Exhibit 10.4


METABASIS
THERAPEUTICS, INC.


SEVERANCE
AGREEMENT


THIS SEVERANCE AGREEMENT (this “Agreement”) is
entered into effective as of April 27, 2007 (the “Effective Date”), by and between MARK D. ERION (the “Employee”) and METABASIS THERAPEUTICS, INC.,
a Delaware corporation (the “Company”).


RECITALS


WHEREAS, the Employee and the Company
entered into a Severance Agreement dated June 30, 2003 (the “Prior Severance Agreement”);
and


WHEREAS, the parties have agreed that the
Prior Severance Agreement shall be amended, restated and superseded as set
forth herein.


AGREEMENT


NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which is acknowledged, it is
agreed between the parties as follows:


Term of Agreement.


This Agreement shall
remain in effect from the Effective Date until the earlier of:


The date when the
Employee’s employment with the Company terminates for any reason not described
in Section 6; or


The date when the
Company has met all of its obligations under this Agreement following a
termination of the Employee’s employment with the Company for a reason
described in Section 6.


Definition of Change in Control.


For all purposes under this Agreement, “Change in Control”
shall mean the occurrence of any of the following events after the Effective
Date:


The Company is
merged, consolidated, or reorganized into or with another legal entity, and as
a result of such merger, consolidation or reorganization more than 50% of the
voting securities of such entity or its parent outstanding immediately after
such transaction are held by persons other than the holders of voting
securities of the Company immediately prior to such transaction;


The Company sells
all or substantially all of its assets to another legal entity and thereafter,
more than 50% of the voting securities of such entity or its parent outstanding
immediately after such transaction are held by persons other than the holders
of voting securities of the Company immediately prior to such transaction;


A change in the
composition of the Company’s Board of Directors (the “Board”) during any
period of two consecutive years such that individuals who at the beginning of
such period were members of the Board cease for any reason to constitute at
least a majority thereof, unless the election, or the nomination for election
by the Company’s stockholders, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were directors at
the beginning of the period; or


Any person (as the
term person is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act
of 1934, as amended (the “Exchange Act”)) has become the beneficial owner (as
the term “beneficial owner” is defined under Rule 13d-3, or any successor rule
or regulation promulgated under the Exchange Act) of more than 50% of the then
outstanding voting securities of the Company; provided
that changes in beneficial ownership resulting from issuances of securities by
the Company in transactions the primary purpose of which is to raise capital
through the sale of Company equity to one or more financial investors shall be
disregarded in determining whether a Change in Control has occurred.



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Definition of Good Reason.


For all purposes under
this Agreement, “Good
Reason” shall mean that the Employee:


Has been demoted
or has incurred a material reduction in his authority or responsibility as an
employee of the Company, including (without limitation) a reduction or
elimination of his authority to approve expenditures or to hire, promote,
demote or terminate subordinates;


Has incurred a
reduction in his total compensation (including benefits) as an employee of the
Company, other than pursuant to a Company-wide reduction of total compensation
(including benefits) for employees of the Company generally;


Has not received a
contemporaneous increase in his total compensation (including benefits) which
is commensurate with increases in total compensation (including benefits)
received by a majority of executive-level employees of the Company with duties and
responsibilities substantially comparable to those of the Employee;


Has not received a
bonus commensurate with bonuses (if any) received by a majority of
executive-level employees of the Company with duties and responsibilities
substantially comparable to those of the Employee; or


Has been notified
that his principal place of work as an employee of the Company will be
relocated by a distance of 50 miles or more.


Definition of Cause.


For all purposes under
this Agreement, “Cause”
shall mean:


a material and
continuing failure to perform the duties of Employee’s employment which is
injurious to the Company, other than a failure resulting from complete or
partial incapacity due to physical or mental illness or impairment, which
failure is not corrected within 15 business days after written notice thereof
to the Employee;


Employee’s gross
misconduct or fraud; or


Employee’s
conviction of, or plea of “guilty” or “no contest” to, a felony.


