patents, patent applications, formulae, trade-marks, trade-mark applications, trade-names, trade secrets, inventions, copyright, industrial designs, know-how; " Inventory" means all inventories of Components and work-in-process produced or held by Patheon in connection with the manufacture of the Products but, for greater certainty, does not include the Active Pharmaceutical Ingredient;


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" Manufacturing Services" means the manufacturing, quality control, quality assurance testing, packaging and related services, as contemplated in this Agreement, required to produce Products from Active Pharmaceutical Ingredient and Components;

" Manufacturing Requirements" means Patheon' s responsibilities and obligations with respect to the provision of Manufacturing Services as set forth in Article 2; " Maximum API Value" has the meaning specified in Section 9.2(a); " Minimum Run Quantity" means the minimum quantity of a Product, expressed in packaged units, to be produced during the same cycle of manufacturing as set forth in Schedule A hereto;

" Products" means the products listed on Schedule A hereto; " Quality Agreement" means the agreement to be entered into between Patheon and the Client setting out the quality assurance standards to be applicable to the Manufacturing Services provided by Patheon, which agreement shall be substantially in the form of the agreement attached hereto as Schedule D;

" Specifications" means the file, for each Product, which is provided by the Client to Patheon, including, without limitation, the documents attached hereto as Schedule F, and which contains documents relating to such Product, including, without limitation:

(a) written specifications for Active Pharmaceutical Ingredient, Components and finished Product; (b) manufacturing and packaging specifications;

(c) shipping and storage requirements;

(d) all environmental, health and safety information relating to the Product, including material safety data sheets, all as updated, amended and revised from time to time by the Client in accordance with the terms of the Agreement; and

(e) any other technical information necessary to carry out the contracted operations correctly in accordance with the marketing authorisation and any other legal requirements,

all as updated, amended and revised from time to time by the Client in accordance with the terms of this Agreement;

" Technical Dispute" has the meaning specified in Section 11.2; " Territory" means the geographic area of the United States and Canada; " Third Party Rights" means the Intellectual Property of any third party;


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" Year" means the twelve-month period commencing, in the case of the first Year of this Agreement, on the Effective Date, and thereafter commencing upon completion of the immediately preceding Year.

1.2 Currency .

Unless otherwise indicated, all monetary amounts are expressed in this Agreement in the lawful currency of Canada.

1.3 Sections and Headings .

The division of this Agreement into Articles, sections, subsections and Schedules and the insertion of headings are for convenience of reference only and shall not affect the interpretation of this Agreement. Unless otherwise indicated, any reference in this Agreement to a Section or Schedule refers to the specified Section or Schedule to this Agreement. In this Agreement, the terms " this Agreement" , " hereof, " herein" , " hereunder" and similar expressions refer to this Agreement and not to any particular part, Section, Schedule or the provision hereof.

1.4 Singular Terms .

Except as otherwise expressly provided herein or unless the context otherwise requires, all references to the singular shall include the plural and vice versa.

1.5 Schedules .

The following Schedules are attached to, incorporated in and form part of this Agreement:

Schedule A Product, Minimum Run Quantity, Estimated Annual Volume, Target Yield and Fees Schedule B Active Pharmaceutical Ingredient & Value Schedule C Technical Dispute Resolution Schedule D Quality Agreement Schedule E Batch Numbering and Expiration Dates Schedule F Finished Product Specifications Schedule G Logistics Routing Guide Schedule H Component Liability

ARTICLE 2 - PATHEON' S OBLIGATIONS 2.1 Manufacturing Services.

Patheon shall provide the Manufacturing Services for the Territory for the fees specified in Schedule A in order to produce Products for the Client. The Client shall purchase its entire requirement of Products for sale in the Territory from Patheon pursuant to the terms of this Agreement. Notwithstanding the foregoing, Patheon hereby acknowledges that the Client may purchase up to [ ** ] of its requirement of Products from another manufacturer. In providing the Manufacturing Services: (a) Conversion of Active Pharmaceutical Ingredient and Components .


- 4 - (i) Patheon shall convert Active Pharmaceutical Ingredient and Components into Products. Patheon shall provide the Client with a quarterly inventory report and reconciliation of the API held by Patheon, which shall contain the following information for such quarter:

Quantity Received means the total quantity of API that complies with the Specifications received at the Facility during the applicable period.

