Document:

Exhibit
4.1

WARRANT

PHARMACOPEIA
DRUG DISCOVERY, INC.

WARRANTS
FOR THE PURCHASE OF SHARES OF COMMON STOCK

No.  W-2006-[  ]                                                                                                                   [_______]
Shares

THIS CERTIFIES
that, for value received, Pharmacopeia Drug Discovery, Inc., a Delaware
corporation (the “Company”), upon the surrender of this Warrant to the Company
at the address specified herein, at any time during the Exercise Period (as
defined below) will upon receipt of the Exercise Price (as defined below), sell
and deliver to [                  ] (the “Holder”)
up to the number of duly authorized, validly issued and fully paid and
nonassessable shares of common stock of the Company, par value $0.01 per share,
set forth above.  The term “Common Stock”
shall mean the aforementioned common stock of the Company together with any
other equity securities that may be issued by the Company in connection
therewith or in substitution therefor, as provided herein, that is not limited
as to final sum or percentage in respect of the rights of the holders thereof
to participate in dividends or in distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Company.  The “Exercise Period” shall begin on April
[  ], 2006 and shall end on April [  ], 2011. 
During the Exercise Period, the Holder may purchase such number of
shares of Common Stock at a purchase price per share equal to $5.14 as
appropriately adjusted pursuant to Section G hereof (the “Exercise Price”).

The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid for a share of Common Stock are subject to adjustment from
time to time as hereinafter set forth. 
The shares of Common Stock deliverable upon such exercise, as adjusted
from time to time, are hereinafter sometimes referred to as “Warrant Shares.”

Section A.             Exercise of Warrant.  This Warrant may be exercised in whole or in
part, at any time or from time to time, during the Exercise Period by
presentation and surrender hereof to the Company at 3000 Eastpark Boulevard,
Cranbury, New Jersey 08512 (or at such other address as the Company or its
agent may hereafter designate in writing to the Holder), or at the office of
its warrant agent, with the Notice of Exercise Form contained herein duly
executed and accompanied by a wire transfer of immediately available funds,
cash or a certified or official bank check drawn to the order of “Pharmacopeia
Drug Discovery, Inc.” in the amount of the Exercise Price multiplied by the
number of Warrant Shares specified in such form.   If this Warrant should be exercised
in part only, the Company shall, upon surrender of this Warrant, promptly
execute and deliver a new Warrant evidencing the rights of the Holder thereof
to purchase the balance of the Warrant Shares purchasable hereunder.  Upon receipt by the Company during the
Exercise Period of this Warrant and such Notice of Exercise Form, in proper
form for exercise, together with proper payment of the Exercise Price, at such
office, or

 

 

 

by the warrant agent of
the Company at its office, the Holder shall be deemed to be the holder of
record of the number of Warrant Shares specified in such form; provided,
however, that if the date of such receipt by the Company or its agent is
a date on which the stock transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding business day on which the stock
transfer books of the Company are open. 
The Company shall pay any and all documentary, stamp or similar issue or
transfer taxes payable in respect of the issue or delivery of such Warrant
Shares.  Any new or substitute Warrant
issued under this Section A or any other provision of this Warrant shall be
dated the date of this Warrant.  Upon
exercise of this Warrant, the Company or its warrant agent shall, within 3
business days, cause to be issued and shall promptly deliver upon written order
of the Holder of this Warrant, and in such name or names as such Holder may
designate, a certificate or certificates for the Warrant Shares, which Warrant
Shares shall be issued unlegended and free of any resale restrictions, except
as otherwise provided herein.  If the
Company’s transfer agent is a participant in the DTC FAST system, then such Warrant
Shares shall be delivered electronically by crediting the broker account
designated by the Holder pursuant to the DWAC system.

