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Custom Manufacturing Agreement

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This Agreement is entered into as of this 27th day of September, 1999 (the "Effective Date"), by and between Draxis Pharma, Inc., 16751 Route Transcanadienne, Kirkland, Quebec H9H 4J4 (hereinafter referred to as "Draxis") and Penwest Pharmaceuticals Co., 2981 Route 22, Patterson, New York 12563, a Washington corporation (hereinafter referred to as "Penwest").

WHEREAS, Penwest is a producer and marketer of controlled release systems for use in the manufacture of pharmaceutical preparations; and

WHEREAS, Penwest desires to have Draxis provide manufacturing and laboratory services, specifically custom granulation, by granulating different raw materials provided by Penwest, to prepare different formulations of Penwest's line of controlled release systems which are marketed under the tradename TIMERx(R) ("TIMERx"); and

WHEREAS, Draxis possesses valuable facilities and know-how and employs personnel having skills relative to the manufacture of pharmaceutical compounds and excipients and is willing to provide granulating services to Penwest.

NOW THEREFORE, in consideration of the premises and the undertakings of the parties hereinafter set forth, the parties agree as follows:


1.1 "FDA" shall mean the U.S. Food and Drug Administration.

1.2 "Materials" shall mean (a) Raw Materials and (b) any specialized packaging and/or shipping containers and/or labeling components that are used by Draxis solely in its performance under this Agreement. 2 1.3 "Packaging Specifications" shall mean any and all specifications for Product packaging that accompany a given order for Product(s), as required under Section 5.2.

1.4 "Product(s)" as used herein shall mean the granulated forms of those different formulations of Penwest's line of controlled release systems sold under the tradename TIMERx and listed in Exhibit A attached hereto. Exhibit A may be revised from time to time during the Term as may be mutually agreed by the parties in writing.

1.5 "Product Specifications" shall mean any and all specifications for the Product(s) that accompany a given order for Product(s), as required under Section 5.2.

1.6 "Raw Materials Specifications" shall mean any and all specifications for the Raw Materials (as defined below) that accompany a given order for Product(s), as required under Section 5.2.

1.7 "Specifications" shall mean the Packaging Specifications, the Product Specifications and the Raw Materials Specifications.

1.8 "Term" shall mean the Initial Term and any Renewal Term(s) as hereinafter defined.

1.9 "TIMERx Technology" shall mean all know-how, trade secrets, and related information and techniques communicated by Penwest to Draxis in connection with the granulation of TIMERx pursuant to this Agreement, whether patentable or not.


2.1 During the Term, Draxis shall granulate and sell to Penwest and Penwest shall purchase from Draxis, subject to the terms and conditions hereinafter set forth from Draxis, the Product(s) in quantities as ordered hereunder.

2.2 Draxis acknowledges and agrees that intellectual property rights in any discoveries or inventions relating to and/or improvements, modifications, alterations or enhancements to any of Penwest's TIMERx Technology made in the course of Draxis's activities under this Agreement ("Inventions") shall be the exclusive property of Penwest. Draxis shall cooperate with Penwest in Penwest's patent filings or other

2 3 activities with respect to such intellectual property. Draxis shall, throughout the term, (a) promptly notify Penwest of any and all Inventions, and (b) execute any and all documents reasonably required by Penwest in support of such patent filings or other activities.


3.1 The term of this Agreement shall extend from the Effective Date and shall continue through the Initial Term, which is defined as the five (5) year period following the Effective Date (the "Initial Term"). Except as provided below, the Agreement shall be automatically renewed for successive periods of one (1) year each, (the "Renewal Term(s)"). At any time following the five-year anniversary of the Effective Date, either party may terminate this Agreement upon at least six (6) months prior written notice to the other party.

3.2 This Agreement may be terminated by written notice by the non-breaching party in the event that the other has breached this Agreement in any material manner and shall have failed to remedy such breach within forty-five (45) days after written notice thereof from the non-breaching party.

