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                                                                    Exhibit 10.4

                                     NDD-094
                                LICENSE AGREEMENT

                                     between

                               Novartis Pharma AG,

                                  Novartis AG

                                      and

                          Vanda Pharmaceuticals, Inc.

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CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

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                            NDD-094 LICENSE AGREEMENT

     This LICENSE AGREEMENT (the "Agreement") dated the 4th day of June, 2004
(the "Effective Date") by and between Novartis Pharma AG, a corporation
organized and existing under the laws of Switzerland and having its principal
office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis"), Novartis AG, a
corporation organized and existing under the laws of Switzerland and having its
principal office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis AG") and
Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws
of the State of Delaware and having its principal office at 47 Hulfish Street,
Suite 310, Princeton, NJ 08542, The United States ("Vanda"). Novartis, Novartis
AG and Vanda may be referred to herein individually as a "Party" and
collectively as the "Parties".

                                  INTRODUCTION

     WHEREAS, Novartis AG owns or has rights to certain Novartis Patents (as
defined below) and Novartis AG and Novartis each have rights to Novartis
Know-How (as defined below) related to the Product (as defined below) and the
Compound (as defined below), and each has the right to grant certain rights and
licenses thereunder as set forth herein, and

     WHEREAS, Vanda has certain expertise in the development and
commercialization of pharmaceutical products, and Vanda wishes to obtain certain
licenses to the Compound for the purpose of developing and commercializing the
Product, and

     WHEREAS, Novartis AG and Novartis each wish to grant a license to Vanda in
respect of such development and commercialisation.

     NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the sufficiency of which is hereby
acknowledged, the Parties to this Agreement mutually agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

     For purposes of this Agreement, the following initially capitalized terms
in this Agreement, whether used in the singular or plural, shall have the
following meanings:

          1.1 "Affiliate" shall mean any corporation, company, partnership,
     joint venture and/or firm which controls, is controlled by, or is under
     common control with a specified person or entity. For purposes of this
     Section 1.1, "control" shall be presumed to exist if one of the following
     conditions is met: (a) in the case of corporate entities, control of at
     least fifty per cent (50%) of the voting rights at a meeting of the board
     of directors or direct or indirect ownership of at least fifty percent
     (50%) of the stock or shares having the right to vote for the election of
     directors, and (b) in the case of non-corporate entities, direct or
     indirect ownership of at least fifty percent (50%) of the equity interest
     with the power to direct the management and policies of such non-corporate
     entities. The Parties acknowledge that in the case of certain entities
     organized under the laws of certain countries outside of the United States,
     the


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     maximum percentage ownership permitted by law for a foreign investor may be
     less than fifty percent (50%), and that in such cases such lower percentage
     shall be substituted in the preceding sentence, provided that such foreign
     investor has the power to direct the management and policies of such
     entity. Notwithstanding the foregoing venture capital investors in Vanda
     shall not be considered Affiliates of Vanda.

          1.2 "Annex" or "Schedule" shall mean the annexes attached to the back
     of this Agreement. In the event of conflict between the drafting of the
     operative terms of the Agreement and the Annex, the operative terms of the
     Agreement shall prevail.

          1.3 "Back-up Compound" shall mean a compound currently available to
     Novartis and Novartis AG to be selected by Novartis in its sole discretion
     and offered by it to Vanda in the event that in the agreed opinion of
     Novartis and Vanda the Compound fails in a Phase II trial.

          1.4 "Business Day" shall mean any day on which banking institutions in
     New York, New York and Basel are open for business.

          1.5 "Commercialization" or "Commercialize" shall mean activities
     conducted by a Party either by itself or through a Third Party and directed
     to marketing, promoting, distributing, importing, exporting, offering for
     sale and selling a Product. When used as a verb, "Commercialize" means to
     engage in Commercialization.

          1.6 "Commercializing Party" shall mean Vanda, except that
     "Commercializing Party" shall mean Novartis as soon as Novartis has
     exercised either the Scenario II Option or the Scenario III Option and
     thereby has elected to Commercialize the Product.

          1.7 "Compound" shall mean the compound currently identified by
     Novartis and Novartis AG as NDD-094 or isomers or epimers thereof and any
     metabolites and salts thereof and more particularly described on Schedule
     1.7.

          1.8 "Confidential Information" has the meaning set forth in Section
     8.1.

          1.9 "Controlled" or "Controls", when used in reference to intellectual
     property, shall mean the legal authority or right of a Party hereto (or any
     of its Affiliates) to grant a license or sublicense of intellectual
     property rights to another party, or to otherwise disclose proprietary or
     trade secret information to such other Party, without breaching the terms
     of any agreement with a Third Party infringing upon the intellectual
     property rights of a Third Party, or misappropriating the proprietary or
     trade secret information of a Third Party.

          1.10 "Co-Promotion Agreement" has the meaning set forth in Section
     2.1(b).

          1.11 "Development Costs" shall mean all reasonable costs incurred by
     Vanda after the Effective Date in developing the Product in accordance with
     this Agreement, as set out in the Development Plan, which costs shall be
     proportionate and in line with the costs incurred by Vanda in
     commercializing other compounds at the same stage of development with
     equivalent sales and profit potential and including:


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          (a) all reasonable Out-of-Pocket Costs and expenses incurred;

          (b) the reasonable direct and indirect costs of internal scientific,
medical or technical personnel (including personnel expenses, travel expenses
and infrastructure costs but for the avoidance of doubt, not including the costs
of managerial, financial, legal or business development personnel) engaged in
such efforts, which costs shall be determined based on the FTE Rate, unless
another basis is otherwise agreed by the Parties in writing

          (c) the reasonable costs and expenses of clinical supplies for such
efforts, including without limitation (i) supply cost of clinical supplies of
the Product; (ii) costs and expenses incurred to purchase and/or package
comparator or combination drugs or devices; and (iii) costs and expenses of
disposal of clinical samples;

          (d) the reasonable costs and expenses incurred in connection with
manufacturing process development and validation, manufacturing scale-up and
improvements, stability testing and quality assurance/quality control
development; qualification and validation of Third Party contract manufacturers;

          (e) the reasonable direct and indirect costs of senior management of
Vanda to the extent reasonably related to the Product and

          (f) all regulatory filing fees.

     1.12 "Development Plan" shall mean the detailed plan drafted by Vanda and
showing its intentions and estimated costs with respect to the development of
the Compound.

     1.13 "Effective Date" shall mean the date specified in the first paragraph
of this Agreement.

     1.14 "EMEA" shall mean the European Agency for the Evaluation of Medicinal
Products.

     1.15 "FDA" shall mean the U.S. Food and Drug Administration or its
successor agency.

     1.16 "Field of Use" shall mean application to all conditions, disorders and
diseases in humans.

     1.17 "First Commercial Sale" shall mean the first sale of a Product to a
Third Party by a Party or an Affiliate or sublicensee of such Party in a country
in the Territory following the obtaining of the applicable Regulatory Approval
of such Product in such country.

     1.18 "FTE Rate" shall mean a rate of $ 200,000 per annum for the time of an
employee for a full-time equivalent person year (consisting of a total of 2,000
hours per annum) of work, to be pro-rated on a daily basis (per annum amount to
be divided by 250 to produce the rate per whole day consisting of eight hours)
if necessary, such rate to include all travel expenses.


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     1.19 "Good Clinical Practice" shall mean the current Good Clinical Practice
regulations promulgated by the FDA, published at 21 C.F.R. Part 50 and 56 as
such regulations may be amended, and such comparable regulations or standards as
may be applicable with respect to the design, conduct, performance, monitoring,
auditing, recording, analyses and reporting of clinical trials outside the
United States.

     1.20 "GMP" shall mean the current Good Manufacturing Practice regulations
promulgated by the FDA, published at 21 C.F.R. Part 210 et seq., as such
regulations may be amended, and such comparable regulations or standards as may
be applicable with respect to Compound or Product(s) manufactured or sold
outside the United States.

     1.21 "Investigational New Drug Application" or "IND" has the meaning set
forth in Section 2.2(a).

     1.22 "Indemnified Party" has the meaning set forth in Section 10.3.

     1.23 "Indemnifying Party" has the meaning set forth in Section 10.3.

     1.24 "Infringement Claim" has the meaning set forth in Section 6.2(a).

     1.25 "Joint Development Committee" or "JDC" shall mean the joint global
development committee to be set up by Vanda and Novartis to coordinate the
development and registration efforts described in this Agreement.

     1.26 "Loss" has the meaning set forth in Section 10.1

     1.27 "Major Market Country" means each and any of the USA, Japan, UK,
France, Germany, Italy and Spain.

     1.28 "NDA" or "New Drug Application" shall mean a new drug application and
all amendments and supplements thereto filed with the FDA pursuant to 21 C.F.R.
Section 314, the EMEA or an equivalent Regulatory Authority in a Major Market
Country, requiring such filing, and including all documents, data and other
information concerning a pharmaceutical product which are necessary for the
gaining of Regulatory Approval seeking permission to market and sell the Product
in a Major Market Country.

     1.29 "NDA Acceptance" means the written notification by the FDA or its
equivalent outside the United States, that the NDA has met all the criteria for
filing acceptance pursuant to 21 C.F.R. Section 314.101 or such equivalent.

     1.30 "NDA Filing" means the first submission of the NDA to the FDA, EMEA or
its equivalent in a Major Market Country.

     1.31 "Net Sales" shall mean the amount invoiced by or on behalf of a Party
and its Affiliates and sublicensees for sales of the Product to Third Parties in
the Territory in a bona fide arm's length transaction, less the following
deductions in respect of the Product (each as determined in accordance with
International Accounting Standards("IAS")) if not previously deducted or
reimbursed or paid by a Third Party in the amount invoiced or received: (a)
cash,


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and/or quantity discounts actually allowed or taken; (b) excise, sales and other
consumption taxes and customs duties to the extent included in the invoice price
(and excluding taxes based on Vanda's income); (c) all reasonable freight,
postage and shipping, insurance and other transportation charges to the extent
included in the invoice price to the customer; (d) all amounts repaid or
credited by reason of rejections, return of goods or price adjustments, in each
case specifically identifiable as relating to Product; (e) amounts incurred
resulting from governmental (or an agency thereof) mandated rebate programs;(f)
any Third Party rebates, administrative fees and chargebacks clearly and
directly related to the sale of Product to the extent actually allowed as agreed
by the parties in writing, any other specifically identifiable amounts included
in Product's gross sales that were or ultimately will be credited and that are
substantially similar to the items listed above. Sales from Novartis or Vanda to
their Affiliates, Sublicensees or to each other shall be disregarded for
purposes of calculating Net Sales.