Quantity Dispensed means the total quantity of API dispensed at the Facility during the applicable period. The Quantity Dispensed is calculated by adding the Quantity Received to the inventory of API that complies with the Specifications held at the beginning of the applicable period, less the inventory of API that complies with the Specifications held at the end of such period. The Quantity Dispensed shall only include API received and dispensed in connection with commercial manufacturing of Products and, for certainty, shall not include any API received or dispensed in connection with technical transfer activities or development activities during the applicable period, including, without limitation, any regulatory, stability, validation or test batches manufactured during the applicable period.

Quantity Converted means the total amount of API contained in the Products produced with the Quantity Dispensed, delivered by Patheon, and not rejected, recalled or returned as a result of a failure of Patheon to provide Manufacturing Services in accordance with the Manufacturing Requirements. Patheon shall calculate the yield for each Product for each applicable period, to be calculated by dividing, for each Product, the Quantity Converted by the Quantity Dispensed (each, an " Actual Yield" ). The Actual yield shall be greater than or equal to the Target Yield set out in Schedule A. Based upon historical Actual Yield data supplied by Patheon, the parties have agreed to set the target Yield levels for each Product (each a " Target Yield" ) set out in Schedule A. Patheon hereby undertakes to strive to maintain Yield levels for each Product to the process and meet the agreed Target Yield. This will be reviewed and discussed at the business review meetings.

(ii) Whenever Patheon agrees to manufacture another product or a new stock keeping unit (" SKU" ) is created, Patheon shall collect Yield data from the first ten (10) batches of such product or SKU. Once this data has been collected, the parties will agree on a specific Target Yield for such product or SKU. Patheon hereby undertakes to strive to aim for a ninety percent (90%) Yield for each such new product or SKU.


- 5 - (b) Quality Control and Quality Assurance . Patheon shall perform the quality control and quality assurance testing specified in the Quality Agreement. For certainty, the Client acknowledges that all finished Product testing is performed by Client' s third party laboratory. As a result, Patheon shall not be responsible for finished Product testing or for supplying certificates of analysis in respect of such finished Products;

(c) Components . Patheon shall purchase all Components and test all Components at Patheon' s expense as specified by the Specifications. (d) Active Pharmaceutical Ingredients . API will be tested by Client' s third party laboratory prior to delivery to Patheon. Upon delivery of the API at the Facility, Patheon shall rely on the certificate of analysis that is supplied with the incoming API and shall only conduct identity testing on such API. To the extent that Patheon discovers defective API during such review, Patheon shall promptly give the Client written notice of any API that are not in compliance with the Specifications.

Patheon' s liability with respect to any lost or damaged API shall be as set forth in Section 9.2.

(e) Packaging . Patheon shall package the Product with labels, product inserts and other packaging as set out in the Specifications. In addition, Patheon shall make arrangements for and implement the imprinting of batch numbers and expiration dates for each Product shipped. Such batch numbers and expiration dates shall be affixed on the Product and on the shipping carton of the Product as outlined in the Specifications and as required by cGMPs. The system used by Patheon for batch numbering and expiration dates is detailed in Schedule E hereto. The Client may, in its sole discretion, make changes to labels, product inserts and other packaging for the Product, which changes shall be submitted by the Client to all applicable governmental agencies and other third parties responsible for the approval of the Product. Patheon' s name shall not appear on the label or anywhere else on the Product unless required by a governmental authority or applicable laws or regulations.

(f) API Importing . Patheon and the Client will cooperate and provide such assistance and information to each other as may be reasonably necessary to permit the import of the API into Canada. Each party shall ensure that the information provided in connection with this Section 2.1(f) is accurate and shall bear any costs, expenses and damages (including, without limitation, any fines and penalties) which the other party may incur as a result of the inaccuracy of such information.


- 6 - 2.2 Standard of Performance .

Patheon shall provide the Manufacturing Services in accordance with (i) the provisions of Article 2 hereof; (ii) the Specifications and cGMPs; and (iii) any other terms and conditions provided in the Quality Agreement (hereinafter collectively the " Manufacturing Requirements" ).

ARTICLE 3 - CLIENT' S OBLIGATIONS 3.1 Payment .

Pursuant to the terms of this Agreement, the Client shall pay Patheon for the provision of the Manufacturing Services according to the fees specified in Schedule A hereto (such fees being subject to adjustment in accordance with the terms hereof). 3.2 Active Pharmaceutical Ingredient .