At any time during
the Exercise Period, the Holder may elect to exercise all or any part of this
Warrant by means of a “cashless exercise” in which the Holder shall be entitled
to receive a certificate (unlegended and free of any resale restrictions when
there is an effective registration statement permitting the sale of the Warrant
Shares by the Company to the Holder in effect or with appropriate legends and
subject to resale restrictions when there is no effective registration
statement permitting the sale of the Warrant Shares by the Company to the
Holder) for the number of Warrant Shares equal to the quotient obtained by dividing
[(A-B) (X)] by (A), where:

(A) = the volume weighted average share price on the business day
during normal trading hours (9:30 a.m. to 4:00 p.m. NY time) immediately
preceding the date of such election as reported by Bloomberg, L.P.;

(B) = the Exercise Price of this Warrant, as adjusted; and

(X) = the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means of a cash
exercise rather than a cashless exercise.

If the Holder
elects to exercise all or any part of this Warrant other than by means of a “cashless
exercise” as provided above when there is no effective registration statement
permitting the sale of the Warrant Shares by the Company to the Holder, then
the Company may, upon any such exercise, issue Warrant Shares to the Holder
with appropriate legends and subject to resale restrictions.

If the Company
fails to deliver to the Holder a certificate or certificates representing the
Warrant Shares pursuant to this Section A by the 3rd business day after
exercise hereof, then the Holder will have the right to rescind such exercise.
In addition to any other rights available to the Holder, if the Company fails
to cause its transfer agent to transmit to the

 

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Holder a certificate or
certificates representing the Warrant Shares pursuant to an exercise on or
before the fifth business day following a Warrant exercise, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the number of
Warrant Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at which the sell
order giving rise to such purchase obligation was executed, and (2) at the
option of the Holder, either reinstate the portion of the Warrant and
equivalent number of Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its exercise and delivery
obligations hereunder.  For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted exercise of shares of Common Stock
with an aggregate sale price giving rise to such purchase obligation of
$10,000, under clause (1) of the immediately preceding sentence the Company
shall be required to pay the Holder $1,000. 
The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In, together with
applicable confirmations and other evidence reasonably requested by the
Company.  Nothing herein shall limit a
Holder’s right to pursue any other remedies available to it hereunder, at law
or in equity including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Company’s failure to timely
deliver certificates representing shares of Common Stock upon exercise of the
Warrant as required pursuant to the terms hereof.

Notwithstanding
anything herein to the contrary, the Holder shall not have the right to
exercise any portion of this Warrant, pursuant to Section A or otherwise, to
the extent that after giving effect to such issuance after exercise, the Holder
(together with the Holder’s affiliates), as set forth on the applicable Notice
of Exercise, would beneficially own in excess of 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
issuance.  For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder
and its affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by the Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or nonconverted
portion of any other securities of the Company (including, without limitation,
any other Warrants) subject to a limitation on conversion or exercise analogous
to the limitation contained herein beneficially owned by the Holder or any of
its affiliates.  Except as set forth in
the preceding sentence, for purposes of this provision, beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act.  To the extent that the limitation contained
in this provision applies, the determination of whether this Warrant is
exercisable (in relation to other securities owned by the Holder) and of which
a portion of this

 

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Warrant is exercisable
shall be in the sole discretion of such Holder, and the submission of a Notice
of Exercise shall be deemed to be such Holder’s determination of whether this
Warrant is exercisable (in relation to other securities owned by such Holder)
and of which portion of this Warrant is exercisable, in each case subject to
such aggregate percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination.  For purposes of this provision, in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Company’s Transfer Agent setting forth the number of shares of
Common Stock outstanding.  In any case,
the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company,
including this Warrant, by the Holder or its affiliates since the date as of
which such number of outstanding shares of Common Stock was reported.

Section B.             Warrant
Register.  This Warrant
will be registered in a register (the “Warrant Register”) to be maintained by
the Company or its agent at its principal office in the name of the
recordholder to whom it has been distributed. 
The Company may deem and treat the registered holder of this Warrant as
the absolute owner thereof (notwithstanding any notation of ownership or other
writing hereon made by anyone), for the purpose of any exercise thereof or any
distribution to the holder thereof and for all other purposes, and the Company
shall not be affected by any notice to the contrary.