          In the event that the Product is sold as part of a combination
product, the Net Sales of the Product, for the purposes of determining royalty
payments, shall be determined by multiplying the Net Sales (as defined above in
this Section) of the combination product by the fraction A/(A+B), where A is the
weighted (by sales volume) average sale price of Product when sold separately in
finished form and B is the weighted average sale price of the other product(s)
sold separately in finished form. In the event that such average sale price
cannot be determined for both Product and the other product(s) in combination,
Net Sales for purposes of determining royalty payments shall be mutually agreed
by the Parties within a reasonable period of time prior to the first Regulatory
Approval of such combination product based on all relevant factors including
relative cost and the relative value contributed by each component, and such
agreement shall not be unreasonably withheld.

     1.32 "Novartis Know-How" shall mean any proprietary or nonproprietary
information specific to the Compound or Product within the Field of Use and of a
confidential nature necessary or useful for the manufacture, preparation or
development of the Compound or Product Controlled by Novartis and/or Novartis AG
during the term of this Agreement and shall include, without limitation, data,
knowledge and information., including chemical, stability, pharmacological,
toxicological, pre-clinical, clinical and manufacturing data, samples,
documentation, analytical standards, and gene expression data, provided that
Novartis Know-How shall not include [*].

     1.33 "Novartis Monthly Average Exchange Rate" shall mean for a currency,
the mathematical average of Reuters Daily Rates between 9:00 a.m. and 10 a.m.
Basel time and the official European Central Bank daily rate fixed at 2p.m. for
each Business Day of a month, where applicable.

     1.34 "Novartis Patents" shall mean those Patents Controlled by Novartis AG
claiming Compound, Product, or their metabolites or any formulation of Compound,
processes, uses and intermediates of the foregoing, including those listed on
Annex 3 attached hereto. For the avoidance of doubt, such Novartis Patents shall
not include patents for [*].

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     1.35 "Out of Pocket Costs" shall mean, in accordance with International
Accounting Standards, expenses incurred by a Party and for the avoidance of
doubt, not including pre-paid amounts and capital expenditure.

     1.36 "Patents" shall mean all rights under any patents or patent
applications and any continuations, continuations-in-part, divisions,
provisionals, substitutions, patents of addition, reissues, reexamination,
renewals or extensions thereof (including any supplemental patent certificates)
and any confirmation patent or registration patent and all foreign counterparts
of any of the foregoing.

     1.37 "Payee" has the meaning set forth in Section 5.6.

     1.38 "Payor" has the meaning set forth in Section.5.6

     1.39 "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization or
government or political subdivision thereof.

     1.40 "Phase I Clinical Trial" shall mean the first phase of human clinical
trials of a drug required by the FDA to gain evidence of safety for Product(s),
as described in 21 C.F.R. 312(a), as may be amended and deemed to commence on
the date that the first patient is first dosed by or on behalf of Vanda.

     1.41 "Phase II Clinical Trials" shall mean that portion of the FDA
submission and approval process which provides for the initial trials of a
Product on a limited number of patients for the purposes of determining dose
and, evaluating safety and efficacy in the proposed therapeutic indication, as
more fully defined in 21 C.F.R. 312.21(b) as may be amended and deemed to
commence on the date that the first patient is first dosed by or on behalf of
Vanda.

     1.42 "Phase III Clinical Trials" shall mean that portion of the FDA
submission and approval process which provides for the continued trials of a
Product on sufficient numbers of patients to generate safety, efficacy and
pharmacoeconomic data to support regulatory approval in the proposed therapeutic
indication, as more fully defined in 21 C.F.R. 312.21(c) as may be amended and
deemed to commence on the date that the first patient is first dosed by or on
behalf of Vanda (and Novartis, if applicable).

     1.43 "Primary Market Research Development" shall mean all market research
activity undertaken by the Commercialising Party prior to the First Commercial
Sale.

     1.44 "Product" shall mean a formulated pharmaceutical product containing
the Compound or Back-up Compound as an active ingredient and packaged for the
use by the ultimate consumer.

     1.45 "Reasonable Commercial Efforts" shall mean the efforts and resources
normally used in the pharmaceutical industry by companies employing best
practice and the highest commercial standards for a product with equivalent
sales and profit potential.


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     1.46 "Regulatory Approval" shall mean, with respect to a country or group
of countries in the Territory, all authorizations by the appropriate Regulatory
Authority, governmental entity or entities necessary for commercial sale of a
Product in that country or group of countries including, without limitation and
where applicable, approval of labeling, price, reimbursement and manufacturing.

     1.47 "Regulatory Authority" shall mean the FDA, EMEA or any other
counterpart or additional governmental or regulatory agencies responsible for
applicable Regulatory Approvals.

     1.48 "Scenario I Option" has the meaning set forth in Section 2.2(c).

     1.49 "Scenario II Option" has the meaning set forth in Section 2.2(a).

     1.50 "Scenario III Option" has the meaning set forth in Section 2.2(b).

     1.51 "Sublicensee" shall mean a Person, other than a Vanda Affiliate, to
whom Vanda grants any right or license to use Novartis Patents or Novartis
Know-How or to make, use or sell any Product under all or part of Novartis'
Patents or Novartis' Know-How in the Territory.

     1.52 "Supply Agreement" has the meaning set forth in Section 3.2.

     1.53 "Support" or "Supporting" shall mean the preparation, filing,
prosecution, maintenance, renewal and defense of a Patent.

     1.54 "Term" has the meaning set forth in Section 9.1(a).

     1.55 "Territory" shall mean all the countries and territories of the world.

     1.56 "Third Party" shall mean any Person or other entity other than Vanda,
Novartis, Novartis AG or their respective Affiliates of rights conveyed under
this Agreement.

     1.57 "Valid Claim" shall mean (i) an unexpired or issued claim of a
Novartis Patent which claim has not been held invalid or unenforceable by final
decision of a court or other governmental agency of competent jurisdiction,
unappealable or unappealed within the time allowed for appeal, and which is not
admitted to be invalid or unenforceable through reissue, disclaimer or otherwise
or (ii) pending patent application that is a Novartis Patent Right, which claim
was filed in good faith and has not been abandoned or finally disallowed without
the possibility of appeal or refiling of said application.

     1.58 "Vanda Technology" means all Patents and know-how that are (i)
generated, identified, discovered, created or made by Vanda, its employees or a
Third Party on behalf of Vanda, (ii) controlled by Vanda, and (iii) necessary to
manufacture, use, research, develop, sell or seek regulatory approval,
including, without limitation, manufacturing processes, formulations, modes of
delivery and methods of use for the Compound, Back-up Compound, or Products
developed by Vanda pursuant to its development work with the Compound or the
Back-up Compound.


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                                    ARTICLE 2
                                     LICENSE

     2.1 Grant to Vanda.

          (a) Subject to the terms and conditions of this Agreement, on the
Effective Date, Novartis and Novartis AG hereby grant to Vanda an exclusive
license, with the right to sublicense with the prior written consent of Novartis
and Novartis AG, such consent not to be unreasonably withheld, under the
Novartis Patents and Novartis Know-How, to develop, use, make and have made
Compound and Product in the Field of Use and in the Territory.

          (b) Subject to the Scenario II Option pursuant to Section 2.2 (a) and
Scenario III Option pursuant to Section 2.2 (b) and the Co-Promotion Option
pursuant to Section 2.3 (a) and (b), Vanda shall have an exclusive license to
Commercialize the Compound and Product, with right to sublicense without
consent.

          (c) Novartis AG and Novartis retain all rights to Novartis Patents and
Novartis Know-How except to the extent explicitly granted to Vanda hereunder.

     2.2 Option.

          (a) Scenario II Option. Upon the execution of this Agreement, Vanda
agrees and undertakes that it shall commence Phase II Clinical Trials for the
Product on [*]. Vanda shall be responsible for the conduct and financing of each
of the Phase I Clinical Trials and Phase II Clinical Trials which it elects to
conduct. Within three (3) months of the completion of the Phase II Clinical
Trials, Vanda shall provide Novartis with a full written report of the results
of the Phase II Clinical Trials, including the conclusions thereof. Upon request
by Novartis, Vanda shall make available to Novartis any source data reasonably
necessary for Novartis to determine whether to exercise the Scenario II Option.
Novartis shall have sixty (60) Business Days immediately following the delivery
to Novartis of the final Phase II Clinical Trial report to provide notice of
exercise to Vanda stating, that Novartis wishes to co-develop and Commercialize
the Product (the "Scenario II Option").

          Upon exercise of the Scenario II Option, Novartis shall take over the
Investigational New Drug Application with the FDA or such other application
filed with any other Regulatory Authority ("IND") and Novartis shall be
responsible for the overall development and regulatory filings for the Product
in the Territory. After the exercise of the Scenario II Option, Vanda shall
remain responsible for continuing to conduct the development of the Product(s)
in accordance with the Development Plan as approved by the JDC. As per Section
4.2 below Novartis shall take over the Chairman of the JDC immediately after the
exercise of the Scenario II Option. Subject only to the option to co-promote in
Section 2.3 (c) below, under Scenario II Novartis and its Affiliates shall have
the exclusive rights for the Commercialisation of the Compound or Product and
Vanda shall grant Novartis an exclusive license under the Vanda Technology.

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          Upon the exercise of the Scenario II Option by Novartis the Scenario I
Option, pursuant to Section 2.2(c) below and Scenario III Option pursuant to
Section 2.2(b) below as well the Co-Promotion Option pursuant to Section 2.3(a)
and (b) shall be deemed expired.

          (b) Scenario III Option. In the event that Novartis does not exercise
its Scenario II Option, Vanda will consider the results of the Phase II Clinical
Trial and may elect to commence Phase III Clinical Trials for the Product within
[*] of the delivery of the final Phase II Clinical Trial report to Novartis.
Vanda shall provide written notice of such election to Novartis. Upon such
election, Vanda shall be responsible for the conduct and financing of the Phase
III Clinical Trials. If Novartis does not receive such election notice within
the twelve (12) months period, Novartis may terminate this Agreement according
to Section 9.3. Within three months of the completion of the Phase III Clinical
Trials, Vanda shall provide Novartis with a full written report of the results
of the Phase III Clinical Trials, including the conclusions thereof. The Phase
III Clinical Trials shall be performed in accordance with a plan reviewed with
the relevant Regulatory Authority in a post Phase IIB meeting and be approved by
the JDC. Upon request by Novartis Vanda shall make available to Novartis any
source data reasonably necessary for Novartis to determine whether to exercise
the Scenario III Option. Novartis shall have sixty (60) Business Days
immediately following the delivery to Novartis of the final Phase III Clinical
Trials report to provide written notice to Vanda of exercise stating, Novartis
wishes to Commercialize the Product (the "Scenario III Option").