The Client shall, at its sole cost and expense, deliver the API to Patheon in sufficient quantities to meet each Firm Order not later than the date of submission of the relevant Firm Order pursuant to Section 5.1(b), which API shall be held by Patheon on behalf of the Client on the terms and subject to the conditions herein contained.

Client' s failure to supply Patheon with API in accordance with the timeframes set forth in this Section 3.2 shall not be deemed a breach of this Agreement but shall release Patheon from strict compliance with the Delivery Date(s) specified in a particular Firm Order, provided however, Patheon shall use all commercially reasonable efforts to meet the Delivery Dates specified in a Firm Order once the Client supplies Patheon with API.

The parties acknowledge and agree that title to the API shall at all times belong to and remain the property of the Client. Patheon agrees that any API received by it shall only be used by Patheon to provide the Manufacturing Services. Patheon' s liability with respect to any lost or damaged Active Pharmaceutical Ingredient shall be as set forth in Section 9.2.

3.3 API and Finished Product Testing .

The parties acknowledge that the Client has engaged a third party laboratory to provide API and finished Product testing, at the Client' s expense. The Client shall ensure that API is delivered to Patheon with a certificate of analysis certifying that the API complies with the Specifications.

In the event the Client makes a claim hereunder with respect to defective Product, the Client shall, upon Patheon' s written request, transfer the Product test methods to Patheon or to a mutually agreed third party for independent testing and analysis. The costs incurred to transfer and validate the test method (including any further development required for validation) and to perform the evaluation shall be borne by Patheon if the claim is found to arise from Patheon' s failure to provide the Manufacturing Services in accordance with the Manufacturing Requirements, otherwise such costs shall be borne by the Client.


- 7 - 3.4 Axcan Affiliates .

Any obligation of Axcan under or pursuant to this Agreement may be satisfied, met or fulfilled, in whole or in part, at Axcan' s sole and exclusive option, either by Axcan directly or by any affiliate of Axcan that Axcan causes to satisfy, meet or fulfill such obligation, in whole or in part.

ARTICLE 4 - CONVERSION FEES AND COMPONENT COSTS 4.1 Fees and Component Costs .

The fees for the Manufacturing Services (which fees include Component Costs) listed in Schedule A are intended by the parties to be fixed for the first Year of this Agreement, subject to any amendments to such fees in accordance with Section 4.3 hereof.

4.2 Subsequent Years' Pricing .

The fees for the Manufacturing Services provided pursuant to the terms of this Agreement during any period following the first anniversary of this Agreement shall be determined in accordance with the following: (a) Manufacturing Costs . On [ ** ] of each Year of this Agreement, Patheon shall be entitled to an adjustment to the fees for (i) Manufacturing Services in respect of the Products to reflect inflation, which adjustment shall be based on the increase in the [ ** ] of the then current Year compared to the same month of the preceding Year, unless the parties otherwise agree in writing; and (ii) Component costs to pass on the [ ** ]. In addition to the foregoing, Patheon shall also have the right on each of the [ ** ] of this Agreement to increase the fees for the Manufacturing Services in respect of the [ ** ] product to reflect [ ** ], provided that such additional increase shall not exceed [ ** ]% or the previous Year' s fees.

(b) Annual Forecast . At least two hundred ten (210) days prior to the end of each Year of this Agreement, the Client shall provide Patheon a yearly volume projection. To the extent that Patheon determines that the projections contained in that yearly volume forecast necessitate that an adjustment be made to the Manufacturing Services fees in respect of any Product for such Year, Patheon shall, within thirty (30) days of receipt by Patheon of the yearly forecast, be entitled to request an appropriate price adjustment, to be agreed upon by the parties.

(c)

Pricing Basis . The Client acknowledges that the fee for Manufacturing Services in respect of a Product in any Year is quoted based upon the Minimum Run Quantity for such Product specified in Schedule A and is subject to change if the


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specified Minimum Run Quantity is not met. For greater certainty, if Patheon and the Client agree that the Minimum Run Quantity in respect of a Product shall be reduced and, as a result of such reduction, Patheon' s fees for services relating to such Product increase on a per unit basis, then Patheon shall be entitled to an increase in the fee for Manufacturing Services in respect of such Product, as provided in Section 4.3(a) herein below.