Section C.             Reservation
of Shares.  The Company
hereby agrees that at all times there shall be reserved for issuance and
delivery upon exercise of this Warrant all shares of its Common Stock or other
shares of capital stock of the Company from time to time issuable upon exercise
of this Warrant.  All such shares shall
be duly authorized and, when issued upon such exercise in accordance with the
terms of this Warrant, shall be validly issued, fully paid and nonassessable,
free and clear of all liens, security interests, charges and other encumbrances
or restrictions on sale and free and clear of all preemptive rights.

Section D.             Transfer
of Warrant.  Subject to
compliance with applicable federal and state securities laws, this Warrant and
all rights hereunder are transferable, in whole or in part, without charge to
the Holder hereof (except for transfer taxes), upon surrender of this Warrant
properly endorsed.

Section E.              Lost, Mutilated
or Missing Warrant.  Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and (in the case of loss,
theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company, at its
expense, shall execute and deliver a new Warrant of like tenor and date.

Section F.              Rights of
the Holder.  Subject to
applicable law, the Holder shall not, by virtue hereof, be entitled to any
rights or subject to any obligation or liability of a shareholder in the
Company, either at law or equity, and the rights of the Holder are limited to
those expressed in this Warrant.

Section G.             Adjustments.  The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:

 

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1.             Stock
Dividend, Split or Subdivision of Shares. 
If the number of shares of Common Stock outstanding at any time after
the date hereof is increased by a stock dividend payable to all holders of
Common Stock in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date fixed for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Exercise Price shall be appropriately
decreased and the number of shares of Common Stock issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding
shares.

2.             Combination
of Shares.  If, at any time after the
date hereof, the number of shares of Common Stock outstanding is decreased by a
combination or consolidation of the outstanding shares of Common Stock, by
reclassification, reverse stock split or otherwise, then, following the record
date for such combination, the Exercise Price shall be appropriately increased
and the number of shares of Common Stock issuable on exercise of each Warrant
shall be decreased in proportion to such decrease in outstanding shares.

3.             Calculations.  All calculations under this Section shall be
made to the nearest one-tenth of a cent ($.001), or to the nearest one-tenth of
a share, as the case may be.

4.             Merger
and Consolidation.  If at any time
there is a capital reorganization or reclassification of shares of Common
Stock, or a merger or consolidation of the Company with or into another
corporation where the Company is not the surviving corporation, or the sale of
all or substantially all of the Company’s properties and assets to any other
person, then as part of such reorganization, reclassification, merger,
consolidation or sale, lawful provision shall be made so that the Holder shall
thereafter be entitled to receive upon exercise of its rights to purchase
Common Stock, the number of shares of Common Stock, cash, property or shares of
the successor corporation resulting from such reorganization, reclassification,
merger, consolidation or sale, deliverable upon exercise of the rights to
purchase Common Stock hereunder, to which a holder of Common Stock would have
been entitled in such reorganization, reclassification, merger, consolidation
or sale if the right to purchase such Common Stock hereunder had been exercised
immediately prior to such reorganization, reclassification, merger, consolidation
or sale.  In any such event, appropriate
adjustment shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after such
reorganization, reclassification, merger, consolidation or sale so that the
provisions of this Warrant (including Exercise Price and the number of shares
of Common Stock purchasable pursuant to the terms and conditions of this
Warrant) shall be applicable after that event as near as reasonably may be, in
relation to any shares deliverable upon the exercise of the Holder’s rights to
purchase Common Stock pursuant to this Warrant.

5.             Certificate
as to Adjustments.  Upon the
occurrence of each adjustment or readjustment pursuant to this Section G, the
Company, at its own expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish

 

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to each Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based.  The Company
shall, upon the written request, at any time, of any such Holder, furnish or
cause to be furnished to such Holder a like certificate setting forth: (a) such
adjustments and readjustments; (b) the Exercise Price at the time in effect;
and (c) the number of shares and the amount, if any of other property that at
the time would be received upon the exercise of the Warrant.

