exv10w01



 





Exhibit 10.01




COLLABORATION AGREEMENT

between

AVALON PHARMACEUTICALS, INC.

and

CHEMDIV, INC.




dated as of July 25, 2006






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







 









 





COLLABORATION AGREEMENT




     THIS COLLABORATION AGREEMENT dated as of the 25th day of July, 2006 (the “Agreement”) is made
between Avalon Pharmaceuticals, Inc., a Delaware corporation having its principal place of business
at 20358 Seneca Meadows Parkway, Germantown, Maryland 20876 (“Avalon”) and ChemDiv, Inc., a
Wisconsin corporation having its principal office at 11558 Sorrento Valley Road, San Diego,
California 92121 (“ChemDiv,” and together with Avalon, the “Parties”).



RECITALS




     WHEREAS, ChemDiv has know-how, expertise, intellectual property rights and technology with
respect to chemical libraries and chemical synthesis; and



     WHEREAS, Avalon possesses know-how, expertise, intellectual property rights and technology
with respect to screening of libraries to identify compounds of interest and the development of
compounds; and



     WHEREAS, the Parties desire to form a collaboration for the co-development and
commercialization of certain products.



     NOW THEREFORE, in consideration of the premises and of the covenants herein contained, the
Parties hereto mutually agree as follows:



ARTICLE 1



DEFINITIONS




     For purposes of this Agreement, the terms defined in this Article shall have the meanings
specified below, whether used in their singular or plural form:





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






 









 





     1.1 “Affiliate” with respect to either Party, means any corporation or other entity which
controls, is controlled by, or is under common control with that Party. A corporation or other
entity shall be regarded as in control of another corporation or entity if it directly or
indirectly owns or controls more than fifty percent (50%) of the voting stock or other ownership
interest of the other corporation or entity, or if it possesses, directly or indirectly, the power
to direct or cause the direction of the management and policies of the corporation or other entity
or the power to elect or appoint fifty percent (50%) or more of the members of the governing body
of the corporation or other entity.



     1.2 “Applicable Percentage” means * percent (*%).



     1.3 “Approved Target” means a Target selected by the Parties for screening.



     1.4 “Avalon Invention” means any Invention that is conceived by employees of Avalon or others
acting on behalf of Avalon, other than a Collaboration Invention.



     1.5 “Avalon Patent Rights” shall mean any and all claims of Patent Rights (other than
Collaboration Patent Rights) owned by Avalon as of the Effective Date or during the term of this
Agreement or licensed to Avalon as of the Effective Date or during the term of this Agreement with
the right to grant a sublicense, which claim would be or is infringed by the development,
manufacture, use, sale, offer for sale or import of Product.



     1.6 “Avalon Know-How” means Know-How owned or controlled by Avalon, or licensed to Avalon as
of the Effective Date or owned by Avalon during the term of this Agreement or licensed to Avalon
during the term of this Agreement with the right to grant a sublicense during the term of this
Agreement, in each case that relates to or is useful for the development, obtaining regulatory
approval for, manufacture, use or commercialization of Product. For the avoidance of doubt, Avalon
Know-How does not include Know-How for





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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screening against Targets and/or for identifying compounds with activity against Targets
and/or libraries, and does not include Collaboration Compounds or Collaboration Inventions.



     1.7 “Business Day” shall mean each day of the week excluding Saturday, Sunday and U.S. Federal
holidays.



     1.8 “ChemDiv Invention” means any Invention that is conceived during the term of this
Agreement by employees of ChemDiv or others acting on behalf of ChemDiv other than a Collaboration
Invention.



     1.9 “ChemDiv Library” means the collection of more than * compounds in the possession of
ChemDiv.



     1.10 “ChemDiv Patent Rights” means any and all claims of Patent Rights (other than
Collaboration Patent Rights) owned by ChemDiv as of the Effective Date or during the term of this
Agreement and/or licensed to ChemDiv as of the Effective Date or during the term of this Agreement
with the right to grant a sublicense which claim would be infringed by the development,
manufacture, use, sale, offer for sale or import of Product.



     1.11 “ChemDiv Know-How” means Know-How owned by ChemDiv as of the Effective Date or during the
term of this Agreement or licensed to ChemDiv as of the Effective Date or during the term of this
Agreement with a right to grant a sublicense thereunder, in each case that relates to or is useful
for the development, obtaining regulatory approval for, manufacture, use or commercialization of
Product. For the avoidance of doubt, ChemDiv Know-How does not include Know-How for screening
against Targets and/or for identifying compounds with activity against a target and/or libraries
that are not Selected Compounds and does not include Collaboration Compounds or Collaboration
Inventions.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.12 “Collaboration Compounds” means, with respect to each Project, (i) any and all compounds
first synthesized by or on behalf of a Party pursuant to a Project prior to the Opt-Out Date for
such Project, (ii) all isomers, enantiomers, hydrates, conjugates, esters, racemates, polymorphs,
and metabolites of any of the foregoing compounds, (iii) all salt forms of any of the foregoing
compounds, and (iv) all prodrugs of any of the foregoing compounds.



     1.13 “Collaboration Inventions” means any Invention conceived by an employee of a Party and/or
by a person or entity obligated to assign such an Invention to a Party pursuant to work on a
Project prior to the Opt-Out Date for the Project, which Invention is directed to a Collaboration
Compound, a composition containing a Collaboration Compound, or a process of using or making a
Collaboration Compound or composition containing a Collaboration Compound.



     1.14 “Collaboration Patent Right” means Patent Rights that claim a Collaboration Invention, a
Collaboration Compound and/or manufacture and/or use thereof. For the avoidance of doubt, such
Collaboration Patent Rights may also claim analogs and/or derivatives of Collaboration Compounds
and/or manufacture and/or use thereof and such claims are included in Collaboration Patent Rights.



     1.15 “Collaboration Rights” means individually and collectively Collaboration Compounds,
Collaboration Patent Rights and Collaboration Inventions.



     1.16 “Development Compound” means, with respect to each Project, a compound identified or
synthesized pursuant to the Project prior to the Opt-Out Date for the Project that is designated
for further development to obtain Regulatory Approval thereof, which designation shall be made
prior to the Opt-Out Date for the Project by the JSC and after the Opt-Out Date for the Project, by
the Selling Party.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.17 “Development Costs” with respect to Product means the costs incurred or accrued by the
Parties with respect to work performed by the Parties or their respective Affiliates in accordance
with the Development Plan in connection with the conduct of process and manufacturing development,
development of Product and Regulatory Approvals and related activities including, but not limited
to, data management, statistical designs and studies, document preparation and other expenses
associated with the clinical testing program for Product, clinical grants, clinical laboratory
fees, positive controls and the cost of studies conducted and services provided by contract
research organizations and individuals, consultants, toxicology contractors, and manufacturers
necessary or useful for the purpose of obtaining Regulatory Approvals for Product, costs for
preparing, submitting, reviewing or developing data or information for the purpose of submission of
applications to obtain Regulatory Approvals for Product which costs are limited to, (a) direct,
out-of-pocket external costs, (b) the Fully Absorbed Cost of Goods for batches of Product
manufactured and supplied for use in pre-clinical and clinical trials and pre-commercialization
activities and (c) work performed by ChemDiv and Avalon FTEs charged at the FTE Rate. All cost
determinations made hereunder shall be made in accordance with GAAP.



     1.18 “Development Plan” means for each Project, each development plan and amendments thereto
that is approved by the JSC.



     1.19 “Development Program” means for each Project the activities to develop and manufacture a
Product, including pre-clinical, non-clinical and clinical activities with respect to Product,
and/or activities to develop a manufacturing process and to have manufactured Product, and/or to
obtain Regulatory Approval for Product.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.20 “Earnings” means the positive or negative amount that is calculated on a
Product-by-Product basis in accordance with GAAP, by deducting Product Costs from Revenue.



     1.21 “Effective Date” means the date first set forth above.



     1.22 “FDA” means the United States Food and Drug Administration or any successor agency with
responsibilities comparable to those of the United States Food and Drug Administration.



     1.23 “First Commercial Sale” means the first sale of a Product for consumption by the general
public in a country.



     1.24 “Fixed Costs” means the costs of facilities, utilities, insurance, facility and equipment
depreciation and other such fixed costs (including payments to Third Parties other than those
included in Product Costs) that are directly related to the applicable activity, allocated based
upon the proportion of such costs directly attributable to support of the applicable activity,
which in all cases, Fixed Costs shall exclude costs and charges related to unused capacity, and
amortization of property not directly related to the activity.



     1.25 “FTE” means a full-time equivalent person year consisting of * hours per year of
scientific or technical work.



     1.26 “FTE Rate” means an annual rate per FTE. The FTE Rate includes Fixed Costs
(excluding payments to Third Parties). The FTE Rate for a Party for a calendar year shall be the
FTE Rate as calculated for such Party for the previous calendar year based on actual costs for such
previous calendar year.



     1.27 “Fully Absorbed Cost of Goods” with respect to Product means (a) the Variable Costs and
Fixed Costs incurred by or on behalf of a Party or its Affiliates associated with the





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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manufacture (inclusive of finishing processes) of Product or (b) if the Product is not
manufactured by the Parties, production campaign or costs of the transfer price for Product
purchased from Third Party manufacturers. Fixed Costs shall be allocated to the Product based upon
the proportion of such costs directly attributable to support of the manufacturing process for the
Product. If a facility is used to manufacture Product and product for other programs of either
Party, Fixed Costs shall be allocated in proportion to the use of such facility for the manufacture
of Product and product for such other programs. Except as otherwise provided in this Agreement, all
cost determinations made hereunder shall be made in accordance with GAAP.



     1.28 “GAAP” means the current United States generally accepted accounting principles,
consistently applied.



     1.29 “IND” means an Investigational New Drug application filed with the FDA to obtain approval
to conduct human clinical trials of the Product for an indication.



     1.30 “Invention” means all ideas, data, writings, inventions, discoveries, improvements and
other technology, whether or not patentable or copyrightable.



     1.31 “JSC” means the Joint Steering Committee of Section 6.1.



     1.32 “Know-How” means data, information, know-how, compounds and reagents.



     1.33 “Marketing Committee” means the Marketing Committee of Section 10.1.



     1.34 “Marketing Expenses” means, with respect to Product, all costs and expenses (including
salaries and benefits) incurred by the Selling Party in the Territory for marketing associated with
pre-launch, launch, advertising and sales promotion (including, without limitation, expenses of
patient programs such as those involving compassionate use, indigents, uninsured and underinsured,
training, disease information and management, and compliance;





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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expenses related to promotional publications, space or time in various media, direct mail
campaigns, samples, advertising agency fees and other promotion activities; phase IV studies
(whether or not required by a regulatory agency)). Such expenses include allocated maintenance and
depreciation costs for building space directly dedicated to the marketing of Product, but exclude
costs and charges relating to unused capacity, marketing of other products, and amortization of
property, plant and equipment not directly related to marketing of Product, in each case determined
in accordance with GAAP. Marketing Expenses do not include Selling Expenses.