3.3 If either party shall commence as debtor any proceedings under any bankruptcy, insolvency, reorganization, readjustment of debt, dissolution or liquidation law or statue of the Federal Government or any state or provincial government or any subdivision of either now or hereafter in effect; or if any such proceedings shall be commenced against such party, or any trustee or receiver in respect of either party shall be appointed in any such proceedings, and any such party shall be appointed in any such proceedings, and any such party shall by any act or failure to act indicate approval of, or consent to or acquiescence in such proceedings or in the appointment of any such trustee or receiver; or if any such proceedings brought against such party shall be approved by any court or shall remain undismissed for sixty (60) days; or if any warrant of attachment shall be issued against all the assets of such party and shall not be released within sixty (60) days after its levy, then, in any such case, the party not involved in such proceedings, other than as a creditor, shall have the option to terminate this Agreement by written notice and upon the giving of such notice this Agreement shall immediately terminate.

3 4 3.4 Within ninety (90) days of the effective date of any termination of this Agreement, Penwest shall purchase from Draxis, at Draxis's cost, if any, all remaining Materials; provided, however, that Penwest shall not be so obligated (a) in the event that (i) Draxis terminates this Agreement other than for cause or (ii) Penwest terminates this Agreement for cause, or (b) in the case of Materials that Penwest reasonably considers to be unusable. The foregoing shall be delivered at the expense of the party that is responsible for the termination of the Agreement, in accordance with applicable laws and regulations, to Penwest F.O.B. Draxis's warehouse in Kirkland Quebec. Penwest shall be responsible for reimbursing Draxis for any costs incurred by Draxis in connection with the cancellation of any Firm Order, as defined in Exhibit D, unless such cancellation occurs in connection with Penwest's termination of this Agreement for cause pursuant to Section 3.2.

3.5 Termination of this Agreement shall not relieve either party from any liabilities or obligations which may be accrued prior to the date of such termination, including but not limited to Penwest's obligation to pay for Product(s) delivered to Penwest by Draxis. Notwithstanding anything else in this Agreement to the contrary, the parties agree that Sections 2.2, 3, 8, 9, 10 and 12 shall survive the termination of this Agreement.

3.6 Upon the termination of this Agreement, Draxis shall provide to Penwest the originals all Specifications; provided, however, that a copy of such document may be retained by Draxis for archival purposes, as a means of determining any continuing obligation or confidentiality, but for no other purpose.


4.1 During the Term and subject to the terms and conditions hereof, Draxis shall (a) granulate all Product(s), in accordance with the Product Specifications, (b) use no Raw Materials that fail to meet the Raw Materials Specifications, and (c) package all Product(s) in accordance with the Packaging Specifications. Penwest shall supply Draxis with the Material Safety Data Sheets (MSDS) for all materials to be supplied by Penwest to Draxis. If the Specifications are changed, Penwest shall also provide reasonable technical assistance and associated services to enable Draxis to custom manufacture and package the Product(s) in conformity with the new specifications.

4 5 4.2 Draxis shall obtain each of the raw materials listed in Exhibit C ("Raw Materials") from Penwest's approved supplier for each such Raw Material in quantities sufficient to permit Draxis to fill all of Penwest's orders in accordance with the provisions of Section 5; provided, however that, with respect to any of the Raw Materials held by Penwest as of the Effective Date, Draxis shall first obtain such Raw Material(s) from Penwest until it has exhausted all supplies of such Raw Materials held by Penwest. Draxis shall arrange for the delivery of all Raw Materials to Draxis's facility. Penwest shall reimburse Draxis for any and all expenses associated with obtaining and delivering Raw Materials, except that Draxis shall bear such expenses with respect to any of the same that constitute replacements of Raw Materials destroyed or rendered useless due to the negligent failure of Draxis. Risk of loss of all Raw Materials delivered to Draxis hereunder shall remain with Penwest until delivered to Draxis' loading dock. Any and all Raw Materials so supplied shall at all times be and remain the property of Penwest until such Raw Materials are used by Draxis in the manufacture of Product(s). Any other materials to be used by Draxis in the performance of its obligations hereunder (including without limitation water, equipment, and plant supplied) shall be supplied by Draxis, at its expense, in quantities sufficient to permit Draxis to fill Penwest's orders in accordance with the provisions of Section 5.

