Exhibit 10.2

REGISTRATION RIGHTS AGREEMENT
 
This Registration Rights Agreement (this “Agreement”) is made and entered into
as of October 22, 2009, by and among A.P. Pharma, Inc., a Delaware corporation
(the “Company”), and the investors signatory hereto (each a “Purchaser” and
collectively, the “Purchasers”).
 
This Agreement is made pursuant to the Securities Purchase Agreement, dated as
of October 19, 2009, among the Company and the Purchasers (the “Purchase
Agreement”).
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:
 
1.           Definitions.  Capitalized terms used and not otherwise defined
herein that are defined in the Purchase Agreement shall have the meanings given
such terms in the Purchase Agreement.  As used in this Agreement, the following
terms shall have the respective meanings set forth in this Section 1:
 
“Advice” shall have the meaning set forth in Section 7(c).
 
“Closing” shall have the meaning set forth in the Purchase Agreement.
 
“Common Stock” means the common stock of the Company, par value $0.01 per share,
and any securities into which such common stock may hereafter be reclassified.
 
“Commission” means the Securities and Exchange Commission.
 
“Effective Date” means the date that the Registration Statement filed pursuant
to Section 2(a) is first declared effective by the Commission.
 
“Effectiveness Date” means: (a) with respect to the Initial Registration, the
90th calendar day following the Closing (or the 120th calendar day following the
Closing in the event the initial Registration Statement is reviewed by the
Commission), (b) with respect to registration of the Registrable Securities
issued in the Second Closing, the 90th calendar day following the Second Closing
(or the 120th calendar day following such Closing, in the event the Registration
Statement is reviewed by the Commission) (c) with respect to any additional
Registration Statements that may be required pursuant to Section 2 hereof, the
90th calendar day following the date on which the Company first knows, or
reasonably should have known, that such additional Registration Statement is
required under such Section (or the 120th calendar day following the Closing in
the event such Registration Statement is reviewed by the Commission); provided,
however, that if the Company is notified by the Commission that a Registration
Statement will not be reviewed or is no longer subject to further review and
comments, the Effectiveness Date as to such Registration Statement shall be the
5th Trading Day following the date on which the Company is so notified if such
date precedes the dates otherwise required above; provided, further, that if the
Effectiveness Date falls on a Saturday, Sunday or other day that the Commission
is closed for business, the Effectiveness Date shall be extended to the next
business day on which the Commission is open for business.

 
 
 

“Effectiveness Period” shall have the meaning set forth in Section 2(a).
 
“Event” shall have the meaning set forth in Section 2(c).
 
“Event Date” shall have the meaning set forth in Section 2(c).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“Filing Date” means: (a) with respect to the Initial Registration Statement
required to be filed to cover the resale by the Holders of the Registrable
Securities, the 30th calendar day following the Closing, (b) with respect to the
Registration Statement required to be filed to cover the resale by the Holders
of the Registrable Securities issued in the Second Closing, the 30th calendar
day following the Second Closing and (c) with respect to any additional
Registration Statements that may be required pursuant to Section 2 hereof, the
30th calendar day following the date on which the Company first knows, or
reasonably should have known, that such additional Registration Statement is
required under such Section.
 
“Holder” or “Holders” means the holder or holders, as the case may be, from time
to time of Registrable Securities.
 
“Indemnified Party” shall have the meaning set forth in Section 6(c).
 
“Indemnifying Party” shall have the meaning set forth in Section 6(c).
 
“Initial Registration Statement” means the initial Registration Statement
required to be filed to cover the resale by the Holders of the Registrable
Securities pursuant to Section 2(a).
 
“Losses” shall have the meaning set forth in Section 6(a).
 
“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
 
“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
 
“Prospectus” means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A or Rule 430B promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by a Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

 
 
 

 
“Reduction Securities” shall have the meaning set forth in Section 2(b).
 
“Registrable Securities” means (i) the Shares issued pursuant to the Purchase
Agreement, (ii) the Underlying Shares issuable upon exercise of the Warrants
issued pursuant to the Purchase Agreement and (iii) any other shares of Common
Stock issued as (or issuable upon conversion or exercise of any warrant, right
or other security which is issued as) a dividend or other distribution with
respect to, in exchange for or in replacement of the Shares or the Underlying
Shares.
 