In connection with a fee adjustment pursuant to Section 4.2(a), Patheon shall deliver to the Client a revised Schedule A and a statement outlining the percentage increase in the [ ** ] upon which such fee adjustment is based. In connection with all fee adjustment requests pursuant to this Section 4.2(b) and 4.2(c), Patheon shall deliver to the Client a revised Schedule A and such budgetary pricing information or other documentation reasonably sufficient to demonstrate that a fee adjustment is justified, provided that Patheon shall have no obligation to provide any supporting documents to the extent such documents are subject to obligations of confidentiality between Patheon and its suppliers. Patheon shall deliver such fee adjustment requests to Client for review and approval on or before [ ** ] of each Year. Upon delivery of such a request, each of the Client and Patheon shall forthwith use all reasonable efforts to agree on a revised fee for the Manufacturing Services in respect of each affected Product. Adjustments to the fees for Manufacturing Services pursuant to this Section 4.2 shall be effective with respect to all orders shipped on or after [ ** ] of each Year.

4.3 Adjustments to Pricing .

During any Year of this Agreement, the fees set out in Schedule A shall be subject to adjustment in accordance with the following:

(a) Volume Reduction . If Firm Orders for a Product amount to less than the Minimum Run Quantity for such Product, as set out in Schedule A, then Patheon shall be entitled to request an adjustment to the fee for Manufacturing Services in respect of that Product to reflect the increased costs that Patheon will incur as a result of the reduced run quantity. To the extent that the fee for Manufacturing Services in respect of a Product has been previously adjusted pursuant to this clause (a) to reflect its reduced run quantity, the adjustment provided in this clause (a) shall operate based on the fees attributed to such Product at the time the last of such adjustments were made.

(b)

Extraordinary Increases in Component Costs . If at any time market conditions result in Patheon' s cost of Components being materially greater than normal forecasted increases, then Patheon shall be entitled to request an adjustment to the fee for Manufacturing Services in respect of any affected Product to compensate it for such increased Component costs. For the purposes of this Section 4.3(b), changes materially greater than normal forecasted increases shall be considered to have occurred if: (i) the cost of a Component increases by [ ** ]% of the cost for that Component upon which the fee quote was based; or (ii) the aggregate cost for all Components required to manufacture a Product increases by [ ** ]% of the total Component costs for such Product upon which the fee quote was based. To the extent that Manufacturing Services


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fees have been previously adjusted pursuant to Section 4.2(a) or this Section 4.3(b) to reflect an increase in the cost of one or more Components, the adjustments provided for in (i) and (ii) above shall operate based on the costs attributed to such Component (or Components) at the time the last of such adjustments were made. In connection with a fee adjustment request pursuant to this Section 4.3, Patheon shall deliver to the Client a revised Schedule A and such budgetary pricing information, adjusted Component costs or other documentation reasonably sufficient to demonstrate that a fee adjustment is justified, provided that Patheon shall have no obligation to provide any supporting documents to the extent such documents are subject to obligations of confidentiality between Patheon and its suppliers. Upon delivery of such a request, each of the Client and Patheon shall forthwith use all reasonable efforts to agree on a revised fee for the Manufacturing Services in respect of each affected Product.

4.4 Adjustments Due to Technical Changes .

Amendments to the Specifications or the Quality Agreement requested by the Client will only be implemented following a technical and cost review by Patheon and are subject to the Client and Patheon reaching agreement as to revisions, if any, to the fees specified in Schedule A necessitated by any such amendment. If the Client accepts a proposed fee change, the proposed change in the Specifications shall be implemented, and the fee change shall become effective only with respect to those orders of Product that are manufactured in accordance with the revised Specifications. In addition, the Client agrees to purchase, at Patheon' s cost, all Inventory utilized under the previous Specifications and purchased or maintained by Patheon in order to fill Firm Orders or in accordance with Section 5.2, to the extent that such Inventory can no longer be utilized under the revised Specifications. Open purchase orders for Components no longer required under any revised Specifications that were placed by Patheon with suppliers in order to fill Firm Orders or in accordance with Section 5.2 shall be cancelled where possible, and where such orders are not subject to cancellation without penalty, shall be assigned to and satisfied by the Client.

Any amendments or additions to cGMPs or to applicable laws which necessitate: (a) resulting changes to Product Specification or Manufacturing Requirements shall be conducted at the expense of the Client; and (b) resulting changes to the Facility shall be borne by Patheon. 4.5 Multi-Country Packaging Requirements.

If and when the Client decides that it wishes to have Patheon man ...