Document:

Exhibit
10.2

 

TAX
SHARING AND INDEMNIFICATION AGREEMENT

 

This Tax Sharing and Indemnification Agreement (this
“Agreement”) is entered into as of the Distribution Date by and between
Pharmacopeia, Inc., a Delaware corporation (“Pharmacopeia”), on behalf of itself
and each Pharmacopeia Affiliate, and Pharmacopeia Drug Discovery, Inc., a
Delaware corporation (“PDD”), and their respective successors.

 

RECITALS

 

WHEREAS, Pharmacopeia is the common parent of an
affiliated group of corporations within the meaning of Section 1504(a) of the
Code, which currently files consolidated income Tax Returns;

 

WHEREAS, PDD is a first-tier subsidiary of
Pharmacopeia;

 

WHEREAS, PDD conducts the drug discovery business
which integrates proprietary small molecule combinatorial and medicinal
chemistry, high-throughput screening, in-vitro pharmacology, computational
methods and informatics to discover and optimize lead compounds, as more fully
described in its Form 10 filed with the Securities and Exchange Commission on
December 22, 2003, and the amendment thereto filed on February 17, 2004 (the
“Drug Discovery Business”);

 

WHEREAS, Pharmacopeia holds certain assets used in the
Drug Discovery Business;

 

WHEREAS, Pharmacopeia has agreed to transfer and
assign, or cause to be transferred and assigned, to PDD substantially all the
remaining assets and properties of the Drug Discovery Business not already held
by PDD (the “Contribution”);

 

WHEREAS, Pharmacopeia, its subsidiary Accelrys, Inc.,
and other Pharmacopeia Affiliates are engaged in the development and
commercialization of molecular modeling and simulation software for the life
sciences and materials research markets, cheminformatics and decision support
systems, and bioinformatics tools including gene sequence analysis (the “Software
Business”);

 

WHEREAS, the Board of Directors of Pharmacopeia has
determined that it would be advisable and in the best interests of Pharmacopeia
and its shareholders for Pharmacopeia to distribute on a pro-rata basis to the
holders of record of Pharmacopeia common stock, par value $0.0001 per share
(the “Pharmacopeia Common Stock”), without any consideration being paid by such
holders, all of the outstanding shares of PDD common stock, par value $0.01 per
share (the “PDD Common Stock”) owned directly by Pharmacopeia (the
“Distribution”);

 

WHEREAS, Pharmacopeia and PDD intend that the
Contribution and the Distribution qualify as free of Federal Tax to
Pharmacopeia and its stockholders under Sections 355 and 368(a)(1)(D) of the
Code;

 

 

WHEREAS, the parties hereto are entering into this
agreement: to ensure the tax-free status of the Contribution and Distribution;
to provide certain indemnities; and to provide for various administrative
matters relating to Taxes, including (1) the preparation and filing of Tax
Returns along with the payment of Taxes shown as due and payable thereon, (2)
the retention and maintenance of relevant records necessary to prepare and file
appropriate Tax Returns, as well as the provision for appropriate access to
those records by the parties to this Agreement, (3) the conduct of audits,
examinations, and proceedings by appropriate governmental entities which could
result in a redetermination of Taxes, and (4) the cooperation of all parties
with one another in order to fulfil their duties and responsibilities under
this Agreement and under the Code and other applicable law; and

 

WHEREAS, the parties desire to set forth their
respective responsibilities for Taxes, including any Taxes that could be
incurred in connection with the Distribution.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants and agreements set forth below, the parties agree as
follows:

 

ARTICLE
I

DEFINITIONS

 

Unless otherwise defined in this Agreement,
capitalized terms shall have the meanings ascribed thereto in the Distribution
Agreement.  As used in this Agreement,
the following terms shall have the following meanings:

 

1.1.          “Adjustment”
means any proposed or final change in the taxable income or Tax Liability of a
taxpayer.

 

1.2.          “Affiliate”
means, when used with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person.

 

1.3.          “Associates”
has the meaning ascribed to such term in the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.

 

1.4.          “Code”
means the Internal Revenue Code of 1986, as amended.

 

1.5.          “Combined
State Tax” means, with respect to each United States state or local taxing
jurisdiction, any income, franchise or similar tax payable to such state or
local taxing jurisdiction in which any PDD Affiliate files Returns with a
Pharmacopeia Affiliate, on a consolidated, combined or unitary basis for purposes
of such Tax.

 

1.6.          “Combined
State Tax Return” means any Return with respect to any Combined State Taxes
that includes any Pre-Distribution Tax Period.

 

2

 

1.7.          “Distribution”
has the meaning set forth in the recitals.

 

1.8.          “Distribution
Agreement” means the Master Separation and Distribution Agreement between
Pharmacopeia, Accelrys Inc. and PDD dated April 30, 2004.

 

1.9.          “Distribution
Date” has the meaning set forth in the Distribution Agreement.

 

1.10.        “Federal Tax” means any Tax imposed
under the Code, including any interest, penalty or other additions to Tax
imposed under Subtitle F of the Code.

 

1.11.        “Federal Tax Return” means any Return
with respect to any Federal Taxes that includes any Pre-Distribution Tax
Period.

 

1.12.        “Final Determination” means the final
resolution of any Tax matter.  A final
Determination shall result from the first to occur of:

 

(a)           the
expiration of 30 days after the IRS’s acceptance of a Waiver of Restrictions on
Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
on Form 870 or 870-AD (or any successor comparable form) (the “Waiver”),
except as to reserved matters specified therein, or the expiration of 30 days
after acceptance by any other Taxing Authority of a comparable agreement or
form under the laws of any other jurisdiction, including state, local, and
foreign jurisdictions; unless, within such period, the taxpayer gives notice to
the other party to this Agreement of the taxpayer’s intention to attempt to
recover all or part of any amount paid pursuant to the Waiver by the filing of
a timely claim for refund;

 

(b)           a
decision, judgment, decree, or other order by a court of competent jurisdiction
that is not subject to further judicial review (by appeal or otherwise) and has
become final;

 

(c)           the
execution of a closing agreement under Code section 7121, or the acceptance by
the IRS of an offer in compromise under Code section 7122, or comparable
agreements under the laws of any other jurisdiction, including state, local,
and foreign jurisdictions; except as to reserved matters specified therein;

 

(d)           the
expiration of the time for filing a claim for refund or for instituting suit in
respect of a claim for refund that was disallowed in whole or part by the IRS
or any other Taxing Authority;

 

(e)           the
expiration of the applicable statute of limitations; or

 

(f)            an
agreement by the parties hereto that a Final Determination has been made.

 

1.13.        “Indemnified Liability” is defined at
Section 7.2.

 

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1.14.        “Indemnified Parties” is defined at
Section 7.2.

 

1.15.        “Indemnifying Parties” is defined at
Section 7.2.

 

1.16.        “IRS” means the U.S. Internal Revenue
Service.

 

1.17.        “IRS Interest Rate” means the rate of
interest imposed from time to time on underpayments of income tax pursuant to
Code section 6621(a)(2).

 

1.18.        “Opinion Documents” means (i) the
Spin-Off Opinion, (ii) the representation letters issued by Pharmacopeia and
PDD to Dechert LLP in connection with the Spin-Off Opinion and (iii) all other
documents provided by Pharmacopeia and PDD to Dechert LLP and on which Dechert
LLP relied in issuing the Spin-Off Opinion

 

1.19.        “PDD Affiliate” means PDD and any
Affiliate of PDD after the Distribution Date.

 

1.20.        “PDD Change in Control Tax” means any
Tax imposed by reason of section 355(e) of the Code or any comparable provision
of state or local law as a result of one or more persons acquiring, directly or
indirectly, stock representing a 50% or greater interest in PDD.

 

1.21.        “PDD Separate Return” means any state or
local Tax Return of PDD, other than any Combined State Tax Return, that
includes any Pre-Distribution Tax Period.

 

1.22.        “Pharmacopeia Affiliate” means
Pharmacopeia and any Affiliate of Pharmacopeia (other than PDD) before, on or
after the Distribution Date, as applicable.

 

1.23.        “Pharmacopeia Consolidated Group” means
the group of companies filing a consolidated Federal Tax Return or Combined
State Tax Return, as the case may be, that includes Pharmacopeia.

 

1.24.        “Pharmacopeia Consolidated Return” means
any consolidated Federal Tax Return or Combined State Tax Return of the
Pharmacopeia Consolidated Group that includes any Pre-Distribution Tax Period.

 

1.25.        “Person” means any natural person,
corporation, business trust, joint venture, association, company, partnership,
or government, or any agency or political subdivision thereof.

 

1.26.        “Post-Distribution Tax Period” means (i)
any tax period ending after the Distribution Date, and (ii) with respect to a
tax period that begins on or before the Distribution Date and ends after the
Distribution Date, such portion of the tax period that begins on the day after
the Distribution Date.

 

1.27.        “Pre-Distribution Tax Period” means (i)
any tax period beginning and ending before or on the Distribution Date, and
(ii) with respect to a tax period that begins on or before and ends after the
Distribution Date, such portion of the tax period that begins before the
Distribution Date and ends at the close of the Distribution Date.

 

4

 

1.28.        “Proceeding” is defined at section
8.2(a).

 

1.29.        “Return” means any return, declaration,
report, claim for refund, or information or return or statement relating to
Taxes, including any schedule or attachment thereto, and including any
amendment thereof.

 

1.30.        “Separation Tax” means any Tax (other
than any PDD Change in Control Tax) imposed on any Pharmacopeia Affiliate or
PDD Affiliate in connection with the Contribution and Distribution that would
not have occurred had the Contribution and Distribution not occurred.

 

1.31.        “Spin-Off Opinion” means the opinion
received from Dechert LLP to the effect that the Distribution will qualify as
free of Federal Tax to Pharmacopeia and its stockholders under sections 355 and
368(a)(1)(D) of the Code.

 

1.32.        “Spin-Off Period” means the period
commencing on the Distribution Date and ending on the seventh anniversary of
the close of the taxable year of Pharmacopeia in which the Distribution occurs.

 

1.33.        “Subsidiary” means with respect to
Pharmacopeia or PDD, any Person of which Pharmacopeia or PDD, respectively,
controls or owns, directly or indirectly, more than 50% of the stock or other
equity interest entitled to vote on the election of members to the board of
directors or similar governing body.

 

1.34.        “Tax Asset” means any Tax Item that may
have the effect of producing a Tax Benefit.

 

1.35.        “Tax Benefit” means a reduction in the
Tax Liability of a taxpayer (whether a Pharmacopeia Affiliate or a PDD
Affiliate) for any taxable period. 
Except as otherwise provided in this Agreement, a Tax Benefit shall be
deemed to have been realized or received from a Tax Item in a taxable period
only if and to the extent that the Tax Liability of the taxpayer for such
period, after taking into account the effect of the Tax Item on the Tax
Liability of such taxpayer in all prior periods, is less than it would have
been if such Tax Liability were determined without regard to such Tax Item.

 

1.36.        “Taxes” means all federal, state, local
and foreign gross or net income, gross receipts, withholding, payroll,
franchise, transfer, sales, use, value added, estimated or other taxes of any
kind whatsoever or similar charges and assessments, including all interest,
penalties and additions imposed with respect to such amounts which any
Pharmacopeia Affiliate or any PDD Affiliate is required to pay, collect or
withhold, together with any interest and any penalties, additions or additional
amounts imposed with respect thereto, and “Tax” means any of the Taxes.

 

1.37.        “Taxing Authority” means the IRS or any
other governmental authority or any subdivision, agency, commission or
authority thereof or any quasi-governmental or private body

 

5

 

having jurisdiction pursuant to applicable law over
the assessment, determination, collection or imposition of any Tax.

 

1.38.        “Tax Item” means any item of income,
gain, loss, deduction, credit, recapture of credit, or any other item (including
basis) which may have the effect of increasing or decreasing Taxes paid or
payable.

 

1.39.        “Tax Liability” means the net amount of
Taxes due and paid or payable for any taxable period, determined after applying
all tax credits and all applicable carrybacks or carryovers for net operating
losses, net capital losses, unused general business tax credits, or any other
Tax Items arising from a prior or subsequent taxable period, and all other
relevant adjustments.

 

1.40.        “Tax Returns” means all reports,
estimates, declarations of estimated tax, information statements and returns
relating to, or required to be filed in connection with any Taxes, including
information returns or reports with respect to backup withholding and other
payments to third parties.