          Upon exercise of the Scenario III Option, Novartis shall take over the
Investigational New Drug application with the FDA or such other application
filed with any other Regulatory Authority ("IND") and Novartis shall be
responsible for the overall development and regulatory filings for the Product
in the Territory. As per Section 4.2 below Novartis shall take over the Chairman
of the JDC immediately after the exercise of the Scenario III Option. Subject
only to the option to co-promote in Section 2.3(c) below, under Scenario III
Novartis and its Affiliates shall have the exclusive rights for the
Commercialisation of the Compound or Product and Vanda shall grant Novartis and
exclusive license under the Vanda Technology.

          Upon the exercise of the Scenario III Option by Novartis the Scenario
I Option pursuant to Section 2.2(c) below and the Co-Promotion Option pursuant
to Section 2.3(a) and (b) shall be deemed expired.

          (c) Scenario I Option. In the event that Novartis does not exercise
the Scenario II Option or the Scenario III Option, Novartis shall be deemed to
have exercised the Scenario I Option. Under Scenario I Vanda shall be fully
responsible for the entire development, manufacturing and Commercialisation of
the Compound and the Product. Subject to the option to co-promote in Section
2.3(a) and (b) below, under Scenario I Novartis shall have no right or
obligation to the Commercialisation of the Compound or Product. Within three
months of the last date for Novartis to exercise the Scenario III Option, but
did not exercise such option, Vanda shall submit to Novartis a detailed
commercialisation plan demonstrating the planned application of Reasonable
Commercial Efforts.

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          (d) Good Clinical Practices. All Phase I Clinical Trials, Phase II
Clinical Trials or Phase III Clinical Trials conducted by Vanda pursuant to this
Agreement shall be conducted in accordance to Good Clinical Practice.

     2.3 Co-Promotion Option.

          (a) Novartis First Right of Refusal - If pursuant to section 2.2(c)
above Novartis is deemed to have exercised its Scenario I Option, and Vanda
decides to co-promote the product with a Third Party, Vanda shall notify
Novartis in writing of its intention to co-promote the Products with such a
co-promotion partner. Novartis will have ninety (90) Business Days from the date
Vanda notifies Novartis of its intention to co-promote the Product with a Third
Party to provide written notice of its intent to exercise its option to
co-promote the Product with Vanda and to negotiate in good faith a Co-Promotion
Agreement on commercially reasonable terms and conditions.

          (b) If after such ninety-Business Day period, the Parties have not
entered into a Co-Promotion Agreement, Vanda would be free to enter into an
arrangement with a Third Party leading pharmaceutical company; provided, that
Vanda will provide Novartis a last opportunity to submit a Matching counteroffer
on terms no less favorable to Vanda than those terms last offered by the
potential Third Party leading pharmaceutical company. Vanda shall provide to
Novartis all reasonably available information belonging to Vanda, and not
subject to Third Party confidentiality restrictions, relating to the arrangement
as Novartis shall reasonably require, including proposed terms; provided,
however, that Vanda shall not be required to disclose the identity of such Third
Party. Within sixty (60) Business Days of Novartis' receipt of the written
notice, Novartis will respond to Vanda in writing regarding Novartis' interest
in Matching the counter-offer. During the same sixty (60) Business Day period
following receipt of such notice from Vanda, Novartis may submit to Vanda the
counter-offer. Vanda shall consider such counteroffer from Novartis in good
faith and agree to negotiate with Novartis in the event that the terms of such
Novartis counteroffer are more favourable to Vanda than those of a bona fide
definitive agreement negotiated by Vanda with a Third Party. As used herein,
"Matching" shall mean [*] or (ii) [*].

          (c) If Novartis exercises its Scenario II Option or Scenario III
Option, and intends to co-promote the product in a Major Market Country with a
Third Party, Novartis shall notify Vanda in writing of its intention to
co-promote the Products with a co-promotion partner. Vanda will have ninety (90)
Business Days from the date Novartis notifies Vanda of its intention to
co-promote the Product to provide written notice of its intent to exercise its
option to co-promote the Product with Novartis on commercially reasonable terms
and conditions to be negotiated in good faith and set forth in the Co-Promotion
Agreement. If after ninety (90) Business Days of such good faith negotiations
there is no agreement on the

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terms of the Co-Promotion Agreement between the Parties, Novartis shall be free
to co-promote the Product with a Third Party.

                                    ARTICLE 3

                             MANUFACTURE AND SUPPLY

     3.1 Provision of Compound. Within twenty (20) Business days of the
Effective Date, Novartis will provide to Vanda, at no cost to Vanda, [*] EX
WORKS (as such term is defined in INCOTERMS 2000 of the International Chamber of
Commerce in Paris: delivery to Vanda shall occur when the Compound and Product
is placed at Vanda's disposal at Novartis' premises), as well as adequate data
in connection with the development of the Compound and Product. Further Novartis
shall sell to Vanda and Vanda shall buy (only if in useable condition, on an as
needed basis) from Novartis the remaining Compound available at Novartis in
addition to the 20 kg specified in this Section 3.1 at the terms and conditions
specified in SCHEDULE 3.1. For the avoidance of doubt, Novartis makes no
representation or warranty that any quantities of Compound provided to Vanda
under this Agreement will meet the GMP standards.

     3.2 Right to Manufacture Clinical Supply. Within thirty (30) Business Days
of the Effective Date, the Parties shall determine whether Novartis will
manufacture and supply to Vanda the clinical supplies of Compound and/or
Product, and the parties shall negotiate the terms and conditions of a clinical
supply agreement pursuant to which the Compound shall be supplied. To the extent
that the Parties do not enter into an agreement for the supply of Compound for
clinical purposes within such thirty (30) Business Day period, then Novartis
shall co-operate in all reasonable respects to transfer such Novartis Know-How
to Vanda and provide such other assistance reasonably necessary in order to
enable Vanda or a Third Parry to supply clinical supplies of Compound and/or
Product. Novartis shall have exclusive rights to manufacture the Compound and
Product in the event that Novartis exercises either the Scenario II Option or
the Scenario III Option.

     3.3 Transfer of Novartis Know-How and Novartis Patent Files. In furtherance
of the activities contemplated by this Agreement, Novartis and Novartis AG each
shall, or shall cause its Affiliates to, transfer as promptly as possible to
Vanda the Novartis Know-How and the files of the Novartis Patents, including
copies of all relevant laboratory notebook information, screening data and
synthesis schemes clinical trial information and clinical trial raw and derived
datasets, which includes description in any forms, data and other information
disclosed or transferred to Vanda before the Effective Date. Banked DNA samples
and or animal tissues treated with the compound will only be made available to
Vanda for further studies in accordance with the protocols and informed consents
set forth at the time of sample acquisition provided however that no human
tissue samples with identifiable patient data will be transferred to Vanda. All
raw data and individual clinical and genetic data will be transferred to Vanda
under a mutually agreed coding schema, in order to protect patient
confidentiality. All original identifiable patient data will, however be
provided to the FDA as part of the submission package. If Vanda requires
additional genotyping on existing samples, Novartis will contract this work out,
in accordance with the informed consents, on Vanda's

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behalf and at Vanda's cost. If further DNA samples from past study patients are
desired, Vanda will revisit the sites and try to consent or reconsent these
patients for additional DNA sampling. Novartis and Vanda shall each be
responsible for the costs of their employees, representatives or agents
incurred in the transfer from Novartis to Vanda of the Novartis Know-How and the
files of the Novartis Patents. In addition, Novartis and Novartis AG shall make
a Novartis representative familiar with the Novartis Know-How and the files of
the Novartis Patents reasonably available within reasonable office hours of the
relevant employee to assist Vanda with the transfer as well as to answer any
questions Vanda may have concerning such transferred information. In the event a
translator is necessary or any of the materials need to be translated into
English, the Parties shall share equally in the cost of such translation. Upon
Novartis' exercise of the Scenario II option Vanda shall transfer back to
Novartis the files of the Novartis Patents.

     3.4 Transfer of Pharmacovigilance obligations and IND. In furtherance of
the activities contemplated by this Agreement, Novartis and Novartis AG each
shall, or shall cause its Affiliates to, transfer to Vanda the IND, including
copies of all relevant registration dossiers. Such transfer shall however be
subject to the transfer of all Pharmacovigilance obligations, with respect to
clinical trials of Products performed prior to the Effective Date by Novartis to
Vanda or Vanda's Affiliates.

                                    ARTICLE 4
                        DEVELOPMENT AND COMMERCIALIZATION

     4.1 Development. Subject to the exercise by Novartis of either the Scenario
II Option or the Scenario III Option, Vanda shall be responsible for overall
development and regulatory filings for the Product in the Territory. Vanda shall
use its Reasonable Commercial Efforts to perform its obligations under this
Agreement and cause or cause to be done, all things necessary to perform the
obligations contemplated hereby. Vanda shall use Reasonable Commercial Efforts
to make all registrations, filings and applications, to give all notices to the
relevant Regulatory Authority and obtain any governmental transfers, approvals,
orders, qualifications and waivers necessary or desirable for the
commercialisation of the Product hereby.

     4.2 The JDC shall be set up within four (4) weeks of the Scenario II Option
and shall be comprised of at least one member from Vanda and Novartis
respectively (or further equal numbers from both Parties on an ad hoc basis as
is agreed), plus the chairman from the Commercialising Party with the deciding
vote to assist in a consistent and harmonized development of the Product under
this Agreement, it being understood that each member shall be entitled and
expected to consult with their organization. The JDC shall discuss development
and registration issues and shall co-ordinate the development and registration
efforts described in this Agreement. Meetings of the JDC shall be at such times
and places and in such form (e.g., in person, telephonic or video conference) as
the members of the JDC shall determine but shall meet at least once every six
(6) months. Representatives of both Novartis and Vanda shall be present at any
meeting of the JDC. Decisions of the JDC shall be made by a majority vote at a
telephone or video conference or by a written consent signed by


                                  Page 13 of 43

<PAGE>

all members thereof. The JDC shall keep minutes of its deliberations (or appoint
a secretary to do so) setting forth, amongst other matters, all proposed actions
and all votes thereon.

