Supplemental Agreement - Tanox Biosystems Inc. and Ciba-Geigy Ltd.
CONFIDENTIAL
TANOX BIOSYSTEMS, INC.
SUPPLEMENTAL AGREEMENT
Tanox and Ciba currently are engaged in settling certain litigation with
Genentech and Roche. In connection with the settlement of such litigation,
Tanox, Ciba and Genentech (and possibly certain Roche entities) have entered
Into an agreement (the "Multiparty Transaction" under which Genentech merges its
anti-IgE antibody project with the anti-IgE antibody project of Tanox/Ciba which
is being pursued under a Development and License Agreement between Tanox and
Ciba dated May 11, 1990 (the "D&L Agreement").
Tanox and Ciba also are party to a Loan Agreement dated effective December 13,
1994, pursuant to which Ciba has agreed to loan up to $10 million for the
construction, validation, and start-up of a mammalian cell culture pilot
manufacturing facility located in Houston, Texas (the "Pilot Plant").
To further facilitate the cooperation between them in connection with the
Multiparty Transaction and the development of the respective anti-IgE antibody
product ("Anti-IgE Product") project, Tanox and Ciba intend to enter into an
agreement which modifies and amends their agreements to the extent of the
provisions set forth below.
1.0 DEVELOPMENT IN CERTAIN FAR EAST COUNTRIES
1.1 MERGER OF RIGHTS IN EA COUNTRIES. Pursuant to the D & L Agreement,
Tanox has retained certain commercialization rights for the Anti-IgE
Product in the territories of Taiwan, Hong Kong, Singapore, China and Korea
(the "EA Countries"). Ciba also has certain commercialization rights for
Anti-IgE Product in such EA Countries. As part of this Addendum to the D &
L Agreement, Tanox and Ciba agree to merge their rights in the EA Countries
into a combined development and commercialization program for the Anti-IgE
Product, in which each shall share all development and commercialization
costs as set out in Section 1.4 below and net profits before taxes from
commercialization of the Anti-IgE Product on a 50:50 basis.
1.2 TANOX DEVELOPMENT COMPANY. The parties acknowledge that all or a
portion of Tanox's rights and responsibilities for development and
commercialization of the Anti-IgE Product in the EA Countries may be
undertaken by (a) company(ies) formed by Tanox for such purpose ("EA
Company"), which may be financed in part by third parties as shareholders
and in which Tanox shall have the control, i.a. by having a majority of the
voting rights as shareholder.
1.3 DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES. The parties shall
cooperate fully in connection with the development and commercialization of
the Anti-IgE Product. Tanox shall assume primary responsibility in
coordination with the Steering Committee (as defined in the D & L
Agreement) for pursuing any additional
<PAGE>
Supplemental Agreement
June 10, 1996
Page 2
development activities in the EA Countries which may be necessary or
beneficial in connection with obtaining product registration and marketing
approval in such countries. Ciba shall have the right to market and sell
the Anti-IgE Product following marketing approval. Tanox shall have the
right to supply product to the EA Countries at cost from its pilot facility
in Houston, Texas, and/or from a facility owned and operated by the EA
Company. To the extent Tanox is unable to supply all the product which may
be required for the EA Countries, such product also may be purchased from
Genentech or supplied by Ciba, as applicable.
1.4 COST AND PROFIT SHARING. All costs associated with development
activities undertaken for commercialization of the Anti-IgE Product in the
EA Countries, which may include production of clinical materials, clinical
trials and other activities for obtaining marketing authorization, and
supporting activities/services and fees, shall be shared between Ciba and
Tanox or the EA Company on a 50:50 basis. All costs for the
manufacturing/purchase of the Anti-IgE Product and the costs for marketing
and sales in the EA Countries, including all supporting and auxillary
activities and royalties to third parties (if any) also shall be shared
between Ciba and Tanox or the EA Company on a 50:50 basis. All net profits
before taxes from commercialization of the Anti-IgE Product in the EA
Countries shall be shared between Ciba and Tanox or the EA Company on a
50:50 basis.
2.0 REIMBURSEMENT OF CIBA'S PATENT LITIGATION COSTS
2.1 REIMBURSABLE COSTS. Tanox agrees that it will reimburse Ciba in the
manner agreed below for * of its ex-pocket expenditures for
attorneys' fees and expenses, document discovery, and compensation for
expert's opinions which are directly related to Ciba's defense of
Genentech's patent claims against it for infringement of the U.S. "Cabilly"
patent and/or Ciba's counterclaims against Genentech for invalidation of
such patent. Ciba agrees that reimbursable ex-pocket expenditures shall not
include any expenditures which have been incurred by Ciba following
February 15, 1996, and shall not include any expenditures relating to
representation of Ciba's interests outside the scope of the patent claims
and counterclaims as defined above, including, without limitation, any
attorneys' fees incurred in connection with representation of Ciba in the
multiparty settlement discussions or bilateral discussions between Tanox
and Ciba.
2.2 DOCUMENTATION. Promptly following execution of the agreement
contemplated hereby, Ciba agrees to submit copies to Tanox of appropriate
invoices or other documentation for such ex-pocket expenditures to be
claimed for reimbursement hereunder so that Tanox can confirm that all such
charges are
<PAGE>
Supplemental Agreement
June 10, 1996
Page 3
properly within the scope of the ex-pocket expenditures agreed to be
reimbursable hereunder.
2.3 REIMBURSEMENT BY OFFSET. All amounts due Ciba hereunder shall be paid
solely by Ciba's offset of such amounts against royalties payable to Tanox
by Ciba under the D & L Agreement or which are attributable to Ciba based
on its profit sharing ratios under the Multiparty Transaction.