 

1.41.        “Unqualified Tax Opinion” means an
unqualified “will” opinion of tax counsel to the effect that a transaction does
not disqualify the Distribution from qualifying for tax-free treatment for
Pharmacopeia or its shareholders under Code section 355 (including Code section
355(e))and any other applicable sections of the Code, assuming that the
Distribution would have qualified for tax treatment if such transaction did not
occur, which opinion is in form and substance reasonably satisfactory to Pharmacopeia.  An Unqualified Tax Opinion may rely upon,
and may assume the accuracy of, any representations given in any Opinion
Document, and any customary representations contained in an officer’s
certificate delivered by an officer of Pharmacopeia or PDD to such counsel.

 

ARTICLE
II

PREPARATION AND FILING OF TAX RETURNS.

 

2.1.          Designation
of Agent.  With regard to each
Pharmacopeia Consolidated Return, each PDD Affiliate hereby irrevocably
authorizes and designates Pharmacopeia as its agent, coordinator, and administrator,
for the purpose of taking any and all actions (including the execution of
waivers of applicable statutes of limitation) necessary or incidental to the
filing of any such Tax Return or other Tax proceedings, and for the purpose of
making payments to, or collecting refunds from, any Taxing Authority, provided
that PDD may continue to participate in any such Tax proceedings as provided
herein.

 

2.2.          Pharmacopeia
Consolidated Returns.  Pharmacopeia
will prepare all Pharmacopeia Consolidated Returns.  Pharmacopeia shall have the exclusive right to (a) file,
prosecute, compromise, or settle any claim for refund, and (b) determine
whether any refunds to which the Pharmacopeia Consolidated Group may be
entitled shall be received by way of refund or credit against the Tax liability
of the Pharmacopeia Consolidated Group.

 

6

 

2.3.          Taxable
Period Ends on Distribution Date. 
Unless prohibited by applicable law, any taxable period of PDD that is
included in a Pharmacopeia Consolidated Return that includes the Distribution
Date shall end on the Distribution Date.

 

2.4.          Allocation.  Unless Pharmacopeia and PDD agree otherwise,
the taxable year of PDD shall be treated for all Tax purposes as ending on the
Distribution Date, and no alternative method of allocating Tax Items of PDD to
the period including the Distribution shall be used.

 

2.5.          PDD
Separate Returns.  PDD shall be
solely responsible for the preparation and filing of all PDD Separate
Returns.  PDD shall be responsible for
paying to the applicable Tax Authorities all Taxes shown as due from any PDD
Affiliate on the PDD Separate Returns.

 

2.6.          Post-Distribution
Conduct of PDD.  On or after the
Distribution Date, PDD will not, nor will it permit any PDD Affiliate to, make
or change any accounting method, change its taxable year, amend any Return or
take any Tax position on any Return, take any other action, omit to take any
action, or enter into any transaction that may reasonably be expected to result
in or does result in any increased Tax liability or reduction of any Tax Asset
of the Pharmacopeia Consolidated Group or any Pharmacopeia Affiliate.

 

ARTICLE
III

TAX SHARING

 

3.1.          Taxes
Generally.  Except as provided in
Section 3.2 and Section 3.3 of this Agreement, Pharmacopeia shall pay or cause
to be paid and shall indemnify and hold each PDD Affiliate harmless against all
Tax Liabilities that arise under each Pharmacopeia Consolidated Return.  PDD shall pay or cause to be paid and shall
indemnify and hold each Pharmacopeia Affiliate harmless against all Tax
Liabilities that arise under each PDD Separate Return.

 

3.2.          Adjustments.  If any Tax Return is examined by a Taxing
Authority and an Adjustment results from such examination, liability for Taxes
arising from such Adjustment shall be borne by the responsible party as
determined under Section 3.1, provided, however, that if the Adjustment which
results in additional Tax Liability to one party also results in a Tax Benefit
to the other party, the party receiving such Tax Benefit, to the extent it is
equal to or less than the other party’s additional Tax Liability, shall pay
such Tax Benefit to the other party within 30 days after such Tax Benefit is
realized.  Promptly after receiving
notice from the party having the Adjustment which results in additional Tax
Liability, the other party shall make a claim for any Tax Benefit resulting
from such Adjustment, on an amended Tax Return or in a formal or informal claim
filed with the IRS, unless the amount of such Tax Benefit is immaterial or
unless otherwise agreed by the parties. 
If an Adjustment could be governed by both this Section 3.2 and Articles
VII or VIII, those Articles will take precedence over this Section 3.2.

 

3.3.          Separation
Taxes.  Notwithstanding anything in
this Agreement to the contrary, PDD shall indemnify and hold harmless each
Pharmacopeia Affiliate against liability for (i) any PDD Change in Control Tax
and (ii) any Separation Tax for which PDD or its Affiliates has an obligation
to indemnify Pharmacopeia under any other provision of this Agreement.

 

7

 

Pharmacopeia shall indemnify and hold harmless each
PDD Affiliate against liability for all other Separation Taxes.

 

ARTICLE
IV

COOPERATION AND EXCHANGE OF INFORMATION; AUDITS AND ADJUSTMENTS

 

4.1.          Tax
Return Information.

 

(a)           PDD
shall, and shall cause each appropriate PDD Affiliate to, provide Pharmacopeia
with all information and other assistance reasonably requested by Pharmacopeia
to enable the Pharmacopeia Affiliates to prepare and file Pharmacopeia
Consolidated Returns required to be filed by them pursuant to this Agreement.

 

(b)           Pharmacopeia
shall, and shall cause each appropriate Pharmacopeia Affiliate to, provide PDD
with all information and other assistance reasonably requested by PDD to enable
the PDD Affiliates to prepare and file PDD Separate Returns required to be
filed by them pursuant to this Agreement.

 

4.2.          Audits
and Adjustments.

 

(a)           Whenever
a Pharmacopeia Affiliate or PDD Affiliate receives in writing from the IRS or
any other Taxing Authority notice of an Adjustment that may give rise to a
payment from the other party under this Agreement or otherwise affect the other
party’s Taxes, Pharmacopeia or PDD, as the case may be, shall give written
notice of the Adjustment to the other party in accordance with the terms of
Article VIII.  The audit shall be
controlled and settled pursuant to the terms of that article.

 

(b)           PDD
agrees reasonably to cooperate with Pharmacopeia in the negotiation,
settlement, or litigation of any liability for Taxes of any Pharmacopeia
Affiliate.

 

(c)           Pharmacopeia
agrees reasonably to cooperate, and to cause each Pharmacopeia Affiliate to
cooperate, with PDD in the negotiation, settlement, or litigation of any liability
for Taxes of any PDD Affiliate.

 

(d)           Pharmacopeia
will reasonably promptly notify PDD in writing of any Adjustment involving a
change in the tax basis of any asset of any PDD Affiliate, specifying the
nature of the change so that such PDD Affiliate will be able to reflect the
revised basis of its tax books and records for periods beginning on or after
the Distribution Date.

 

4.3.          PDD
Carrybacks.  Whenever permitted to
do so by applicable law, and unless agreed otherwise by Pharmacopeia, PDD shall
elect to relinquish any carryback period which would include any
Pre-Distribution Tax Period.

 

For purposes of this Article IV, the term “party” shall refer to any
Pharmacopeia Affiliate and any PDD Affiliate, as the case may be.

 

8

 

ARTICLE
V

RETENTION OF RECORDS

 

5.1.          Retention
of Records.  Pharmacopeia and PDD
agree to retain the appropriate records which may affect the determination of
the liability for Taxes of any PDD Affiliate or Pharmacopeia Affiliate,
respectively, until such time as there has been a Final Determination with
respect to such liability for Taxes.  A
party may satisfy its obligations under the preceding sentence by allowing the
other party to duplicate records at such second party’s request and expense.

 

5.2.          Statute
of Limitations.  Pharmacopeia and
PDD will notify each other in writing of any waivers or extensions of the
applicable statute of limitations that may affect the period for which any
materials, records, or documents must be retained.

 

ARTICLE
VI

COVENANTS

 

6.1.          Pharmacopeia
Covenants.  Pharmacopeia covenants
to PDD that:

 

(a)           No
Pharmacopeia Affiliate will take any action or fail to take any action, which
action or failure to act would cause the Contribution and the Distribution to
fail to qualify under Sections 351(a), 355(a), and 368(a)(1)(D) of the Code or
any corresponding provision of state or local law.  Without limiting the foregoing, Pharmacopeia covenants to PDD
that:

 

(i)            During
the six-month period following the Distribution Date, no Pharmacopeia Affiliate
will liquidate, merge, or consolidate with any person or enter into any
substantial negotiations, agreements, or arrangements with respect to any such
transaction.

 

(ii)           During
the six-month period following the Distribution Date, no Pharmacopeia Affiliate
will sell, exchange, distribute, or otherwise dispose of assets to any person
or enter into any substantial negotiations, agreements, or arrangements with
respect to any such transaction, except in the ordinary course of business.

 

(iii)          Following the Distribution, Accelrys and its
subsidiaries will, for a minimum of two years, continue the active conduct of
the Software Business.

 

(iv)          No
Pharmacopeia Affiliate will take any action inconsistent with the information
and representations in the Opinion Documents.

 

(v)           No
Pharmacopeia Affiliate will repurchase stock of Pharmacopeia in a manner
contrary to the requirements of Revenue Procedure 96-30 or in a manner contrary
to the representations made in the Opinion Documents.

 

(vi)          No
Pharmacopeia Affiliate will permit its agents to take any of the actions
described in items (i) through (v) above on its behalf.

 

9

 

(b)           No
Pharmacopeia Affiliate will take or omit to take (or permit its agents to take
or omit to take) any action that results in any Separation Tax being imposed on
any PDD Affiliate in excess of the amount that would be imposed on such PDD
Affiliate, based upon:

 

(i)            any
specific agreements between a Pharmacopeia Affiliate and a PDD Affiliate as to
the manner in which the Contribution and Distribution and any other relevant
transactions are to be treated for tax purposes, and

 

(ii)           to
the extent not contrary to the agreements described in Section 6.1(b)(i),
the form of the Contribution and Distribution and any other relevant
transactions as set forth in agreements between the relevant Pharmacopeia
Affiliates and PDD Affiliates.

 

(c)           Within
the two-year period following the distribution, no Pharmacopeia Affiliate will
take any action (including stock issuances, whether pursuant to the exercise of
options or similar interests or otherwise, option grants, capital
contributions, or redemptions) or omit to take any action (or permit its agents
to take or omit to take any action) which is reasonably likely to, either alone
or in combination with actions or omissions by any Pharmacopeia Affiliate or
any other party, result in the imposition of any Separation Tax.

 

6.2.          PDD
Covenants.  PDD covenants to
Pharmacopeia that:

 

(a)           No
PDD Affiliate will take any action or fail to take any action, which action or
failure to act would cause the Contribution and the Distribution to fail to
qualify under Sections 351(a), 355(a), and 368(a)(1)(D) of the Code or any
corresponding provision of state or local law. 
Without limiting the foregoing, PDD covenants to Pharmacopeia that:

 

(i)            During
the six-month period following the Distribution Date, PDD will not liquidate,
merge, or consolidate with any person, or enter into any substantial negotiations,
agreements, or arrangements with respect to any such transaction.

 

(ii)           During
the six-month period following the Distribution Date, no PDD Affiliate will
sell, exchange, distribute, or otherwise dispose of assets to any person, or
enter into any substantial negotiations, agreements, or arrangements with
respect to any such transaction, except in the ordinary course of business.

 

(iii)          Following the Distribution, PDD will, for a
minimum of two years, continue the active conduct of the Drug Discovery
Business.

 

(iv)          No
PDD Affiliate will take any action inconsistent with the information and
representations in the Opinion Documents.

 

(v)           No
PDD Affiliate will repurchase stock of PDD in a manner contrary to the
requirements of Revenue Procedure 96-30 or in a manner contrary to the
representations made in the Opinion Documents.

 

10

 

(vi)          No
PDD Affiliate will permit its agents to take any of the actions described in
items (i) through (v) above on its behalf.

 

(b)           No
PDD Affiliate will take or omit to take (or permit its agents to take or omit
to take) any action that results in any Separation Tax being imposed on any
Pharmacopeia Affiliate in excess of the amount that would be imposed on such
Pharmacopeia Affiliate, based upon:

 

(i)            any
specific agreements between a Pharmacopeia Affiliate and a PDD Affiliate as to
the manner in which the Contribution and Distribution and any other relevant
transactions are to be treated for tax purposes, and

 

(ii)           to
the extent not contrary to the agreements described in Section 6.1(b)(i),
the form of the Contribution and Distribution and any other relevant
transactions as set forth in agreements between the relevant Pharmacopeia
Affiliates and PDD Affiliates.