     1.35 “Marketing Plan” means the Marketing Plan of Section 10.1.



     1.36 “Net Sales” with respect to Product or Royalty Bearing Product, as the case may be, means
the invoiced sales of all Product or Royalty Bearing Product, as the case may be, to Third Parties
by the Selling Party, its Affiliates or a Sublicensee, less the following items as applicable to
the Product or Royalty Bearing Product, as the case may be, to the extent such items are customary
under industry practices: (a) credits or allowances granted upon returns, rejections or recalls,
retroactive price reductions, billing corrections or allowances for bad debt; (b) freight, shipping
and insurance costs to the extent separately included on the invoice; (c) quantity and other trade
discounts, credits or allowances; (d) customs duties, taxes and surcharges and other governmental
charges incurred in connection with the production, sale, transportation, delivery, use,
exportation or importation of Product or Royalty Bearing Product, as the case may be, to the extent
separately included on an invoice; (e) government mandated rebates and discount programs; and (f)
Third Party rebates and charge backs or managed care organization rebates all in accordance with
standard allocation procedures and accounting methods consistently applied, which methods are in
accordance with GAAP.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






8









 





     In the event the Product or Royalty Bearing Product, as the case may be, is sold as a
component of a combination of active pharmaceutical components, the Net Sales for the purposes of
determining royalty payments on such combination, shall be determined by multiplying the Net Sales
of the combination by the fraction A/(A+B) where A is the average sale price of the Product or
Royalty Bearing Product, as the case may be, portion of the combination when sold separately in
finished form during the applicable royalty reporting period and in the country in which the sale
was made, and B is the aggregate average selling price of the other pharmaceutically active
components of the combination sold separately during the applicable royalty reporting period and in
the country where the sale was made. In the event that no separate sale of either such
above-designated Product or Royalty Bearing Product, as the case may be, or such above-designated
other active pharmaceutical components of the combination is made during the applicable royalty
reporting period and in the country in which the sale was made, Net Sales shall be determined by
multiplying the Net Sales of the combination by the fraction C/(C+D) where C is the standard
fully-absorbed cost of the Product or Royalty Bearing Product, as the case may be, portion of such
combination and, D is the standard fully-absorbed cost of the other active pharmaceutical
components (with such fully-absorbed cost determinations to be made in accordance with GAAP).



     In the event that a Selling Party sells Product or Royalty Bearing Product, as the case may
be, to its Affiliate for resale, then Net Sales shall be calculated on the invoiced price on resale
to a person or entity that is other than such Affiliate of a Party.



     1.37 “Non-Selling Party” in each country is the Party that is not the Selling Party and who is
not an Opt-Out Party.



     1.38 “Opt-Out Party” has the meaning of Section 7.1.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.39 “Patent Rights” means United States and foreign patents, patent applications, provisional
patent applications, certificates of invention, applications for certificates of invention,
divisions, continuations, continuations-in-part, continuing prosecution applications, together with
any extensions, registrations, confirmations, reissues, re-examinations or renewals of the above as
well as supplementary protection certificates therefore, and any other form of government-issued
patent protection directed to the inventions claimed in the foregoing.



     1.40 “Party” means ChemDiv or Avalon.



     1.41 “Phase I Clinical Trial” means, as to a Product, the first controlled and lawful study in
humans of the safety of such Product, which is prospectively designed to generate sufficient data
(if successful) to commence a Phase II Clinical Trial of such Product, as further defined in
Federal Regulation 21 C.F.R. 312.21, or corresponding non-US applicable laws.



     1.42 “Phase II Clinical Trial” means, as to a Product, a controlled and lawful study in humans
of the safety, dose ranging and efficacy of such Product, which is prospectively designed to
generate sufficient data (if successful) to commence a Pivotal Trial of such Product, as further
defined in Federal Regulation 21 C.F.R. 312.21, or corresponding non-US Applicable Laws.



     1.43 “Pivotal Trial” means a clinical trial that is of size and design agreed to by the FDA
that is appropriate to establish that a pharmaceutical product is safe and effective for its
intended use, to define warnings, precautions and adverse reactions that are associated with the
pharmaceutical product in the dosage range to be prescribed, and to support Regulatory Approval of
such pharmaceutical product or label expansion of such pharmaceutical product.



     1.44 “Plans” means individually and collectively the Development Plan and Research Plan.



     1.45 “Primary Contact Person” has the meaning set forth in Section 5.8 hereof.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.46 “Product” means a Development Compound and/or a Replacement Compound and/or a
pharmaceutical composition that includes a Development Compound and/or Replacement Compound.



     1.47 “Product Costs” means the aggregate of all expenses of the Selling Party in accordance
with GAAP (including accruals legitimately chargeable against profits) in connection with the
commercialization, manufacture and distribution of Product, consisting of only the following:



          (i) Fully Absorbed Cost of Goods for Product that is sold in the Territory;



          (ii) Selling Expenses for Product in the Territory;



          (iii) Marketing Expenses for Product in the Territory;



          (iv) Distribution expenses for Product in the Territory (including freight, insurance and
other monies paid to Third Parties) to the extent not deducted from Net Sales;



          (v) Royalties and other fees paid to a Third Party (including, but not limited to royalties
paid to Third Parties for ChemDiv Patent Rights and Avalon Patent Rights) for Product in the
Territory;



          (vi) Recall Expense for Product in the Territory;



          (vii) General and administrative costs to the extent not included in items (i) through (vi)
hereof that are chargeable in an amount not to exceed twenty percent (20%) of Net Sales;



          (viii) Damages (including out-of-court settlements) and legal expenses incurred by the Selling
Party with respect to a Third Party claim or action arising out of the research, development,
manufacture, use, distribution, marketing or sale of Product including those incurred as result of
indemnification under Article 14 and those incurred under Article 11;





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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          (ix) Legal expenses with respect to Product not included in 1.47(viii), including those
incurred with enforcing intellectual property rights with respect to Product, but excluding those
equally shared with ChemDiv under this Agreement;



          (x) Other expenses agreed to by the Parties; and



          (xi) Insurance premiums with respect to Product, including Product liability insurance.



     1.48 “Product Revenues” means any and all revenue received by the Selling Party for Product
(other than Net Sales) and/or rights to Product and/or under an agreement with respect to Product
(other than Net Sales), including, but not limited to, monies received pursuant to a license such
as upfront fees, milestones, royalties and/or monies received for marketing rights and/or
distribution rights and monies received as damages and/or in settlement of a legal action with
respect to Product.



     1.49 “Project” means research activities with respect to identifying compounds with activity
against an Approved Target, synthesizing compounds based on such identified compounds, identifying
and selecting a Development Compound, developing, manufacturing, obtaining Regulatory Approval and
commercializing a Product.



     1.50 “Recall Expense” the cost and expense for recall or market withdrawal of Product in the
Territory required or requested by a governmental authority having jurisdiction there over or as a
result of a decision of the Selling Party, including, but not limited to, expenses incurred for
replacement of Product, all in accordance with GAAP.



     1.51 “Regulatory Approvals” means all approvals from regulatory authorities in any country or
region required lawfully to develop, manufacture and market Product in any such country or region,
including without limitation any Product pricing approvals where applicable.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.52 “Replacement Compound” means (i) a derivative or analog of a Development Compound or (ii)
a Collaboration Compound, in each case that is selected to replace a Development Compound prior to
the Opt-Out Date by the JSC or after the Opt-Out Date by the Selling Party.



     1.53 “Research Plan” means for each Project each research plan and amendments thereto that is
approved by the JSC.



     1.54 “Research Program” means for each Project activities to identify and select a Development
Compound, including screening of compounds, synthesis of compounds, and testing of compounds.



     1.55 “Revenue” means the aggregate of Net Sales and Product Revenues.



     1.56 “Royalty Bearing Product” means a Product of a Project as to which a Party has exercised
Opt-Out rights under Article 7.



     1.57 “Royalty Percentage” means on a Project-by-Project basis the following percentages
depending on the Opt-Out Date for the Project:



	 	 	 	 	 
	                             Opt-Out Date	 	Percentage
	i. After selection of a Development

Compound and up to dosing of a patient in a

Phase I Clinical Trial
	 	 	*	%
	ii. After dosing of a patient in a Phase I

Clinical Trial and up to dosing of a patient in a

Phase II Clinical Trial
	 	 	*	%
	iii. After dosing of a patient in a Phase II

Clinical Trial up to dosing of a patient in a

Pivitol Trial
	 	 	*	%
	iv. After dosing of a patient in a Pivitol Trial

up to filing for Regulatory Approval in the

United States.
	 	 	*	%
	v. Upon filing for Regulatory Approval in the

United States and therafter.
	 	 	*	%







 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







13









 






     For the avoidance of doubt the Royalty Percentage for a Project is *% until selection of a
Development Compound for such Project.



     1.58 “Selected Compounds” has the meaning set forth in Section 2.1.



     1.59 “Selling Expenses” means the aggregate amount of all direct expenses and related costs
such as health care and other benefits incurred for the sales force and sales force management by
the Selling Party in the Territory, all in accordance with GAAP and all only as they relate to sale
of Product in the Territory, including but not limited to salaries, commissions, sales incentive
payments, sales training expenses, and travel expenses. Such expenses include allocated
maintenance and depreciation costs for building space directly dedicated to the selling of Product,
but exclude costs and charges relating to unused capacity, selling of other products, and
amortization of property, plant and equipment not directly related to selling of Product, in each
case determined in accordance with GAAP.



     1.60 “Selling Party” means Avalon and its Affiliates (i) unless Avalon becomes an Opt-Out
Party, in which case, if ChemDiv is a Non-Selling Party, ChemDiv shall become the Selling Party, or
(ii) unless Avalon and ChemDiv mutually agree in writing that ChemDiv shall be the Selling Party,
in which case ChemDiv shall be the Selling Party. If each Party becomes an Opt-Out Party, neither
Party shall be a Selling Party.3



     1.61 “Sublicensee” means any person or entity other than a distributor that receives from the
Selling Party the right to manufacture and sell Product.



     1.62 “Target” means a protein and/or peptide and/or polynucleotide.



     1.63 “Territory” means the world.



     1.64 “Third Party” means any entity other than ChemDiv or Avalon and their respective
Affiliates.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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     1.65 “Valid Claim” means an issued claim of an unexpired patent, included within Collaboration
Patent Rights which has not been withdrawn, canceled or disclaimed, or held permanently revoked, or
held invalid or unenforceable by a court of competent jurisdiction or administrative agency in an
unappealed or unappealable decision, and which has not been admitted to be invalid or unenforceable
through reissue or disclaimer or otherwise.