Definition of Continuation Period.


For all purposes under
this Agreement, “Continuation
Period” shall mean the period commencing on the date when the
termination of the Employee’s employment under Section 6 is effective and
ending on the earlier of:


The date twelve
(12) months after the date when the employment termination was effective; or


The date of the
Employee’s death.


Entitlement to Severance Pay and
Benefits.


The Employee shall
be entitled to receive the severance pay described in Section 7 (the “Severance Pay”) and
the benefits described in Section 8(a)(i), 8(b) and 8(c) from the Company if on
or before the occurrence of a Change in Control, the Company terminates the
Employee’s employment for any reason other than Cause.


The Employee shall
be entitled to receive the Severance Pay described in Section 7 and the
benefits described in Section 8(a)(ii), 8(b) and 8(c) from the Company if one
of the following events occurs:


Within the first 12-month
period after the occurrence of a Change in Control, the Employee voluntarily
resigns his employment for Good Reason;



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Within the first 12-month
period after the occurrence of a Change in Control, the Company terminates the
Employee’s employment for any reason other than Cause; or


Within the first 12-month
period after the occurrence of a Change in Control, the Company terminates the
Employee’s employment because his position has been eliminated in connection
with a restructuring or a reduction in force, as determined by the Company.


The Employee’s
receipt of any Severance Pay or any other benefits pursuant to this Agreement
shall be subject to, and contingent upon, the Employee’s furnishing to the
Company an effective Release and Waiver of Claims in the form attached hereto
as Exhibit A.


Amount of Severance Pay.


During the Continuation
Period, the Company shall pay the Employee Severance Pay at an annual rate
equal to the sum of:


The Employee’s
base compensation at the annual rate in effect on the date 30 days prior to the
date when the termination of his employment with the Company is effective; plus


The arithmetic
mean of the Employee’s annual bonuses for the last three calendar years
completed prior to the date when the termination of his employment with the
Company is effective.  In the event that
the Employee received no bonus from the Company for one or more of such
calendar years, the years in which no bonus was paid shall be disregarded and
the arithmetic mean of the Employee’s bonuses for the remaining years (if any)
shall be used.


Such amount, as determined in accordance with Sections
7(a) and 7(b), shall be paid at periodic intervals in accordance with the
Company’s standard payroll procedures.


Other Benefits.


Stock
Options and Restricted Stock.


Immediately upon the
occurrence of the event described in Section 6(a), there shall vest immediately
such number of unvested stock options and shares of restricted stock granted to
Employee by the Company that would have vested if Employee’s employment would
have continued for an additional 12 months following the occurrence of such
event.


All unvested stock
options and shares of restricted stock granted to Employee by the Company shall
vest immediately upon the occurrence of one of the events described in Section
6(b).


In the case of the foregoing clause (ii) only, the post-termination
exercise grace period under the Employee’s stock options shall commence at the
end of the Continuation Period.  The
Employee represents that he has consulted or will consult a tax adviser
regarding the impact of this Subsection (a) on the tax treatment of Employee’s
stock options and shares of restricted stock.


Group
Insurance.  At the
commencement of the Continuation Period, the Employee (and, where applicable,
his dependents) shall be entitled to convert his key employee long-term
disability policy and group life insurance policy into individual policies pursuant
to the terms of such policies.  Should
the Employee elect to convert either or both of such policies, the Company will
pay the premiums for such policy or policies during the Continuation Period.  At the commencement of the Continuation
Period, the Employee shall be eligible to continue his group health
continuation coverage under the Consolidated Omnibus Budget Reconciliation Act
of 1986, and the Company will pay the premiums for such coverage during the
Continuation Period.  The foregoing
notwithstanding, in the event that the Employee becomes eligible for comparable
group insurance coverage in connection with new employment, the premium
payments by the Company under this Subsection (b) shall terminate immediately.