Section H.             Fractional
Shares.  No fractional
shares of the Company’s Common Stock will be issued in connection with any
exercise hereunder but in lieu of such fractional shares the Company shall make
a cash refund therefor equal in amount to the product of the applicable
fraction multiplied by the Exercise Price paid by the Holder for one Warrant
Share upon such exercise.

Section I.               Notices
of Certain Events. In the event:

1.             the
Company authorizes the issuance to all holders of its Common Stock of rights or
warrants to subscribe for or purchase shares of its Common Stock or of any
other subscription rights or warrants; or

2.             the
Company authorizes the distribution to all holders of its Common Stock of
evidences of its indebtedness or assets (other than cash dividends or
distributions except extraordinary cash dividends or distributions); or

3.             of
any capital reorganization or reclassification of the Common Stock (other than
a subdivision or combination of the outstanding Common Stock and other than a
change in par value of the Common Stock) or of any consolidation or merger to
which the Company is a party or of the conveyance or transfer of all or
substantially all of the properties and assets of the Company; or

4.             of
the voluntary or involuntary dissolution, liquidation or winding-up of the
Company; or

5.             any
other actions would require an adjustment under Section G hereof;

then the Company will
cause to be mailed to the Holder, at least 5 days before the applicable record
or effective date hereinafter specified, a notice stating (A) the date as of
which the holders of Common Stock of record entitled to receive any such
rights, warrants or distributions are to be determined, or (B) the date on
which any such consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record will be entitled to
exchange their shares of Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up.

 

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Section J.              Listing
on Securities Exchanges. 
The Company will list on the Nasdaq Global Market and each national
securities exchange on which any Common Stock may at any time be listed all
shares of Common Stock from time to time issuable upon the exercise of this
Warrant, subject to official notice of issuance upon the exercise of this
Warrant, and will maintain such listing so long as any other shares of its
Common Stock are so listed; and the Company shall so list on the Nasdaq Global
Market and each national securities exchange, and shall maintain such listing
of, any other shares of capital stock of the Company issuable upon the exercise
of this Warrant if and so long as any shares of capital stock of the same class
are listed on the Nasdaq Global Market and such national securities exchange by
the Company.  Any such listing will be at
the Company’s expense.

Section K.             Successors.  All the provisions of this Warrant by or for
the benefit of the Company shall bind and inure to the benefit of its
respective successors and assigns.

Section L.              Headings.  The headings of sections of this Warrant have
been inserted for convenience of reference only, are not to be considered a
part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.

                Section M.             Amendments.  The terms and provisions of this Warrant may
not be modified or amended, or any provisions hereof waived, temporarily or
permanently, except by written consent of the Company and the Holder hereof.

Section N.             Notices.  Unless otherwise provided in this Warrant,
all notices, requests, consents and other communications hereunder shall be in
writing, shall be sent by U.S. Mail or a nationally recognized overnight
express courier postage prepaid, and shall be deemed given one day after being
so sent, or if delivered by hand shall be deemed given on the date of such
delivery to such party, or if sent to such party (in the case of a Holder) at
its address in the Warrant Register that will be maintained by the Company or
its agent in accordance with Section B hereof or (in the case of the Company)
at its address set forth above, Attention: 
General Counsel, or to such other address as is designated by written
notice, similarly given to each other party hereto.

Section O.             Governing
Law.  This Warrant shall
be deemed to be a contract made under the laws of the State of New York and for
all purposes shall be construed in accordance with the laws of said State as
applied to contracts made and to be performed in New York between New York
residents.

 

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IN WITNESS
WHEREOF, the Company has duly caused this Warrant to be signed and attested by
its duly authorized officer and to be dated as of October [__], 2006.

	
  

  	
  PHARMACOPEIA
  DRUG DISCOVERY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

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NOTICE OF
EXERCISE

Date:
___________________, 20__

The undersigned
hereby elects to exercise this Warrant to purchase ____ shares of Common Stock
and hereby makes payment of $____________ in payment of the exercise price
thereof.