 

(c)           Within
the two-year period following the distribution, no PDD Affiliate will take any
action (including stock issuances, whether pursuant to the exercise of options
or similar interests or otherwise, option grants, capital contributions, or
redemptions) or omit to take any action (or permit its agents to take or omit
to take any action) which is reasonably likely to, either alone or in
combination with actions or omissions by any PDD Affiliate or any other party,
result in the imposition of any Separation Tax.

 

6.3.          Exceptions.  Any Pharmacopeia Affiliate or PDD Affiliate
may take actions inconsistent with the covenants contained in Section 6.1, if
Pharmacopeia or PDD, as the case may be obtains an Unqualified Tax Opinion, it
being understood that each party hereto agrees to cooperate with the party
seeking such opinion and use its reasonable best efforts to assist the party
seeking such opinion in its attempting to obtain, as expeditiously as possible,
any opinion described in this Section 6.3.

 

ARTICLE
VII

INDEMNITY OBLIGATIONS

 

7.1.          PDD
Indemnity.  Each PDD Affiliate
(collectively, jointly and severally, the “PDD Indemnifying Parties”)
will jointly and severally indemnify each Pharmacopeia Affiliate (each a “Pharmacopeia
Indemnified Party”) against and hold them harmless from:

 

(a)           Any
state and local Tax of any PDD Affiliate, excluding any Combined State Tax and
excluding (for purposes of this Section 7.1(a)) any Separation Tax;

 

(b)           any
Separation Taxes resulting from a breach by a PDD Indemnifying Party of (i) any
representation or covenant in an Opinion Document (as such representation is
modified, qualified or elaborated in any subsequent Opinion Document), (ii) any
representation,

 

11

 

covenant or other agreement set forth in this
Agreement, or (iii) any agreements or covenants between a Pharmacopeia
Affiliate and a PDD Affiliate pertaining to Tax matters;

 

(c)           any
PDD Change in Control Tax;

 

(d)           any
Tax liability arising from an Adjustment for which PDD is responsible under
Section 3.2;

 

(e)           any
Tax imposed on a Pharmacopeia Affiliate as a result of PDD’s failure to
cooperate with Pharmacopeia under Article VIII; and

 

(f)            any
Tax increase to Pharmacopeia resulting from PDD’s adoption of a position
inconsistent with the allocation set out in Section 2.4.

 

7.2.          Pharmacopeia
Indemnity.  Each Pharmacopeia
Affiliate (collectively, jointly and severally, the “Pharmacopeia
Indemnifying Parties” and, together with PDD Indemnifying Parties, the “Indemnifying
Parties”) will jointly and severally indemnify each PDD Affiliate (each a “PDD
Indemnified Party” and, together with the Pharmacopeia Indemnified Parties,
the “Indemnified Parties”) against and hold them harmless from:

 

(a)           Any
Pharmacopeia Consolidated Group Taxes, excluding (for purposes of this Section
7.2) any Separation Taxes;

 

(b)           Any
separate state or local Tax and any foreign Tax of any Pharmacopeia Affiliate;

 

(c)           Any
liability or damage arising from the breach by any Pharmacopeia Affiliate of
(i) any representation or covenant in an Opinion Document (as such
representation is modified, qualified or elaborated in any subsequent Opinion
Document), (ii) any representation, covenant or other agreement set forth in
this Agreement, or (iii) any agreements or covenants between a Pharmacopeia
Affiliate and a PDD Affiliate pertaining to Tax matters;

 

(d)           any
Separation Taxes (other than such Taxes for which PDD is required to indemnify
Pharmacopeia under Section 7.1);

 

(e)           Any
Tax liability arising from an Adjustment for which Pharmacopeia is responsible
under Section 3.2; and

 

(f)            Any
Tax imposed on a PDD Affiliate (other than a Separation Tax) as a result of
Pharmacopeia’s failure to cooperate with PDD under Article VIII (each of the
items described in Section 7.1 or 7.2, an “Indemnified Liability”).

 

7.3.          Amount
of Indemnity.  The amount of Tax
included in an Indemnified Liability that is incurred by any Indemnified Party
shall in the case of a Tax based or determined with reference to income shall
for any year be the difference between (x) the actual Tax incurred by

 

12

 

the Indemnified Party for such year and (y) the amount
of Tax that the Indemnified Party would have paid in such year absent the Tax
Items (or adjustments thereto) in that year or any prior year giving rise to
the Indemnified Liability.  For the
avoidance of doubt, if an adjustment to any Tax Item would have resulted in
additional Tax paid but for the availability of net operating losses or tax
credits, the Indemnifying Party shall indemnify the Indemnified Party when, as,
and to the extent that such loss or credit carryforward would otherwise have
been available to reduce any Tax.  All
amounts payable under this Agreement shall be treated as adjustments to the
amount of the Contribution, provided that if any taxing jurisdiction determines
that the amounts received by an Indemnified Party nevertheless are taxable,
then the Indemnifying Party shall make additional payments to the Indemnified
Party so that the Indemnified Party is made whole on an after-tax basis.  For this purpose, the amount of Taxes
imposed on the payments shall be determined based on the taxing jurisdiction’s
highest marginal Tax rate applicable to taxable income of corporations such as
the Indemnified Party on income of the character subject to tax and indemnified
against under this Article VII for the taxable period in which the Distribution
occurs (net of any federal Tax Benefit from state and local Taxes).

 

ARTICLE
VIII

PROCEDURAL ASPECTS OF INDEMNITY

 

8.1.          General.

 

(a)           If
either any Indemnified Party or any Indemnifying Party receives any written
notice of deficiency, claim or adjustment or any other written communication
from any Taxing Authority that may result in an Indemnified Liability, the
party receiving such notice or communication shall promptly give written notice
thereof to the other party, provided that any delay by an Indemnified Party in
so notifying an Indemnifying Party shall not relieve the Indemnifying Party of
any liability hereunder, except to the extent (i) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified
Liability administratively or in the courts in accordance with section 8.2 and
(ii) the Indemnifying Party is materially and adversely prejudiced by the
delay.

 

(b)           The
parties hereto undertake and agree that from and after such time as they obtain
knowledge that any representative of a Taxing Authority has begun to
investigate or inquire into the Distribution (whether or not such investigation
or inquiry is a formal or informal investigation or inquiry), the party
obtaining such knowledge shall (i) notify the other party thereof, provided
that any delay by an Indemnified Party in so notifying an Indemnifying Party
shall not relieve the Indemnifying Party of any liability hereunder (except to
the extent (A) such delay restricts the ability of the Indemnifying Party to
contest the resulting Indemnified Liability administratively or in the courts
in accordance with section 8.2 and (B) the Indemnifying Party is materially and
adversely prejudiced by such delay), (ii) consult with the other party from
time to time as to the conduct of such investigation or inquiry, (iii) provide
the other party with copies of all correspondence with such Taxing Authority or
any representative thereof pertaining to such investigation or inquiry, and
(iv) arrange for a representative of the other party to be present at all

 

13

 

meetings with such Taxing Authority or any
representative thereof pertaining to such investigation or inquiry.

 

8.2.          Contests.

 

(a)           Provided
that (i) an Indemnifying Party shall furnish the Indemnified Party with
evidence reasonably satisfactory to the Indemnified Party of its ability to pay
the full amount of the Indemnified Liability and (ii) such Indemnifying Party
acknowledges in writing that the asserted liability is an Indemnified
Liability, such Indemnifying Party shall assume and direct the defense or
settlement of any tax examination, administrative appeal, hearing, arbitration,
suit or other proceeding (each a “Proceeding”) commenced, filed or
otherwise initiated or convened to investigate or resolve the existence and
extent of such liability.

 

(b)           If
the Indemnified Liability is grouped with other unrelated asserted liabilities
or issues in the Proceeding, the parties shall use their respective best
efforts to cause the Indemnified Liability to be the subject of a separate
proceeding.  If such severance is not
possible, the Indemnifying Party shall assume and direct and be responsible
only for the matters relating to the Indemnified Liability.  The Indemnified Party may settle, partially
settle, or otherwise resolve any controversy involving the Indemnified Party’s
return to which the particular Adjustment relates, so long as the Indemnified
Party does not settle, partially settle, or otherwise resolve the controversy
in a manner inconsistent with the Indemnifying Party’s position, without prior
written consent, which may not be unreasonably withheld, from the Indemnifying
Party.

 

(c)           Notwithstanding
the foregoing, if at any time during a Proceeding controlled by an Indemnifying
Party pursuant to Section 8.2(a) such Indemnifying Party fails to provide
evidence reasonably satisfactory to the Indemnified Party of its ability to pay
the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that such Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the
Indemnified Party may assume control of the Proceedings upon 7 days written
notice.

 

(d)           In
addition to amounts referred to in Section 7.1 or Section 7.2, an Indemnifying
Party shall pay all out-of-pocket expenses and other costs related to the
Indemnified Liability, including but not limited to fees for attorneys,
accountants, expert witnesses or other consultants retained by such
Indemnifying Party and/or the Indemnified Party.  To the extent that any such expenses and other costs have been or
are paid by an Indemnified Party, the Indemnifying Party shall promptly
reimburse the Indemnified Party therefor.

 

(e)           An
Indemnifying Party shall not pay (unless otherwise required by a proper notice
of levy and after prompt notification to the Indemnified Party of receipt of
notice and demand for payment), settle, compromise or concede any portion of
the Indemnified Liability without the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld.  An Indemnifying Party shall, on a timely basis, keep the
Indemnified

 

14

 

Party informed of all developments in the Proceeding
and provide the Indemnified Party with copies of all pleadings, briefs, orders,
and other written papers.

 

(f)            Any
Proceeding which is not controlled or which is no longer controlled by an
Indemnifying Party pursuant to this Section 8.2 shall be controlled and
directed exclusively by the Indemnified Party, and any related out-of-pocket
expenses and other costs incurred by the Indemnified Party, including but not
limited to fees for attorneys, accountants, expert witness or other
consultants, shall be reimbursed by such Indemnifying Party.  An Indemnified Party will not be required to
pursue the claim in federal district court, the Court of Federal Claims or any
state or foreign court if as a prerequisite to such court’s jurisdiction, the
Indemnified Party is required to pay the asserted liability unless the funds
necessary to invoke such jurisdiction are provided by such Indemnifying Party.

 

8.3.          Time
and Manner of Payment.  An
Indemnifying Party shall pay to the Indemnified Party the amount of the
Indemnified Liability and any expenses or other costs indemnified against (less
any amount paid directly by an Indemnifying Party to the Taxing Authority) no
less than seven (7) days prior to the date payment of the Indemnified Liability
is to be made to the Taxing Authority. 
Such payment shall be paid by wire transfer of immediately available
funds to an account designated by the Indemnified Party by written notice to an
Indemnifying Party prior to the due date of such payment.  If an Indemnifying Party delays making
payment beyond the due date hereunder, such party shall pay interest on the
amount unpaid at the IRS Interest Rate for each day and the actual number of
days for which any amount due hereunder is unpaid.

 

8.4.          Refunds.  In connection with this Agreement, if an
Indemnified Party receives a refund in respect of amounts paid by an
Indemnifying Party to any Taxing Authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the Taxing Authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to such Indemnifying Party.

 

8.5.          Cooperation.  The parties shall cooperate with one another
in a timely manner in any administrative or judicial proceeding involving any
matter that may result in an Indemnified Liability.

 

8.6.          Affiliates.  Pharmacopeia agrees and acknowledges that
Pharmacopeia shall be responsible for the performance of the obligations of
each Pharmacopeia Affiliate under this Agreement.  PDD agrees and acknowledges that PDD shall be responsible for the
performance of the obligations of each PDD Affiliate under this Agreement.

 

8.7.          Application
to Present and Future Subsidiaries. 
This Agreement is being entered into by Pharmacopeia and PDD on behalf
of themselves and each Pharmacopeia Affiliate and each PDD Affiliate,
respectively.  This Agreement shall
constitute a direct obligation of each such affiliate and shall be deemed to
have been readopted and affirmed on behalf of any

 

15

 

corporation or other entity which becomes a
Pharmacopeia Affiliate or a PDD Affiliate in the future.

 

ARTICLE
IX

DISPUTE RESOLUTION

 

9.1.          Disputes.

 

(a)           Resolution
of any and all disputes arising from or in connection with this Agreement,
whether based on contract, tort, statute, or otherwise, including, but not
limited to, disputes in connection with claims by third parties (collectively,
“Disputes”) shall be subject to the provisions of this Section 9.1;
provided, however, that nothing contained herein shall preclude either party
from seeking or obtaining (i) injunctive relief or (ii) equitable or other
judicial relief to enforce the provisions hereof or to preserve the status quo
pending resolution of Disputes hereunder.