“Registration Statement” means each of the following: (i) an initial
registration statement which is required to register the resale of the
Registrable Securities, and (ii) each additional registration statement, if any,
contemplated by Section 2, and including, in each case, the Prospectus,
amendments and supplements to each such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“Rule 415” means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“Rule 424” means Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
“Shares” shall have the meaning set forth in the Purchase Agreement.
 
“Trading Day” means any day on which the Common Stock is traded on the Principal
Market (as defined in the Purchase Agreement), or, if the Principal Market is
not the principal trading market for the Common Stock, then on the principal
securities exchange or securities market on which the Common Stock is then
traded.
 
“Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.
 
“Underlying Shares” shall have the meaning set forth in the Purchase Agreement.
 
“Warrants” shall have the meaning set forth in the Purchase Agreement.

 
 
 

 
2.           Registration.
 
(a)           On or prior to each Filing Date, the Company shall prepare and
file with the Commission a Registration Statement covering the resale of all
Registrable Securities not already covered by an existing and effective
Registration Statement (except as provided in Section 2(b) and Section 2(d)) for
an offering to be made on a continuous basis pursuant to Rule 415.  The
Registration Statement shall be on Form S-3 (except if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3, in which
case such registration shall be on another appropriate form for such purpose)
and shall contain (except if otherwise required pursuant to written comments
received from the Commission upon a review of such Registration Statement) the
“Plan of Distribution” in substantially the form attached hereto as Annex
A.  The Company shall use its best efforts to cause each Registration Statement
to be declared effective under the Securities Act as soon as possible but, in
any event, no later than the Effectiveness Date for such Registration Statement,
and shall use its best efforts to keep the Registration Statement continuously
effective under the Securities Act until the date on which all Registrable
Securities under such Registration are available for sale under Rule 144(b) (or
any successor provision thereto) without volume limitation (the “Effectiveness
Period”).  It is agreed and understood that the Company shall, from time to
time, be obligated to file one or more additional Registration Statements to
cover any Registrable Securities which are not registered for resale pursuant to
a pre-existing Registration Statement.
 
(b)           Notwithstanding anything contained herein to the contrary,
including the fact that such Registrable Securities may be registered pursuant
to the Registration Statement referred to in Section 2(d) below, in the event
that the Commission limits the amount of Registrable Securities that may be
included and sold by Holders in any Registration Statement, including the
Initial Registration Statement, pursuant to Rule 415 or any other basis, the
Company may reduce the number of Registrable Securities included in such
Registration Statement on behalf of the Holders (in case of an exclusion as to a
portion of such Registrable Securities, such portion shall be allocated pro rata
among such Holders first in proportion to the respective numbers of Registrable
Securities represented by Shares requested to be registered by each such Holder
over the total amount of Registrable Securities represented by Shares, and
second in proportion to the respective numbers of Registrable Securities
represented by Underlying Shares requested to be registered by each such Holder
over the total amount of Registrable Securities represented by Underlying
Shares) (such Registrable Securities, the “Reduction Securities”).  In such
event the Company shall give the Holders prompt notice of the number of such
Reduction Securities and the Company will not be liable for any liquidated
damages under Section 2(c), or otherwise under this Agreement, in connection
with the Reduction Securities.  The Company shall use its best efforts at the
first opportunity that is permitted by the Commission to register for resale the
Reduction Securities.  Such new Registration Statement shall be on Form S-3
(except if the Company is not then eligible to register for resale the Reduction
Securities on Form S-3, in which case such registration shall be on another
appropriate form for such purpose) and shall contain (except if otherwise
required pursuant to written comments received from the Commission upon a review
of such Registration Statement) the “Plan of Distribution” in substantially the
form attached hereto as Annex A.  The Company shall use its best efforts to
cause each such Registration Statement to be declared effective under the
Securities Act as soon as possible but, in any event, no later than the
Effectiveness Date for such Registration Statement, and shall use its best
efforts to keep such Registration Statement continuously effective under the
Securities Act during the entire Effectiveness Period.