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Outplacement
Services.  If one of the
events described in Section 6 has occurred, the Employee shall be entitled to
reasonable outplacement services at the Company’s expense.  Such services shall be provided by a firm
selected by the Employee from a list compiled by the Company and shall be
limited to a period of six consecutive months.


Limitation on Payments.


Reductions.  If any payment or benefit Employee would
receive in connection with a Change in Control from the Company or otherwise (a
“Payment”)
would (i) constitute a “parachute payment” within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the “Code”), and (ii) but
for this sentence, be subject to the excise tax imposed by Section 4999 of the
Code (the “Excise Tax”),
then such Payment shall be equal to the Reduced Amount (as defined below).  The “Reduced Amount” shall be either (x) the
largest portion of the Payment that would result in no portion of the Payment
being subject to the Excise Tax or (y) the largest portion of the Payment, up
to and including the total Payment, whichever amount, after taking into account
all applicable federal, state and local employment taxes, income taxes, and the
Excise Tax (all computed at the highest applicable marginal rate), results in
the Employee’s receipt, on an after-tax basis, of the greater amount of the
Payment notwithstanding that all or some portion of the Payment may be subject
to the Excise Tax. If a reduction in payments or benefits constituting
“parachute payments” is necessary so that the Payment equals the Reduced
Amount, reduction shall occur in the following order unless the Employee elects
in writing a different order (provided, however,
that such election shall be subject to Company approval if made on or after the
date on which the event that triggers the Payment occurs):  reduction of cash payments; cancellation of
accelerated vesting of stock awards; reduction of employee benefits.  If acceleration of vesting of stock award
compensation is to be reduced, such acceleration of vesting shall be cancelled
in the reverse order of the date of grant of the Employee’s stock awards unless
the Employee elects in writing a different order for cancellation.


Accounting
Firm.  The accounting
firm engaged by the Company for general audit purposes as of the day prior to
the effective date of the Change in Control shall perform the foregoing
calculations, subject to the necessary authorizations of the Audit Committee of
the Company’s Board of Directors (the “Audit Committee”).  Alternatively, the Audit Committee may engage
a consulting firm with expertise in calculations under Section 280G of the Code
to perform such calculations.  If any
accounting firm so engaged by the Company is serving as accountant or auditor
for either the Employee or the entity or group that is effecting the Change in
Control, the Company shall appoint a nationally recognized accounting or
consulting firm to make the determinations required hereunder.  The Company shall bear all expenses with
respect to the determinations by such accounting or consulting firm required to
be made hereunder.


Determinations.  The accounting or
consulting firm engaged to make the determinations hereunder shall provide its
calculations, together with detailed supporting documentation, to the Company
and the Employee within ten (10) calendar days after the date on which the
Employee’s right to a Payment is triggered (if requested at that time by the
Company or the Employee) or such other time as requested by the Company or the
Employee.  If the accounting or
consulting firm determines that no Excise Tax is payable with respect to a
Payment, either before or after the application of the Reduced Amount, it shall
furnish the Company and the Employee with an opinion reasonably acceptable to
the Employee that no Excise Tax will be imposed with respect to such
Payment.  Any good faith determinations
of the accounting firm made hereunder shall be final, binding and conclusive
upon the Company and the Employee.


Successors.


Company’s
Successors.  The
Company shall require any successor (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to all or
substantially all of the Company’s business and/or assets, by an agreement in
substance and form satisfactory to the Employee, to assume this Agreement and
to agree expressly to perform this Agreement in the same manner and to the same
extent as the Company would be required to perform it in the absence of a
succession.  For all purposes under this
Agreement, the term “Company” shall include any successor to the Company’s
business and/or assets which executes and delivers the assumption agreement
described in this Subsection (a) or which becomes bound by this Agreement by
operation of law.



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Employee’s
Successors.  This
Agreement and all rights of the Employee hereunder shall inure to the benefit
of, and be enforceable by, the Employee’s personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.