 

(b)           Either
party may give the other party written notice of any Dispute not resolved in
the normal course of business.  The
parties shall attempt in good faith to resolve any Dispute promptly by
negotiation between executives of the parties who have authority to settle the
controversy and who are at a higher level of management than the persons with
direct responsibility for administration of this Agreement.  Within 30 days after delivery of the notice,
the foregoing executives of both parties shall meet at a mutually acceptable
time and place, and thereafter as often as they reasonably deem necessary for a
period not to exceed 15 days, to attempt to resolve the Dispute.  All reasonable requests for information made
by one party to the other will be honored. 
If the parties do not resolve the Dispute within such 45 day period (the
“Initial Mediation Period”), the parties shall attempt in good faith to
resolve the Dispute by negotiation between (a) in the case of Pharmacopeia, the
Chief Financial Officer, and (b) in the case of PDD, the Chief Financial
Officer (collectively, the “Designated Officers”).  Such officers shall meet at a mutually
acceptable time and place (but in any event no later than 15 days following the
expiration of the Initial Mediation Period) and thereafter as often as they
reasonably deem necessary for a period not to exceed 15 days, to attempt to
resolve the Dispute.

 

(c)           If
the Dispute has not been resolved by negotiation within 75 days of the first
party’s notice, or if the parties failed to meet within 30 days of the first
party’s notice, or if the Designated Officers failed to meet within 60 days of
the first party’s notice, either party may commence any litigation or other
procedure allowed by law.

 

ARTICLE
X

GENERAL

 

10.1.        Term of the Agreement.  This Agreement shall become effective as of
the Distribution Date, and except as expressly provided herein, shall continue
in full force and effect indefinitely.

 

16

 

10.2.        Elections under Code section 1552.  Nothing in this Agreement is intended to
change or otherwise affect any election made by or on behalf of the
Pharmacopeia Consolidated Group with respect to the calculation of earnings and
profits under Code section 1552.

 

10.3.        Injunctions.  The parties acknowledge that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or were otherwise breached.  The parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof in any
court having jurisdiction, such remedy being in addition to any other remedy to
which they may be entitled at law or in equity.

 

10.4.        Assignment.  Neither of the parties may assign or delegate any of its rights
or duties under this Agreement without the prior written consent of the other
party, which consent will not be unreasonably withheld.  This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.

 

10.5.        Further Assurances.  Subject to the provisions hereof, the
parties hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this Agreement and
to consummate the transactions contemplated hereby.  Subject to the provisions hereof, each of the parties shall, in
connection with entering into this Agreement, performing its obligations
hereunder and taking any and all actions relating hereto, comply with all
applicable laws, regulations, orders, and decrees, and promptly provide the
other parties with all such information as they may reasonably request in order
to be able to comply with the provisions of this sentence.

 

10.6.        Waivers.  No failure or delay on the part of the parties in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such right or power, preclude any other or
further exercise thereof or the exercise of any other right or power.  No modification or waiver of any provision
of this Agreement nor consent to any departure by the parties therefrom shall
in any event be effective unless the same shall be in writing, and then such waiver
or consent shall be effective only in the specific instance and for the purpose
for which given.

 

10.7.        Change of Law.  If, due to any change in applicable law or regulations or their
interpretation by any court of law or other governing body having jurisdiction
subsequent to the date of this Agreement, performance of any provision of this
Agreement or any transaction contemplated thereby shall become impracticable or
impossible, the parties hereto shall use their best efforts to find and employ
an alternative means to achieve the same or substantially the same result as
that contemplated by such provision.

 

10.8.        Confidentiality.  Subject to any contrary requirement of law
and the rights of each party to enforce its rights hereunder in any legal
action, each party agrees that it shall keep strictly confidential, and shall
cause its employees and agents to keep strictly confidential, any

 

17

 

information which it or any of its employees or agents
may require pursuant to, or in the course of performing its obligations under,
any provision of this Agreement.

 

10.9.        Headings.  Descriptive headings are for convenience only and shall not
control or affect the meaning or construction of any provision of this
Agreement.

 

10.10.      Counterparts.  For the convenience of the parties, any number of counterparts of
this Agreement may be executed by the parties hereto, and each such executed
counterpart shall be, and shall be deemed to be, an original instrument.

 

10.11.      Notices. 
All notices, requests, claims and other communications hereunder shall
be in writing and shall be given or made (and shall be deemed to have been duly
given or made upon receipt) by delivery by hand, by reputable overnight courier
service, by facsimile transmission, or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the addresses
(or at such other address for a party as shall be specified in a notice given
in accordance with this Section 10.11) listed below:

 

Pharmacopeia at:                  Pharmacopeia,
Inc.

9685 Scranton Road

San Diego, CA

Attn:  Chief
Financial Officer

Phone:  (858)
799-5000

Fax no.:  (858)
799-5100

 

PDD at:                                  Pharmacopeia
Drug Discovery, Inc.

3000 East Park Boulevard

Cranbury, NJ 
08512

Attn:  Chief
Financial Officer

Phone:  (609)
452-3600

Fax no.:  (609)
452-3672

 

or to such other address
as any party may, from time to time, designate in a written notice delivered in
a like manner.  Notice given by hand
shall be deemed delivered when received by the recipient.  Notice given by mail as set out above shall
be deemed delivered three (3) business days after the date the same is
mailed.  Notice given by reputable
overnight courier shall be deemed delivered on the next following business day
after the same is sent.  Notice given by
facsimile transmission shall be deemed delivered on the day of transmission
provided telephone confirmation of receipt is obtained promptly after
completion of transmission.

 

10.12.      Pre-Distribution Earnings and Profits.  Pharmacopeia and PDD agree to allocate pre-Distribution
earnings and profits in accordance with Treasury Regulation section 1.312-10.

 

10.13.      Costs and Expenses.  Unless specifically provided herein, each
party agrees to pay its own costs and expenses resulting from the fulfillment
of its respective obligations hereunder.

 

18

 

10.14.      Cancellation of Prior Tax Allocation or Tax
Sharing Agreements.  Except as
otherwise expressly provided herein, on or prior to the effective date,
Pharmacopeia shall cause to be canceled all agreements (other than this
Agreement) providing for the allocation or sharing of Taxes to which any PDD
Affiliate would otherwise be bound following the Distribution.

 

10.15.      Interest on Late Payments.  If a party delays making any payment beyond
the due date hereunder, such party shall pay interest on the amount unpaid at
the IRS Interest Rate for each day and the actual number of days for which any
amount due hereunder is unpaid.

 

10.16.      General. 
This Agreement, including the attachments, shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and shall supersede all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof and
thereof.  This Agreement may not be
amended or modified except (a) by an instrument in writing signed by, or on
behalf of, the parties or (b) by a waiver in accordance with Section 10.6.  This Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective present
and future Subsidiaries, and nothing herein, express or implied, is intended to
or shall confer upon any third parties any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.

 

10.17.      Governing Law and Severability.  This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, including the
provisions of such laws relating to conflict of laws.  If any term or other provision of this agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party.  Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner in order that the transactions contemplated hereby are
consummated as originally contemplated to the greatest extent possible.

 

19

 

IN WITNESS WHEREOF, the undersigned have caused this
Agreement to be duly executed by their respective officers, each of whom is
duly authorized, all as of the Distribution Date.

 

	
   

  	
  PHARMACOPEIA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John J. Hanlon

  	
   

  
	
   

  	
   

  	
  Name: John J. Hanlon

  
	
   

  	
   

  	
  Title: Chief Financial Officer

  

 

	
   

  	
  PHARMACOPEIA DRUG DISCOVERY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph A. Mollica, Ph.D.

  	
   

  
	
   

  	
   

  	
  Name: Joseph A. Mollica, Ph.D.

  
	
   

  	
   

  	
  Title: President and Chief Executive OfficerExhibit
10.3

 

EMPLOYEE MATTERS
AGREEMENT

 

dated as of

 

April 30, 2004

 

between

 

PHARMACOPEIA, INC.

 

and

 

PHARMACOPEIA DRUG
DISCOVERY, INC.

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  ARTICLE
  II EMPLOYEES AND ALLOCATIONS OF LIABILITIES

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  2.1 Identification and
  Employment.

  	
   

  
	
   

  	
  2.2 Spinco
  Assumption of Liabilities.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III SAVINGS PLANS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  3.1 Transition
  Period

  	
   

  
	
   

  	
  3.2
  Establishment of and Transfer to the Spinco Savings Plan.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV WELFARE PLANS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  4.1 Continuation
  in Supplier Welfare Plans

  	
   

  
	
   

  	
  4.2 Establishment of
  Welfare Plans.

  	
   

  
	
   

  	
  4.3 Vacation and
  Sick Pay Liabilities.

  	
   

  
	
   

  	
  4.4 Medical
  Spending/Dependent Care Accounts.

  	
   

  
	
   

  	
  4.5 Severance.

  	
   

  
	
   

  	
  4.6
  Workers’ Compensation and Unemployment Compensation.

  	
   

  
	
   

  	
  4.7 HIPAA
  Business Associate Provisions.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V
  EXECUTIVE COMPENSATION PROGRAMS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  5.1 Supplier Non-Qualified
  Plan.

  	
   

  
	
   

  	
  5.2 Bonus Plans.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI STOCK
  INCENTIVE PLANS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  6.1
  Stock Option Awards.

  	
   

  
	
   

  	
  6.2 Employee Stock Purchase
  Plan.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII FOREIGN PLANS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  7.1
  Foreign Retirement Plans.

  	
   

  
	
   

  	
  7.2
  Foreign Welfare Plans.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII ACCOUNTING

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  8.1
  Payment of and Accounting Treatment for Expenses.

  	
   

  
	
   

  	
  8.2
  Accounting Adjustments.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX AUDITS;
  INFORMATION SHARING

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  9.1 Audits.

  	
   

  
	
   

  	
  9.2 Sharing of Participant
  Information.

  	
   

  

 

i

 

	
  ARTICLE X GENERAL

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  10.1 Notices.

  	
   

  
	
   

  	
  10.2
  Amendment and Waiver.

  	
   

  
	
   

  	
  10.3 Entire
  Agreement.

  	
   

  
	
   

  	
  10.4
  Parties in Interest.

  	
   

  
	
   

  	
  10.5
  No Third-Party Beneficiaries; No Termination of Employment.

  	
   

  
	
   

  	
  10.6 Right to
  Amend or Terminate Any Plans.

  	
   

  
	
   

  	
  10.7 Effect
  if Distribution Does Not Occur.

  	
   

  
	
   

  	
  10.8
  Relationship of Parties.

  	
   

  
	
   

  	
  10.9 Affiliates.

  	
   

  
	
   

  	
  10.10 Further
  Assurances and Consents

  	
   

  
	
   

  	
  10.11 Severability.

  	
   

  
	
   

  	
  10.12 Governing
  Law.

  	
   

  
	
   

  	
  10.13 Counterparts.

  	
   

  
	
   

  	
  10.14 Disputes.

  	
   

  
	
   

  	
  10.15 Assignment.

  	
   

  
	
   

  	
  10.16 Interpretation.

  	
   

  
	
   

  	
  10.17 Headings.

  	
   

  

 

ii

 

EMPLOYEE MATTERS
AGREEMENT

 

THIS IS AN EMPLOYEE
MATTERS AGREEMENT, dated as of April 30, 2004 (the “Agreement”), by and
between Pharmacopeia, Inc., a Delaware corporation (together with its
successors and permitted assigns, “Supplier”), and Pharmacopeia Drug
Discovery, Inc., a Delaware corporation (together with its successors and
permitted assigns, “Spinco”) (collectively, the “Parties” or
individually, a “Party”).

 

Background

 

WHEREAS,
the Board of Directors of Supplier has authorized a
distribution of Spinco’s common stock to all holders of outstanding stock of
the Supplier (the “Distribution”).

 

WHEREAS,
in connection with the Distribution, Supplier and Spinco will
enter into a number of agreements that will govern certain matters relating to
the Distribution and the relationship of Supplier and Spinco and their
respective subsidiaries and affiliates following the Distribution.

 

WHEREAS,
this Agreement sets forth the arrangements between the
Parties relating to certain employee benefit and compensation matters.

 

NOW,
THEREFORE, in consideration of the foregoing and the
respective covenants and agreements set forth in this Agreement, and intending
to be legally bound hereby, the parties hereto hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

The following words and phrases used in this Agreement
shall have the meanings set forth below unless a different meaning is plainly
required by the context.