 
 
 

 
(c)           If: (i) a Registration Statement is not filed on or prior to its
Filing Date, (ii) a Registration Statement is not declared effective by the
Commission on or prior to its required Effectiveness Date, or (iii) after its
Effective Date, such Registration Statement ceases for any reason (including
without limitation by reason of a stop order or the Company’s failure to update
the Registration Statement) to be effective and available to the Holders as to
all Registrable Securities to which it is required to cover at any time prior to
the expiration of its Effectiveness Period for an aggregate of more than 30
consecutive Trading Days or an aggregate of 60 Trading Days (which need not be
consecutive) in any given 360-day period, (any such failure or breach being
referred to as an “Event,” and for purposes of clauses (i) or (ii) the date on
which such Event occurs, and for purposes of clause (iii) the date on which such
30 consecutive or 60 Trading Day-period (as applicable) is exceeded, being
referred to as the “Event Date”), then, in addition to any other rights
available to the Holders, on each monthly anniversary of each such Event Date
thereof (if the applicable Event shall not have been cured by such date) until
the applicable Event is cured, the Company shall pay each Holder an amount in
cash, as partial liquidated damages and not as a penalty, equal to 1% of the
aggregate purchase price paid by such Holder pursuant to the Purchase Agreement
for its Registrable Securities then held; provided, that all periods shall be
tolled, with respect to a Holder, by the number of Trading Days during which
such Holder fails to provide the Company with information regarding such Holder
which was reasonably requested by the Company in order to effect the
registration of such Holder’s Registrable Securities pursuant to Section 7(e)
hereof.  It shall be a condition precedent to the obligations of the Company to
pay any liquidated damages pursuant to this Section 2 with respect to the
Registrable Securities of any Holder that such Holder shall furnish to the
Company such information regarding itself and the Registrable Securities held by
it.  The partial liquidated damages pursuant to the terms hereof shall apply on
a pro rata basis for any portion of a month prior to the cure of an
Event.  Notwithstanding the foregoing, the maximum payment to a Holder
associated with all Events in the aggregate shall not exceed (i) in any 30-day
period following an Event Date, an aggregate of 1% of the aggregate purchase
price paid by such Holder pursuant to the Purchase Agreement for its Registrable
Securities then held and (ii) 8% of the aggregate purchase price paid by such
Holder pursuant to the Purchase Agreement for its Registrable Securities then
held.
 
3.           Registration Procedures
 
In connection with the Company’s registration obligations hereunder, the Company
shall:
  
(a)           Not less than five Trading Days prior to the filing of a
Registration Statement or any related Prospectus or any amendment or supplement
thereto, the Company shall furnish to the Holders copies of all such documents
proposed to be filed (other than those incorporated by
reference).  Notwithstanding the foregoing, the Company shall not be required to
furnish to the Holders any prospectus supplement being prepared and filed solely
to name new or additional selling securityholders unless such Holders are named
in such prospectus supplement.  In addition, in the event that any Registration
Statement is on Form S-1 (or other form which does not permit incorporation by
reference), the Company shall not be required to furnish to the Holders any
prospectus supplement containing information included in a report or proxy
statement filed under the Exchange Act that would be incorporated by reference
in such Registration Statement if such Registration Statement were on Form S-3
(or other form which permits incorporation by reference).  The Company shall
duly consider any comments made by Holders and received by the Company not later
than two Trading Days prior to the filing of the Registration Statement, but
shall not be required to accept any such comments to which it reasonably objects
in good faith.

 
 
 

 
(b)           (i)  Prepare and file with the Commission such amendments,
including post-effective amendments and supplements, to each Registration
Statement and the Prospectus used in connection therewith as may be necessary to
keep such Registration Statement continuously effective as to the applicable
Registrable Securities for its Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424;
(iii) respond as promptly as reasonably possible to any comments received from
the Commission with respect to each Registration Statement or any amendment
thereto and, as promptly as reasonably possible provide the Holders true and
complete copies of all correspondence from and to the Commission relating to
such Registration Statement that pertains to the Holders as Selling Stockholders
but not any comments that would result in the disclosure to the Holders of
material and non-public information concerning the Company; and (iv) comply in
all material respects with the provisions of the Securities Act and the Exchange
Act with respect to the Registration Statements and the disposition of all
Registrable Securities covered by each Registration Statement.
 