     1.66 “Variable Costs” means the direct cost of labor, raw materials, supplies and other
resources directly consumed in the conduct of the applicable activity.



ARTICLE 2


LIBRARY




     2.1 (a) ChemDiv shall provide Avalon with two hundred thousand (200,000) compounds selected by
Avalon from the ChemDiv Library (individually and collectively the “Selected Compounds”). ChemDiv
shall provide Avalon with structural information with respect to a reasonable number of compounds
in excess of such 200,000 compounds to permit Avalon to select the Selected Compounds. The
Selected Compounds shall be provided as * well plates with each well containing * micromoles of
compound per well, dissolved in * microliters of DMSO, with the compound being at a final
concentration of * micromoles. The Selected Compounds in such format shall be provided to Avalon
within 90 days after the later of the date of the selection by Avalon or the Effective Date.
Compounds may be shipped in multiple shipments and shall be invoiced by ChemDiv to Avalon on a
per-shipment basis.



          (b) Avalon shall pay ChemDiv * per Selected Compound for the Selected Compounds. Avalon shall
pay each invoice within thirty (30) days after receipt of the compounds covered by the invoice.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






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          (c) In the event that Avalon determines that one or more Selected Compounds has activity
against an Approved Target, and Avalon reasonably requires additional quantities thereof for use in
a Project for screening or other Project purposes, ChemDiv shall provide Avalon with up to *
micromoles of each Selected Compound, dissolved in DMSO or in dry powder form, as is reasonably
required for the Project without charge.



          (d) In the event that JSC determines that Selected Compounds are required in excess of the
amounts to be provided under Section 2.1(c) for use in a Project, ChemDiv shall provide Avalon with
such additional Selected Compounds at no charge.



          (e) In the event that Avalon desires additional Selected Compounds for use outside of a
Project for screening or other research purposes, ChemDiv agrees to provide Avalon with such
Selected Compounds for such use at a price no greater than that charged to other customers of
ChemDiv as of such time.



     2.2 (a) Avalon shall have the right to use the Selected Compounds pursuant to a Project
without any payment to ChemDiv other than those defined in Section 2.1.



          (b) Subject to Section 2.2(c), Avalon shall have the right to use the Selected Compounds for
screening purposes outside of a Project without any additional payment to ChemDiv.



          (c) In the event that Avalon uses the Selected Compounds with respect to screening work
performed for a Third Party, Avalon shall pay to ChemDiv * ($*) per compound per treatment of a
cell line used in a screen, and Avalon shall have the right to use and to disclose to such Third
Party any and all information with respect to such work performed by Avalon with respect to such
Selected Compounds, including, but not limited to, structures, computational values, properties,
and uses for such Third Party; provided however that Avalon shall not have





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






16









 







the right to grant a Third Party any rights or license in the compounds, or in any ChemDiv
Patent Rights, or in any ChemDiv Know-How.



          (d) In the event that as a result of screening work performed by Avalon for a Third Party with
respect to Selected Compound, such Third Party wishes to procure any Selected Compound, Avalon
agrees to refer such Third Party to ChemDiv. Avalon agrees not to transfer, sell, barter, assign,
or trade any Selected Compounds to or with any Third Party.



          (e) In the event that Avalon desires to out source lead optimization and/or synthesis of
chemical compounds, based on selection of a Selected Compound in a screen outside of a Project,
Avalon shall provide ChemDiv with the first opportunity to provide such services to Avalon with
respect to * percent (*%) of such services and Avalon shall employ ChemDiv for such services
provided that ChemDiv can provide such services at a price, quality and in the time period
specified by Avalon. In the event that Avalon does not select ChemDiv with respect to such
services, as to which ChemDiv was provided a first opportunity, Avalon shall have the right to
employ a Third Party for such services provided that the price, quality and the time period as a
whole are not less favorable to Avalon than those offered to Avalon by ChemDiv. Avalon’s
obligations under this Section 2.2(c) shall terminate on the earlier of (i) Avalon paying ChemDiv *
thousand dollars ($*) for services under this Section 2.2(c); or (ii) ChemDiv failing to cure a
material breach of ChemDiv’s obligations with respect to services performed pursuant to this
Section 2.2(c); or (iii) ChemDiv becoming an Opt-out Party pursuant to Section 15.2 or 15.3.



     2.3 Except for Collaboration Inventions, Avalon shall own all Inventions made by or on behalf
of Avalon based on work performed with the Selected Compounds and any and all





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






17









 







intellectual property rights (including, but not limited to, Patent Rights) with respect to
such Inventions.



ARTICLE 3


PROJECTS




     3.1 Within * days of the Effective Date, the Parties shall select * Targets from a list of
Targets provided by the Parties. Subject to the rights of a Party to opt-out as provided in
Article 7, the Parties agree to initiate * Projects with respect to * different Approved Targets.
The first Project shall be initiated by the Parties upon the JSC selecting the first Approved
Target. The Parties agree to initiate * with respect to a *, respectively, provided, however,
without the consent of both Parties, * will be initiated no earlier than * after the Effective Date
and * will be initiated no earlier than * after the Effective Date.



ARTICLE 4



RESEARCH




     4.1 For each Project, the Parties shall prepare a plan for the Research Program therefore,
including screening against an Approved Target, synthesizing compounds based on compounds
identified by such screening, testing of identified and synthesized compounds and selecting a
Development Compound. Such plan shall provide that Avalon is responsible for screening activities
to identify compounds with activity against an Approved Target and ChemDiv is responsible for
synthesizing compounds based on compounds identified by screening. Such plan shall be submitted to
the JSC for approval. Such plan in amended or unamended form as approved by the JSC shall be the
Research Plan.



     4.2 Each Party shall perform the activities allocated to a Party under a Research Plan.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






18









 





     4.3 Each Party shall bear the cost and expense of performing the activities allocated to a
Party under a Research Plan.



     4.4 The Parties shall cooperate with each other in performing their respective obligations
under a Research Plan and shall keep each other informed as to their activities and results
thereof.



     4.5 ChemDiv shall supply Avalon with a specific quantity and format of each compound that is
synthesized by ChemDiv pursuant to a Project, as determined by the JSC.



     4.6 The Parties shall provide the JSC with written reports with respect to activities
performed under each Research Plan and each Development Plan prior to each scheduled JSC meeting
which report shall cover the period between the last report and a date ten (10) days prior to the
scheduled JSC meeting.



ARTICLE 5



DEVELOPMENT




     5.1 For each Project, the Selling Party shall be responsible for developing and obtaining
Regulatory Approval of a Product. The Selling Party shall apply for and own all Regulatory
Approvals for Product. In the event that a Selling Party opts-out of a Project under Article 7,
effective as of the Opt-Out Date, the Selling Party shall transfer to the Non-Selling Party, with
respect to such Project, any and all Regulatory Approvals and/or filings for Regulatory Approvals
and/or other filings as part of the procedure for obtaining Regulatory Approval, at no additional
cost to the Non-Selling Party.



     5.2 For each Project, the Selling Party, in consultation with the Non-Selling Party, shall
prepare a rolling * year development plan for the Development Program therefore which





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






19









 







shall describe the development activities for the applicable Product, including without limitation
pre-clinical studies, toxicology, formulation activities, scale up of production process,
manufacturing development and clinical trials as appropriate for the stage of development. The
development plan shall also include a summary of the estimated costs expected to be incurred under
the development plan during the covered period and a description of, and budget for, all activities
proposed for such period under the development plan. In addition, the development plan shall
identify the number of personnel to be used by the Selling Party and, if applicable, the
Non-Selling Party in performing activities in connection with the development plan, as well as
activities to be performed by Third Parties. The initial rolling * development plan for each
Project shall be prepared upon selection of a Development Compound therefore.



     5.3 Avalon and ChemDiv each agree that it shall cause the JSC to approve a development plan
for each calendar year that includes a level of efforts, resources and monies sufficient to
research, develop and manufacture Product and to seek Regulatory Approval of Product in at least
the United States.



     5.4 The rolling * year development plan prepared by the Selling Party (except for the initial
development plan), shall be submitted to the JSC for approval by no later than * of the calendar
year preceding the * calendar years covered therein. The development plan approved by the JSC in
amended or unamended form shall be the Development Plan. The Development Plan shall always be a
rolling three year plan and the Development Plan shall be updated or amended at least annually by
no later than * of each year preceding the year for which the update is being made. Except by
mutual agreement of the Parties, all calendar year budgets are only to be updated and/or amended
annually by no later than August 1 of each year preceding the year for which the update is being
made.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






20









 





     5.5 In a calendar year, unless approved in writing by the Parties, neither Party shall incur
Development Costs that exceed * of the budget for such calendar year under a Development Plan.



     5.6 Each Party shall report to the JSC the Development Costs actually incurred by each Party
in a calendar quarter within thirty (30) calendar days after the end of the applicable calendar
quarter. The JSC shall determine the aggregate Development Costs for the applicable calendar
quarter and determine the amount of Development Costs that should have been incurred by Avalon
based on the Applicable Percentage and the Development Costs that should have been incurred by
ChemDiv based on the Applicable Percentage. The JSC shall report such calculation to both Parties
within ten (10) Business Days after receiving the reports thereby communicating its determination
as to Development Costs owed. To the extent that a Party has incurred Development Costs in excess
of the Development Costs that should have been incurred by such Party based on the Applicable
Percentage, within (30) days, the other Party shall pay to such Party such excess so that each
Party bears the Applicable Percentage of such aggregate Development Costs for such calendar
quarter.



     5.7 Each Party shall keep and shall cause each of its Affiliates and its and their contractors
to keep full and accurate records and books of account containing all particulars that may be
necessary for the purpose of calculating Development Costs to be charged to the other Party
pursuant to this Agreement. Such books of account shall be kept by a Party at its places of
business and, with all necessary supporting data shall, for the * years next following the end of
the calendar year to which each shall pertain be open for inspection by an independent certified
accounting firm selected by the other Party and reasonably acceptable to the Party whose books are
being inspected upon reasonable notice during normal business hours at the other Party’s





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






21









 







expense for the sole purpose of verifying charges in compliance with this Agreement, but in no
event more than once each calendar year. All information and data offered shall be used only for
the purpose of verifying charges to the inspecting Party. In the event that such inspection shall
indicate that in any calendar year the charges for Development Costs were overstated by at least *
percent (*), then the Party whose books are being inspected shall pay the cost of the inspection.
All underpayments and overpayments revealed by such audit are immediately due and payable.