 

1.1          “Active Spinco Employee”
means:

 

(a)           Any
Employee who is performing services for Spinco on the Distribution Date,
including any such Employee who is not actively performing such service as a
result of sick leave, workers’ compensation leave, short-term disability or
other authorized leave of absence; and

 

(b)           Any
Employee of Supplier who is designated by Supplier and Spinco as an Employee to
whom Spinco offers employment beginning on or before the Distribution Date and
who has accepted such offer.

 

1.2          “ASO Contract” means an
administrative services only contract or other contract with a third-party
administrator or service provider that pertains to any Supplier Welfare Plan or
Spinco Welfare Plan.

 

 

1.3          “Beneficiary” means the
individual(s) designated by an Employee, former Employee, by operation of law
or otherwise, as the party entitled to compensation, benefits, insurance
coverage or any other goods or services under any Plan.

 

1.4          “COBRA” means the
Consolidated Omnibus Budget Reconciliation Act of 1986

 

1.5          “Code” means the
Internal Revenue Code of 1986, as amended.

 

1.6          “Distribution Agreement”
means the Master Separation and Distribution Agreement between Supplier and
Spinco of even date herewith.

 

1.7          “Distribution Date”
means the date upon which Supplier completes the distribution of Spinco’s
Common Stock.

 

1.8          “Employee” means any
individual who performs services pursuant to a common-law employer-employee
relationship.

 

1.9          “ERISA” means the
Employee Retirement Income Security Act of 1974, as amended.

 

1.10        “Foreign Plan,” when
immediately preceded by “Supplier,” means a Plan maintained by Supplier or when
immediately preceded by “Spinco,” a Plan maintained by Spinco, in either case
for the benefit of Employees who perform services and/or are compensated under
a payroll that is administered outside the United States, its territories and
possessions, and the District of Columbia.

 

1.11        “Former Spinco Employee”
means an Employee whose employment with Spinco terminated for any reason
(including retirement or long-term disability) before the Distribution Date and
who, as of the Distribution Date, is not employed by Supplier or an affiliate
of Supplier; provided, however, that any Employee who terminated employment at
any time prior to the Distribution Date and subsequently became employed by
Supplier after such termination (and did not return to employment with Spinco),
shall not be a Former Spinco Employee for any purpose hereunder.

 

1.12        “Governmental Authority”
means any federal, state or local court, government, department, commission,
board, bureau, agency, official or other regulatory, administrative or
governmental authority, including, without limitation, the United States Department
of Labor (“DOL”), and the Internal Revenue Service (“IRS”).

 

1.13        “Group Insurance Policy”
means a group insurance policy issued under any Supplier Welfare Plan or any
Spinco Welfare Plan, as applicable.

 

1.14        “HIPAA” means the
Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”),

 

1.15        “HMO” means a health
maintenance organization that provides benefits under the Supplier Welfare
Plans or the Spinco Welfare Plans.

 

2

 

1.16        “HMO Agreements” means
contracts, letter agreements, practices and understandings with HMOs that
provide medical services under the Supplier Welfare Plans or Spinco Welfare
Plans.

 

1.17        “Key Recipient” means
the holders of Supplier Options set forth on Schedule I, attached hereto and
made a part hereof.

 

1.18        “Liabilities” means any
and all losses, claims, charges, compensation, benefits, debts, demands,
actions, costs and expenses (including, without limitation, administrative and
related costs and expenses of any Plan, program or arrangement), of any nature
whatsoever, whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising.

 

1.19        “Person” means an
individual, a general or limited partnership, a corporation, a trust, a joint
venture, an unincorporated organization, a limited liability entity or any
other entity.

 

1.20        “Plan” means any plan,
policy, program, payroll practice or other arrangement, whether written or
unwritten, providing benefits to Employees or former Employees of Supplier or
Spinco.

 

1.21        “Spinco Common Stock”
means the shares of common stock, par value $0.01 per share, of Spinco.

 

1.22        “Spinco Welfare Plans”
means the welfare benefit plans, programs, and policies that are sponsored by
Spinco for all periods after the Distribution Date.

 

1.23        “Subsidiary” means,
with respect to any specified Person, any corporation or other legal entity of
which such Person or any of its Subsidiaries owns or controls, directly or
indirectly, more than 50% of the stock or other equity interest entitled to
vote on the election of members to the board of directors or similar governing
body.

 

1.24        “Supplier Common Stock”
means the shares of common stock, par value $0.0001 per share, of Supplier.

 

1.25        “Supplier Non-Qualified Plan”
means the Pharmacopeia, Inc. Non-Qualified Defined Compensation Plan.

 

1.26        “Supplier Savings Plans”
means the Employees Tax-Deferred Savings Plan of Pharmacopeia, Inc.

 

1.27        “Supplier Stock Incentive Plans”
means, collectively, the Pharmacopeia, Inc. 1994 Incentive Stock Plan, the
Pharmacopeia, Inc. 2000 Stock Option Plan and the Pharmacopeia, Inc. 1994
Director Option Plan.

 

1.28        “Supplier Welfare Plans,”
means the welfare benefit plans, programs, and policies listed that are
sponsored by Supplier.

 

3

 

1.29        “Transition End Date”
means December 31, 2004, or such other date as the parties mutually agree in
writing.  The Transition End Date may be
different for different plans, programs or arrangements if the Parties so
provide in writing.

 

1.30        “Transition Period”
means the period beginning on the Distribution Date and ending on the
Transition End Date.  The Transition
Period may be different for different plans, programs or arrangements if the
Parties so provide in writing.

 

ARTICLE II

EMPLOYEES AND ALLOCATIONS OF LIABILITIES

 

2.1          Identification and Employment.  Effective as of the Distribution Date,
Supplier and Spinco shall jointly compile a list by name, social security
number, job title and assigned location of all Active Spinco Employees.  Effective as of the Distribution Date,
Spinco shall employ all such identified Active Spinco Employees.  Effective as of the Distribution Date,
Supplier and Spinco shall jointly compile a list by name and social security
number of all Former Spinco Employees who are identifiable at such time.  An individual who would be classified as a
Former Spinco Employee shall be treated as such for all purposes of this
Agreement notwithstanding that such individual is not on the list provided for
in the preceding sentence.

 

2.2          Spinco Assumption of Liabilities.  Except as specifically provided
otherwise in this Agreement, Spinco shall, on behalf of itself and its
Subsidiaries, assume (i) all Liabilities related to Active Spinco Employees and
Former Spinco Employees incurred in connection with their employment by Spinco
or Supplier prior to the Distribution Date; (ii) all Liabilities related to
Active Spinco Employees and Former Spinco Employees arising on or after the
Distribution Date relating to employment with any affiliate of Spinco; and
(iii) all other Liabilities related to, arising out of, or resulting from
obligations, liabilities and responsibilities assumed or retained by Spinco
under this Agreement or a Plan sponsored or maintained by Spinco.

 

ARTICLE III

SAVINGS PLANS

 

3.1          Transition Period

 

(a)           Spinco
will take all such actions as are necessary to adopt the Supplier Savings Plan,
effective as of the Distribution Date, as another participating “Employer,”
within the meaning of the Supplier Savings Plan; such adoption shall be limited
by this Agreement and shall solely relate to the Spinco Employees and any new
employees of Spinco who become eligible to participate in the Supplier Savings
Plan.  Supplier hereby consents to the
adoption of the Plan by Spinco and agrees to take all such actions as are
reasonably necessary to facilitate the adoption of the Plan by Spinco.  Supplier and Spinco agree to cooperate and
share the costs on a pro rata basis (determined by number of participants in
the Savings Plan who are Active or Former Spinco or Supplier Employees) of (i)
communicating with the trustee, recordkeepers and all other providers with
respect to the Supplier Savings Plan, and (ii) communicating with Supplier
Savings Plan participants, including providing any summary of material
modifications necessary under ERISA.

 

4

 

(b)           Spinco
and Supplier acknowledge and understand that the Supplier Savings Plan will be
a “multiple employer plan” within the meaning of section 413(c) of the Code for
the period that both Spinco and Supplier participate in the Plan
simultaneously.

 

(c)           Spinco
hereby agrees to: (i) to withhold all elective deferrals, and make any required
matching contributions as described in the Supplier Savings Plan, and deliver
them to the trustee of the Supplier Savings Plan; (ii) in its discretion,
make any other contributions (such as qualified non-elective or qualified matching
contributions) as described in the Supplier Savings Plan, and deliver them to
the Trustee of the Plan; (iii) provide Spinco Employees who are participants in
the Supplier Savings Plan (or become participants) with access to their
accounts and opportunity to make investment fund elections in accordance with
the terms of the Plan; and (iv) account for all hours of service earned under
the Supplier Savings Plan, hirings, terminations and attainment of eligibility
under the Supplier Savings Plan, and communicate such events as necessary with
the recordkeeper or trustee of the Supplier Savings Plan.

 

(d)           Supplier,
as the primary employer under the Supplier Savings Plan, hereby agrees to
retain sole responsibility for (i) amending the Supplier Savings Plan for
purposes of maintaining tax-qualification under the Code and compliance with
the provisions of ERISA; (ii) communicating with the recordkeeper, trustee,
custodian and other similar service providers for the Supplier Savings Plan
(except as set forth above); and (iii) (A) correcting any qualification
failures or plan document failures (as described in the IRS Employee Plans
Compliance Resolution System), and (B) correcting any fiduciary violations with
the DOL (including corrections under the Voluntary Fiduciary Compliance
Program).  Supplier shall share a pro
rata portion (relating to the period after adoption by Supplier with respect to
Supplier’s employees and former employees who participate or participated in the
Supplier Savings Plan due to their employment with Supplier) of the costs and
expenses associated with each of the foregoing provisions, except paragraph
(iii). The costs of paragraph (iii) shall be borne by the party at fault (and
shared based upon fault if both parties are at fault).

 

(e)           Effective
as of the Distribution Date, Supplier shall amend the Supplier Savings Plan to
provide that (i) any matching contributions to be made on or after the
Distribution Date with respect to Active Spinco Employees shall be made in
Spinco Common Stock, and (ii) any matching contributions to be made on or after
the Distribution Date with respect to any Supplier employees shall be made in
Supplier Common Stock; provided, however, that Supplier and Spinco shall be
permitted to exercise their discretion to permit the investment of matching
contributions in any other investment fund available under the Supplier Savings
Plan excluding the common stock fund of the other Party.

 

(f)            As
of the Distribution Date, any matching contributions or other amounts credited
to Spinco Employees’ accounts under the Supplier Savings Plan that are invested
in Supplier Common Stock, shall receive a distribution of Spinco Common Stock
in accordance with the Distribution Agreement. 
After the Distribution Date, such amounts shall be invested in
accordance with the terms of the Plan, as amended by either Party.

 

5

 

3.2          Establishment of and Transfer to the Spinco Savings
Plan.

 

(a)           Spinco
shall only be an employer participating in the Plan with respect to the Spinco
Employees for the period beginning on the Distribution Date and ending on the
Transition End Date.  Effective as of
the Transition End Date, Spinco shall establish a separate savings plan for the
benefit of Spinco Employees (“Spinco Savings Plan”).

 

(b)           Effective
as of the Transition End Date, Spinco shall adopt the Spinco Savings Plan,
which shall provide benefits with respect to Active Spinco Employees, their
Beneficiaries and their respective alternate payees immediately after the
Transition End Date.  For purposes of
eligibility and vesting, all service recognized under the Supplier Savings Plan
(for periods immediately before the Transition End Date) shall, as of
immediately after the Distribution Date, be recognized and taken into account
under the Spinco Savings Plan.

 

(c)           Effective
as of the Transition End Date, Spinco shall establish or cause to be
established with respect to the Spinco Savings Plan, a trust, which shall be
exempt from taxation under Code section 501(a).

 

(d)           As
soon as practicable after the Transition End Date, but no later than 30 days
after the Transition End Date, Supplier shall cause the accounts (if any) of
the Active Spinco Employees and Former Spinco Employees, their Beneficiaries
and their respective alternate payees, if any, under the Supplier Savings Plan
that are held by its related trust to be transferred to the Spinco Savings Plan
and its related trust, and Spinco shall cause such transferred accounts to be
accepted by such plan and trust, in accordance with Section 414(l) of the Code
to the extent applicable.  The transfer
of such accounts shall be made:  (A) in
kind, to the extent the assets consist of investments in the Spinco Common
Stock Fund and (B) otherwise in cash, interests in mutual funds, securities, or
other property or in a combination thereof, as the Parties may agree, but, to
the extent practicable, shall be invested initially in comparable investment
options in the Spinco Savings Plan as such accounts were invested immediately before
the date of transfer.  Any outstanding
loan balances under any Supplier Savings Plans to Active Spinco Employees and
Former Spinco Employees shall also be transferred with the underlying accounts.  After the transfer, (i) Active and Former
Spinco Employees will be able to sell the Supplier Common Stock held in their
account under the Spinco Savings Plan, and (ii) Active and Former Supplier
Employees will be able to sell the Spinco Common Stock held in their account
under the Supplier Savings Plan.