Warrant Shares
shall be delivered to the following address:

	
   

  	
   

  	
   

  
	
  

  	
  [Holder’s Name]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
					

 

 

 9Exhibit
10.1

COLLAGENEX PHARMACEUTICALS, INC.

CHANGE OF CONTROL AGREEMENT

This Change of
Control Agreement (the “Agreement”) is made and entered into effective as of
October 16, 2006 (the “Effective Date”), by and between Colin W. Stewart (the “Employee”)
and CollaGenex Pharmaceuticals, Inc., a Delaware corporation (“CollaGenex”).  Certain capitalized terms used in this
Agreement are defined in Section 1 below.

R E C I T A L S

A.            It is expected that CollaGenex from
time to time will consider the possibility of a Change of Control, as defined
in this Agreement.  The Board of
Directors of CollaGenex (the “Board”) recognizes that such consideration can be
a distraction to the Employee and can cause the Employee to consider
alternative employment opportunities.

B.            The Board believes that it is in the
best interests of CollaGenex and its stockholders to provide the Employee with
an incentive to continue his or her employment and to maximize the value of
CollaGenex upon a Change of Control for the benefit of its stockholders.

C.            In order to encourage the Employee
to remain with CollaGenex notwithstanding the possibility of a Change of
Control, the Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee’s termination of employment under
certain circumstances following a Change of Control.

D.            This agreement supersedes any and
all prior agreements that have as their primary purpose the provision of
benefits upon termination of employment under certain circumstances following a
Change of Control.

AGREEMENT

In consideration
of the mutual covenants contained in this Agreement and the continued
employment of Employee by CollaGenex, the parties agree as follows:

 

1.             Definition
of Terms.  The following terms
referred to in this Agreement shall have the following meanings:

(a)           Cause.  “Cause” shall mean (i) any act of dishonesty
taken by the Employee in connection with his or her responsibilities as an
employee which is intended to result in personal enrichment of the Employee,
(ii) Employee’s conviction of a felony that the Board believes has had or will
have a material detrimental effect on CollaGenex’ reputation or business, (iii)
a willful act or willful failure to act by the Employee that constitutes
misconduct and is injurious to CollaGenex, (iv) any material breach by Employee
of any agreement with CollaGenex, after there has been delivered to the
Employee a written notice of breach and Employee has been given a reasonable
opportunity to cure such breach, or (v) continued willful violations by the
Employee of the Employee’s obligations to CollaGenex or responsibilities/duties
as an employee after there has been delivered to the Employee a written demand
for performance from CollaGenex which describes the basis for CollaGenex’
belief that the Employee has not substantially performed his or her duties, and
Employee has been given a reasonable opportunity to cure the violations.

(b)           Change
of Control.  “Change of Control”
shall mean the occurrence of any of the following events:

(i)            the approval by CollaGenex’ shareholders of a merger or
consolidation of CollaGenex with any other corporation, other than a merger or
consolidation which would result in the voting securities of CollaGenex
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of CollaGenex or such surviving entity
outstanding immediately after such merger or consolidation;

(ii)           the approval by CollaGenex’ shareholders of a plan of
complete liquidation of CollaGenex or an agreement for the sale or disposition
by CollaGenex of all or substantially all of CollaGenex’ assets;

(iii)          any “person” (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial
owner” (as defined in Rule 13d-3 under said

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Act), directly or indirectly,
of securities of CollaGenex representing 50% or more of the total voting power
represented by CollaGenex’ then outstanding voting securities; or

(iv)          a
change in the composition of the Board, as a result of which fewer than a
majority of the directors are Incumbent Directors.  “Incumbent Directors” shall mean directors
who either (A) are directors of CollaGenex as of the date hereof, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of those directors whose election or nomination was not
either in connection with any transactions described in subsections (i), (ii),
or (iii), or in connection with an actual or threatened proxy contest relating
to the election of directors of CollaGenex.