3.0 LOAN REPAYMENT OBLIGATION
3.1 EFFECTIVENESS OF PROVISIONS. If the Multiparty Transaction is
concluded, then as of such date, repayment of that certain $10 million loan
("Loan") from Ciba to Tanox for construction, validation and start-up of
the Pilot Plant shall be governed by the provisions of this Paragraph 3.
3.2 UTILIZATION OF FACILITY. The parties agree that (i) if Genentech's
anti-IgE antibody is selected for development as of the Selection Date, as
defined in the Outline of Terms entered into in connection with the
Multiparty Transaction or (ii) if the parties to the Outline of Terms
otherwise determine that activities currently contemplated for the Pilot
Plant should be shifted to Genentech in whole or in part in connection with
its agreement, on Ciba's request, to undertake commercial production of up
to * of Anti-IgE Product, then Tanox shall have 120 days from receipt of
written notice of the occurrence of either such event to notify Ciba of its
intent to pursue one of the following alternatives:
(a) Tanox may notify Ciba that it has decided to shut down the Pilot Plant
and terminate production activities effective as of a date mutually
agreeable to the parties ("Shut-down Date"), subject to reactivation,
as Tanox may wish, within five (5) years from the Shut-down Date
(however, Tanox can continue to perform routine maintenance activities
at its cost beneficial to reactivation of the facility); or
(b) Tanox may notify Ciba that it has decided to continue operation of the
Pilot Plant at its own commercial and technical responsibility, in
which case such decision shall become effective immediately on Ciba's
receipt of such notice ("Continuation Date")
3.3 SHUT-DOWN ALTERNATIVE. If Tanox has notified Ciba that it has decided
to shut down the Pilot Plant, subject to reactivation as provided
hereinafter, then at the expiration five (5) years from the Shut-down
Date or on satisfaction of Tanox's obligations to Ciba following the
Disposal Date, as hereinafter defined, whichever is the first to
occur, Ciba shall forgive, without further
<PAGE>
Supplemental Agreement
June 10, 1996
Page 4
action on its part, the principal balance and accrued interest
remaining outstanding on the Loan at such time. Thereafter, Tanox
shall have no further obligations under the Loan. During such
five-year period, if Tanox should sell or otherwise dispose of the
Pilot Plant (the "Disposal Date", then Tanox shall be obligated to pay
to Ciba, in reduction of the outstanding principal and any unforgiven
interest, the proceeds from such disposal net of all reasonable costs
accrued during such period in connection with the maintenance of the
shut-down Pilot Plant. Tanox shall pay such net proceeds to Ciba
within 90 days following the Disposal Date. During such five-year
period, if Tanox should decide to reactivate the Pilot Plant for
production activities, then the provisions of Paragraph 3.4 below
shall immediately become effective.
3.4 CONTINUATION ALTERNATIVE. If Tanox has notified Ciba that it has
decided to continue operation of (or reactivate, as the case may be)
the Pilot Plant, then Tanox will be obligated at the end of each
calendar year, beginning as of the first year end following the
Continuation Date (or date of reactivation), to account for the
operations of the Pilot Plant and determine Net Cash Flow available
from operations as defined in Paragraph 3.5 below. On or before March
31 of the succeeding year, Tanox will be obligated to apply 75% of Net
Cash Flow first to payment of accrued interest for such year and then
to reduction of the outstanding principal balance on the Loan. Tanox
will be entitled to retain the remaining 25% of Net Cash Flow. If the
75% Net Cash Flow payments due as set out above should not equal the
Loan amount including accrued interest, at the end of 10 years from
the Continuation Date (or date of reactivation), and following payment
by Tanox of the amount to be applied against the Loan and accrued
interest through such date based on an interim accounting for such
final period, Ciba shall forgive, without further action on its part,
the principal balance and all accrued interest for such period that
remains outstanding on the Loan and Tanox shall have no further
obligations under the Loan.
3.5 ACCOUNTING FOR THE PILOT PLANT. At the end of each calendar year
during which Pilot Plant operations are continued or reactivated, the
Pilot Plant's Net Cash Flow will be computed and any payments required
under Paragraph 3.4 above will be made on or before March 31 of the
succeeding year. Net Cash Flow for purposes of this agreement will be
the Pilot Plant's "net cash provided from operating activities" (as
illustrated in SFAS No.95), *
<PAGE>
Supplemental Agreement
June 10, 1996
Page 5
*. Allocable costs to the Pilot Plant shall be apportioned in a manner
consistent with GAAP and Tanox's normal practices, which have been
reviewed in connection with the preparation of Tanox's annual audited
financial statements.
3.6 INTEREST EXPENSE. As set out in the Loan Agreement, interest shall
begin as of the Commencement Date (as defined in the Loan Agreement)
for the Pilot Plant. If the Pilot Plant is shut down, then at the end
of each calendar year in which the Pilot Plant remains shut down
(provided no disposal has occurred), Ciba agrees to forgive all the
interest accrued on the Loan for such year. If Tanox disposes of the
Pilot Plant, the net proceeds of such disposal, as provided in
Paragraph 3.3 above, shall first be applied to payment of accrued
interest on the Loan for the year in which disposal occurs and then to
reduction of the outstanding principal balance.
The contents of this supplemental agreement represent the bona fide intent of
the parties who shall negotiate and enter into a more detailed agreement in
line with the provisions set forth above.
Ciba-Geigy Limited Tanox Biosystems, Inc.
By: H. F. MOHR By: DAVID ANDERSON
Name: Dr. H. F. Mohr Name: David Anderson
Title: Head Pharma Licensing Title: Executive Vice President
Date: Date: July 8, 1996
By: HERBERT GUT
Name: Dr. Herbert Gut
TItle: Senior Division Counsel
Date: July 6, 1996