 

(e)           Spinco
shall apply to the IRS for favorable determination letters with respect to the
tax-qualified status of the Spinco Savings Plan as soon as practicable after
the Transition End  Date, and Spinco, consistent with the
terms of this Agreement, shall make such amendments to such Savings Plans as
may be required by the IRS in order for Spinco to receive favorable
determination letters with respect to these Plans.

 

(f)            After
the Transition End Date, all beneficiary designations made by Active Spinco
Employees or their respective alternate payees with respect to the Supplier
Savings Plan shall be transferred to and be in full force and effect under the
Spinco Savings Plans until such beneficiary designations are replaced or
revoked by the individual who made such beneficiary designation.

 

6

 

3.3          Governmental Filings.  Supplier and Spinco shall cooperate to make
any and all filings required with respect to the Supplier Savings Plans and the
Spinco Savings Plans under the Code or ERISA or in connection with any of the
transactions described in this Article III.

 

ARTICLE IV

WELFARE PLANS

 

4.1          Continuation in Supplier Welfare Plans

 

(a)           Spinco
will take all such actions as are necessary to adopt the Supplier Welfare Plans,
effective as of the Distribution Date; such adoption shall be limited by this
Agreement and shall solely relate to the Spinco Employees and any new employees
of Spinco who become eligible to participate in the Supplier Welfare Plan.  Supplier hereby consents to the adoption of
the Plan by Spinco and agrees to take all such actions as are reasonably
necessary to facilitate the adoption of the Welfare Plans by Spinco.  Supplier and Spinco agree to cooperate and share
the costs on a pro rata basis (determined by number of participants in the
relevant Welfare Plan who are Active or Former Spinco or Supplier Employees) of
(i) communicating with the insurance companies, HMOs and all other providers or
third-party administrators with respect to the benefits provided under the
Welfare Plans, and (ii) communicating with Welfare Plan participants, including
providing any summary of material modifications necessary under ERISA.  Spinco and Supplier acknowledge and
understand that the Supplier Welfare Plans will be “multiple employer welfare
arrangements” within the meaning of Section 3 (40) ERISA.

 

(b)           Supplier,
as the primary employer under the Welfare Plan, hereby agrees to retain sole
responsibility for (i) amending the Plan for purposes of maintaining compliance
with the provisions of ERISA and (ii) correcting any fiduciary violations with
the DOL.  Supplier and Spinco shall
share a pro rata portion (determined by number of participants in the relevant
Welfare Plan who are Active or Former Spinco or Supplier Employees) of the
costs and expenses associated with each of the foregoing provisions (relating
to the period after adoption by Supplier with respect to Supplier’s employees
and former employees who participate or participated in the Plans due to their
employment with Supplier), except paragraph (ii). The costs of paragraph (ii)
shall be borne by Supplier.

 

(c)           Spinco
hereby agrees to (i) withhold all employee contributions and make all employer
contributions as required by any applicable Supplier Welfare Plan, and pay such
contributions as directed by the Supplier and (ii) notify the Supplier
regarding any changes of status or termination of employment by any Spinco
Employees, Spinco Former Employees or Beneficiaries who are participants in the
Welfare Plans, within the meaning of section 125 of the Code and the
regulations thereunder.

 

(d)           Vendor
Contracts.

 

(i)            Before
the Distribution Date, Supplier shall take such steps as are necessary under
each ASO Contract, Group Insurance Policy and HMO Agreement in existence as of
the date of this Agreement to permit Spinco to participate in the terms and
conditions of such ASO Contract, Group Insurance Policy or HMO Agreement
beginning immediately after the Distribution Date.

 

7

 

(ii)           Supplier
shall determine, and shall promptly notify Spinco of, the manner in which
Spinco’s participation in the terms and conditions of ASO Contracts, Group
Insurance Policies and HMO Agreements, as set forth above is to be effectuated.  Spinco hereby authorizes Supplier to act on
its behalf to extend to Spinco the terms and conditions of the ASO Contracts,
Group Insurance Policies and HMO Agreements during the Transition Period.  Spinco shall fully cooperate with Supplier
in such efforts.

 

(iii)          Supplier and Spinco shall use their
reasonable best efforts to cause each of the insurance companies, HMOs, paid
provider organizations and third-party administrators providing services and
benefits under the Supplier Welfare Plans and the Spinco Welfare Plans to
maintain the premium and/or administrative rates, based on the aggregate number
of participants in both the Supplier Welfare Plans, during the Transition
Period, and the Spinco Welfare Plans.

 

(iv)          For
the Transition Period, Spinco shall be responsible, subject to the direction
and control of Supplier, for the management of the existing contractual and
other arrangements pertaining to the administration of the Spinco Welfare
Plans.  Immediately after the
Distribution Date, Spinco shall be responsible for the management and control
of the ASO contracts, Group Insurance Policies and HMO Agreements and other
vendor contracts and relationships to the extent such contracts, policies and
agreements apply to the Spinco Welfare Plans. 
Notwithstanding the foregoing, nothing contained in this Section
4.1(d)(iv) shall permit Spinco to direct any insurance carrier, third-party
vendor or claims administrator with respect to any contractual arrangement,
policy or agreement under any Supplier Welfare Plan.

 

(e)           For
the period before the Distribution Date and for the Transition Period, Supplier
shall be responsible for administering compliance with the continuation
coverage requirements for “group health plans” under Title X of COBRA, and the
portability requirements under HIPAA, with respect to Active Spinco Employees,
Former Spinco Employees and their Beneficiaries and shall be responsible for
furnishing all necessary employee change notices with respect to these persons
in accordance with applicable Supplier policies and procedures.  Following the time periods described in the
preceding sentence, Spinco shall be solely responsible for administering
compliance with and satisfying any outstanding COBRA or HIPAA obligation with
respect to Active Spinco Employees, Former Spinco Employees and their
Beneficiaries.

 

(f)            If
Spinco recovers any amounts through subrogation or reimbursement for claims
paid by Supplier to Active Spinco Employees, Former Spinco Employees or their
Beneficiaries, Spinco shall pay such amounts to Supplier.

 

4.2          Establishment of Welfare Plans.  Effective as of the Transition
End Date, Spinco shall take all actions necessary or appropriate to establish
the Spinco Welfare Plans to provide Active Spinco Employees (and Former Spinco
Employees, if applicable) those benefits it determines in its sole
discretion.  Spinco shall provide
coverage to Active Spinco Employees (and Former Spinco Employees, if
applicable) under such Spinco Welfare Plans without the need to undergo a
physical examination or otherwise provide evidence of insurability, will not
impose pre-existing condition exclusions and will recognize and maintain all
irrevocable assignments

 

8

 

and elections made by Active Spinco Employees (and Former
Spinco Employees, if applicable) in connection with any life insurance coverage
under the Supplier Welfare Plans.

 

4.3          Vacation and Sick Pay Liabilities.  Effective as of the Distribution
Date, Spinco shall assume all Liabilities for vacation, sick leave and other
paid time off in respect of all Active Spinco Employees (and Former Spinco
Employees, if applicable) as of the Distribution Date.

 

4.4          Medical Spending/Dependent Care Accounts.  As soon as practicable after the
Transition End Date, Supplier shall reimburse Spinco for the aggregate
contributions to such accounts withheld by Supplier from Active Spinco
Employees (and Former Spinco Employees, if applicable) prior to the
Distribution Date to the extent that Supplier did not exhaust such contributions
by providing benefits to Active Spinco Employees (and Former Spinco Employees,
if applicable) prior to the Distribution Date, or if benefits paid by Supplier
to Active Spinco Employees (and Former Spinco Employees, if applicable) prior
to the Distribution Date exceeds the contributions withheld by Supplier from
Active Spinco Employees (and Former Spinco Employees, if applicable), Spinco
shall reimburse Supplier for such difference.

 

4.5          Severance.  The Parties agree that, with
respect to Active Spinco Employees who, in connection with the Distribution,
cease to be employees of Supplier and become Employees of Spinco, such
cessation shall not be deemed a severance of employment for purposes of any
Plan that provides for the payment of severance, salary continuation or similar
benefits.  The Parties shall take all
such action, including, but not limited to, amending any Plan to give effect to
the provisions of this Section.

 

4.6          Workers’ Compensation and Unemployment Compensation.  Effective as of the Distribution
Date, Spinco shall assume all Liabilities for Active Spinco Employees and
Former Spinco Employees related to any and all workers’ compensation and
unemployment compensation matters under any law of any state, territory, or
possession of the United States or the District of Columbia and Spinco shall be
fully responsible for the administration of all such claims.  If Spinco is unable to assume any of such
Liabilities or the administration of any such claim because of the operation of
applicable state law or for any other reason, Spinco shall reimburse Supplier
for all such Liabilities.

 

4.7          HIPAA Business Associate Provisions.

 

(a)           Definitions.  For purposes of this Section 4.7, the
following words and phrases shall have the meanings set forth below.

 

(i)            “Designated
Record Set” shall have the meaning set out in its definition at 45 C.F.R.
§164.501, as such provision is currently drafted and as subsequently amended.

 

(ii)           “Record”
means any item, collection, or grouping of information that includes Protected
Health Information and is maintained, collected, used, or disseminated by or
for Spinco.

 

9

 

(iii)          “Individually Identifiable Health
Information” shall have the meaning set out in its definition at 45 C.F.R.
§164.501, as such provision is currently drafted and as subsequently amended.

 

(iv)          “Privacy
Standards” shall mean the Standards for Privacy of Individually
Identifiable Health Information promulgated under HIPAA.

 

(v)           “Protected
Health Information” or (“PHI”) shall have the meaning set out in its
definition at 45 C.F.R. §164.501, as such provision is currently drafted and as
subsequently amended.

 

(b)           Use and
Disclosure of PHI.  Supplier
may use and disclose PHI received from Spinco or created or received by
Supplier on behalf of Spinco solely as permitted or required by this Agreement
or as otherwise required by law. 
Supplier shall not use and disclose PHI received from Spinco or created
or received by Supplier on behalf of Spinco in any manner that would constitute
a violation of the Privacy Standards if used in such manner by Spinco.

 

(c)           Safeguards.  Supplier agrees that it will use
commercially reasonable efforts to safeguard PHI and to prevent use or
disclosure of PHI other than as provided for under this Section 4.7.

 

(d)           Reporting of
Disclosures of PHI.  Supplier
shall report to Spinco any use or disclosure of PHI in violation of this
Section 4.7 of which it becomes aware.

 

(e)           Agreements
with Third Parties.  Supplier
shall obtain agreement with any agent or subcontractor that will have access to
PHI that is received from, or created or received by Supplier on behalf of
Spinco, to be bound by the same restrictions, terms, and conditions that apply
to Supplier pursuant to this Section 4.7 with respect to such PHI.

 

(f)            Access to
Information. Within twenty-five (25) days of receipt of a request by
Spinco for access to PHI in a Designated Record Set concerning an individual
whose PHI is held by Supplier under this Agreement, Supplier will provide such
access to an individual in accordance with 45 C.F.R. § 164.524.

 

(g)           Availability
of PHI for Amendment.  Within
fifty (50) days of receipt of a request from Spinco for the amendment of an
individual’s PHI contained in a Designated Record Set, Supplier agrees to make
any amendment to PHI in a Designated Record Set that Spinco directs or agrees
to pursuant to 45 C.F.R. §164.526.

 

(h)           Accounting
of Disclosures.  Within fifty
(50) days of receipt of a notice from Spinco to Supplier stating that Spinco
has received a request for an accounting of disclosures of PHI regarding an
individual, Supplier shall make available to Spinco such information as is in
Supplier’s possession and is required for Spinco to make the accounting under
45 C.F.R. §164.528.  Supplier
agrees to document such disclosures of PHI and information related to such
disclosures as would be required for Spinco to respond to a request by an
individual for an accounting of disclosures of PHI in accordance with
45 C.F.R. § 164.528.