     4.3 All records of the JDC shall at all times be available to the Parties.
The JDC may delegate to one Party or to a specific representative the authority
to make certain decisions. The costs incurred by each Party through its
participation in the JDC shall be borne by each Party.

     4.4 Quarterly Reports. While the Compound is under development and until
the completion of Phase II and Phase III Clinical Trials, Novartis will receive
reports every three months prepared by Vanda within forty-five (45) Business
Days after the end of each quarterly period. Such reports shall set forth in
summary form the results of development work performed and costs incurred during
the preceding quarterly period and the planned development work, time-lines,
launch plans, estimated costs to be incurred and commercialisation to be
performed by Vanda in the next quarterly interval and explain to Novartis in
detail the reasons for any disparity between product development work performed
and costs incurred during the preceding quarterly period and the description of
planned development work and costs estimate contained in the preceding quarterly
report.

     4.5 Discontinuance of or Delay in Development. If either (1) Vanda should
decide to discontinue the development of the Compound into Product or (2) if a
time period of more than one year, elapses between patient dosings prior to the
NDA Filing or (3) more than one year elapses between the receipt of guidance by
Vanda from a Regulatory Authority and the next dosing of a patient it shall
promptly notify Novartis in person and in writing and all licenses granted
hereunder will thereupon automatically terminate. Vanda will make available to
Novartis all results of development work carried out up to the point of
discontinuance and Novartis shall have a non-exclusive license to use all such
results of the Vanda Technology solely for use in any future development or
commercialisation work to be carried out in respect of the Compound, Product or
Back-up Compound. Should the Compound ultimately become a commercialized
Product, a [*]([*])% royalty on Net Sales will be payable to Vanda by Novartis
where such Net Sales are in countries where the Product is protected by Patents
in the name of Vanda. For countries where Net Sales are made and where the
Product is not protected by Patents in the name of Vanda, Novartis shall pay to
Vanda a royalty of [*] ([*]) per cent on Net Sales for a period of five (5)
years after the First Commercial sale of a Product.

     4.6 Regulatory and Marketing Efforts

          (a) Market Launch. The Commercializing Party shall use Reasonable
Commercial Efforts to seek marketing authorizations in Major Market Countries
and effect the introduction of Product into Major Market Countries within [*] of
such Product completing the Regulatory Approval process.

          (b) Sole Discretion. Subject to the terms and conditions of the
Co-Promotion Agreement, if entered into by the Parties, the Commercializing
Party shall be responsible for and have sole discretion over all
Commercialization of Product in the

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Territory. The Commercialising Party shall have sole responsibility for all
Primary Market Research Development

     4.7 Commercialisation. The Commercialising Party shall have full
responsibility for the costs of the Commercialisation unless otherwise agreed in
writing by the parties.

                                    ARTICLE 5
                                    PAYMENTS

     5.1 Upfront Payment. Within ten Business Days of the Effective Date, Vanda
shall pay to Novartis an upfront payment of $500,000.

     5.2 Technology Access Fee. Vanda shall pay to Novartis a [*] milestone
payment upon [*] should Vanda's aggregate expenditure on [*] not reach [*]. If
upon the initiation of the first qualified Phase II Clinical Trial, Vanda's cost
of [*] exceeds [*], and is less than [*], Vanda will pay to Novartis a milestone
payment equal to [*] minus the cost of [*].

     5.3 Outside Funding from a Third Party. If Novartis has not exercised its
Scenario II Option and Vanda needs outside funding to support further
development, Vanda will provide written notice to Novartis of Vanda's intention
to seek a Third Party partner to assist Vanda with the continued development of
the Compound. Novartis will have thirty (30) Business Days from its receipt of
such notice to inform Vanda if Novartis is willing to provide a secured
interest-bearing loan facility to Vanda on terms to be negotiated, to be used to
fund all subsequent development costs that Vanda may need to complete its
obligations as set out in the Development Plan (or the Development plan
amendments as approved by the JDC). In the event that Vanda receives debt
funding from a Third Party it shall not grant any interest to that Third Party
which conflict with its obligations to Novartis. If Vanda requests that Novartis
relinquish Novartis' Scenario III Option rights (primarily for the purposes of
securing Third Party outside funding), financial consideration for these rights
shall be negotiated between Vanda and Novartis.

     5.4 Milestone Payments by Vanda

          (a) Scenario I Milestone Payments. In the event that Novartis does not
exercise its Scenario II Option or Scenario III Option, and Vanda continues with
the development, manufacture and Commercialization of the Product, then Vanda
will pay to Novartis or Novartis AG (as specified) upon achieving the following
milestones in addition and not instead of any payments received prior to such
milestones:

<TABLE>
<CAPTION>
MILESTONE   UNITED STATES DOLLARS
---------   ---------------------
<S>         <C>
[*]           [*] to Novartis AG
</TABLE>

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                                  Page 15 of 43

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<TABLE>
<S>         <C>
[*]         [*] to Novartis AG
[*]         [*] to Novartis
</TABLE>

          Each such milestone shall be payable only once upon the first Product
          to achieve a milestone.

     5.5  Milestone Payments by Novartis

          (a) Scenario II Milestone Payments. In the event that Novartis
exercises its Scenario II Option, then, Novartis shall pay to Vanda the
following milestones:

<TABLE>
<CAPTION>
MILESTONE   UNITED STATES DOLLARS
---------   ---------------------
<S>         <C>
[*]                  [*]
[*]                  [*]
[*]                  [*]
[*]                  [*]
</TABLE>

          Each such milestone shall be payable only once upon the first Product
          to achieve a milestone.

          (b) Scenario III Milestone Payments. In the event that Novartis
exercises its Scenario III Option, Novartis shall pay to Vanda the following
milestones:

<TABLE>
<CAPTION>
MILESTONE   UNITED STATES DOLLARS
---------   ---------------------
<S>         <C>
[*]         [*]
[*]         [*]
[*]         [*]
[*]         [*]
</TABLE>

          Each such milestone shall be payable only once upon the first Product
          to achieve a milestone.

     5.6  Timing.

          Payment to be made by one Party (the "Payor") to the other ("Payee")
shall be made within thirty (30) Business Days after its receipt of notification
by the Payee of the occurrence of a milestone event giving rise to a payment
obligation hereunder, with an accompanying invoice from the Payee. All payments
shall be made by wire transfer in United States Dollars to the credit of such
bank account as may be designated, from time to time, by the Payor in writing.
Vanda may receive a milestone amount stated in this clause (if payable) only
once from the applicable paying Party.

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     5.7  Development Costs.

          (a) Scenario I or Scenario III Development Costs. In the event that
either the Scenario I Option or Scenario III Option applies, Vanda will be
responsible for all Development Costs for Product.

          (b) Scenario II Development Costs. In the event that Novartis
exercises its Scenario II Option, Novartis will reimburse Vanda for [*] percent
([*]%) of any and all Development Costs paid by Vanda prior to the exercise of
the Scenario II Option (as set forth in Section 5.2). Thereafter, Novartis shall
pay [*] percent ([*]%) of all future Development Costs to be incurred by Vanda
after such exercise date and Vanda will provide Novartis with quarterly invoices
for Novartis' share of the Development Costs and Novartis will pay such invoices
within thirty (30) days of the date of such invoice. Vanda shall reimburse
Novartis [*] percent ([*]%) of all future Development Costs to be incurred by
Novartis after such exercise date, should the JDC determine such costs are
warranted.

     5.8  Royalties.

          (a) Payment.

               (i) Scenario I Royalty. In the event that Novartis does not
exercise its Scenario II Option or Scenario III Option, Vanda will pay to
Novartis a [*] percent ([*]%) royalty on annual Net Sales of Product by Vanda,
its Affiliates and Sublicensees in the Territory in consideration of the license
granted under the Novartis Know-How and Novartis Patents.

               (ii) Scenario II Royalty. In the event that Novartis exercise its
Scenario II Option, Novartis will pay to Vanda a [*] percent ([*]%) royalty on
annual Net Sales of Product by Novartis, its Affiliates and Sublicensees in the
Territory in consideration of the license granted under the Vanda Technology.

               (iii) Scenario III Royalty. In the event that Novartis exercises
its Scenario III Option, Novartis will pay to Vanda a [*] percent ([*]%) royalty
on annual Net Sales of Product by Novartis, its Affiliates and Sublicensees in
the Territory in consideration of the license granted under the Vanda
Technology.

               (iv) Each of the foregoing shall be collectively and individually
referred to as "Royalties".

          (b) Royalty Offset for Third Party Royalty Payments. The
Commercialising Party may require additional patented technologies to which no
Party has rights, from a Third Party, in order to develop, manufacture and
Commercialize the Compound or Products. As between Novartis and Vanda, the
Commercialising Party shall have the right to deduct [*] percent ([*]%) of such
third person royalty or consideration from the royalty owed to the other Party
on Net Sales of the Product in such country, provided that any deduction under
this Section shall not exceed [*] percent ([*]%) of the royalty percentage (e.g.
[*]%, [*]%, [*]% respectively for [*]%, [*]%, and [*]% royalties as described
in Section 5.5(a) above) otherwise due to the other party for the Net Sales from
that country.

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                                  Page 17 of 43

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          (c) Royalty Offset for Third Party Intellectual Property Infringement.
As between Novartis and Vanda and in the event that the manufacture, use or sale
of Compound or Product in any country infringes a Third Party patent and the
Commercialising Party must pay to a Third Party a royalty or consideration
accordingly, the Commercialising Party shall have the right to deduct such third
person royalty or consideration from the royalty owed to the other Party on Net
Sales of the Product in such country, provided that any deduction under this
Section shall not exceed [*] percent ([*]%) of the royalty percentage (e.g.
[*]%, [*]%, [*]%, respectively for [*]%, [*]% and [*]% royalties as described in
Section 5.5 (a) above) otherwise due to the other Party for Net Sales from that
country, and provided further that such deduction shall be in addition to any
indemnification for breach of representation that such Party may be entitled to
receive under this Agreement.

          (d) Countries with No Valid Claim Covering Product. As between
Novartis and Vanda and for countries where there is no Valid Claim of an
applicable Patent related to the Compound or Product or a method of use thereof,
Royalty amounts payable by the Commercialising Party with respect to the Net
Sales of Product in such country shall be reduced by [*] percent ([*]%).

          (e) As between Novartis and Vanda and the maximum Royalty relief which
may be claimed by the Commercialising Party in respect of this Section 5.8 in
any one country is [*] percent ([*]%) of the royalty otherwise due to the other
Party.