(c)           Notify the Holders as promptly as reasonably possible (and, in the
case of (i)(A) below, not less than three Trading Days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later than
one Trading Day following the day: (i)(A) when a Prospectus or any prospectus
supplement (but only to the extent notice is required under Section 3(a) above)
or post-effective amendment to a Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a “review” of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement (in which case the Company shall provide true and
complete copies thereof and all written responses thereto to each of the Holders
that pertain to the Holders as a Selling Stockholder or to the Plan of
Distribution, but not information which the Company believes would constitute
material and non-public information); and (C) with respect to each Registration
Statement or any post-effective amendment, when the same has been declared
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to a Registration Statement
or Prospectus or for additional information that pertains to the Holders as
Selling Stockholders or the Plan of Distribution; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of a Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; (v) of the occurrence of any event or passage of time that makes the
financial statements included or incorporated by reference in a Registration
Statement ineligible for inclusion or incorporation by reference therein or any
statement made in such Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to such Registration Statement,
Prospectus or other documents so that, in the case of such Registration
Statement or the Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and (vi) of the
occurrence or existence of any pending corporate development with respect to the
Company that the Company believes may be material and that, in the determination
of the Company, makes it not in the best interest of the Company to allow
continued availability of a Registration Statement or Prospectus; provided, that
any and all of such information shall remain confidential to each Holder until
such information otherwise becomes public, unless disclosure by a Holder is
required by law; provided, further, that notwithstanding each Holder’s agreement
to keep such information confidential, each such Holder makes no acknowledgement
that any such information is material, non-public information.
 
 
 
 
(d)           Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
 
(e)           Furnish to each Holder, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto and all exhibits
to the extent reasonably requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission; provided, that the Company shall have no
obligation to provide any document pursuant to this clause that is available on
the EDGAR system.
 
(f)           Promptly deliver to each Holder, without charge, as many copies of
each Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request.  Subject
to Section 6(d) hereof, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
 
(g)           Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Registrable Securities for offer and sale
under the securities or Blue Sky laws of those jurisdictions within the United
States as any Holder reasonably requests in writing to keep each such
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by the Registration Statements; provided, that the Company
shall not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or subject the Company to any material tax in
any such jurisdiction where it is not then so subject.
 
(h)           Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be delivered
to a transferee pursuant to the Registration Statements, which certificates
shall be free, to the extent permitted by the Purchase Agreement, of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such Holders may request.
 
(i)           Upon the occurrence of any event contemplated by Section 3(c)(v),
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to the affected Registration Statements or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, no Registration Statement nor any Prospectus will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
 
(j)           The Company may require each selling Holder to furnish to the
Company a certified statement as to the number of shares of Common Stock
beneficially owned by such Holder and any Affiliate thereof, and, if required by
the Commission, the natural persons thereof that have voting and dispositive
control over the shares.
 
 
 
 
4.           Holder’s Obligations.  Each Holder agrees, by acquisition of the
Registrable Securities, that no Holder shall be entitled to sell any of such
Registrable Securities pursuant to a Registration Statement or to receive a
Prospectus relating thereto, unless such Holder has furnished the Company with
such information set forth in the Investor Questionnaire and Selling Stockholder
Questionnaire pursuant to the Purchase Agreement.  Any sale of any Registrable
Securities by any Holder shall constitute a representation and warranty by such
Holder that the information relating to such Holder is as set forth in the
Prospectus delivered by such Holder in connection with such disposition, that
such Prospectus does not as of the time of such sale contain any untrue
statement of a material fact relating to or provided by such Holder and that
such Prospectus does not as of the time of such sale omit to state any material
fact relating to or provided by such Holder necessary to make the statements in
such Prospectus, in the light of the circumstances under which they were made,
not misleading.
 
5.           Registration Expenses.  All fees and expenses incident to the
Company’s performance of or compliance with its obligations under this Agreement
(excluding any underwriting discounts and selling commissions and all legal fees
and expenses of legal counsel for any Holder) shall be borne by the Company
whether or not any Registrable Securities are sold pursuant to a Registration
Statement.  The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the Principal Market on which the Common Stock is then listed for
trading, and (B) in compliance with applicable state securities or Blue Sky
laws), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable Securities included in the Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) reasonable fees and
disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) reasonable fees
and expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement.  In addition,
the Company shall be responsible for all of its internal expenses incurred in
connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit and the fees and expenses incurred in connection with the
listing of the Registrable Securities on any securities exchange as required
hereunder.  In no event shall the Company be responsible for any broker or
similar commissions of any Holder or, except to the extent provided for in the
Transaction Documents, any legal fees or other costs of the Holders.
 