 

10

 

(i)            Availability
of Books and Records. 
Supplier agrees to make its internal policies, procedures, practices,
books, records and agreements relating to the use and disclosure of PHI
received from, or created or received by Supplier on behalf of, Spinco
available to the Secretary of the Department of Health and Human Services (“Secretary”)
for purposes of determining Spinco’s compliance with the Privacy Standards,
subject to attorney-client and other applicable legal privileges.

 

(j)            Return of
PHI upon Termination.  Upon
termination of the Agreement for any reason, Supplier shall return to Spinco
all PHI received from Spinco or created or received by Supplier on behalf of
Spinco and which Supplier still maintains in any form.  Prior to doing so, Supplier further agrees
to recover any PHI in the possession of its subcontractors or agents.  Supplier shall not retain any copies of such
PHI.  If it is not feasible to return
such PHI as determined by Spinco, Supplier agrees to extend any and all
protections, limitations, and restrictions in this Section 4.7 to
Supplier’s use and disclosure of any PHI retained after the termination of the
Agreement, and to limit any further uses and disclosures to the purpose or
purposes that make the return of PHI infeasible.  If it is not feasible for Supplier to obtain from a subcontractor
or agent any PHI in the possession of the subcontractor or agent, Supplier will
require the subcontractor and/or agent to agree to extend any and all protections,
limitations, and restrictions in this Section 4.7 to the subcontractors’
and/or agents’ use and disclosure of any PHI retained after the termination of
the Agreement, and to limit any further uses and disclosures to the purposes
that make the return of the PHI infeasible.

 

(k)           Termination.  Pursuant to 45 C.F.R.
§164.504(e)(2)(iii), Spinco may upon ten (10) days notice terminate the
provisions of any agreement that relates to the administration of any Welfare
Plan determined to be a health plan under the Privacy Standards if Spinco
determines that Supplier has breached a material term of this
Section 4.7.  Alternatively, Spinco
may (i) provide Supplier with 30 days written notice of the existence of an
alleged material breach; and (ii) afford Supplier an opportunity to cure
said alleged material breach to Spinco’s satisfaction within the stated time
period.  Failure to cure the alleged
breach is grounds for immediate termination of the provisions of any agreement
that relates to the administration of any Welfare Plan determined to be a
health plan under the Privacy Standards; provided, however, that in the event
that Spinco determines that such termination is not feasible, Supplier hereby
acknowledges that Spinco shall have the right to report the breach to the
Secretary, notwithstanding any other provision of the Agreement to the
contrary.  Spinco reserves the right to
cure any breach by Supplier of any provision of this Section 4.7;
provided, however, that Spinco retains its right to terminate relevant
provision of an agreement as provided under this Section 4.7(k) and its
right to seek related remedies, even if Spinco is able to cure the breach.

 

(l)            Spinco’s
Obligations.  Spinco shall
notify Supplier of any limitation(s) in its notice of privacy practices, to the
extent that such limitation may affect Supplier’s use or disclosure of
PHI.  Spinco also shall notify Supplier
of any changes in, or revocation of, permission by an individual to use or
disclose PHI, to the extent that such changes may affect Supplier’s use or
disclosure of PHI.  Spinco also shall
notify Supplier of any restriction to the use or disclosure of PHI that Spinco
has agreed to in accordance with 45 C.F.R. § 164.522, to the extent that
such restriction may affect Supplier’s use or disclosure of PHI.

 

11

 

(m)          Management
and Administration.  Except
as otherwise limited in this Agreement, Supplier may use PHI for the proper
management and administration of the Spinco health plan or to carry out the
legal responsibilities of Supplier. 
Except as otherwise limited in this Agreement, Supplier may disclose PHI
for the proper management and administration of the Spinco health plan,
provided that disclosures are required by law, or Supplier obtains reasonable
assurances from the person to whom the information is disclosed that it will
remain confidential and used or further disclosed only as required by law or
for the purposes for which it was disclosed to the person.  The person also must agree to notify
Supplier of any instances of which it is aware in which the confidentiality of
the information has been breached.

 

(n)           Amendment.  The parties agree to take such action as is
necessary to amend this Section 4.7 from time to time as is necessary for
Spinco to comply with the requirements of the Privacy Standards.

 

ARTICLE
V

EXECUTIVE COMPENSATION PROGRAMS

 

5.1          Supplier Non-Qualified Plan.

 

(a)           All
Active Spinco Employees shall cease to be eligible to participate in the
Supplier Non-Qualified Plan as of the Distribution Date.

 

(b)           Effective
as of the Distribution Date, (i) Spinco shall assume all Liabilities in
connection with the Supplier Non-Qualified Plan for Active Spinco Employees
(and Former Spinco Employees, if applicable) and Supplier shall have no
responsibility with respect to such Liabilities, (ii) to the extent those
Liabilities are funded by a rabbi trust, the assets relating to Active Spinco
Employees (and Former Spinco Employees, if applicable), shall be transferred to
Spinco or a rabbi trust designated by Spinco as soon as practicable following
the Distribution Date, (iii) Spinco shall establish a non-qualified deferred
compensation plan on such terms as it determines in its sole discretion (“Spinco
Non-Qualified Plan”), and (iv) as applicable, all service recognized under
the Supplier Non-Qualified Plan (for periods immediately before the
Distribution Date) shall, as of immediately after the Distribution Date, be
recognized and taken into account under the Spinco Non-Qualified Plan.

 

5.2          Bonus Plans.  Spinco shall assume all
Liabilities for or related to Active Spinco Employees (and Former Spinco
Employees, if applicable) payable under any bonus plan sponsored or maintained
by Spinco or Supplier with respect to the period prior to the Distribution
Date; provided, however, that Supplier and Spinco may jointly make such
adjustments to the financial goals, targets, payments and forms of payment as
they deem appropriate to reflect the Distribution.  As of the Distribution Date, Spinco may establish a bonus plan
covering such of its Active Spinco Employees as it in its sole discretion deems
appropriate.

 

12

 

ARTICLE VI

STOCK INCENTIVE PLANS

 

6.1          Stock Option Awards.

 

(a)           Effective
as of the Distribution Date, Spinco shall establish an equity-based incentive
plan for the benefit of Spinco’s employees, consultants and directors (“Spinco
Stock Incentive Plan”), with such terms as Spinco determines, in its sole
discretion.

 

(b)           Except
as provided in Section 6.1(c) for Key Recipients and Section 6.1(d) for
Director Recipients, employees and consultants who have received unexercised
options (whether vested or unvested) to purchase Supplier Common Stock (“Supplier
Options”) under the Supplier Stock Incentive Plans before the Distribution
Date, and who become employees or consultants of Spinco on the Distribution
Date, will have each of their unexercised Supplier Options converted into
options to purchase Spinco Common Stock (“Spinco Options”) under the
Spinco Stock Incentive Plan as of the Distribution Date, subject to the
following terms and conditions:

 

(i)            The
terms of the conversion described in this Section will be determined by
reference to, and in consideration of, the ratio of the  market price of Supplier common stock and
Spinco Common Stock immediately before or after the distribution.  The conversion will preserve the then
intrinsic value of the existing Supplier Options.  Following the conversion contemplated by this Section, the
aggregate market value of the Spinco Common Stock purchasable under the Spinco
Options immediately after the Distribution will be approximately equal to the
aggregate market value of the Supplier Common Stock that was purchasable under
the Supplier Options immediately before the distribution, with the aggregate
exercise price of the Spinco Options being the same as the Supplier Options
(except to the extent the number of shares purchasable is rounded down to the
nearest whole share).

 

(ii)           The
term, vesting and other terms of the Spinco Options will be the same as the
terms of the current Supplier Options; notwithstanding any contrary provision
of the Spinco Stock Incentive Plan.

 

(c)           Each Key Recipient of Supplier Options under the Supplier Stock Incentive
Plans before the Distribution Date who becomes an employee or consultant of
Spinco on the Distribution Date, will, have 30% of his or her unexercised
vested Supplier Options converted into Spinco Options under the Spinco Stock
Incentive Plan as of the Distribution Date. 
The remaining 70% of his or her vested, unexercised Supplier Options
shall remain under the terms of the Supplier Stock Incentive Plan (“Key
Supplier Options”).  Unvested
Supplier Options held by Key Recipients (other than the Designated Key
Recipient identified on Schedule I) will be converted into Spinco Options in
accordance with Section 6.1(b). 
Unvested Supplier Options held by the Designated Key Recipient
identified on Schedule I will remain under the terms of the Supplier Stock
Incentive Plan as unvested Key Supplier Options.  Supplier will administer the applicable Supplier Stock Incentive
Plan to provide that the holders of the Key Supplier Options will not be
treated as terminating employment or service with Supplier due to the
Distribution, solely for purposes of determining the terms applicable to the
Key Supplier

 

13

 

Options after the Distribution
Date.  The term, vesting and other terms
of the Spinco Options will be the same as the terms of the current Supplier
Options.  The valuation and
determination of the number of Spinco Options and Supplier Options will be made
in the same manner as described in Section 6.1(b)(i).

 

(d)           Each recipient of Supplier Options who is a
director of Supplier (“Director Recipient”) before the Distribution Date
will have 30% of his or her unexercised Supplier Options converted into Spinco
Options under the Spinco Stock Incentive Plan as of the Distribution Date.  The remaining 70% of his or her unexercised
Supplier Options shall remain under the terms of the Supplier Stock Incentive
Plan (“Director Supplier Options”). 
Supplier will administer the applicable Supplier Stock Plan to provide
that the holders of the Director Supplier Options who do not remain as
directors of Supplier after the Distribution will not be treated as terminating
service from Supplier due to the Distribution, solely for purposes of
determining the terms applicable to the Director Supplier Options after the
Distribution Date.  The term, vesting
and other terms of the Spinco Options will be the same as the terms of the
current Supplier Options.  The valuation
and determination of the number of Spinco Options and Supplier Options will be
made in the same manner as described in Section 6.1(b)(i).

 

(e)           Spinco
shall make such additional awards under the Spinco Stock Incentive Plan to
Active Spinco Employees, consultants and directors as it in its sole discretion
deems appropriate.

 

6.2          Employee Stock Purchase Plan.

 

(a)           Effective
as of the Distribution Date, Spinco shall establish an employee stock purchase
plan (the “Spinco ESPP”) that will provide benefits that are similar to
those provided under the Supplier Employee Stock Purchase Plan (the “Supplier
ESPP”) immediately before the Distribution Date.

 

(b)           Effective
as of the Distribution Date, Supplier shall amend the Supplier ESPP to provide
that any amounts contributed by Active Spinco Employees to the Supplier ESPP
shall be transferred to Spinco and shall be applied to the purchase of Spinco
Common Stock under the Spinco ESPP.  The
rights to purchase Supplier Common Stock, which have been earned under the
Supplier ESPP shall be converted, in accordance with the procedures described
in Section 6.1(b) and applicable law, into rights to purchase Spinco Common
Stock under the Spinco ESPP effective as of the Closing Date.  The initial “purchase period” under the
Spinco ESPP will end on the same date that such period is scheduled to end
under the Supplier ESPP.  Additional
purchase periods under the Spinco ESPP will be subject to the terms and
conditions determined by Spinco in its sole discretion.

 

ARTICLE VII

FOREIGN PLANS

 

7.1          Foreign Retirement Plans.  Supplier and Spinco shall use
their reasonable best efforts so that, as soon as practicable after the Distribution
Date, all Supplier Foreign Plans which provide retirement benefits solely to
Active Spinco Employees and Former Spinco Employees shall be assumed by Spinco
together with all related assets and liabilities and neither

 

14

 

Supplier nor any Supplier Group Plan shall retain any
liability with respect to such Foreign Plans.

 

7.2          Foreign Welfare Plans.  Supplier and Spinco shall use
their reasonable best efforts, effective as of the Distribution Date, and to
the extent allowed under foreign laws, to handle the Foreign Plans which
provide welfare benefits in a manner which mirrors the approach outlined in
this Agreement for the various employee benefit plans.

 

ARTICLE VIII

ACCOUNTING

 

8.1          Payment of and Accounting Treatment for Expenses.

 

(a)           Except
as specifically provided in this Agreement, all expenses (and the accounting
treatment related to such expenses) related to liabilities through the
Distribution Date regarding matters addressed in this Agreement shall be
handled and administered in the ordinary course by Supplier and Spinco in
accordance with past Supplier accounting and financial practices and procedures
pertaining to such matters.  To the
extent such expenses are unpaid as of the Distribution Date that pertain to
Active Spinco Employees or Former Spinco Employees, Spinco shall be solely
responsible for such payment, without regard to any accounting treatment to be
accorded such expense by Supplier or Spinco on their respective books and
records.  The accounting treatment to be
accorded all such expenses, whether such expenses are paid by Supplier or
Spinco, shall be determined by Supplier.