     5.8 Avalon and ChemDiv have each designated an initial primary contact person (“Primary
Contact Person”) who shall be responsible for the interactions between the Parties related to this
Agreement. The initial Primary Contact Persons are identified in Exhibit A hereto. The
Primary Contact Persons shall attempt to promptly resolve any disputes that arise under the
Research Program and/or Development Program and, if they are unable to do so, such dispute shall be
referred to the JSC. Each Party may change its Primary Contact Person upon written notice to the
other Party. Each Party’s Primary Contact Person may also serve as one of its representatives on
the JSC. The Primary Contact Person for each Party shall designate one or more employees as
appropriate to be a member of a project team, who shall meet as often as needed to coordinate the
work of the Parties under the applicable Research Plan and Development Plan.



ARTICLE 6



JOINT STEERING COMMITTEE




     6.1 JSC. (a) Until the Opt-Out Date for a Project, each Project shall be managed and directed
by a committee composed of four members, with Avalon appointing two (2) members and ChemDiv two (2)
members (the “JSC”), with a member appointed by Avalon being





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






22









 







Chairman of the JSC. Avalon and ChemDiv may also appoint such non-voting ex-officio members
of the JSC as each Party may deem appropriate, provided that such ex-officio member that is not an
employee signs an appropriate confidentiality agreement.



          (b) The JSC shall meet at least once each calendar quarter in person or by telephone. A
quorum for the conduct of business at any meeting of the JSC shall consist of at least one
representative of Avalon and at least one ChemDiv representative. Each member of the JSC,
excluding ex-officio members, shall have one vote, and all decisions shall be reached by a
unanimous vote. The Parties shall cause the JSC to review and vote on each submitted development
plan and research plan. The JSC has the authority to approve Plans.



          (c) The JSC shall review each approved Development Plan and Research Plan at least once each
year or at the request of any member, and shall decide whether or not to amend the Development Plan
or Research Plan, as the case may be.



          (d) If there is a tie vote in the JSC, or if the JSC is unable to resolve a dispute referred
to the JSC, ChemDiv and Avalon agree to exert all reasonable efforts to arrive at a mutually
acceptable resolution, including a meeting between their CEO’s or a person designated by a CEO.
After a Development Compound has been selected for a Project, in the event that there is a vote or
dispute as to such Project that is not resolved by the respective CEOs or their designate within
thirty (30) days after submission to the CEOs, then the Selling Party shall have the right to cast
the deciding vote with respect thereto, except in the case of a budget of a Development Plan in
which case such budget shall be submitted to binding arbitration in accordance with Section
16.5(c). Prior to selection of a Development Compound for a Project, all unresolved disputes with
respect to such Project shall be submitted to binding arbitration in accordance with Section
16.5(c).





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






23









 





          (e) The JSC shall be responsible for providing advice with respect to and generally
supervising research and development pursuant to a Plan and for deciding disputes between the
Parties with respect to work to be performed under a Plan.



          (f) The JSC shall keep accurate minutes of its deliberations which shall record all proposed
decisions and all actions recommended or taken. An Avalon representative shall be responsible for
the preparation of draft minutes. Draft minutes shall be sent to all members of the JSC within *
days after each meeting and shall be approved, if appropriate, or amended and approved as amended
within * days by a quorum of the JSC. All records of the JSC shall at all times be available to
both ChemDiv and Avalon.



ARTICLE 7



OPT-OUT




     7.1 On a Project by Project basis, upon selection of a compound as a Development Compound for
a Project or thereafter, either Party by written notice to the other Party shall have the right
within its sole discretion to Opt-Out of a Project. If such written notice is provided by a Party
with respect to a Project, prior to approval of the first Development Plan for a Development
Compound for such Project, such notice shall take effect with respect to such Project * thereafter.
If such written notice is provided for a Project after approval of the first Development Plan for
a Development Compound for a Project, such notice shall take effect with respect to such Project *
after such written notice. The date on which such notice takes effect for a Project is the
“Opt-Out Date” for the Project, and, as of the Opt-Out Date, the Party that provides such notice is
the Opt-Out Party. In the event that a Party receives written notice with respect to a Project
under this Section 7.1, such receiving Party, within * thereafter, shall have the right by written
notice to also opt-out of such Project, in which case, as of the applicable Opt-





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






24









 





Out Date as determined by the first notice, each Party shall be an Opt-Out Party and neither
Party shall be a Selling Party. In addition after the Opt-Out Date, for a Project the Selling
Party may opt-out of such Project by written notice to the other Party, in which case, both Parties
shall be an Opt-Out Party.



     7.2 After the Opt-Out Date for a Project, the Opt-Out Party (i) shall no longer be obligated
to perform work under a Research Plan and/or Development Plan for such Project and/or to pay the
Applicable Percentage of Development Costs for such Project, (ii) shall not be entitled to receive
the Applicable Percentage of Positive Earnings for Product of such Project, (iii) shall no longer
be obligated to pay the Applicable Percentage of Negative Earnings for Product of such Project and
(iv) shall be entitled to receive the Royalty Percentage of Net Sales of Royalty Bearing Product
for such Project and milestone payments for such Project in each case in accordance with Article
9.. After the Opt-Out Date for a Project, the JSC, Project Leaders, project team and Marketing
Committee shall discontinue their functions with respect to such Project and Products of such
Project, and the Selling Party shall have the right to make any and all decisions with respect to
such Project and Products of such Project.



ARTICLE 8



LICENSES AND NON-COMPETE




     8.1 For each Project, ChemDiv agrees to grant and hereby grants to Avalon an exclusive
(exclusive even as to ChemDiv) worldwide sublicensable exclusive right and license under
Collaboration Rights, ChemDiv Patent Rights, and ChemDiv Know-How to make, have made, use, sell,
offer to sell and import Product and such license shall automatically terminate





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






25









 







for each Product of a Project (i) as to which Avalon becomes an Opt-Out Party effective as of
the Opt-Out Date or (ii) as to which Avalon becomes a Non-Selling Party.



     8.2 For each Project as to which ChemDiv is the Selling Party, Avalon agrees to grant and
hereby grants to ChemDiv an exclusive (exclusive even as to Avalon) worldwide sublicensable
exclusive right and license under Collaboration Rights, Avalon Patent Rights, and Avalon Know-How
to make, have made, use, sell, offer to sell and import Product and such license shall
automatically terminate for each Product of a Project as to which ChemDiv becomes an Opt-Out Party
effective as of the Opt-Out Date.



     8.3 For each Project, ChemDiv grants to Avalon a non-exclusive license under Patent Rights
owned by ChemDiv to perform research under the Research Plan for such Project, which license shall
terminate for each Project when Avalon becomes an Opt-Out Party for such Project.



     8.4 For each Project, Avalon grants to ChemDiv a non-exclusive license under Patent Rights
owned by Avalon to perform research under the Research Plan for such Project, which license shall
terminate for each Project when ChemDiv becomes an Opt-Out Party for such Project.



     8.5 On a Project-by-Project basis, in the event that a Non-Selling Party becomes an Opt-Out
Party, the rights and licenses granted under Sections 8.1 and 8.2 to the Selling Party shall be
irrevocable except in the case where the Selling Party by written notice to the other Party becomes
an Opt-Out Party.



     8.6 With respect to each Project, prior to the Opt-Out Date therefore, neither Party shall
grant a Third Party the right to commercialize a Product without the mutual written agreement of
both Parties, provided, however, upon Regulatory Approval of a Product of a Project, the Selling
Party, with the approval of the Marketing Committee, shall have the right to





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






26









 







grant a Third Party commercialization rights with respect to such Product in one or more
countries. After the Opt-Out Date for a Project, the Selling Party shall have the right to grant
commercialization rights with respect to a Product of a Project without the agreement of the
Opt-Out Party.



     8.7 Neither Party shall develop, market or sell a Product except in accordance with the terms
and conditions of this Agreement.



ARTICLE 9


PAYMENTS




     9.1 (a) For each Project as to which a Party becomes an Opt-Out Party, the Selling Party shall
pay the Opt-Out Party royalties on Net Sales of Royalty Bearing Product for such Project based on
the Applicable Royalty Percent of Net Sales for such Project as set forth in Section 1.57.



          (b) Royalties under Section 9.1(a) are payable for a period beginning on the Opt-Out Date and
ending on a country-by-country and Royalty Bearing Product-by-Royalty Bearing Product basis on the
later of (i) in each country, * years after First Commercial Sale in a country of Royalty Bearing
Product for which royalties are payable under this Agreement; or (ii) in each country, when Royalty
Bearing Product sold in the country does not infringe a Valid Claim of Collaboration Patent Rights
in the country where sold.



     9.2 During the term of this Agreement, following the First Commercial Sale in any country of
Royalty Bearing Product, the Selling Party shall furnish to the Opt-Out Party a written calendar
quarterly report showing, on a country by country basis: (i) the Net Sales of all Royalty Bearing
Product sold by the Selling Party and its Affiliates and Sublicensees during the reporting





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






27









 







period; (ii) the royalties and other payments payable in United States dollars which shall
have accrued hereunder in respect of such sales; (iii) withholding taxes, if any, required by law
to be deducted in respect of such sales, the identity of the taxing authorities, and the taxpayer
identification number under which such taxes and deductions were remitted, as applicable; (iv) the
dates of the First Commercial Sales of the Royalty Bearing Product in any country by the Selling
Party and its Affiliates and Sublicensees during the reporting period; (v) the exchange rates used
in determining the amount of United States dollars. All amounts payable will first be calculated
in the currency of sale and then converted into United States dollars using as a rate of exchange
the rate exchange reported in the Wall Street Journal (Eastern Edition) for the last day of the
applicable calendar quarter. Reports shall be due on the sixtieth (60th) day following the close
of each calendar quarter. If no sales are made or if no royalties are due for any period
hereunder, the Selling Party shall so report. All reports delivered pursuant to this Section and
any information that can be derived therefrom shall be subject to the confidentiality obligations
of Article 12. The Selling Party shall keep complete and accurate records in sufficient detail to
enable the royalties payable under this Agreement to be determined.



     9.3 Upon the written request of the Opt-Out Party, the Selling Party shall permit an
independent certified public accounting firm selected by the Opt-Out Party and acceptable to the
Selling Party, which acceptance shall not be unreasonably withheld or delayed, to have reasonable
access during normal business hours to such of the records of the Selling Party, its Affiliates and
Sublicensees as may be reasonably necessary to verify the accuracy of the royalty reports hereunder
in respect of any calendar quarter ending not more than * months prior to the date of such request.
Except as provided below, all such verifications shall be conducted at the expense of the Opt-Out
Party and not more than once in each calendar year during the term of





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






28









 







this Agreement and not more than bi-annually during the * year period following the expiration
or termination of this Agreement.