4.3 Draxis shall perform all of its obligations hereunder in accordance with U.S. current Good Manufacturing Practices ("cGMP"). Without limiting the foregoing, Draxis shall at all times store and preserve all Materials to be used by Draxis in the performance of its obligations hereunder and shall segregate the same from any other property or materials as may be required under cGMP regulations.

4.4 Draxis shall perform, or have performed, those quality control tests set forth in Exhibit B-1, with respect to all Raw Materials. Draxis understands that Penwest is relying on Draxis to perform or have performed such tests and that Penwest and its suppliers will not have conducted any such testing.

4.5 Draxis shall perform those quality control tests set forth in Exhibit B-2, with respect to each batch of each Product. In the event Penwest requests that any additional tests be performed, Draxis shall, if Draxis has the capacity to perform such tests and Draxis can perform such additional testing in a timely manner, perform such test as requested by Penwest. Penwest shall reimburse Draxis for all costs of performing such additional testing.

5 6 4.6 Draxis shall perform those inspections, measurements and tests that are set forth in Exhibit B-3.

4.7 Draxis shall provide to Penwest a copy of the results of all quality control tests performed by or on behalf of Draxis promptly upon completion of all such testing. Draxis shall not ship any batch of a Product (a) that fails to meet the Product Specifications, (b) containing any Raw Materials that failed to meet the Raw Materials Specifications, or (c) the packaging for which failed to meet the Packaging Specifications, unless directed to so ship by Penwest in writing. Without limiting the foregoing, Draxis shall be responsible for (a) batch manufacturing record review and final Product release, (b) preparing and maintaining reserve/retain samples for Materials, Raw Materials and completed Product lots, and (c) phase-time testing of Materials and Raw Materials.

4.8 If Penwest determines that a Product batch does not conform with the Specifications, Penwest shall so notify Draxis within thirty (30) days following the date of delivery of such Product batch to Penwest under Section 5.4. Penwest shall be deemed to have accepted any Product batch with respect to which it fails to so notify Draxis. If Draxis and Penwest do not agree on whether a Product batch conforms with the Product Specifications, the matter shall be submitted for testing to an independent testing laboratory acceptable to both parties. The determination of such independent laboratory shall be binding on both parties. If Draxis or the independent testing laboratory agrees with Penwest, Draxis shall (a) at its own expense accept return of any shipment not accepted or reimburse Penwest for the cost of disposal or destruction, at Draxis' option, and (b) replace the non-conforming Product batch with a conforming Product batch. Until a dispute is resolved, Penwest shall not dispose of such batch without the prior written authorization of Draxis. The cost of the independent testing laboratory shall be borne by the party whose testing results were in error.

4.9 Without limiting the foregoing, Draxis shall make no final disposition of any Materials, Raw Materials or Products without prior consultation with, and the prior written approval of, Penwest.

4.10 Either of the parties shall have the right to request changes to any of the Specifications. Recommendations to change any of the Specifications shall be in

6 7 writing. Draxis shall implement no change in the manufacturing process for the Product(s), including but not limited to any change in major manufacturing equipment, control parameters, in-process specifications, or working formulae, or any of the Specifications, whether requested by either of the parties or requested or required by any Governmental or regulatory authority ("Governmental Authority"), unless the parties have agreed in writing to such change. Any costs incurred due to any such change shall be paid by Draxis, except for costs that would not have been incurred but for a change or changes in the (a) Specifications or (b) cGMP (but only to the extent such change or changes in cGMP are relevant only to Draxis' manufacture of the Products), which shall be paid by Penwest.

4.11 Draxis shall promptly notify Penwest of any problems or unusual production situations which have the potential to have a material adverse effect on Draxis' performance hereunder. Together with any such notice, Draxis also shall provide to Penwest a written summary of the plan of action by which Draxis intends to correct such problems or unusual production situations. Draxis further agrees to (a) meet with representatives of Penwest to discuss any such problems or unusual production situations, (b) implement any and all reasonable suggestions offered by Penwest for correcting such problems or unusual production situations, and (c) keep Penwest fully informed of Draxis's progress toward correcting such problems or unusual production situations until they are resolved.