 

(b)           Spinco
shall assume any balance sheet liability for any Liabilities assumed by it
under this Agreement as of the Distribution Date or thereafter, with respect to
any Active Spinco Employee or Former Spinco Employees.  The determination of any balance sheet
liability as of the close of business on the Distribution Date shall be
determined by Supplier consistent with past accounting practices, consistently
applied.

 

8.2          Accounting Adjustments.  Before the Distribution Date,
Spinco will have established on its books for financial accounting purposes
liabilities and reserves for deferred compensation, welfare and other employee
benefit plan obligations that will be retained or assumed by Spinco under this
Agreement, and Supplier will have adjusted the liabilities and reserves on its
books for financial accounting purposes to take into account Spinco’s
assumption or retention of Liabilities under this Agreement.  The initial adjustments as of the
Distribution Date will be made on an estimated basis.  After the Parties have finally calculated the actual liabilities
under this Agreement, each Party shall appropriately adjust its liabilities and
reserves to reflect the amount of the liabilities and reserves that are
properly allocable to that Party.

 

15

 

ARTICLE
IX

AUDITS; INFORMATION SHARING

 

9.1          Audits.

 

(a)           Each
of Supplier and Spinco, and their duly authorized representatives, shall have
the right to conduct audits at any time upon reasonable prior notice, at their
own expense, with respect to all information provided to it or to any Plan
trustee, recordkeeper or third-party administrator by the other Party.  The Party conducting the audit shall have
the sole discretion to determine the procedures and guidelines for conducting
audits and the selection of audit representatives under this Section.  The auditing Party shall have the right to
make copies of any records at its expense. 
The Party being audited shall provide the auditing Party’s
representatives with reasonable access during normal business hours to its
operations, computer systems and paper and electronic files, and provide
workspace to its representatives.  After
any audit is completed, the Party being audited shall have the right to review
a draft of the audit findings and to comment on those findings in writing
within ten business days after receiving such draft.

 

(b)           The
auditing Party’s audit rights under this Section shall include the right to
audit, or participate in an audit facilitated by the Party being audited, of
any Subsidiaries and affiliates of the Party being audited and of any benefit
providers and third parties with whom the Party being audited has a
relationship, or agents of such Party, to the extent any such persons are
affected by or addressed in this Agreement. 
The Party being audited shall, upon written request from the auditing
Party, provide an individual (at the auditing Party’s expense) to supervise any
audit of any such benefit provider or third-party.  The auditing Party shall be responsible for supplying, at its
expense, additional personnel sufficient to complete the audit in a reasonably
timely manner.

 

9.2          Sharing of Participant Information.  Subject to any limitations
expressly provided for herein, Supplier and Spinco shall share, Supplier shall
cause each applicable affiliate of Supplier to share, and Spinco shall cause
each applicable affiliate of Spinco to share, with each other and their
respective agents and vendors (without obtaining releases) all participant
information necessary for the efficient and accurate administration of each of
the Supplier Plans and the Spinco Plans. 
Supplier and Spinco and their respective authorized agents shall,
subject to applicable laws on confidentiality, be given reasonable and timely
access to, and may make copies of, all information relating to the subjects of
this Agreement in the custody of the other Party, to the extent necessary for
such administration.

 

ARTICLE X

GENERAL

 

10.1        Notices.  All notices, requests, claims and
other communications hereunder shall be in writing and shall be given or made
(and shall be deemed to have been duly given or made upon receipt) by delivery
by hand, by reputable overnight courier service, by facsimile

 

16

 

transmission, or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
addresses listed below:

 

if to Supplier, to:                   Pharmacopeia,
Inc.

9685 Scranton Road

San Diego, CA

Attn.:      Vice President, Human
Resources

Fax:         (858) 799-5100

 

if to Spinco, to:                     Pharmacopeia
Drug Discovery, Inc.

3000 Eastpark Blvd.

Cranbury, NJ 08512

Attn:       Executive Vice President,
Human Resources

Fax:         (609) 452-3671

 

or to such other address as any Party may, from time to time, designate
in a written notice given in accordance with this Section.  Notice given by hand shall be deemed
delivered when received by the recipient. 
Notice given by mail as set out above shall be deemed delivered five
calendar days after the date the same is mailed.  Notice given by reputable overnight courier shall be deemed
delivered on the next following business day after the same is sent.  Notice given by facsimile transmission shall
be deemed delivered on the day of transmission provided telephone confirmation
of receipt is obtained promptly after completion of transmission.

 

10.2        Amendment and Waiver.  This Agreement may not be altered
or amended, nor may rights hereunder be waived, except by an instrument in
writing executed by the Party or Parties to be charged with such amendment or
waiver.  No waiver of any term,
provision or condition of or failure to exercise or delay in exercising any
rights or remedies under this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term,
provision, condition, right or remedy or as a waiver of any other term,
provision or condition of this Agreement.

 

10.3        Entire
Agreement.  This
Agreement constitutes the entire understanding of the Parties with respect to
the subject matter herein addressed, superseding all negotiations, prior
discussions and prior agreements and understandings relating to such subject
matter.

 

10.4        Parties in
Interest.  Neither
of the Parties may assign its rights or delegate any of its duties under this
Agreement without the prior written consent of the other Party (which consent
shall not be unreasonably withheld or delayed).  This Agreement shall be binding upon, and shall inure to the
benefit of, the Parties and their respective successors and permitted assigns.

 

10.5        No Third-Party Beneficiaries; No Termination of
Employment.  No
provision of this Agreement shall be construed to create any right, or
accelerate entitlement, to any compensation or benefit whatsoever on the part
of any Active Spinco Employee or Former Spinco Employee under any Supplier Plan
or Spinco Plan or otherwise.  Without
limiting the generality of the foregoing, neither the Distribution nor the
termination of the controlled group status of a affiliate of Spinco shall cause
any Employee to be deemed to have incurred a

 

17

 

termination of employment that by itself entitles such
individual to the commencement of benefits under any of the Supplier Plans, any
of the Spinco Plans, or any individual agreements.

 

10.6        Right to Amend or Terminate Any Plans.  Nothing in this Agreement other
than those provisions specifically set forth in this Agreement to the contrary
shall preclude Spinco or Supplier, at any time after the Distribution Date,
from amending, merging, modifying, terminating, eliminating, reducing, or otherwise
altering in any respect any Spinco plan or Supplier Plan, respectively, any
benefit under any Plan or any trust, insurance policy or funding vehicle
related to any Spinco Plan or Supplier Plan.

 

10.7        Effect if Distribution Does Not Occur.  If the Distribution does not
occur, then all actions and events that are, under this Agreement, to be taken
or occur effective as of the Distribution Date, immediately after the
Distribution Date, or otherwise in connection with the Distribution, shall not
be taken or occur except to the extent specifically agreed to in writing by
Spinco and Supplier.

 

10.8        Relationship of Parties.  Nothing in this Agreement shall
be deemed or construed by the Parties or any third party as creating the
relationship of principal and agent, or a partnership or joint venture between
the Parties, it being understood and agreed that no provision contained in this
Agreement, and no act of the Parties, shall be deemed to create any
relationship between the Parties other than the relationship set forth in this
Agreement.

 

10.9        Affiliates.  Each of Supplier and Spinco shall
cause to be performed, and hereby guarantees the performance of, all actions,
agreements and obligations set forth in this Agreement to be performed by
affiliates of Supplier or affiliates of Spinco, respectively, where relevant.

 

10.10      Further Assurances and Consents   In addition to the actions
specifically provided for elsewhere in this Agreement, each of the Parties will
use its reasonable best efforts to (a) execute and deliver such further
instruments and documents and take such other actions as any other Party may
reasonably request in order to effectuate the purposes of this Agreement and to
carry out the terms of this Agreement and (b) take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, using its reasonable best
efforts to obtain any consents and approvals and to make any filings and
applications necessary or desirable in order to consummate the transactions
contemplated by this Agreement; provided that no Party shall be obligated to
pay any consideration therefor (except for filing fees and other similar
charges) to any third-party from whom such consents, approvals and amendments
are requested or to take any action or omit to take any action if the taking of
or the omission to take such action would be unreasonably burdensome to the
Party.

 

10.11      Severability.  The provisions of this Agreement
are severable and should any provision of this Agreement be void, voidable or
unenforceable under any applicable law, such provision shall not affect or
invalidate any other provision of this Agreement, which shall continue to
govern the relative rights and duties of the Parties as though such void,
voidable or unenforceable provision were not part of this Agreement.

 

18

 

10.12      Governing
Law.  Subject
to federal law, this Agreement shall be construed in accordance with, and
governed by, the laws of the State of Delaware, without regard to the conflicts
of law rules of such state.

 

10.13      Counterparts.  This Agreement may be executed in
one or more counterparts each of which shall be deemed an original instrument,
but all of which together shall constitute but one and the same Agreement.

 

10.14      Disputes.

 

(a)           Resolution
of any and all disputes arising from or in connection with this Agreement,
whether based on contract, tort, statute or otherwise, including, but not
limited to, disputes in connection with claims by third parties (collectively,
“Disputes”), shall be subject to the provisions of this Section 10.14;
provided, however, that nothing contained in this Agreement shall preclude
either Party from seeking or obtaining (i) injunctive relief or (ii) equitable
or other judicial relief to enforce the provisions of this Agreement or to preserve
the status quo pending resolution of Disputes hereunder.

 

(b)           Either
Party may give the other Party written notice of any Dispute not resolved in
the normal course of business.  The
parties shall attempt in good faith to resolve any Dispute promptly by
negotiation between executives of the parties who have authority to settle the
controversy and who are at a higher level of management than the persons with
direct responsibility for administration of this Agreement.  Within 30 days after delivery of the notice,
the foregoing executives of both parties shall meet at a mutually acceptable
time and place, and thereafter as often as they reasonably deem necessary for a
period not to exceed 15 business days, to attempt to resolve the Dispute.  All reasonable requests for information made
by one Party to the other will be honored. 
If the parties do not resolve the Dispute within such 45 business day
period (the “Initial Negotiation Period”), the Parties shall attempt in
good faith to resolve the Dispute by negotiation between (a) in the case of
Supplier, the Chief Financial Officer and (b) in the case of Spinco, the Chief
Financial Officer (collectively, “Designated Officers”).  Such officers shall meet at a mutually
acceptable time and place (but in any event no later than 15 business days
following the expiration of the Initial Negotiation Period) and thereafter as
often as they reasonably deem necessary for a period not to exceed 15 business
days, to attempt to resolve the Dispute.

 

(c)           If
the Dispute has not been resolved by negotiation within 75 business days of the
first Party’s notice, or if the Parties failed to meet within 30 business days
of the first Party’s notice, or if the Designated Officers failed to meet
within 60 business days of the first Party’s notice, either Party may commence
any litigation or other procedure allowed by law.

 

10.15      Assignment.  Neither of the parties may assign
or delegate any of its rights or duties under this Agreement without the prior
written consent of the other party, which consent will not be unreasonably
withheld; provided that Supplier may, at any time, assign or delegate its
rights or duties hereunder to Accelrys, Inc without obtaining the consent of
Spinco.  This Agreement shall be binding
upon, and shall inure to the benefit of, the Parties and their respective
successors and permitted assigns. 
Notwithstanding the foregoing, Spinco may, and hereby gives notice to
Supplier that it intends to, pledge its rights and obligations under this

 

19

 

Agreement to its lenders as collateral to secure
indebtedness outstanding under its senior secured credit facility and all
renewals, refundings, refinancings and replacements thereof.

 

10.16      Interpretation.  Words in the singular shall be
held to include the plural and vice versa and words of one gender shall be held
to include the other genders as the context requires.  The word “including” and words of similar import when used in
this Agreement means “including, without limitation,” unless the context
otherwise requires or unless otherwise specified.

 

10.17      Headings.  The Article and Section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the Parties and shall not in any way affect the
meaning or interpretation of this Agreement.

 

*     *     *     *     *

 

20

 

IN WITNESS WHEREOF, the
Parties have executed and delivered this Agreement as of the day and year first
above written.

 

 

	
   

  	
  PHARMACOPEIA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John J.
  Hanlon

  
	
   

  	
   

  	
  Name: John J.
  Hanlon

  
	
   

  	
   

  	
  Title: Chief
  Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PHARMACOPEIA DRUG DISCOVERY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph A.
  Mollica, Ph.D.

  
	
   

  	
   

  	
  Name: Joseph A.
  Mollica, Ph.D.

  
	
   

  	
   

  	
  Title: President
  and Chief Executive Officer

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