(c)          
Involuntary Termination  “Involuntary
Termination” shall mean (i) without the Employee’s express written consent, a
significant reduction of the Employee’s duties, position or responsibilities
relative to the Employee’s duties, position or responsibilities in effect
immediately prior to such reduction, or the removal of the Employee from such
position, duties and responsibilities, unless the Employee is provided with
comparable duties, position and responsibilities;  (ii) without the Employee’s express written
consent, a significant reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) without the Employee’s
express written consent, a reduction by CollaGenex of the Employee’s base
salary as in effect immediately prior to such reduction; (iv) without the
Employee’s express written consent, a material reduction by CollaGenex in the
kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee’s overall
benefits package is significantly reduced; (v) without the Employee’s express
written consent, the relocation of the Employee to a facility or a location
more than fifty (50) miles from his or her current location; (vi) any
termination of the Employee by CollaGenex that is not effected for Cause or for
which the grounds relied upon are not valid; or (vii) the failure of CollaGenex
to obtain the assumption of this Agreement by any successors contemplated in
Section 7 below.

(d)           Termination
Date.  “Termination Date” shall mean
the effective date of any notice of termination delivered by one party to the
other under this Agreement.

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2.             Term
of Agreement.  This Agreement shall
terminate on the earlier of (a) the date that all obligations of the parties
under this Agreement have been satisfied or (b) on the date, prior to a Change
of Control, the Employee is no longer employed by CollaGenex.

3.             At-Will
Employment.  CollaGenex and the
Employee acknowledge that the Employee’s employment is and shall continue to be
at-will, as defined under applicable law. 
If, prior to any Change of Control, the Employee leaves the employment
of CollaGenex either voluntarily or involuntarily for any reason, this
Agreement will terminated by Operation of Section 2 and the Employee shall not
be entitled to any payments, benefits, damages, awards or compensation other
than as may otherwise be established under CollaGenex’ then existing employee
benefit plans or policies at the Termination Date, or as otherwise agreed by
the parties at such time.

4.             Option
Acceleration Upon A Change of Control. 
If a Change of Control occurs while the Employee is employed by
CollaGenex, regardless of whether Employee’s employment relationship with
CollaGenex continues following such Change of Control, then (a) all stock
options granted by CollaGenex to the Employee prior to the Change of Control
shall become fully vested and exercisable as of the date of the Change of
Control to the extent such stock options are outstanding and unexercisable at
the time of such termination, and (b) all stock subject to a right of
repurchase by CollaGenex (or its successor) that was purchased prior to the
Change of Control shall have such right of repurchase lapse with respect to all
of such shares.

5.             Severance
Benefits In the Event of an Involuntary Termination.

(a)           Termination
Following A Change of Control.  If
the Employee’s employment with CollaGenex terminates as a result of an
Involuntary Termination at any time within twenty-four (24) months after a
Change of Control, Employee shall be entitled to the following severance
benefits:

(i)            2.5 (two and one half) times the Employee’s base salary
as in effect as of the Termination Date, plus an amount equal to 2.5 (two and
one half) times the average bonus paid to Employee for the three fiscal years
prior to the Termination Date (pro rated in the event Employee’s duration of
employment by CollaGenex resulted in less than three bonus payments), less
applicable withholding, payable in a lump sum within thirty (30) days of the
Termination Date;

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provided, however, if Employee
has not worked long enough to have received a bonus for a full year of
employment, an amount equal to 2 (two) times the maximum bonus opportunity for
the year in which employment is terminated shall be substituted for the payment
based on average bonus payments referred to above in this subparagraph;

(ii)           the same level of health (i.e., medical, vision and
dental) coverage and benefits as in effect for the Employee on the day
immediately preceding the day of the Employee’s termination of employment for a
period of twenty-four (24) months; and

(iii)          outplacement/administrative support for a period of
eighteen (18) months following the Termination Date, plus reimbursement of up
to Five Thousand Dollars ($5,000) of out of pocket expenses incurred by
Employee in connection with Employee’s job search.