6.           Indemnification.
 
(a)           Indemnification by the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, partners, members, stockholders
and employees of each Holder, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents, partners, members, stockholders and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, reasonable costs of
preparation and reasonable attorneys’ fees) and expenses (collectively,
“Losses”), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in any Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
(it being understood
 
 
 
that the Holder has approved Annex A hereto for this purpose), or arising out of
or relating to any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein (in the case of
any Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (1) such untrue statements, alleged untrue
statements, omissions or alleged omissions are based solely upon information
regarding such Holder furnished in writing to the Company by such Holder
expressly for use therein, or to the extent that such information relates to
such Holder or such Holder’s proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto (it being understood that
the Holder has approved Annex A hereto for this purpose) or (2) in the case of
an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use
by such Holder of an outdated or defective Prospectus after the Company has
notified such Holder in writing that the Prospectus is outdated or defective and
prior to the receipt by such Holder of an Advice (as defined below) or an
amended or supplemented Prospectus, but only if and to the extent that following
the receipt of the Advice or the amended or supplemented Prospectus the
misstatement or omission giving rise to such Loss would have been
corrected.  The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.
 
(b)           Indemnification by Holders.  Each Holder shall, notwithstanding
any termination of this Agreement, severally and not jointly, indemnify and hold
harmless the Company, its directors, officers, agents and employees, each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, agents,
partners, members, stockholders or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon: (x) for so long as the
Company is not a “Seasoned Issuer” and the prospectus delivery requirements of
the Securities Act apply to sales by such Holder, such Holder’s failure to
comply with the prospectus delivery requirements of the Securities Act or (y)
any untrue statement of a material fact contained in any Registration Statement,
any Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein (in the case of any Prospectus, or any form of prospectus or supplement
thereto, in light of the circumstances under which they were made) not
misleading to the extent, but only to the extent that, (1) such untrue
statements or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein, or
to the extent that such information relates to such Holder or such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto (it being understood that the Holder has
approved Annex A hereto for this purpose) or (2) in the case of an occurrence of
an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder
of an outdated or defective Prospectus after the Company has notified such
Holder in writing that the Prospectus is outdated or defective and prior to the
receipt by such Holder of an Advice or an amended or supplemented Prospectus,
but only if and to the extent that following the receipt of the Advice or the
amended or supplemented Prospectus the misstatement or omission giving rise to
such Loss would have been corrected.  In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
 

 
 
 
 
(c)           Conduct of Indemnification Proceedings.  If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
“Indemnified Party”), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all reasonable fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.

 
An Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless:  (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party); provided,
that the Indemnifying Party shall not be liable for the fees and expenses of
more than one separate firm of attorneys at any time for all Indemnified Parties
pursuant to this Section 6(c).  The Indemnifying Party shall not be liable for
any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld, delayed or conditioned.  No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding.
 
All fees and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or preparing to
defend such Proceeding in a manner not inconsistent with this Section) shall be
paid to the Indemnified Party, as incurred, within ten Trading Days of written
notice thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
 
(d)           Contribution.  If a claim for indemnification under Section 6(a)
or 6(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations.  The
 
 
 
 
 
relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission.  The amount paid or
payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 6(c), any reasonable attorneys’
or other reasonable fees or expenses incurred by such party in connection with
any Proceeding to the extent such party would have been indemnified for such
fees or expenses if the indemnification provided for in this Section was
available to such party in accordance with its terms.
 
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 6(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding
paragraph.  Notwithstanding the provisions of this Section 6(d), no Holder shall
be required to contribute, in the aggregate, any amount in excess of the amount
by which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.  No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
 
The indemnity and contribution agreements contained in this Section 6 are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties and are not in diminution or limitation of the
indemnification provisions under the Purchase Agreement.

 
7.           Miscellaneous.
 
(a)           Remedies.  In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement.  The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agree that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense that a remedy
at law would be adequate.
 
(b)           Compliance.  Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.
 
(c)           Discontinued Disposition.  Each Holder agrees by its acquisition
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Section 3(c), such
Holder will forthwith discontinue disposition of such Registrable Securities
under the Registration Statement until such Holder’s receipt of the copies of
the supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.  The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.

 
 
 
 
(d)           Furnishing of Information.  Each Holder shall furnish in writing
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it, as shall be reasonably requested by the Company to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request.
 
(e)           Piggy-Back Registrations.  If at any time during the Effectiveness
Period, except as contemplated by Section 2(b) or Section 2(d) hereof, there is
not an effective Registration Statement covering all of the Registrable
Securities and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within 15 calendar days after the date of such
notice, any such Holder shall so request in writing, the Company shall include
in such registration statement all or any part of such Registrable Securities
such Holder requests to be registered; provided, however, that the Company shall
not be required to register any Registrable Securities pursuant to this Section
7(e) that are eligible for resale pursuant to Rule 144 promulgated under the
Securities Act without volume limitation or that are the subject of a then
effective Registration Statement.
 