          (f) Term for Royalty Payments. Royalties shall be payable on a
country by country basis from the First Commercial Sale until the later of
either the last applicable Patent to expire (including extensions thereof) with
a Valid Claim which in absence of the license would be infringed by the
Compound, the Product or a method of use thereof, or five (5) years from the
date of First Commercial Sale of a Product.

     5.9 Sales Reports.

          (a) Substance of Reports. After the First Commercial Sale of Product
and during the term of this Agreement, the Commercialising Party shall furnish
or cause to be furnished to the other Party on a quarterly basis no later than
one month after the end of the preceding quarter a written report showing the
Net Sales of Product in each country in the Territory.

          (b) Timing. Final yearly reports shall be due on the ninetieth (90)
day following the close of the calendar year.

          (c) Records. The Commercialising Party shall keep accurate records in
sufficient detail to enable the amounts due hereunder to be determined and to be
verified by an independent certified public accountant mutually agreed upon by
the Parties pursuant to Section 5.4(e).

          (d) Vanda Currency Exchange. With respect to payments to be made by
Vanda to Novartis in respect of Net Sales invoiced in United States Dollars, the
Net Sales and

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the amounts due to Novartis hereunder shall be expressed in United States
Dollars. With respect to Net Sales invoiced in a currency other than United
States Dollars, the Net Sales shall be expressed in the domestic currency of the
entity making the sale, together with the Dollar equivalent, calculated using
the arithmetic average of the spot rates on the last Business Day of each month
of the calendar quarter in which the Net Sales were made. The "closing mid-point
rates" found in the "dollar spot forward against the dollar" table published by
The Financial Times or any other publication as agreed to by the Parties shall
be used as the source of spot rates to calculate the average as defined in the
preceding sentence. All payments shall be made in United States Dollars. If at
any time legal restrictions in any country in the Territory prevent the prompt
remittance of any payments with respect to sales in that country, Vanda shall
have the right and option to make such payments by depositing the amount thereof
in local currency to Novartis' account in a bank or depository in such country.

          (e) Novartis Currency Exchange. With respect to royalty payments to be
made by Novartis to Vanda in relation to Net Sales invoiced in United States
Dollars, payments to Vanda by Novartis shall be made in United States Dollars.
With respect to the calculation of royalty payments to be made by Novartis to
Vanda in relation to Net Sales invoiced in a currency other than United States
Dollars, for the conversion of the Net Sales amount into United States Dollars,
the Novartis Monthly Average Exchange Rate or such other standard methodology
for currency conversion as employed by Novartis at that time, shall be used.

          (f) In the event of a co-commercialization between Vanda and Novartis,
local payments to be made between Vanda and Novartis shall be made in the
applicable local currency.

          (g) Royalty Payment Due Date; Accrual. Royalties which have accrued
during any calendar year and are required to be shown on a sales report provided
for under this Section 5.4(a) of this Agreement shall be due and payable on the
date such sales report is due.

               (i) The Commercializing Party, its Affiliates and Sublicensees
          shall keep for [*] from the date of each payment of royalties complete
          and accurate records of sales by the Commercializing Party and its
          Affiliates and Sublicensees of Product in sufficient detail to allow
          the accruing royalties to be determined accurately.

               (ii) The non-Commercializing Party shall have the right for a
          period of [*] after receiving any report or statement with respect to
          royalties due and payable to appoint an independent certified public
          accountant reasonably acceptable to the Commercializing Party to
          inspect the relevant records of the Commercializing Party and its
          Affiliates and Sublicensees to verify such report or statement not
          more than once a year.

               (iii) The Commercializing Party and its Affiliates and
          Sublicensees shall each make its records available for inspection by
          such independent certified public accountant during regular business
          hours at such place or

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          places where such records are customarily kept, upon reasonable notice
          from the non-Commercializing Party, solely to verify the accuracy of
          the reports and payments. Such inspection right shall not be exercised
          more than once in any calendar year.

               (iv) The non-Commercializing Party agrees to hold in strict
          confidence all information concerning royalty payments and reports,
          and all information learned in the course of any audit or inspection
          (and not to make copies of such reports and information), except to
          the extent necessary for the non-Commercializing Party to reveal such
          information in order to enforce its rights under this Agreement or if
          disclosure is required by law, regulation or judicial order. The
          results of each inspection, if any, shall be binding on both Parties.

               (v) The non-Commercializing Party shall pay for such inspections,
          except that in the event there is any upward adjustment in aggregate
          royalties payable for any year shown by such inspection of more than
          [*] ([*]%) of the amount paid, the Commercializing Party shall pay for
          such inspection. Any overpayments shall be fully creditable against
          amounts payable in subsequent payment periods.

               (vi) The Commercializing Party shall include in each sublicense
          or marketing agreement entered into by it pursuant to this Agreement a
          provision requiring the Sublicensee or marketing partner to keep and
          maintain adequate records of sales made pursuant to such sublicense or
          marketing agreement and to grant access to such records by the
          aforementioned independent public accountant for the reasons specified
          in this Section.

     5.10 Tax Withholding. The withholding tax, duties, and other levies (if
any) applied by a government of any country of the Territory on payments made by
one Party (the "Payor") to the other ("Payee") hereunder shall be borne by
Payee. Payor, its Affiliates and Sublicensees shall cooperate with Payee to
enable Payee to claim exemption therefrom under any double taxation or similar
agreement in force and shall provide to Payee proper evidence of payments of
withholding tax and assist Payee by obtaining or providing in as far as possible
the required documentation for the purpose of Payee's tax returns.

     5.11 Interest Due. In case of any delay in payment by Vanda to Novartis not
occasioned by Force Majeure, interest on the overdue payment shall accrue at an
annual interest rate, compounded monthly, equal to the three month London
Interbank Offer Rate (LIBOR) as determined for each month on the last Business
Day of that month, assessed from the day payment was initially due. The
foregoing interest shall be due from Vanda without any special notice.

     5.12 Payments to Novartis. All payments to be made by Vanda shall be made
to the following bank account of Novartis and Novartis AG:

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                                  Page 20 of 43

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Bank: [*]
Swift: [*]
Correspondent Bank for USD: [*]
USD Account Novartis AG, Basel / Switzerland: [*]
USD Account Novartis Pharma AG, Basel / Switzerland: [*]

     5.13 Payments to Vanda. All payments to be made by Novartis shall be made
to the following bank account of Vanda:

[*]
ABA: [*]
Account #: [*]
Account Name: [*]

                                    ARTICLE 6
                              INTELLECTUAL PROPERTY

     6.1 Novartis Patentable Inventions and Know-How.

     Any invention made by Novartis shall be owned by Novartis and any invention
made by Vanda shall be owned by Vanda.

          (a) Novartis Patent Prosecution.

               (i) During the term of the Agreement, the Commercializing Party
          shall, diligently and in the reasonable exercise of its commercial
          discretion, Support the Novartis Patents in the countries where such
          Novartis Patents are filed as of the Effective Date. Except as
          provided in Paragraph 6.1(a)(ii) for discontinued Novartis Patents,
          the Parties will split the costs of maintenance of the Novartis
          Patents worldwide equally (50:50).

               (ii) If the Commercializing party does not intend to file for
          patent protection or does not wish to continue Supporting a Novartis
          Patent, (a "discontinued Novartis Patent") then it shall give at least
          ninety (90) days advance notice, and in no event less than a
          reasonable period of time for the other Party to act in its stead.

                    (A) In such case, the other Party may elect at its sole
               discretion to continue Supporting the discontinued Novartis
               Patent at its sole expense.

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                    (B) Discontinuance may be elected on a country-by-country
               basis or for a patent application or patent series in total.

          (b) Co-operation. Commercializing Party will consult with the other
Party and will keep the other Party continuously informed of all matters
relating to Support of the Novartis Patents.

               (i) Commercialising Party shall provide the other Party with a
          copy of any Novartis Patents relating to the Compound or Product,
          prior to filing the first of such Patents in any jurisdiction and
          copies of all material correspondence with the relevant patent office
          pertaining to the Novartis Patents and relating to the Compound or
          Product.

               (ii) In no event shall a Party relinquish control of the
          prosecution of Novartis Patents to a Third Party.

     6.2 Infringement Claims by Third Parties.

          (a) Notice. If the manufacture, use or sale of Product under the
Novartis Patents results in a claim or a threatened claim by a Third Party
against a Party hereto for patent infringement or for inducing or contributing
to patent infringement ("Infringement Claim"), the Party first having notice of
an Infringement Claim shall promptly notify the other in writing. The notice
shall set forth the facts of the Infringement Claim in reasonable detail.

          (b) Third Party Licenses. In the event that exploitation under the
Novartis Patents in connection with manufacture, use or sale of Compound or
Product in a country would infringe a Third Party Patent and a license to such
Third Party Patent is available and the Commercializing Party in its sole
discretion seeks such a license, the Parties agree that the Commercializing
Party will use commercially reasonable efforts to obtain any such required
licenses under the Third Party's Patents with a right to sublicense to the other
Party and if requested by other Party will grant such sublicense, under
reasonable sublicense terms mutually acceptable to both Novartis and Vanda.

          (c) Litigation. In the event of the institution of any suit by a Third
Party against Vanda as a result of Vanda's manufacture, use or sale of Compound
or Product, Vanda shall have the right but not the obligation to defend such
suit at its expense. Novartis shall cooperate and assist Vanda in any such
litigation at Vanda's expense.

     6.3 Infringement Claims Against Third Parties.

          (a) Cooperation. Novartis and Vanda each agree to take reasonable
actions to protect Novartis Patents from infringement, subject to the terms of
this Section 6.3. If one Party brings any such action or proceeding, the second
Party may be joined as a Party plaintiff if necessary for the action or
proceeding to proceed and, in case of joining, the second Party agrees to give
the first Party reasonable assistance and authority to file and to prosecute
such suit.


                                  Page 22 of 43

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          (b) Notice. If any Novartis Patents are infringed by a Third Party,
the Party to this Agreement first having knowledge of such infringement, or
knowledge of a reasonable probability of such infringement, shall promptly
notify the other in writing. The notice shall set forth the facts of such
infringement in reasonable detail.

          (c) Institution of Proceedings. Vanda, shall have the primary right,
but not the obligation, to institute, prosecute, and control with its own
counsel at its own expense any action or proceeding with respect to infringement
of the claims of such Novartis Patents and the other Party shall have the right,
but not the obligation at its own expense, to be represented in such action by
its own counsel.