     In the event such audit concludes that adjustments should be made in the Opt-Out Party’s
favor, then any appropriate payments (plus accrued interest at the rate reported in the Wall Street
Journal (Eastern Edition) as * in effect on the date that such payment was first due * percent (*%)
per annum shall be paid by the Selling Party within thirty (30) days after the date the Selling
Party receives the Opt-Out Party’s accounting firm’s written report so concluding, the fees charged
by such accounting firm shall be paid by the Opt-Out Party unless the audit discloses that
adjustments in favor of the Opt-Out Party for the period are * percent (*%) or more of the
aggregate amount paid or payable by the Selling Party to the Opt-Out Party during the period, in
which case the Selling Party shall pay the reasonable fees and expenses charged by such accounting
firm. If the audit reveals an overpayment, the Opt-Out Party shall pay the Selling Party such
overpayment with interest at the above rate within thirty (30) days after receipt of the accounting
firms report. Each of the Parties agree that all information subject to review under this Section
9.3 is confidential and that it shall cause its accounting firm to retain all such information
subject to the confidentiality restrictions of Article 12 hereof.



     9.4 All payments to be made by the Selling Party under this Article 9 shall be made in United
States dollars by certified or bank check or by wire transfer to an account designated in writing
by The Opt-Out Party.



     9.5 Any withholding of taxes levied by tax authorities on the payments hereunder shall be
deducted by the Selling Party from the sums otherwise payable by it hereunder for payment to the
proper tax authorities on behalf of the Opt-Out Party and shall be borne by the Opt-Out Party. The
Selling Party agrees to cooperate with the Opt-Out Party in the event the





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






29









 







Opt-Out Party claims exemption from such withholding or seeks deductions under any double
taxation or other similar treaty or agreement from time to time in force, such cooperation to
consist of providing receipts of payment of such withheld tax, tax certificates, affidavits or
other documents as reasonably required by the Opt-Out Party to realize the benefit from such
exemptions or deductions, and to the extent reasonably obtainable by Avalon.



     9.6 The Selling Party shall pay the following milestone payments to the Opt-Out Party with
respect to Royalty Bearing Product to the extent that the applicable milestone is achieved after
the applicable Opt-Out Date:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	After dosing	 	 	 	 	 	 	 	 	 	After filing	 	 
	 	 	of a patient	 	After dosing	 	After dosing	 	for	 	Regulatory
	 	 	in a Phase I	 	of a patient	 	of a patient	 	Regulatory	 	Approval in
	 	 	Clinical	 	in a Phase II	 	in a Pivotal	 	Approval in	 	the United
	 	 	Trial	 	Clinical Trial	 	Trial	 	the United States	 	States
	Opt Out Date	 	($MM)	 	($MM)	 	($MM)	 	($MM)	 	($MM)
	After Development
Compound Selection
	 	 	*	 	 	 	*	 	 	 	*	 	 	 	*	 	 	 	*	 
	After dosing of a
patient in a Phase
I Clinical Trial
	 	 	 	 	 	 	*	 	 	 	*	 	 	 	*	 	 	 	*	 
	After dosing of a
patient in a Phase
II Clinical Trial
	 	 	 	 	 	 	 	 	 	 	*	 	 	 	*	 	 	 	*	 
	After dosing of a
patient in a
Pivotal Trial
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	*	 	 	 	*	 
	After filing for
Regulatory Approval
in the United
States
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	*	 





For each Project, each of the above milestone payments is payable only once and is due and
payable * days after achievement of the milestone.






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






30









 








ARTICLE 10



MARKETING OF PRODUCT




     10.1 Marketing Committee.



          (a) For each Project, prior to the Opt-Out Date therefore, the marketing and selling of
Product in the Territory shall be overseen by a committee composed of four members, with Avalon
appointing one-half of the members and ChemDiv one-half of the members (the “Marketing Committee”),
with a member appointed by the Selling Party being Chairman of the Marketing Committee. Avalon and
ChemDiv may also appoint such non-voting ex-officio members of the Marketing Committee as each
Party may deem appropriate provided that such ex-officio member that is not an employee signs an
appropriate confidentiality agreement..




          (b) The Marketing Committee shall meet at the call of the Chairman, but not less than once
each calendar quarter of each year, at the offices of the Selling Party or such other place
designated by the Chairman. A quorum for the conduct of business at any meeting of the Marketing
Committee shall consist of at least one representative of Avalon and at least one ChemDiv
representative. ChemDiv and Avalon shall each have one vote and all decisions shall be by
unanimous vote.




          (c) By no later than * of each year, commencing with the year in which a Regulatory Approval
for Product is obtained, the Selling Party shall submit to the Marketing Committee a proposed
Marketing Plan for sales and marketing of Product which is to be sold by the Selling Party in the
Territory. The Parties will agree to a reasonable timetable for the submission of the Marketing
Plan for the year in which initial Regulatory Approval is anticipated. Each Marketing Plan shall
include the following: (i) a budget, including an






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.








31









 







estimate of Selling Expenses, Marketing Expenses
and other expenses for the Product; (ii) a price range for sales of Product; (iii) an outline of
marketing and detail strategies and tactics; (iv) Phase IV studies, if any, for Product; and (v)
any other information reasonably requested by a member of the Marketing Committee that is within
the possession of the Selling Party.




          The Marketing Committee shall discuss such plan, including any proposed amendments and/or
additions thereto, and shall decide upon a final plan by the end of the third calendar quarter of
the year in which the plan is submitted. The final plan for Product approved by the Marketing
Committee is the Marketing Plan for the following year. Once approved, a Marketing Plan for a year
can only be amended by a decision of the Marketing Committee.




          (d) In addition to approval of the Marketing Plan, the Marketing Committee shall direct,
discuss, review and monitor marketing of Product in accordance with the Marketing Plan, discuss
future planning for the marketing of Product and coordinate and implement any required recall of
Product. It is specifically understood, however, that the management of marketing and sales
activities and the implementation of the Marketing Plan shall be managed by the Selling Party
rather than the Marketing Committee.




          If the Marketing Committee fails to reach agreement as to any matter, the Parties agree to
exert all reasonable efforts to arrive at a mutually acceptable resolution, including a meeting
between the CEO of Avalon and the CEO of ChemDiv or their designates. In the event that there is a
vote or dispute that is not resolved by the respective CEOs or their designates within * days after
submission to the CEOs, then the Selling Party shall have the right to cast the deciding vote with
respect thereto, except in the case of a budget of a Marketing Plan in which case such budget shall
be submitted to binding arbitration in accordance with Section 16.5(c).






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







32









 








          10.2 (a) During the term of this Agreement, the Selling Party shall manage and implement the
marketing effort for Product pursuant to the Marketing Plan approved by the Marketing Committee.
The Selling Party shall exercise commercially reasonable efforts to promote, market and sell
Product in the Territory in accordance with the Marketing Plan and shall maintain, at its own cost
and expense, an adequate sales organization for this purpose
consistent with the budget of the Marketing Plan. The Selling Party shall keep the
Non-Selling Party advised of general market, economic and regulatory developments that may affect
the sale of Product in the Territory.




          (b) The Selling Party agrees to provide the other Party with the Selling Party’s annual sales
forecast for Product to be sold in the Territory for the purpose of assisting the Non-Selling Party
in its financial planning. Sales forecasts shall not be binding on the Selling Party.




     10.3 In the Territory, with respect to Product, within * days after the end of each calendar
quarter of each year, the Selling Party shall provide the Opt-Out Party with a separate report of
the Earnings for Product (either positive or negative) for the calendar quarter. Within * days
after the end of each year, the Selling Party shall provide the Non-Selling Party with a separate
report of Earnings for Product (either positive or negative) in the Territory for the calendar
year. Each calendar quarter and year report shall contain the following information:




     (i) Quantity of Product sold by the Selling Party, and its Affiliates;




     (ii) Total amount invoiced for Product;




     (iii) Calculation of Net Sales;




     (iv) Calculation of Revenues:




     (v) A separate calculation for each of items (i) to (xi) of Section 1.47 to be
deducted from Earnings;






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






33









 





     (vi) Calculation of amount due to or to be paid by the Non-Selling Party under
Sections 10.4 and 10.5; and




     (vii) Any other information reasonably requested by the Non-Selling Party and
within the possession of the Selling Party for determining amount due to or to be
paid by the Non-Selling Party.



     10.4 (a) In the Territory, for each calendar quarter in which the Earnings for Product are
positive, the Selling Party shall pay to the Non-Selling Party the Applicable Percentage of such
positive Earnings within * days after the end of the applicable calendar quarter or * days after
the delivery of the report of Earnings for such calendar quarter, whichever is earlier.



             (b) For the Territory for each calendar quarter in which the Earnings for a Product are
negative, the Non-Selling Party shall pay to the Selling Party the Applicable Percentage of such
negative Earnings within * days after the Non-Selling Party receives the report under Section 10.3
that includes such negative Earnings.




     10.5 With respect to the Territory, within * days of the end of each year, the Selling Party
shall separately determine Earnings for Product for the year and the Non-Selling Party shall
receive or pay the Applicable Percentage of the Earnings therefore for the applicable year,
adjusted for the aggregate of the amounts received and/or paid by the Non-Selling Party under
Section 10.4 for the calendar quarters of the appropriate year. Any payment due from the Selling
Party shall be made within * days of the end of the applicable year, or * days after delivery of
the report of Earnings for such year, whichever is earlier. Any payment due to the Selling Party
shall be made within * days after the Non-Selling Party receives the yearly report under Section
10.3.




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






34









 





     10.6 The Selling Party shall keep, and shall cause each of its Affiliates to keep accurate
books of account containing all particulars that may be necessary for the purpose of calculating
Earnings and all payments payable to the Non-Selling Party in the Territory for Product in the
Territory. Such books of account shall be kept at their principal place of business and, with all
necessary supporting data shall, for the * years next following the end of the calendar year to
which each shall pertain be open for inspection by an independent certified accounting firm
selected by the Non-Selling Party and reasonably acceptable to the Selling Party upon reasonable
notice during normal business hours at the Non-Selling Party’s expense for the sole purpose of
verifying payments or compliance with this Agreement, but in no event more than once in each year.
All information and data offered shall be used only for the purpose of verifying payments. In the
event that such inspection shall indicate that in any year the payments which should have been paid
by the Selling Party are at least * percent (*%) greater than those which were actually paid by the
Selling Party, or that, in the case of negative Earnings, the amounts that were paid by the
Non-Selling Party to the Selling Party are at least * percent (*%) more than those that should
have been paid by the Non-Selling Party, then the Selling Party shall pay the cost of such
inspection. All underpayments and overpayments are immediately due and payable.



     10.7 (a) The Selling Party shall pay the cost and expense of insurance premiums for the
Non-Selling Party with respect to Product in the applicable countries of the Territory, including
product liability insurance, within * days of invoice therefore. The payment made under this
Section 10.7 shall be deductible against Earnings.