(b)           Termination
Apart from a Change of Control.  If
the Employee’s employment with CollaGenex terminates other than as a result of
an Involuntary Termination within twenty-four (24) months following a Change of
Control, then the Employee shall not be entitled to receive severance or other
benefits as described in this Section 5, but may be eligible for those benefits
(if any) as may then be established under CollaGenex’ then existing severance
and benefits plans and policies at the time of such termination.

Accrued Wages and Vacation; Expenses.  Without regard to the reason for, or the
timing of, Employee’s termination of employment: (i) CollaGenex shall pay the
Employee any unpaid base salary due for periods prior to the Termination Date;
(ii) CollaGenex shall pay the Employee all of the Employee’s accrued and unused
vacation through the Termination Date; and (iii) following submission of proper
expense reports by the Employee, CollaGenex shall reimburse the Employee for
all expenses reasonably and necessarily incurred by the Employee in connection
with the business of CollaGenex prior to the Termination Date.  These payments shall be made promptly upon
termination and within the period of time mandated by law.

6.             Certain
Additional Payments by the Employer. 

(a)           If it shall be determined that any
benefit provided to the Executive or payment or distribution by or for the
account of the Employer to or for the benefit of the

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Executive, whether
provided, paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a “Payment”) would be subject to the excise tax
imposed by Section 4999 of the Code, or any interest or penalties are
incurred by the Executive with respect to such excise tax resulting from any
action or inaction by the Employer (such excise tax, together with any such
interest and penalties, collectively, the “Excise Tax”), then the Executive
shall be entitled to receive an additional payment (a “Gross-Up Payment”)
in an amount such that after payment by the Executive of the Excise Tax and all
other income, employment, excise and other taxes that are imposed on the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the
sum of (A) the Excise Tax imposed upon the Payments and (B) the
product of any deductions disallowed because of the inclusion of the Gross-up
Payment in the Executive’s adjusted gross income and the highest applicable
marginal rate of federal income taxation for the calendar year in which the
Gross-Up Payment is to be made.

(b)           Subject to the provisions of
Section 6(d), all determinations required to be made under this Section 6,
including whether and when a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the Employer’s independent, certified public
accounting firm or such other certified public accounting firm as may be
designated by the Executive and shall be reasonably acceptable to the Employer
(the “Accounting Firm”) which shall provide detailed supporting calculations
both to the Employer and the Executive within 15 business days of the
receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Employer. 
If the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting a change in the ownership or effective
control (as defined for purposes of Section 280G of the Code) of the
Employer, the Executive shall appoint another nationally recognized accounting
firm which is reasonably acceptable to the Employer to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder).  All fees and
expenses of the Accounting Firm shall be borne solely by the Employer.  Any Gross-Up Payment, as determined pursuant
to this Section 6, shall be paid by the Employer to the Executive within
five days of the receipt of the Accounting Firm’s determination.  Any determination by the Accounting Firm
shall be binding upon the Employer and the Executive.  As a result of the uncertainty in the
application of Section 4999 of

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the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that additional Gross-Up Payments shall be required to be made to
compensate the Executive for amounts of Excise Tax later determined to be due,
consistent with the calculations required to be made hereunder (an “Underpayment”).  If the Employer exhausts its remedies
pursuant to Section 6(c) and the Executive is required to make a payment
of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Employer to or for the benefit of the Executive.

(c)           The Executive shall notify the
Employer in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Employer of the Gross-Up
Payment.  Such notification shall be
given as soon as practicable but no later than 10 business days after the
Executive is informed in writing of such claim and shall apprise the Employer
of the nature of such claim and the date on which such claim is requested to be
paid.  The Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on which
it gives such notice to the Employer (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due).  If the Employer notifies the Executive in
writing prior to the expiration of such period that they desire to contest such
claim, the Executive shall:

(i)            give the Employer any information
reasonably requested by the Employer relating to such claim;

(ii)           take such action in connection with
contesting such claim as the Employer shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the Employer;

(iii)          cooperate with the Employer in good
faith effectively to contest such claim; and

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(iv)          permit the Employer to participate in any
proceedings relating to such claim; provided, however, that the Employer shall
bear and pay directly all costs and expenses (including additional interest and
penalties incurred in connection with such contest) and shall indemnify and
hold the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses.