4.12 Draxis shall promptly notify Penwest of any and all contact it has with the FDA or any Governmental Authority relating to the Product(s) that might adversely affect Draxis' ability to perform its obligations under this Agreement or result in an inspection of the facilities at which Draxis granulates and packages the Products.

4.13 Throughout the term of this Agreement, Draxis shall promptly provide to Penwest copies of any production documents prepared or maintained by Draxis with respect to Draxis' obligations under the Agreement, as well as samples of the Product(s) or the Raw Materials, unless otherwise prohibited by FDA regulations, including cGMP. Any and all such samples shall be shipped to Penwest at Penwest's expense in accordance with Section 5.4 or as otherwise instructed by Penwest.

4.14 Draxis shall maintain accurate inventory records of Raw Materials and shall provide to Penwest, on a monthly basis, a running balance thereof.

7 8 4.15 Penwest shall provide to Draxis all information reasonably necessary for Draxis to manufacture the Products in accordance with the Specifications and the requirements of cGMP, and shall make its employees reasonably available to respond to questions concerning such information.

4.16 Penwest shall be responsible for tracking, investigating and responding to third party customer complaints. Draxis shall (a) promptly communicate to Penwest any and all such complaints that are received by Draxis, and (b) provide to Penwest all reasonable assistance, including without limitation any laboratory testing of Product. Draxis' reasonable document and laboratory testing costs associated with providing such assistance shall be reimbursed by Penwest, unless the cause of the relevant third party customer's complaint is subsequently determined to have been related to any failure of Draxis to perform its obligations hereunder.

4.17 The parties agree to hold operations planning meetings not less than once in each calendar quarter during the Term. Each such meeting shall be held at a mutually agreeable location, and each party shall bear its own expenses in connection with participating in each such meeting. The purpose of such meetings shall be to discuss and attempt to settle any financial planning issues, production schedule changes, new product inclusions, line extensions and such other topics as either party may raise or as may be of material interest to either party in connection with this Agreement and their respective rights and obligations hereunder.


5.1 Penwest agrees to purchase the Product(s) in a production batch or a multiple thereof. (The production batch size of each Product is set forth in Exhibit A).

5.2 Product(s) shall be ordered on Penwest's standard purchase order forms. Together with each order for Product(s), Penwest shall provide to Draxis , as applicable to such order, the required specifications corresponding the test parameters set forth in Exhibits B-1, B-2 and B-3 for the Raw Materials, Product(s) and Packaging, respectively. The terms and conditions contained therein, to the extent they are inconsistent or in conflict with the provisions of this Agreement or impose additional obligations on

8 9 Draxis, are superseded by the provisions of this Agreement. Subject to Section 1(c) of Exhibit D, Draxis shall promptly confirm receipt of Penwest's purchase orders.

5.3 Penwest shall submit to Draxis Product order forecasts in accordance with the provisions set forth in Exhibit D.

5.4 Draxis shall ship Products ordered by Penwest pursuant to this Section 5 in accordance with Penwest's instructions. Draxis shall arrange for the shipment of the Products, F.O.B. Draxis' loading dock. Penwest shall provide a listing of carriers and shall pay outbound freight delivery costs. Draxis shall schedule freight pick-up, load the carrier's trailer and complete the documentation. Title to, and risk of loss of, all Products shipped hereunder shall remain with Draxis until delivered to Penwest's carrier at Draxis' loading dock, at which time such title and risk shall pass to Penwest. Draxis shall not be liable to Penwest for loss of any kind arising out of or in relation to damage to Products, however caused, which occurs after title to and risk for the Product passes to Penwest, nor shall any liability of Penwest to Draxis under this Agreement be diminished or extinguished by reason of such loss. For greater certainty, Penwest shall be liable for all risk of loss while Products are in transit, and Penwest is responsible for ensuring that adequate insurance coverage is obtained and maintained for the Products from the time title passes to Penwest.


6.1 Draxis agrees to sell and Penwest agrees to purchase, subject to the other terms and conditions of this Agreement, the custom granulated Product(s) at the prices set forth in Exhibit A, a copy of which is attached hereto and made a part hereof. All payments to Draxis shall be due within forty-five (45) days after receipt by Penwest of the corresponding Product and release documents, and shall be payable i
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