             (b) The Selling Party shall be responsible for paying all royalties owed to a Third Party for
Product.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







35









 








     10.8 (a) If any governmental authority having jurisdiction requires or reasonably requests
recall of Product due to a defect in the manufacture, processing, packaging or labeling of Product
or for any other reason whatsoever, the Selling Party shall immediately notify the Non-Selling
Party and the Marketing Committee



             (b) Prior to commencing any recall, the Selling Party shall review with the Marketing
Committee the proposed manner in which the recall is to be carried out. The Selling
Party agrees to follow any reasonable advice of the Marketing Committee as to the manner of
completing the recall, so long as such advice is agreeable to the governmental authority involved,
if any.




             The Selling Party shall carry out the recall in as expeditious a manner as possible and in
such a way as to cause the least disruption to the sales of the Product and to preserve the
goodwill and reputation attached to the Product and to the names of the Selling Party and the
Non-Selling Party.




             (c) The Selling Party agrees that appropriate records and procedures will be maintained to
permit a recall of Product.




             (d) Subject to deduction against Earnings as a Recall Expense, the Selling Party shall pay for
and bear the cost and expense of any recall under this Section 10.8.




ARTICLE 11



INTELLECTUAL PROPERTY RIGHTS




     11.1 (a) All right, title and interest in all ChemDiv Inventions and ChemDiv Patent Rights
shall be owned by ChemDiv and shall be subject to the license granted under Article 8 hereof.
During the term of this Agreement, ChemDiv shall promptly disclose to Avalon the




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






36









 




ChemDiv Inventions
made by its employees or others acting on its behalf to the extent that Avalon has a license
thereto under this Agreement.




          (b) All right, title and interest in all Avalon Inventions and Avalon Patent Rights shall be
owned by Avalon and shall be subject to the license granted under Article 8 hereof. During the
term of this Agreement, Avalon shall promptly disclose to ChemDiv the Avalon Inventions made by its
employees or others acting on its behalf to the extent that ChemDiv has a license thereto under
this Agreement.




          (c) ChemDiv and Avalon shall each own an undivided one-half interest in Collaboration Rights.
The Parties shall sign and execute all papers and take any actions reasonably required to perfect
the one-half ownership interest of each Party in and to Collaboration Rights. During the term of
this Agreement, the Parties shall promptly disclose to each other Collaboration Inventions.




          (d) Except pursuant to the rights and licenses granted under this Agreement with respect to
Collaboration Rights, neither Party shall use, exploit, license or grant rights to Collaboration
Rights or enforce Collaboration Rights without the express written permission of the other Party
and only pursuant to an agreement that defines the rights and obligations of the Parties. In the
event that both Parties become an Opt-Out Party with respect to a Project, the Collaboration Rights
with respect to such Project shall be governed by this Section 11.1(d).




     11.2 (a) At its cost and expense, ChemDiv shall have sole responsibility for and control over
the filing, prosecution and maintenance of the ChemDiv Patent Rights. At regular intervals, or
upon request, ChemDiv shall provide Avalon with updated information on its patent portfolio as to
which Avalon is licensed under this Agreement.




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






37









 





          (b) At its cost and expense, Avalon shall have sole responsibility for and control over the
filing, prosecution and maintenance of the Avalon Patent Rights. At regular intervals, or upon
request, Avalon shall provide ChemDiv with updated information on its patent portfolio as to which
ChemDiv is licensed under this Agreement, herein.




     11.3 The JSC shall decide which Party shall have responsibility for and control over the
filing, prosecution and maintenance of the Collaboration Patent Rights. Each Party shall keep the
other Party informed of important issues relating to the preparation, filing, prosecution and
maintenance of the Collaboration Patent Rights, and shall furnish to the other Party copies of
documents relevant to such preparation, filing, prosecution or maintenance in sufficient time
prior to filing such document to allow for review and comment by the other Party. The Parties
shall each pay * percent (*%) of the costs for preparation, filing and maintenance of Collaboration
Patent Rights.



     11.4 ChemDiv and Avalon shall each promptly notify the other in writing of any alleged or
threatened infringement of the ChemDiv Patent Rights or Avalon Patent Rights or Collaboration
Patent Rights, with respect to a Product or Royalty Bearing Product, of which they become aware.
The Selling Party shall have the right, but not the obligation, to take any action which it
reasonably deems necessary to obtain a discontinuance of such infringement or to bring suit against
the Third Party infringer. To the extent requested by the Selling Party, the other Party shall
join such suit as a party thereto. In no event shall the Selling Party enter into any settlement
which admits or concedes that any aspect of the ChemDiv Patent Rights or Avalon Patent Rights or
Collaboration Patent Rights is invalid or unenforceable without the prior written consent of both
Parties, which consent shall not be unreasonably withheld or delayed. The Parties will reasonably
cooperate with each other in any such suit or action. The Parties shall




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






38









 




keep each other reasonably
informed of all material developments in connection with any such claim, suit or proceeding. The
Selling Party shall collect any damages obtained in such suit or pursuant to a settlement thereof
and such amount shall be included in Revenues.




     11.5 In the event of the institution of any suit by a Third Party for patent infringement
involving the use, sale, distribution or marketing of any Product or Royalty Bearing Product in the
Territory, the Selling Party shall promptly notify the other Party in writing of such suit. In the
event of all such actions, the Selling Party shall defend such action, at its own expense (which
expense shall be deductible from Earnings in the case of Product), and the other Party
hereby agrees to assist and cooperate with the Selling Party, at the Selling Party’s expense,
to the extent necessary in the defense of such suit. All royalties due hereunder with respect to
Royalty Bearing Product shall continue to be paid by the Selling Party. The Selling Party shall
assume full responsibility for the cost and expense thereof and/or the payment of any award for
damages, or any amount due pursuant to any settlement entered into by the Selling Party with such
Third Party. No settlement shall be entered into that affects the rights of either Party. Any
damages awarded to a Third Party and/or any settlement paid to a Third Party and the cost of
defending the action shall be deductible from Earnings.



ARTICLE 12



CONFIDENTIALITY




     12.1 (a) Except as otherwise provided in this Article 12, during the term of this Agreement
and for a period of * years thereafter, Avalon shall maintain in confidence and use only for
purposes specifically authorized under this Agreement and/or in fulfilling its obligations and/or
exercising its rights under this Agreement information and data received from ChemDiv during this
Agreement (“ChemDiv Information”).




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






39









 





          (b) To the extent it is reasonably necessary or appropriate to fulfill its obligations or
exercise its rights under this Agreement, Avalon may disclose ChemDiv Information it is otherwise
obligated under this Section not to disclose to its Affiliates and to Third Parties, including but
not limited to permitted Sublicensees and potential permitted Sublicensees, consultants, outside
contractors and clinical investigators, on condition that such entities or persons agree to keep
the ChemDiv Information confidential for the same time periods and to the same extent as Avalon is
required to keep the ChemDiv Information confidential with ChemDiv being made a third party
beneficiary thereof, with the right of enforcement; and as a
Selling Party, Avalon or its Affiliates or Sublicensees may disclose such ChemDiv Information
to government or other regulatory authorities to the extent that such disclosure is reasonably
necessary to obtain authorizations to conduct clinical trials with, to obtain Regulatory Approval
for and commercially market any Product, provided ChemDiv is notified in writing in advance, and
Avalon requests confidential treatment thereof. Avalon shall report in writing to ChemDiv, at
least annually, any disclosures of ChemDiv Information, as to which Avalon has confidentiality
obligations under this Section 12.1 and the identity of recipients of such ChemDiv Information.




          (c) The obligation not to disclose and/or use ChemDiv Information shall not apply to any part
of such ChemDiv Information that (i) is or becomes patented, published or otherwise part of the
public domain other than by acts of Avalon or its Affiliates or Sublicensees in contravention of
this Agreement; (ii) is disclosed to Avalon or its Affiliates or Sublicensees by a Third Party,
provided such ChemDiv Information was not obtained by such Third Party directly or indirectly from
ChemDiv under an obligation to keep such ChemDiv Information confidential; (iii) prior to
disclosure under this Agreement, can be shown by written documents






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






40









 







to have already been in the
possession of Avalon or its Affiliates or Sublicensees, provided such ChemDiv Information was not
obtained directly or indirectly from ChemDiv under an obligation to keep such ChemDiv Information
confidential; (iv) can be shown by written documents to have been independently developed by Avalon
or its Affiliates or sublicensees without breach of any of the provisions of this Agreement; or (v)
is disclosed by Avalon pursuant to an order or demand issued by a court or governmental agency or
as otherwise required by law; provided, however that Avalon notifies ChemDiv prior to disclosure,
giving ChemDiv sufficient advance notice to permit it to seek a protective order or other similar
order with respect to such ChemDiv
Information and provided further that Avalon furnishes only that portion of the ChemDiv
Information which it is advised by counsel is legally required whether or not a protective order or
other similar order is obtained by ChemDiv.




              (d) For the purpose of this Article 12, Collaboration Compounds and Collaboration Inventions
are deemed to be both ChemDiv Information and Avalon Information.




     12.2 (a) Except as otherwise provided in this Article 12, during the term of this Agreement
and for a period of * years thereafter, ChemDiv shall maintain in confidence and use only for
purposes specifically authorized under this Agreement and/or in fulfilling its obligations and/or
exercising its rights under this Agreement information and data received from Avalon during this
Agreement (“Avalon Information”).



              (b) To the extent it is reasonably necessary or appropriate to fulfill its obligations under
this Agreement or exercise its rights under this Agreement, ChemDiv may disclose Avalon Information
it is otherwise obligated under this Section not to disclose to its Affiliates and to Third Parties
including but not limited to permitted Sublicensees, potential permitted Sublicensees, consultants,
outside contractors, collaborators and clinical investigators





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







41









 







on a need-to-know basis on condition
that such entities or persons agree to keep the Avalon Information confidential for the same time
periods and to the same extent as ChemDiv is required to keep the Avalon Information confidential;
with Avalon being made a third party beneficiary thereof with a right of enforcement, and as a
Selling Party, ChemDiv or its Affiliates may disclose such Avalon Information to government or
other regulatory authorities to the extent that such disclosure is reasonably necessary to obtain
authorizations to conduct clinical trials with, to obtain Regulatory Approval for, and commercially
market Product, provided Avalon is notified in writing, in advance and ChemDiv requests
confidential treatment thereof. ChemDiv
shall report in writing to Avalon, at least annually, any disclosures of Avalon Information as
to which ChemDiv has confidentiality obligations under this Section 12.2, and the identity of
recipients of such Avalon Information.