(f)           Amendments and Waivers.  No provision of this Agreement may be
waived or amended except in a written instrument signed by the Company and the
Holder or Holders (as applicable) of no less than eighty percent of the then
outstanding Registrable Securities.  The Company shall provide prior notice to
all Holders of any proposed waiver or amendment.  No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.
 
(g)           Notices.  All notices, requests, consents and other communications
hereunder shall be in writing, shall be sent by confirmed facsimile or
electronic mail, or mailed by first-class registered or certified airmail, or
nationally recognized overnight express courier, postage prepaid, and shall be
deemed given when so sent in the case of facsimile or electronic mail
transmission, or when so received in the case of mail or courier, and addressed
as follows:
 

 
If to the Company:
 
A.P. Pharma, Inc.
       
123 Saginaw Drive
       
Redwood City, California 94063
       
Attention:  Chief Financial Officer
       
Facsimile:  (650) 365-6490
       
E-Mail:  jwhelan@appharma.com
             
With a copy to:
 
Latham & Watkins LLP
       
140 Scott Drive
       
Menlo Park, California 94025
       
Attention:  Alan C. Mendelson
       
Facsimile:  (650) 463-4693
       
E-Mail:  alan.mendelson@lw.com
 
 
 
 
 
 
 
 
   
If to a Purchaser:
 
To the address set forth under such Purchaser’s name on the signature pages
hereto
           
If to any other Person who is then the registered Holder:
 
To the address of such Holder as it appears in the stock transfer books of the
Company

 
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
 
(h)           Successors and Assigns.  This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder.  Each Holder may assign
its respective rights hereunder in the manner and to the Persons as permitted
under the Purchase Agreement.
 
(i)           Execution and Counterparts.  This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement.  In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
 
(j)           Governing Law.  This Agreement shall be governed by and construed
in accordance with the laws of the State of New York as applied to contracts
entered into and performed entirely in New York by New York residents.
 
(k)           Cumulative Remedies.  The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
 
(l)           Severability.  If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction.  It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
 
(m)           Use of Terms.  The parties agree and acknowledge that when, in
this Agreement, the Company is required to use its best efforts to perform any
covenant under this Agreement, such requirement shall not obligate the Company,
in the reasonable judgment of the disinterested members of its Board of
Directors, to perform any act that will have a material adverse effect on the
Company.
 
(n)           Headings.  The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
 
 
(o)           Independent Nature of Purchasers’ Obligations and Rights.  The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder.  The decision of each Purchaser to purchase Securities
pursuant to the Transaction Documents has been made independently of any other
Purchaser.  Nothing contained herein or in any other agreement or document
delivered at any closing, and no action taken by any Purchaser pursuant hereto
or thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert with respect to
such obligations or the transactions contemplated by this Agreement.  Each
Purchaser acknowledges that no other Purchaser has acted as agent for such
Purchaser in connection with making its investment hereunder and that no
Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment in the Securities or enforcing its rights under the
Transaction Documents.  Each Purchaser shall be entitled to protect and enforce
its rights, including without limitation the rights arising out of this
Agreement, and it shall not be necessary for any other Purchaser to be joined as
an additional party in any proceeding for such purpose.

 
 
 

 
            IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
 
 

 
A.P. PHARMA, INC.
         
By:
  /s/ Ronald J. Prentki
 
Name: Ronald J. Prentki
 
Title: President & CEO

 
 
 

 
 
 

 
 
PURCHASERS:
 
667, L.P.
         667, L.P.

/s/ Felix Baker
/s/ Felix Baker
By: Baker Biotech Capital, L.P. (general partner)
By: Baker Biotech Capital (GP), LLC (general partner)
By: Felix Baker, Ph.D., Managing Member
By: Baker Biotech Capital, L.P. (general partner)
By: Baker Biotech Capital (GP), LLC (general partner)
By: Felix Baker, Ph.D., Managing Member
           

 
 
 
 
BAKER BROTHERS LIFE SCIENCES, L.P.      14159, L.P.