Application of Code Section 409A.  If the Company determines
that any severance benefit or payment under this Agreement fails to satisfy the
distribution requirement of Section 409A(a)(2)(A) of the Code as a result of
Section 409A(a)(2)(B)(i) of the Code, the payment of such benefit shall be
accelerated to the minimum extent necessary so that the benefit is not subject
to the provisions of Section 409A(a)(1) of the Code.  (It is the intention of the preceding
sentence to apply the short-term deferral provisions of Section 409A of the
Code, and the regulations and other guidance thereunder, to any such payments,
and the payment schedule as revised after the application of the preceding
sentence shall be referred to as the “Revised Payment Schedule”.)  However, if there is no Revised Payment Schedule
that would avoid the application of Section 409A(a)(1) of the Code, the payment
of such benefits shall not be paid pursuant to a Revised Payment Schedule and
instead shall be delayed to the minimum extent necessary so that such benefits
are not subject to the provisions of Section 409A(a)(1) of the Code.  The Company may attach conditions to or
adjust the amounts paid under this Agreement to preserve, as closely as
possible, the economic consequences that would have applied in the absence of
this Section 11; provided, however, that no such
condition or adjustment shall result in the payments being subject to Section
409A(a)(1) of the Code.


Miscellaneous Provisions.


Notice.  Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid.  In the case of the Employee, mailed notices
shall be addressed to him at the home address which he most recently
communicated to the Company in writing. 
In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Secretary.


Waiver.  No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). 
No waiver by either party of any breach of, or of compliance with, any
condition or provision of this Agreement by the other party shall be considered
a waiver of any other condition or provision or of the same condition or
provision at another time.


Whole
Agreement.  This Agreement
constitutes the full and entire understanding and agreement between the parties
with regard to the subject matter hereof, and supersede any and all prior
agreements, representations or understandings (whether oral or written and
whether express or implied) made or entered into by either party with respect
to the subject matter hereof, including without limitation the Prior Severance
Agreement.


No
Setoff; Withholding Taxes. 
There shall be no right of setoff or counterclaim, with respect to any
claim, debt or obligation against payments to the Employee under this
Agreement.  All payments made under this
Agreement shall be subject to reduction to reflect taxes required to be
withheld by law.


Choice
of Law.  The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of California.


Severability.  The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.


No
Assignment.  The rights
of any person to payments or benefits under this Agreement shall not be made
subject to option or assignment, either by voluntary or involuntary assignment
or by operation of law, including (without limitation) bankruptcy, garnishment,
attachment or other creditor’s process, and any action in violation of this
Subsection (g) shall be void.



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At-Will
Employment;  No Employment Rights.  Employee acknowledges and agrees that Employee’s
employment with the Company is “at will,” and subject to the provisions of this
Agreement, may be terminated at any time and for any reason whatsoever by
Employee or the Company, with or without Cause and with or without advance
notice.  This “at-will” employment
relationship cannot be changed except in a writing signed by the Company’s
Chief Executive Officer.


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IN WITNESS WHEREOF, each of the parties has
executed this Agreement, in the case of the Company by its duly authorized
officer, as of the Effective Date.


	
  

  	
  EMPLOYEE:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
    /s/ Mark D. Erion

  	
   

  
	
   

  	
  Mark D. Erion

  
	
   

  	
   

  
	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  METABASIS
  THERAPEUTICS, INC.

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Paul K.
  Laikind

  	
   

  
	
   

  	
   

  
	
   

  	
  Title 

  	
  President and
  Chief Executive Officer

  	
   

  
						



 



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EXHIBIT A


RELEASE
AND WAIVER OF CLAIMS


(TO BE
SIGNED FOLLOWING TERMINATION OF EMPLOYMENT)


In
consideration of the payments and other benefits set forth in the Severance
Agreement dated April 27, 2007 (the “Agreement”)
to which this form is attached, I, Mark D. Erion hereby furnish METABASIS THERAPEUTICS, INC.
and any and all affiliated, subsidiary, related, or successor corporations
(collectively, the “Company”), with the
following release and waiver (“Release and Waiver”).