          (c) The obligation not to disclose and/or use Avalon Information shall not apply to any part
of such Avalon Information that (i) is or becomes patented, published or otherwise part of the
public domain other than by acts of ChemDiv or its Affiliates in contravention of this Agreement;
(ii) is disclosed to ChemDiv or its Affiliates by a Third Party, provided such Avalon Information
was not obtained by such Third Party directly or indirectly from Avalon under an obligation to keep
such Avalon Information confidential; (iii) prior to disclosure under this Agreement, can be shown
by written documents to have already been in the possession of ChemDiv or its Affiliates, provided
such Avalon Information was not obtained directly or indirectly from Avalon under an obligation to
keep such Avalon Information confidential; (iv) can be shown by written documents to have been
independently developed by ChemDiv or its Affiliates without breach of any of the provisions of
this Agreement; or (v) is disclosed by ChemDiv pursuant to an order or demand issued by a court or
governmental agency




 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.







42









 







or as otherwise required by law; provided, however that ChemDiv notifies Avalon
prior to disclosure, giving Avalon sufficient advance notice to permit it to seek a protective
order or other similar order with respect to such Avalon Information and provided further that
ChemDiv furnishes only that portion of the Avalon Information which it is advised by counsel is
legally required whether or not a protective order or other similar order is obtained by Avalon.




     12.3 Except as required by applicable law or regulation, neither Party or its Affiliates shall
use the names of the other Party in any publicity or advertising without the prior written approval
of the other Party. ChemDiv and Avalon each agrees not to disclose the existence of
this Agreement or any terms or conditions of this Agreement to any Third Party without the
prior consent of the other Party, except as required by applicable law, rule, or regulation or to
persons with whom Avalon or ChemDiv has entered into or proposes to enter into a business
relationship related to the subject matter hereof, and provided that such persons are subject to
appropriate confidentiality agreements. It is expressly agreed that Avalon and ChemDiv may
disclose this Agreement and its terms and conditions to its permitted Sublicensees and permitted
prospective Sublicensee hereunder provided that such parties are subject to appropriate
confidentiality agreements with respect thereto and may disclose this Agreement in connection with
a proposed financing, or proposed merger, consolidation or purchase as part of due diligence,
provided that the disclosing Party makes reasonable efforts to obtain an agreement of
confidentiality not less restrictive than their own confidentiality obligation to ChemDiv and/or
Avalon. Notwithstanding the foregoing, Avalon and ChemDiv agree that the information contained in
a press release mutually agreed upon by the Parties in advance may be used to describe the nature
of this transaction, and Avalon and ChemDiv may disclose the information contained in any such
agreed upon and issued press release, as modified by mutual agreement from time to time,





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






43









 




without
the other Party’s consent. The Parties agree that in no event shall either Party or its Affiliates
issue a press release or other public announcement disclosing the existence or terms and conditions
of this Agreement without the prior written consent of the other Party.




     12.4 Each Party recognizes the mutual interest in obtaining valid patent protection.
Consequently, a Party or any of its Affiliates, or any of its or their respective employees,
consultants or collaborators wishing to make a publication (including any oral disclosure made
without obligation of confidentiality) relating to work performed as part of a Project (the
“Publishing Party”) shall transmit to the other Party (the “Reviewing Party”) a
copy of the
proposed publication at least * days prior to submission for publication. The Reviewing Party
shall have the right to (a) request a delay in publication or presentation in order to protect
patentable information, (b) propose modifications to the publication for patent reasons or (c)
request that the information be maintained as a trade secret.



     If the Reviewing Party requests a delay as described in clause (a) above, the Publishing Party
shall delay submission or presentation of the publication for a period of * days to enable patent
applications protecting each Party’s rights in such information to be filed. Upon the expiration
of * days from transmission of such proposed disclosures to the Reviewing Party, the Publishing
Party shall be free to proceed with the written publication or the oral presentation, respectively,
unless the Reviewing Party has requested the delay described above.



     To the extent possible in the reasonable exercise of its discretion, the Publishing Party
shall incorporate all modifications proposed under clause (b) above. If a trade secret that is the
subject of a request made under clause (c) above cannot be otherwise protected without unreasonable
expense to the Reviewing Party, such information shall be omitted from the publication.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






44









 





ARTICLE 13


REPRESENTATIONS AND WARRANTIES




     13.1 Each Party represents and warrants to the other that it has the legal right and power to
enter into this Agreement, to extend the rights and licenses granted or to be granted to the other
in this Agreement, and to fully perform its obligations hereunder, and that it has not made nor
will it make any commitments to others in conflict with or in derogation of such rights or this
Agreement.



     13.2 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER CHEMDIV NOR AVALON
MAKES ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE QUALITY OF ANY KNOW-HOW OR PATENT
RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND EACH PARTY HEREBY DISCLAIMS WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY OR REPRESENTATION REGARDING
CLINICAL EFFECTIVENESS OF THE PRODUCT MANUFACTURED OR THAT ANY PATENT IS VALID OR THAT ANY PATENT
APPLICATION WILL BE GRANTED OR THAT PRODUCT OR MANUFACTURE, SALE OR USE THEREOF DOES NOT INFRINGE
PATENTS OWNED BY A THIRD PARTY.



     13.3 It is agreed by the Parties that no Party shall have a right to or shall claim special,
indirect or consequential damages for breach of this Agreement, excluding claims for
indemnification as provided in Article 14 below.





 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






45









 





ARTICLE 14



INDEMNITY




     14.1 On a Project-by-Project basis, the Selling Party shall defend, indemnify and hold the
other Party and its directors, officers, employees, shareholders, representatives and agents (each
an “Indemnitee”), harmless from and against any and all, liabilities, damages, losses, costs and
expenses (including the reasonable fees of attorneys and other professionals, to the extent that
the Selling Party does not defend) incurred by an Indemnitee as a direct result of Third Party
claims, suits and demands arising out of or resulting from the development, manufacture, use,
distribution or sale of any Product pursuant to this Agreement by the Selling Party or its
distributors, co-marketers or Sublicensees who obtain Product or rights to Product from the Selling
Party or its Affiliates or any person or entity that prepares or manufactures Product for or on
behalf of any of the foregoing or that arises or results from use of Product by any person or
entity who receives or obtains (directly or indirectly) Product from any of the foregoing, except
to the extent those losses arise out of the gross negligence or intentional misconduct of the
Indemnitee.



     14.2 An entity that has an indemnity obligation under Section 14.1 (the “Indemnifying Party”)
will be informed as soon as possible of any claim, demand, complaint, action, suit or proceeding
giving rise to an Indemnitee’s right of indemnification by the Indemnifying Party, and the
Indemnifying Party shall assume the defense thereof with counsel mutually satisfactory to the
Parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with
the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnitee by
the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential
conflicting interests between such Indemnitee and any other party






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






46









 







represented by such counsel. Each Indemnitee agrees to render such assistance and cooperation as
may reasonably be requested by the Indemnifying Party for the defense or disposition of all such
cases. Any and all reasonable costs incurred by the Indemnitees in such assistance or cooperation
as aforesaid shall be for the account of and be reimbursed by the Indemnifying Party. The failure
to deliver written notice to the Indemnifying Party within a reasonable amount of time of the
commencement or receipt of any complaint, claim, suit, action or proceeding to the extent
materially prejudicial to the ability of the Indemnifying Party to defend such claim, suit, action
or proceeding, shall relieve the Indemnifying Party of any liability with respect thereto under
Section 14.1. None of the Indemnitees shall (i) compromise or settle any claim or action covered
by Section 14.1 without prior written approval from the Indemnifying Party, which approval the
Indemnifying Party may grant or withhold in its sole discretion, or (ii) make any statement or
admission to any Third Party with respect to the Indemnifying Party’s liability or the availability
of the compensation from the Indemnifying Party under this Agreement without the prior written
approval from the Indemnifying Party, which approval the Indemnifying Party may grant or withhold
in its sole discretion, unless, case otherwise prescribed by an applicable law or regulation or a
court order, or (iii) make any statement or admission as to liability.






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






47









 





ARTICLE 15



TERM AND TERMINATION




     15.1 If not earlier terminated as provided in this Agreement, the term of this Agreement (the
“Term”) will commence on the Effective Date and expire sixty (60) years from the Effective Date or
if earlier on the later of the date that there is no further payment obligation with respect to
Product or no further royalty obligation with respect to Royalty Bearing Product.



     15.2 On a Project-by-Project basis, in the event that the Non-Selling Party materially
breaches this Agreement with respect to a Project, the Selling Party shall have the right to send
written notice of such breach to the Non-Selling Party and if such breach is not cured within *
days thereafter (* days in case of a material breach involving a failure to pay an amount when
due), then, as of such date, the Non-Selling Party shall be deemed to have given an Opt-Out Notice
under Section 7.1 and the Non-Selling Party shall be an Opt-Out Party with respect to such Project.
For the avoidance of doubt, if a Non-Selling Party becomes an Opt-Out Party for a Project, this
Section 15.2 shall no longer be applicable for such Project.



     15.3 On a Project-by-Project basis, in the event that the Selling Party materially breaches
this Agreement with respect to a Project, the Non-Selling Party shall have the right to send
written notice of such breach to the Selling Party and if such breach is not cured within * days
thereafter (* days in case of a material breach involving a failure to pay an amount when due),
then, as of such date, the Selling Party shall be deemed to have given an Opt-Out Notice under
Section 7.1 and the Selling Party shall be an Opt-Out Party with respect to such Project. For the
avoidance of doubt, if a Non-Selling Party becomes an Opt-Out Party for a Project, this Section
15.3 shall no longer be applicable to such Project.






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






48









 





     15.4 This Agreement may only be terminated as provided in Section 15.1 or 15.5 or by mutual
written agreement of the Parties.



     15.5 This Agreement shall terminate in the entirety in the event that for each Project, both
Parties are Opt-Out Parties.



     15.6 Upon termination of this Agreement the rights and obligations of the Parties under this
Agreement shall terminate except for (i) payment obligations that accrued prior to termination;
(ii) the rights and obligations of the Parties under Articles 12, 14 and 16 and Sections 2.2(b),
(c) and (d), 2.3, 5.7, 9.3, 9.5, 11.1, 11.2, 11.3, 13.2, 13.3 and 15..6 and (iii) any other
provision of this Agreement which by its intent is meant to survive termination.



ARTICLE 16


MISCELLANEOUS




     16.1 Neither 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 a payment obligation which shall not be covered by this
Section) when such failure or delay is caused by or results from causes beyond the reasonable
control of the affected Party, including but not limited to fire, floods, embargoes, war, acts of
war (whether war is declared or not), insurrections, riots, civil commotions, strikes, lockouts or
other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental
authority or the other Party; provided, however, that the Party so affected shall use reasonable
commercial efforts to avoid or remove such causes of nonperformance, and shall continue to perform
hereunder with reasonable dispatch whenever such causes are removed. Either Party shall provide
the other Party with prompt written notice of any delay or failure to






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






49









 







perform that occurs by reason of force majeure. The Parties shall mutually seek a resolution
of the delay or the failure to perform as noted above.