          (d) Failure to Institute Proceedings. If Vanda fails to institute,
prosecute, and control such action or prosecution and fails to do so within a
period of sixty (60) Business Days after receiving notice of the infringement,
Novartis shall have the right but not the obligation to bring and control any
such action by counsel of its own choice, and Vanda shall have the right, at its
own expense, to be represented in any such action by counsel of its own choice.

          (e) Division of Damages Award. Each Party shall recover their
respective actual out-of-pocket expenses associated with any litigation or
settlement thereof from any recovery made by any party. Any excess amount
awarded in damages shall be retained by the Party instituting such action.

          (f) Settlement. The Parties shall keep each other informed of the
status of and of their respective activities regarding any litigation or
settlement thereof concerning Product; provided, however, that no settlement or
consent judgment or other voluntary final disposition of a suit under this
Section may be undertaken without the consent of the other Party if such
settlement would require the other Party to be subject to an injunction or to
make a monetary payment or would otherwise adversely affect the other Party's
rights under this Agreement.

     6.4 Notice of Certification. Novartis and Vanda each shall immediately give
notice to the other of any certification filed under the "U.S. Drug Price
Competition and Patent Term Restoration Act of 1984" (or its foreign equivalent)
claiming that a Novartis Patent is invalid or that infringement will not arise
from the manufacture, use or sale of any Product by a Third Party ("Hatch-Waxman
Suit Notice").

          (a) Within ten (10) Business Days after receipt of notice of such
certification Vanda shall give written notice to Novartis of its decision as to
whether to bring a suit at its expense within a thirty (30) Business Day period
from the date of such certification. Should Vanda inform Novartis that it is not
to bring a suit, then Novartis shall be free to immediately bring such a suit in
its name. If Vanda brings suit, at Vanda's written request Novartis agrees to be
named as a party to such suit. If Novartis brings such a suit, at Novartis'
written request Vanda agrees to be named as a party to such suit.

          (b) Novartis may then, but is not required to, bring suit against the
party that filed the certification.


                                  Page 23 of 43

<PAGE>

          (c) Any suit by Vanda or Novartis shall either be in the name of Vanda
or in the name of Novartis, or jointly in the name of Vanda and Novartis, as may
be required by law.

          (d) For this purpose, the Party not bringing suit shall execute such
legal papers necessary for the prosecution of such suit as may be reasonably
requested by the Party bringing suit.

     6.5 Patent Term Extensions. The Parties shall cooperate in good faith with
each other in gaining patent term extensions wherever applicable to Novartis
Patents covering Compound or Product.

          (a) Vanda and Novartis shall jointly determine which Novartis Patents
shall be extended.

          (b) All filings for such extension shall be made by the Party
responsible for prosecution and maintenance of the Novartis Patent, provided,
however, that in the event that the Party who is responsible for prosecution and
maintenance of the Novartis Patent elects not to file for an extension, such
Party shall (i) inform the other Party of its intention not to file and (ii)
grant the other Party the right to file for such extension.

          6.6 Trademarks. No trade mark shall be included in the licences
granted to Vanda under this Agreement. The parties agree to negotiate the terms
of a further agreement governing trade marks related to the Compound or Product.

                                    ARTICLE 7
                         REPRESENTATIONS AND WARRANTIES

     7.1 Novartis AG and Novartis Representations and Warranties. Each of
Novartis and Novartis AG hereby represents and warrants to Vanda as of the
Effective Date that:

          (a) This Agreement has been duly executed and delivered by it and
constitutes the valid and binding obligation of it, enforceable against it in
accordance with its terms except as enforceability may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors' rights generally and by general equitable
principles. The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of it, its officers and
directors;

          (b) to the best of Novartis' and Novartis AG's knowledge, the Novartis
Patents and Novartis Know-How exist and neither Novartis nor Novartis AG have
information that would render any Patent invalid or unenforceable, except as
disclosed to Vanda or available to Vanda in public information; notwithstanding
anything to the contrary in this Agreement, in no event shall Novartis or
Novartis AG be deemed to have guaranteed the validity of the Patents.

          (c) it has not previously assigned, transferred, conveyed or otherwise
encumbered its right, title and interest in Novartis Patents;


                                  Page 24 of 43

<PAGE>

          (d) to the best of Novartis AG's knowledge, (i) it is the sole and
exclusive owner of the Novartis Patents, (ii) all of which are free and clear of
any liens, charges and encumbrances, and (iii) no other person, corporate or
other private entity, or governmental entity or subdivision thereof, has or
shall have any claim of ownership with respect to the Novartis Patents,
whatsoever;

          (e) So far as it is aware, the execution, delivery and performance of
this Agreement does not conflict with any agreement, instrument or
understanding, oral or written, to which it is a Party or by which it may be
bound, and, to the best of its knowledge, does not violate any material law or
regulation of any court, governmental body or administrative or other agency
having authority over it that would be inconsistent with the obligations under
this Agreement;

          (f) It is not subject to any order, decree or injunction by a court of
competent jurisdiction which prevents or materially delays the consummation of
the transactions contemplated by this Agreement.

          NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY AND
SPECIFICALLY DISCLAIMS ANY GUARANTEE THAT THE DEVELOPMENT OF COMPOUND OR
PRODUCTS WILL BE SUCCESSFUL, IN WHOLE OR IN PART, OR THAT NOVARTIS PATENTS AND
NOVARTIS KNOW-HOW WILL BE SUITABLE FOR COMMERCIALIZATION OR THAT THE COMPOUND
AND/OR PRODUCTS WILL BE SUITABLE FOR USE WITH ANY ADDITIONAL PATENTED
TECHNOLOGIES LICENSED FROM A THIRD PARTY. NOVARTIS AND NOVARTIS AG EXPRESSLY
DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE
WITH RESPECT TO NOVARTIS PATENTS AND NOVARTIS KNOW-HOW, INCLUDING WITHOUT
LIMITATION, ANY WARRANTY OR MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE
OR NON-INFRINGEMENT.

     7.2 Vanda Representation And Warranty. Vanda hereby represents and
warrants to each of Novartis and Novartis AG as of the Effective Date that:

          (a) The execution, delivery and performance of this Agreement by Vanda
does not conflict with any agreement, instrument or understanding, oral or
written, to which it is a Party or by which it may be bound, and, to the best of
its knowledge, does not violate any material law or regulation of any court,
governmental body or administrative or other agency having authority over it;

          (b) Vanda is not currently a party to, and during the term of this
Agreement will not enter into, any agreements, oral or written, that are
inconsistent with its obligations under this Agreement;

          (c) Vanda is duly organized and validly existing under the laws of the
country of its incorporation and has full legal power and authority to enter
into this Agreement; and


                                 Page 25 of 43

<PAGE>

          (d) Vanda is not subject to any order, decree or injunction by a court
of competent jurisdiction which prevents or materially delays the consummation
of the transactions contemplated by this Agreement.

     7.3 Disclaimer of Warranties. THE LIMITED WARRANTIES CONTAINED IN THIS
ARTICLE ARE THE SOLE WARRANTIES GIVEN BY THE PARTIES AND ARE MADE EXPRESSLY IN
LIEU OF AND EXCLUDE ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, TITLE, INFRINGEMENT OR OTHERWISE, AND ALL OTHER EXPRESS OR
IMPLIED REPRESENTATIONS AND WARRANTIES PROVIDED BY COMMON LAW, STATUTE OR
OTHERWISE ARE HEREBY DISCLAIMED BY EACH PARTY.

                                    ARTICLE 8
                                 CONFIDENTIALITY

     8.1 Confidentiality. During the term of this Agreement, and for a period of
[*] thereafter, Novartis and Novartis AG will maintain in confidence all
information disclosed by Vanda and Vanda will maintain in confidence all
information disclosed by Novartis and Novartis AG, including for the avoidance
of doubt, Novartis Know-how ("Confidential Information"). With respect to
Novartis and Novartis AG, Vanda shall not use, disclose or grant use of such
Confidential Information except as required under this Agreement. With respect
to Vanda, Novartis and Novartis AG shall not use, disclose or grant use of such
Confidential Information except as required under this Agreement, each Party
shall use at least the same standard of care as it uses to protect its own
Confidential Information to ensure that its and its Affiliates' employees,
agents, consultants, and clinical investigators only make use of Confidential
Information for the purpose of this Agreement and do not disclose any
Confidential Information without the express prior written consent of the other
Party, which consent shall not be unreasonably withheld, or make any
unauthorized use of such Confidential Information. Each Party shall promptly
notify the other upon discovery of any unauthorized use or disclosure of
Confidential Information. Confidential Information shall not include any
information which and to the extent:

          (a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure by the other Party;

          (b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the other Party;

          (c) becomes generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act or omission of
the receiving Party in breach of this Agreement;

          (d) was disclosed to the receiving Party, other than under an
obligation of confidentiality, by a Third Party who had no obligation to the
other Party not to disclose such information; or

          (e) was independently developed by the receiving Party without
reference to the disclosure by the other Party.

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CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
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                                  Page 26 of 43

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     8.2 Terms of Agreement. The Parties agree that the material financial terms
of the Agreement shall be considered the Confidential Information of each Party.

     8.3 Permitted Disclosure. Each Party may disclose the Confidential
Information to the extent such disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation, or
complying with any applicable statute or governmental regulation provided such
Party has given the disclosing Party prompt written notice allowing it to limit
such disclosure. In addition, each Party may disclose Confidential Information
to its Affiliates and to its Sublicensees; provided, however, in connection with
any such disclosure the disclosing Party shall secure confidential treatment of
such Confidential Information.

     8.4 Employee Obligations. The Parties shall undertake to ensure that all
their employees who have access to Confidential Information of the other Party
are under obligations of confidentiality fully consistent with those provided in
this Article.

     8.5 Publication. As between Novartis and Novartis AG on the one hand, and
Vanda on the other, no Party may publish confidential or proprietary information
of the other Party, without the consent of the other Party. The reviewing Party
shall have thirty (30) days from receipt of the proposed oral disclosure or
written publication to provide comments and/or proposed changes to the
disclosing Party. The review period may be extended for an additional two (2)
months to permit the reviewing Party to file one or more patent applications as
it deems appropriate. This Section 8.5 shall be inapplicable to the publication
of information presented in substantially the same form in which was previously
published or disclosed to the public, and to any other disclosures which, on the
advice of counsel, are required by law to be disclosed.