In
exchange for the consideration provided to me by the Agreement that I am not
otherwise entitled to receive, I hereby generally and completely release and
forever discharge the Company and its directors, officers, employees,
shareholders, partners, agents, attorneys, predecessors, successors, parent and
subsidiary entities, insurers, affiliates, and assigns from any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys’ fees,
damages, indemnities and obligations of every kind and nature, in law, equity
or otherwise, both known and unknown, suspected and unsuspected, disclosed and
undisclosed, that arise out of or are in any way related to events, acts,
conduct, or omissions occurring prior to my signing this Release and
Waiver.  This general release includes,
but is not limited to: (1) all claims arising out of or in any way related to my
employment with the Company or the termination of that employment; (2) all
claims related to my compensation or benefits from the Company, including, but
not limited to, salary, bonuses, commissions, vacation pay, expense
reimbursements, severance pay, fringe benefits, stock, stock options, or any
other ownership interests in the Company, other than as provided in the
Agreement (and provided further that nothing in this general release shall
affect (a) my right to receive a payout of my accrued but unused vacation
and/or paid time off as of my termination date or (b) my rights under any stock
options or other stock awards granted, or under any written commitments
regarding future grants of stock options or other stock awards approved, by the
Company’s Board of Directors or the Compensation Committee thereof prior to my
termination date); (3) all claims for breach of contract, wrongful
termination, and breach of the implied covenant of good faith and fair dealing;
(4) all tort claims, including, but not limited to, claims for fraud, emotional
distress, and discharge in violation of public policy, related to my employment
with the Company or the termination of that employment; and (5) all federal,
state, and local statutory claims related to my employment with the Company or
the termination of that employment, including, but not limited to, claims for
discrimination, harassment, retaliation, attorneys’ fees, or other claims
arising under the federal Civil Rights Act of 1964 (as amended), the federal
Americans with Disabilities Act of 1990, the federal Age Discrimination in
Employment Act of 1967 (as amended) (“ADEA”),
and the California Fair Employment and Housing Act (as amended).


I
also acknowledge that I have read and understand Section 1542 of the California
Civil Code which reads as follows:  “A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.”  I hereby
expressly waive and relinquish all rights and benefits under that section and
any law of any jurisdiction of similar effect with respect to any claims I may
have against the Company.


I
acknowledge and agree that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this Release and Waiver is knowing and
voluntary, and that the consideration given for this Release and Waiver is in
addition to anything of value to which I was already entitled as an executive
of the Company.  If I am 40 years of age
or older upon execution of this Release and Waiver, I further acknowledge that
I have been advised, as required by the Older Workers Benefit Protection Act,
that:  (a) the release and waiver granted
herein does not relate to claims under the ADEA which may arise after this
Release and Waiver is executed; (b) I should consult with an attorney prior to
executing this Release and Waiver; (c) I have twenty-one (21) days in which to
consider this Release and Waiver (although I may choose voluntarily to execute
this Release and Waiver earlier); (d) I have seven (7) days following the
execution of this Release and Waiver to revoke my consent to this Release and
Waiver; and (e) this Release and Waiver shall not be effective until the eighth
day after I execute this Release and Waiver and the revocation period has
expired.


I acknowledge my continuing
obligations under my Employee Proprietary Information and Inventions Agreement
with the Company (the “PIIA”) .


This Release and Waiver, along
with the PIIA, constitutes the complete, final and exclusive embodiment of the
entire agreement between the Company and me with regard to the subject matter
hereof.  I am not relying on any promise
or 



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representation by the Company that is not
expressly stated herein.  This Release
and Waiver may only be modified by a writing signed by both me and the Chief
Executive Officer of the Company.


	
  Date:

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Print Name:

  	
   

  	
   

  
						



 



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