7.             Successors.

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

(b)           Employee’s
Successors.  Without the written
consent of CollaGenex, Employee shall not assign or transfer this Agreement or
any right or obligation under this Agreement to any other person or
entity.  Notwithstanding the foregoing,
the terms of this Agreement and all rights of Employee hereunder shall inure to
the benefit of, and be enforceable by, Employee’s personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.

8.             Notices.

(a)           General.  Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when they are personally delivered or when they are mailed by
U.S. registered or certified mail, return receipt requested and postage
prepaid.  In the case of the Employee,
mailed notices shall be addressed to the Employee at the home address which the
Employee most recently communicated to CollaGenex in writing.  In

 8
 

 

the case of CollaGenex, mailed notices shall
be addressed to its corporate headquarters, and all notices shall be directed
to the attention of its Secretary.

(b)           Notice
of Termination.  Any termination by
CollaGenex for Cause or by the Employee as a result of a voluntary resignation
or an Involuntary Termination shall be communicated by a notice of termination
to the other party to this Agreement given in accordance with this
Section.  Such notice shall (i) indicate
the specific termination provision in this Agreement relied upon, (ii) set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and (iii) specify the
Termination Date (which shall be not more than 30 days after the giving of such
notice).  If the Employee fails to
include in the notice any fact or circumstance which contributes to a showing
of Involuntary Termination, that failure shall not waive any right of the
Employee under this Agreement or preclude the Employee from asserting such fact
or circumstance in enforcing his or her rights under this Agreement.

9.             Miscellaneous
Provisions.

(a)           No
Duty to Mitigate.  The Employee shall
not be required to mitigate the amount of any payment contemplated by this
Agreement, nor shall any such payment be reduced by any earnings that the
Employee may receive from any other source.

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

(c)           Integration.  This Agreement and any outstanding stock
option agreements and restricted stock purchase agreements referenced in this
Agreement represent the entire agreement and understanding between the parties
as to the subject matter of this Agreement and supersede all prior or
contemporaneous agreements, whether written or oral, with respect to this
Agreement and any stock option agreement or restricted stock purchase
agreement.

 9
 

 

(d)           Choice
of Law.  The validity,
interpretation, construction and performance of this Agreement shall be
governed by the internal substantive laws, but not the conflicts of law rules,
of the Commonwealth of Pennsylvania.

(e)           Litigation
Expense.  In the event Employee
commences litigation to enforce rights under this Agreement, and a final
unappealable outcome of the litigation is an award in favor of Employee, in
addition to the amount of the award, CollaGenex will reimburse Employee for the
costs and expenses of the litigation, including reasonable attorney fees.

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

(g)           Employment
Taxes.  All payments made pursuant to
this Agreement shall be subject to withholding of applicable income and
employment taxes.

(h)           Counterparts.  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.

10.           Indemnification.

The Company will,
to the fullest extent permitted by law, indemnify and hold the Employee
harmless from any and all liability arising from the Employee’s service as an
employee, officer or director of the Company and its affiliated companies. To
the fullest extent permitted by law, the Company will advance legal fees and
expenses to the Employee for counsel selected by the Employee in connection
with any litigation or proceeding related to the Employee’s service as an
employee, officer or director of the Company and its affiliates. The terms of
this indemnification provision shall survive the expiration of this Agreement.

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IN WITNESS
WHEREOF, each of the parties has executed this Agreement, in the case of
CollaGenex by its duly authorized officer, as of the day and year first written
above.

	
  COMPANY:

  	
   

  	
  COLLAGENEX PHARMACEUTICALS,

  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Andrew K.W.
  Powell

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Vice
  President, General Counsel

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  EMPLOYEE:

  	
   

  	
  /s/ Colin W. Stewart

  	
   

  
	
   

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Colin W. Stewart

  	
   

  
	
   

  	
   

  	
  Printed Name

  
							

 

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