     16.2 This Agreement may not be assigned or otherwise transferred by either Party without the
prior written consent of the other Party, which consent shall not be unreasonably withheld or
delayed; provided, however, that each of the Parties may, without such consent, assign this
Agreement and its rights and obligations hereunder to its Affiliates or in connection with the
transfer or sale of all or substantially all of the portion of its business to which this Agreement
relates, or in the event of its merger or consolidation or similar transaction or, in the case of
Avalon or ChemDiv, the creation of a special purpose corporation or research and development
limited partnership; provided further that the assigning Party shall deliver written notice of any
such permitted assignment to the other Party, the assignee shall agree to be bound to the
non-assigning Party under the terms and conditions of this Agreement and the assigning Party shall
continue to be liable for performance of all obligations under this Agreement as if the assignment
did not occur, except in the case of a consolidation or merger where the assigning party is not the
surviving entity. Any purported assignment in violation of the preceding sentences shall be void.
Any permitted assignee shall assume all obligations of its assignor under this Agreement in
writing.



     16.3 Each Party hereby agrees that it does not intend to violate any public policy, statutory
or common laws, rules, regulations, treaty or decision of any government agency or executive body
thereof of any country or community or association of countries. Should one or more provisions of
this Agreement be or become invalid, the Parties hereto shall substitute, by mutual consent, valid
provisions for such invalid provisions which valid provisions in their economic effect are
sufficiently similar to the invalid provisions that it can be reasonably






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






50









 







assumed that the Parties would have entered into this Agreement with such valid provisions.
In case such valid provisions cannot be agreed upon, the invalidity of one or several provisions of
this Agreement shall not affect the validity of this Agreement as a whole, unless the invalid
provisions are of such essential importance to this Agreement that it is to be reasonably assumed
that the Parties would not have entered into this Agreement without the invalid provisions.



     16.4 Any consent, notice or report required or permitted to be given or made under this
Agreement by one of the Parties hereto to the other shall be in writing, delivered personally or by
facsimile (and promptly confirmed by personal delivery or courier) or by the next business day
delivery service of a nationally recognized overnight courier service (signature required),
addressed to such other Party at its address indicated below, or to such other address as the
addressee shall have last furnished in writing to the addressor and shall be effective upon receipt
by the addressee.



          If to ChemDiv:



ChemDiv, Inc

11558 Sorrento Valley Road

San Diego, California 92121

Attn: General Manager with a cc to Bill Farley




     If to Avalon:


Avalon Pharmaceuticals, Inc.

20358 Seneca Meadows Parkway

Germantown, Maryland 20876

Attn: CEO with a cc to the General Counsel




     16.5 This Agreement shall be governed by and construed in accordance with the laws of the
State of Delaware U.S.A, without regard to any choice of law principles that would dictate the
application of the laws of another jurisdiction.






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






51









 





     16.6 Any disputes arising between the Parties relating to, arising out of or in any way
connected with this Agreement or any term or condition hereof, or the performance by either Party
of its obligations hereunder, whether before or after termination of this Agreement, shall be
resolved as follows:



          (a) By the Chief Executive Officers of ChemDiv and Avalon, who shall meet in person at a
mutually acceptable time and location or by means of telephone or video conference within * days of
such notice and attempt to negotiate a settlement. If the matter remains unresolved within * days
by the Chief Executive Officer, then either Avalon or ChemDiv may initiate arbitration upon written
notice to the other.




          (b) If the Parties fail to resolve the dispute, then such dispute shall be finally resolved by
binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall
give written notice to that effect to the other Party. Any arbitration hereunder shall be conducted
with three arbitrators under the Commercial Arbitration Rules of the American Arbitration
Association. Each such arbitration shall be conducted in the English language by three arbitrators
appointed in accordance with such Rules. Any such arbitration shall be held in Wilmington,
Delaware, and, if applicable law is consulted, the applicable law shall be as set forth in Section
16.5 hereof. The arbitrators shall have the authority to grant specific performance, and to
allocate between the Parties the costs of arbitration in such equitable manner as they determine.
The arbitrators shall reach such a decision based on the rights and obligations of the Parties as
set forth in this Agreement and in reaching such a decision, the Arbitrators shall not have the
power to vary the terms and conditions of this Agreement and/or the obligations of the Parties
under this Agreement. Judgment upon the award so rendered may be entered in any court having
jurisdiction or application may be made to such






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






52









 







 court for judicial acceptance of any award and an order of enforcement, as the case may be.
The decision of the arbitrators shall be final and binding on the Parties.




          (c) In the event the Parties are unable to reach agreement with respect to any matter which is
to be subject to arbitration in accordance with Section 6.1(d) or 10.1(d), such will be determined
through binding arbitration in accordance with the Commercial Rules of Arbitration of the American
Arbitration Association. The site of the arbitration shall be in Wilmington, Delaware.




     The arbitration panel shall be comprised of three (3) arbitrators. Each Party shall be
entitled to appoint one arbitrator. The Parties shall appoint their respective arbitrators within
* days after submission for arbitration. If either Party shall fail to make timely appointment of
its arbitrator, the arbitration shall be heard and decided by the sole arbitrator duly appointed by
the other Party. Where both Parties have timely appointed their respective arbitrators, the two
arbitrators so appointed shall agree on the appointment of the third arbitrator from the list of
arbitrators maintained by the American Arbitration Association. If the Parties’ appointed
arbitrators shall fail to agree within * days from the date both Parties’ arbitrators have been
appointed, on the identity of the third arbitrator, then such arbitrator shall be appointed by the
appropriate administrative body of the American Arbitration Association.



     Within * days of appointment of the full arbitration panel, the Parties shall exchange their
final proposed positions with respect to the matters to be arbitrated, which shall approximate as
closely as possible the closest positions of the Parties previously taken in the negotiations.
Within * days of appointment of the arbitration Panel, each Party shall submit to the arbitrators a
copy of the proposed position which it previously delivered to the other Party, together with a
brief or other written memorandum supporting the merits of its proposed position. The






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






53









 







arbitration panel shall promptly convene a hearing, at which time each Party shall have * to argue
in support of its proposed position. The Parties will not call any witnesses in support of their
arguments.



     The arbitration panel shall select either of the Party’s proposed position on the issue as the
binding final decision to be embodied as an agreement between the Parties. In making their
selection, the arbitrators shall not modify the terms or conditions of either Party’s proposed
position; nor will the arbitrators combine provisions from both proposed position. In making their
selection, the arbitrators shall consider the terms and conditions of this Agreement, the relative
merits of the proposed position and the written and oral arguments of the Parties. In the event
the arbitrators seek the guidance of the law of any jurisdiction, the law of the State of Delaware
shall govern.



     The arbitrators shall make their decision known to the Parties as quickly as possible by
delivering written notice of their decision to both Parties. Such written notice need not justify
their decision. The Parties will execute any and all papers necessary to obligate the Parties to
the position selected by the arbitration Panel within * days of receipt of notice of such
selection. The decision of the arbitrators shall be final and binding on the Parties, and specific
performance may be ordered by any court of competent jurisdiction.



     The Parties will bear their own costs in preparing for the arbitration. The costs of the
arbitrators will be equally divided between the Parties.



     16.7 This Agreement, together with the Exhibits hereto, contains the entire understanding of
the Parties with respect to the subject matter hereof and supersedes and terminates all prior and
contemporaneous agreements and understandings between the Parties, whether oral or in writing, by
and between Avalon and ChemDiv. In the event of any conflict or






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






54









 







inconsistency between any provision of any Exhibit hereto and any provision of this Agreement,
the provisions of this Agreement shall prevail. All express or implied agreements and
understandings, either oral or written, heretofore made are expressly merged in and made a part of
this Agreement. This Agreement may be amended, or any term hereof modified, only by a written
instrument duly executed by the Parties hereto. Each of the Parties hereby acknowledges that this
Agreement and the related documents are each the result of mutual negotiation and, therefore, any
ambiguity in their respective terms shall not be construed against the drafting Party.



     16.8 The captions to the several Articles and Sections hereof and Exhibits hereto are not a
part of this Agreement, but are merely guides or labels to assist in locating and reading the
several Articles and Sections hereof.



     16.9 It is expressly agreed that ChemDiv and Avalon shall be independent contractors and that
the relationship between the two Parties shall not constitute a partnership, joint venture or
agency. Neither ChemDiv nor Avalon shall have the authority to make any statements,
representations or commitments of any kind, or to take any action, which shall be binding on the
other, without the prior written consent of the other Party to do so.



     16.10 The waiver by either Party hereto of any right hereunder or the failure to perform or of
a breach by the other Party shall not be deemed a waiver of any other right hereunder or of any
other breach or failure by said other Party whether of a similar nature or otherwise.



     16.11 This Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same instrument.
Counterparts may be exchanged by facsimile if mutually agreed by the Parties.






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






55









 





     16.12 Each Party shall cause its Affiliates to comply with the terms and conditions of this
Agreement as if such Affiliate was a signatory to this Agreement. The failure of an Affiliate of a
Party to comply with the terms and conditions of this Agreement shall be deemed a breach by such
Party.



     16.13 Except as specified in Section 13.2, 13.3 and 15.4, no remedy referred to in this
Agreement is intended to be exclusive and shall be cumulative and in addition to any other remedy
otherwise available under law or equity.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]






 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






56









 








     IN WITNESS WHEREOF, the Parties have caused this Collaboration Agreement to be executed and
sealed by their respective duly authorized representatives as of the date first set forth above.



	 	 	 	 	 	 	 
	 

	 	 	 	CHEMDIV, INC.	 
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 /s/ Ronald
Demuth	 
	 

	 	 	 	Name:	 Ronald
Demuth	 
	 

	 	 	 	Title:	 General Manager	 
	 

	 	 	 	Date:	 July 27,
2006	 
	 
	 	 	 	 	 	 
	 

	 	 	 	AVALON PHARMACEUTICALS, INC.	 
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 /s/ Kenneth C.
Carter, Ph.D.	 
	 

	 	 	 	Name:	 Kenneth C.
Carter, Ph.D.	 
	 

	 	 	 	Title:	 President and
CEO	 
	 

	 	 	 	Date:	 July 25,
2006	 








 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.






57









 






Exhibit A




Primary Contact Person




	 	 	 
	For ChemDiv, Inc.

	 	*
	 
	 	 
	For Avalon Pharmaceuticals, Inc.

	 	*








 




			
	*	 	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance
on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.









58