                                    ARTICLE 9
                              TERM AND TERMINATION

     9.1 Term.

          (a) Term. Unless earlier terminated as provided herein, the term of
this Agreement shall commence as of the Effective Date and shall remain in full
force and effect until the end of the last to expire milestone or royalty
payment obligation of a Party under this Agreement (the "Term").

          (b) Accrued Obligations. Except where explicitly provided elsewhere
herein, termination of this Agreement for any reason, or expiration of this
Agreement, will not affect: (i) obligations, including the payment of any
royalties or other sums which have accrued as of the date of termination or
expiration, and (ii) rights and obligations which, from the context thereof, are
intended to survive termination or expiration of this Agreement.

     9.2 Termination for Insolvency. Either Party may terminate this Agreement
immediately upon delivery of written notice to the other Party (a) upon the
institution by or against the other Party of insolvency, receivership or
bankruptcy proceedings or any other proceedings for the settlement of the other
Party's debts; provided, however with respect to involuntary proceedings, that
such proceedings are not dismissed within one hundred and twenty (120) days; (b)
upon the other Party's making an assignment for the benefit of


                                  Page 27 of 43

<PAGE>

creditors; or (c) upon the other Party's dissolution or ceasing to do business.
In the event that such insolvency, receivership or bankruptcy proceedings or any
other proceedings for the settlement of a Party's debts are instituted, that
Party shall immediately notify the other Party of such proceedings.

     9.3 Termination for Lack of Diligence. If Vanda ceases all research,
development, and commercialization activities with respect to the Compound or
Product for a one (1) year period for reasons other than a safety (including
toxicity), efficacy, regulatory, manufacturing, medical, legal issue, or a
technical or commercial issue, as determined by Vanda with the agreement of
Novartis or materially breaches the terms of this Agreement, then Novartis may
terminate this Agreement upon thirty (30) days' prior written notice to Vanda.
Such prior written notice shall specify that it is a notice of termination under
this Section 9.3. Within thirty (30) Business Days following Vanda's receipt of
such prior written notice (the "Response Period"), Vanda shall respond, in
writing with reasonable detail, indicating the manner in which it is performing
research, development, and commercialization activities in compliance with this
Agreement. At the request of either Vanda or Novartis, representatives of
Novartis and Vanda shall meet to discuss the status of Vanda's activities with
respect to the Products during the Response Period. For avoidance of doubt,
Vanda may remedy any remediable breach of its obligations under this Section 9.3
during the Response Period. Should Vanda, during the Response Period, fail to
(i) remedy such remediable breach, (ii) respond to Novartis' written notice of
termination under this Section, or (iii) provide to Novartis any written
response regarding compliance or remedy of breach under this Section, then
Novartis may terminate this Agreement pursuant to the termination provisions set
forth in Section 9.4.

     9.4 Material Breach. Either Party may terminate this Agreement upon thirty
(30) days prior written notice to the other Party upon the material breach by
the other Party of any of its obligations under this Agreement; provided,
however, that such termination shall become effective only if the other Party
shall fail to remedy or cure the breach within such thirty (30) day period. If
either Party is in breach of any material obligation hereunder and, in the case
of a breach incapable of remedy, the Party not in breach of the material
obligation may forthwith terminate this Agreement by notice without prejudice to
the accrued rights of either Party.

     9.5 Termination by Vanda. Vanda's obligations to develop and commercialise
under this Agreement may be terminated by it at any time upon six(6) months
prior written notice to Novartis in the event that Vanda determines after
consultation and prior mutual agreement with Novartis that there exists any
material safety (including toxicity), efficacy, regulatory, manufacturing,
medical, legal, technical or commercial issue with respect to the continued
development of the Compound or Product, and Vanda agrees to give Novartis prompt
notice in writing and in person thereof of such issue.

     9.6 Effect Of Termination.

          (a) Effect On License. Upon the expiration or earlier termination of
this Agreement, the rights licensed under this Agreement shall be treated as
follows:


                                  Page 28 of 43

<PAGE>

               (i) Upon the expiration of the Term, Vanda shall have a fully
paid-up, perpetual, irrevocable, royalty-free, transferable, worldwide,
non-exclusive right and license under the Novartis Patents and Novartis Know-How
existing as of the date of such expiration to make, have made, use, offer to
sell, and sell Product in the Territory.

               (ii) Upon termination by Novartis pursuant to Section 9.2, 9.3,
9.4 or by Vanda pursuant to Section 9.5 all rights to Product granted by
Novartis to Vanda shall revert to Novartis. Upon such termination, Vanda shall
grant to Novartis a non-exclusive, world-wide, transferable, irrevocable,
perpetual license, with the right to sublicense, under the Vanda Technology to
make, use, offer to sell, sell and import Products solely in the country or
countries in which Vanda's licenses under this Agreement were so terminated. If
the termination was not due to Section 9.4 and if the Product is ultimately
commercialized, Novartis would pay Vanda [*]% of Net Sales until the later of
either the last Novartis Patent to expire (including extensions thereof) with a
Valid Claim related to the Compound or Product or a method of use thereof, or
five (5) years from the date of First Commercial Sale.

          (b) Ongoing Obligations.

               (i) Upon expiration or termination of this Agreement for any
reason, each Party shall immediately return to the other Party or destroy any
Confidential Information disclosed by the other Party, except for one copy which
may be retained in its confidential files for archive purposes only.

               (ii) Upon termination of this Agreement by Novartis pursuant to
Sections 9.2, 9.3, 9.4 or by Vanda pursuant to Section 9.5, Vanda shall assign
and deliver to Novartis all data and information (including registration
dossiers) obtained for or in pursuing Regulatory Approvals, and all Regulatory
Approvals (e.g., to Novartis; designee in the Territory as permitted under the
applicable law) for Product in the Territory received as of such termination
date.

     9.7 Inventory. Notwithstanding the foregoing, upon early termination of
this Agreement pursuant to Sections 9.2, 9.3, 9.4 or 9.5, Vanda shall have the
right to sell all remaining Product in its inventory within four (4) months
after the date of termination, subject to the payment to Novartis of the amounts
specified in Article 5. Thereafter, Vanda agrees to destroy any remaining supply
of Product at Novartis' request and direction.

     9.8 Royal and Payment Obligations. Termination of this Agreement by either
Party for any reason Will not release the other Party from any obligation to pay
royalties or make any other payments to the Party which were accrued prior to
and including the effective date of termination or expiration (including for Net
Sales and milestones payable prior to the date of termination). Termination of
this Agreement by either Party for any reason will not release Vanda from any
obligation to pay royalties to Novartis on sales arising from Section 9.7. All
payments due to Novartis but not yet paid by Vanda as of the date of termination
shall become immediately due to Novartis.

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CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
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                                  Page 29 of 43

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                                   ARTICLE 10
                                 INDEMNIFICATION

     10.1 Indemnification by Novartis. Novartis will indemnify and hold Vanda
and its Affiliates, and their employees, officers and directors harmless against
any loss, damages, action, suit, claim, demand, liability, expense, bodily
injury, death or property damage (a "Loss"), that may be brought, instituted or
arise against or be incurred by such persons to the extent such Loss is based on
or arises out of the breach by Novartis, Novartis AG of any of its covenants,
representations or warranties set forth in this Agreement; provided however,
that the foregoing indemnification shall not apply to any Loss to the extent
such Loss is caused by the grossly negligent or willful misconduct of Vanda, its
Affiliates or Sublicensees.

     10.2 Indemnification by Vanda. Vanda will indemnify and hold Novartis and
Novartis AG, and its Affiliates, and their employees, officers and directors
harmless against any Loss that may be brought, instituted or arise against or be
incurred by such persons to the extent such Loss is based on or arises out of:

          (a) the development, manufacture, use, sale, storage or handling of a
Compound or a Product by Vanda or its Affiliates or their Sublicensees,
representatives, agents or subcontractors under this Agreement, or any actual or
alleged violation of law resulting therefrom; or

          (b) the breach by Vanda of any of its covenants, representations or
warranties set forth in this Agreement;

          (c) provided that the foregoing indemnification shall not apply to any
Loss to the extent such Loss is caused by the grossly negligent or willful
misconduct of Novartis, Novartis AG or its Affiliates.

     10.3 Claims Procedures. Each Party entitled to be indemnified by the other
Party (an "Indemnified Party") pursuant to Section 10.1 or 10.2 hereof shall
give notice to the other Party (an "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any threatened or asserted claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom; provided:

          (a) That counsel for the Indemnifying Party, who shall conduct the
defense of such claim or any litigation resulting therefrom, shall be approved
by the Indemnified Party (whose approval shall not unreasonably be withheld)
and the Indemnified Party may participate in such defense at such Party's
expense (unless (i) the employment of counsel by such Indemnified Party has been
authorized by the Indemnifying Party; or (ii) the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Indemnifying Party and the Indemnified Party in the defense of such action, in
each of which cases the Indemnifying Party shall pay the reasonable fees and
expenses of one law firm serving as counsel for the Indemnified Party, which law
firm shall be subject to approval, not to be unreasonably withheld, by the
Indemnifying Party).


                                  Page 30 of 43

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          (b) The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Agreement to the extent that the failure to give notice did not result in harm
to the Indemnifying Party.

          (c) No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the approval of each Indemnified Party which
approval shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which (i) would result in injunctive or other relief
being imposed against the Indemnified Party; or (ii) does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.

          (d) Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.

     10.4 Indemnification Amounts. An Indemnifying Party shall not have
liability with respect to any breach of any of this Agreement: (a) for any
individual item where the Loss relating thereto is less that $ 50,000, and (b)
in respect of each individual item where the Loss relating thereto is equal to
or greater than $ 50,000, unless and until the aggregate amount of such Losses
exceeds $ 200,000 and then the Indemnifying Party will be liable for the entire
amount of the Losses described in this clause. Each Party shall take and shall
cause its Affiliates to take all reasonable steps to mitigate any Loss upon
becoming aware of any event which would reasonably be expected to, or does, give
rise thereto, including incurring costs only to the minimum extent necessary to
remedy a breach that gives rise to the Loss.

     10.5 Compliance. The Parties shall comply fully with all applicable laws
and regulations in connection with their respective activities under this
Agreement.