/s/ Felix Baker
/s/ Felix Baker
By: Baker Biotech Capital, L.P. (general partner)
By: Baker Biotech Capital (GP), LLC (general partner)
By: Felix Baker, Ph.D., Managing Member
By: Baker Biotech Capital, L.P. (general partner)
By: Baker Biotech Capital (GP), LLC (general partner)
By: Felix Baker, Ph.D., Managing Member
           

 

 
 
 

PURCHASERS:
 
 
        TANG CAPITAL PARTNERS, L.P.

 
/s/ Kevin Tang
 
Name: Kevin Tang
Title: Managing Director
           

 

 
 
 

PURCHASERS:
 
 
        BOXER CAPITAL, LLC

 
/s/ Chris Fuglesang
 
Name: Chris Fuglesang
Title: Member
           

 

 
 
 

PURCHASERS:
 
 
                           DEERFIELD SPECIAL SITUATIONS FUNDS INTERNATIONAL,
LTD.

 
/s/ Darren Levine
 
Name: Darren Levine
Title: CFO
           

 
                                                                 DEERFIELD
SPECIAL SITUATIONS FUNDS, LP

 
/s/ Darren Levine
 
Name: Darren Levine
Title: CFO
       

 
 
 

 
ANNEX A
 
PLAN OF DISTRIBUTION
 
The selling stockholders and any of their pledgees, donees, transferees,
assignees or other successors-in-interest may, from time to time, sell, transfer
or otherwise dispose of any or all of their shares of common stock or interests
in shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions.  These dispositions may
be at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time
of sale, or at negotiated prices.  The selling stockholders may use one or more
of the following methods when disposing of the shares or interests therein:
 
 
•
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

 
 
•
block trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction;

 
 
•
through brokers, dealers or underwriters that may act solely as agents;

 
 
•
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

 
 
•
an exchange distribution in accordance with the rules of the applicable
exchange;

 
 
•
privately negotiated transactions;

 
 
•
short sales;

 
 
•
through the writing or settlement of options or other hedging transactions
entered into after the effective date of the registration statement of which
this prospectus is a part, whether through an options exchange or otherwise;

 
 
•
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;

 
 
•
a combination of any such methods of disposition; and

 
 
•
any other method permitted pursuant to applicable law.

 
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the “Securities Act”), if available, rather
than under this prospectus.
  
   Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales.  Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated.  The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

 
 
 
 
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell shares of common stock from time to time under this
prospectus, or under a supplement or amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
 
Upon being notified in writing by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of common
stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such shares of common stock were sold, (iv) the commissions
paid or discounts or concessions allowed to such broker-dealer(s), where
applicable, (v) that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
and (vi) other facts material to the transaction.  In addition, upon being
notified in writing by a selling stockholder that a donee or pledge intends to
sell more than 500 shares of common stock, we will file a supplement to this
prospectus if then required in accordance with applicable securities law.
 
The selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
 
            In connection with the sale of the shares of common stock or
interests in shares of common stock, the selling stockholders may enter into
hedging transactions after the effective date of the registration statement of
which this prospectus is a part with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in the
course of hedging the positions they assume.  The selling stockholders may also
sell shares of common stock short after the effective date of the registration
statement of which this prospectus is a part and deliver these securities to
close out their short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities.  The selling stockholders
may also enter into option or other transactions after the effective date of the
registration statement of which this prospectus is a part with broker-dealers or
other financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
 
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales.  In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.  The maximum commission or discount to be
received by any member of the Financial Industry Regulatory Authority (FINRA) or
independent broker-dealer will not be greater than 8% of the initial gross
proceeds from the sale of any security being sold.

 
 
 
 
 
We have advised the selling stockholders that they are required to comply with
Regulation M promulgated under the Securities and Exchange Act during such time
as they may be engaged in a distribution of the shares.  The foregoing may
affect the marketability of the common stock.
 
The aggregate proceeds to the selling securityholders from the sale of the
common stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any.  Each of the selling securityholders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of common stock to be made
directly or through agents.  We will not receive any of the proceeds from this
offering.
 
We are required to pay all fees and expenses incident to the registration of the
shares.  We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act or otherwise.
 
            We have agreed with the selling stockholders to keep the
registration statement of which this prospectus constitutes a part effective
until the earlier of (a) such time as all of the shares covered by this
prospectus have been disposed of pursuant to and in accordance with the
registration statement or (b) the date on which the shares of common stock
covered by this prospectus may be sold by non-affiliates without any volume
limitations pursuant to Rule 144 of the Securities Act.