                                   ARTICLE 11
                            MISCELLANEOUS PROVISIONS

     11.1 Dispute Resolution. In the event of any controversy or claim arising
out of relating to or in connection with any provision of this Agreement, or the
rights or obligations hereunder, the Parties shall try to settle their
differences amicably between themselves. As between Novartis and Novartis AG on
the one hand, and Vanda on the other, each Party may initiate such informal
dispute resolution by sending written notice of the dispute to the other Party
and within ten (10) Business Days after such notice appropriate representatives
of the Parties shall meet for attempted resolutions by good faith negotiations.
If such representatives are unable to resolve such disputed matters, it shall be
referred to the Chief Executive Officers of Novartis Pharma AG and Vanda, for
discussion and resolution.

     11.2 Governing Law. This Agreement shall be construed and the respective
rights of the Parties determined according to the substantive laws of the State
of New York notwithstanding the provisions governing conflict of laws under such
New York law to the contrary, except matters of intellectual property law which
shall be determined in accordance with the intellectual property laws relevant
to the intellectual property in question.


                                  Page 31 of 43

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     11.3 Jurisdiction. Any controversy or claim arising out of or in connection
with this Agreement, which cannot be settled within one hundred eighty (180)
days of the notice according to Section 11.1, shall be under the exclusive
jurisdiction of the courts in New York, NY, USA.

     11.4 Waiver. The failure on the part of Vanda or Novartis to exercise or
enforce any rights conferred upon it hereunder shall not be deemed to be a
waiver of any such rights nor operate to bar the exercise or enforcement thereof
at any time or times thereafter. The observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the Party entitled to enforce such term, but
any such waiver shall be effective only if in writing signed by the Party
against whom such waiver is to be asserted.

     11.5 Force Majeure. No Party shall be held liable or responsible to the
other Party nor be deemed to have defaulted under or breached this Agreement for
failure or delay in fulfilling or performing any term of this Agreement, other
than an obligation to make a payment, when such failure or delay is caused by or
results from fire, foods, embargoes, government regulations, prohibitions or
interventions, war, acts of war (whether war be declared or not), insurrections,
riots, civil commotions, strikes, lockouts, acts of God, or any other cause
beyond the reasonable control of the affected Party.

     11.6 Severability. It is the intention of the Parties to comply with all
applicable laws domestic or foreign in connection with the performance of its
obligations hereunder. In the event that any provision of this Agreement, or any
part hereof, is found invalid or unenforceable, the remainder of this Agreement
will be binding on the Parties hereto, and will be construed as if the invalid
or unenforceable provision or part thereof had been deleted, and the Agreement
shall be deemed modified to the extent necessary to render the surviving
provisions enforceable to the fullest extent permitted by law.

     11.7 Government Acts. In the event that any act, regulation, directive, or
law of a government, including its departments, agencies or courts, should make
impossible or prohibit, restrain, modify or limit any material act or obligation
of Vanda or Novartis or Novartis AG under this Agreement, the Party, if any, not
so affected shall have the right, at its option, to suspend or terminate this
Agreement as to such country, if good faith negotiations between the Parties to
make such modifications to this Agreement as may be necessary to fairly address
the impact thereof, after a reasonable period of time are not successful in
producing mutually acceptable modifications to this Agreement.

     11.8 Assignment. This Agreement may not be assigned or otherwise
transferred by either Party without the prior written consent of the other
Party; provided, however, that either Party may assign this Agreement, without
the consent of the other Party, (i) to any of its Affiliates, if the assigning
Party guarantees the full performance of its Affiliates' obligations hereunder,
or (ii) in connection with the transfer or sale of all or substantially all of
its assets or business or in the event of its merger or consolidation with
another company. In all cases the assigning Party shall provide the other Party
with prompt notice of any such assignment. Any purported assignment in
contravention of this Section shall, at the option of the non-


                                  Page 32 of 43

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assigning Party, be null and void and of no effect. No assignment shall release
either Party from responsibility for the performance of any accrued obligation
of such Party hereunder.

     11.9 Counterparts. This Agreement may be executed in duplicate, both of
which shall be deemed to be originals, and both of which shall constitute one
and the same Agreement.

     11.10 No Agency. Nothing herein contained shall be deemed to create an
agency, joint venture, amalgamation, partnership or similar relationship between
Novartis AG and Novartis on the one hand, and Vanda on the other.
Notwithstanding any of the provisions of this Agreement, as between Novartis and
Novartis AG on the one hand, and Vanda on the other, no Party shall at any time
enter into, incur, or hold itself out to third Parties as having authority to
enter into or incur, on behalf of the other Party, any commitment, expense, or
liability whatsoever, and all contracts, expenses and liabilities undertaken or
incurred by one Party in connection with or relating to the development,
manufacture or sale of Compounds or Products shall be undertaken, incurred or
paid exclusively by that Party, and not as an agent or representative of the
other Party.

     11.11 Notice. As between Novartis and Novartis AG on the one hand, and
Vanda on the other, all communications between the Parties with respect to any
of the provisions of this Agreement will be sent to the addresses set out below,
or to other addresses as designated by one Party to the other by notice pursuant
hereto, by internationally recognized courier or by prepaid certified, air mail
(which shall be deemed received by the other Party on the seventh Business Day
following deposit in the mails), or by facsimile transmission or other
electronic means of communication (which shall be deemed received when
transmitted), with confirmation by letter given by the close of business on or
before the next following Business Day:

          If to Novartis AG, at:
          Novartis AG
          Postfach
          CH-4002 Basel, Switzerland
          Attn: General Counsel

          If to Novartis, at:
          Novartis Pharma AG
          Postfach
          CH-4002 Basel, Switzerland
          Attn: General Counsel, Pharma Legal

          If to Vanda at:
          Vanda Pharmaceuticals Inc.
          47 Hulfish Street, Suite 310
          Princeton, NJ 08542
          Attn: Patricia Nasshorn


                                  Page 33 of 43

<PAGE>

     11.12 Headings. The paragraph headings are for convenience only and will
not be deemed to affect in any way the language of the provisions to which they
refer.

     11.13 Entire Agreement. This Agreement contains the entire understanding of
the Parties relating to the matters referred to herein, and may only be amended
by a written document, duly executed on behalf of the respective Parties.

   ***[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS]***


                                  Page 34 of 43

<PAGE>

     IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.

                                        VANDA PHARMACEUTICALS, INC.


                                        By: /s/ Mihael Polymeropoulos
                                            ------------------------------------
                                            Mihael Polymeropoulos
                                            Chief Executive Officer


                                        NOVARTIS PHARMA AG


                                        By: /s/ Herve Girsault
                                            ------------------------------------
                                        Name: Herve Girsault
                                        Title: Head, Global Partnering
                                               Business Development & Licensing
                                        June 4, 2004


                                        By: /s/ Tom Chakraborti
                                            ------------------------------------
                                        Name: Tom Chakraborti
                                        Title: Senior Legal Counsel
                                        22nd June, 2004


                                        NOVARTIS AG


                                        By: /s/ Jorg Walther
                                            ------------------------------------
                                        Name: Jorg Walther
                                        Title: Authorized Signatory


                                        By: /s/ Clive S. Morris
                                            ------------------------------------
                                        Name: Clive S. Morris
                                        Title: Authorized Signatory
                                        23.06.04


                                  Page 35 of 43

<PAGE>

                                  Schedule 1.7

NDD094 corresponds to [*]. It has the molecular formula [*] and the following
structure:

[*]

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                  Page 36 of 43

<PAGE>

                                                                    SCHEDULE 3.1

TERMS AND CONDITIONS FOR THE SALE OF COMPOUND FORM NOVARTIS TO VANDA

     Available Compound Substance and Lot Number:

<TABLE>
<S>        <C>
     [*]   [*]

     [*]   [*]
     ---
     [*]   Total available Compound substance for technical use only
     ===
</TABLE>

     Price per kg of Compound substance:

     [*]

     Delivery Terms:

     EX WORKS (as such term is defined in INCOTERMS 2000 of the International
     Chamber of Commerce in Paris: delivery to Vanda shall occur when the
     Compound and Product is placed at Vanda's disposal at Novartis' premises)

     NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY THAT ANY
     QUANTITIES OF COMPOUND PROVIDED TO VANDA UNDER THIS AGREEMENT WILL [*].

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                  Page 37 of 43

<PAGE>

                      ANNEX 1- DEVELOPMENT PLAN AND BUDGET

A.   DEVELOPMENT TIMELINES

     [*]

B    CLINICAL TRIALS TO BE PERFORMED UNDER DEVELOPMENT PLAN BY VANDA:

B1   [*]

Primary objectives:

(1)  [*]

(2)  [*]

B2   [*]

Primary objectives:

(1)  [*]

(2)  [*]

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                  Page 38 of 43

<PAGE>

B3   [*]

Primary objectives:

(1)  [*]

(2)  [*]

(3)  [*]

(4)  [*]

B4   [*]

Primary objectives:

(1)  [*]

(2)  [*]

(3)  [*]

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                  Page 39 of 43

<PAGE>

C.   DEVELOPMENT COST

     [*]

VANDA PHARMACEUTICALS, INC.
NDD094

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                   Page 40 of 43

<PAGE>

                                                                         ANNEX 2

                        ***[INTENTIONALLY LEFT BLANK]***


                                 Page 41 of 43

<PAGE>

                                                                         ANNEX 3

PATENT SCHEDULE

                                       [*]

----------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.


                                  Page 42 of 43

<PAGE>

                                     ANNEX 4

                            Novartis POLICY STATEMENT

VANDA agrees to abide by the following policy statement, which is binding on all
parties under contract with Novartis, and is in support of the protection of
internationally proclaimed human rights, ethical and legal behaviour, fair,
courteous and respectful treatment of others, and professionalism and good
business practice.

Gifts, favours, kickbacks, entertainment or other offering of financial
advantage to an official of a government or a government-controlled entity for
the purpose of obtaining business or other services, as set out in the OECD
Convention on Combating Bribery of Foreign Public Officials are not allowed.
Gifts, favours or entertainment to non-governmental officials may be provided to
others only if they meet all of the following criteria:

     (a)  they are consistent with government regulations and customary
          business practices;

     (b)  they are not excessive in value, and cannot be construed as a bribe or
          a pay-off;

     (c)  they are not in contravention of applicable law or ethical standards;
          and

     (d)  they will not embarrass Novartis, VANDA, or the recipient if publicly
          disclosed.

VANDA shall respect the principles and rules of fair competition and shall not
violate applicable antitrust laws.

VANDA hereby agrees that in its dealings on behalf of Novartis, it will take no
action, directly or indirectly, that is inconsistent with the language or,
spirit of this policy statement. VANDA further acknowledges and agrees that any
such action will serve as grounds for immediate termination of this Agreement by
Novartis.


                                  Page 43 of 43