Document:

Exhibit 10.23

 

Execution Copy

 

LICENSE, CO-DEVELOPMENT

 

AND CO-COMMERCIALIZATION AGREEMENT

 

BY AND BETWEEN

 

ARQULE, INC.

 

and

 

DAIICHI SANKYO CO., LTD

 

December 18, 2008

 

[*] = CERTAIN INFORMATION IN
THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.  CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.  OMITTED TEXT IS INDICATED BY AN “*”.

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  DEFINITIONS

  	
  1

  
	
   

  	
   

  	
   

  
	
  2.

  	
  ADMINISTRATION OF THE
  COLLABORATION

  	
  27

  
	
   

  	
  2.1

  	
  Joint
  Steering Committee

  	
  27

  
	
   

  	
  2.2

  	
  Joint
  Development Committee

  	
  30

  
	
   

  	
  2.3

  	
  Joint Life
  Cycle Management Committee

  	
  33

  
	
   

  	
  2.4

  	
  Joint
  Finance Committee

  	
  34

  
	
   

  	
  2.5

  	
  US Joint Marketing
  Committee

  	
  34

  
	
   

  	
  2.6

  	
  Alliance
  Managers

  	
  38

  
	
   

  	
  2.7

  	
  Decision
  Making

  	
  39

  
	
   

  	
  2.8

  	
  Appointment
  Not an Obligation; No Breach

  	
  39

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  DEVELOPMENT AND
  COMMERCIALIZATION OF PRODUCTS

  	
  40

  
	
   

  	
  3.1

  	
  Implementation
  of Development Program

  	
  40

  
	
   

  	
  3.2

  	
  Identification
  of Back-Up Compounds

  	
  43

  
	
   

  	
  3.3

  	
  Supply of
  Licensed Products for Development and Commercialization

  	
  43

  
	
   

  	
  3.4

  	
  Supply of
  Proprietary Materials

  	
  44

  
	
   

  	
  3.5

  	
  Licensed
  Product Commercialization

  	
  45

  
	
   

  	
  3.6

  	
  Development and
  Commercialization Diligence

  	
  46

  
	
   

  	
  3.7

  	
  Compliance

  	
  46

  
	
   

  	
  3.8

  	
  Cooperation

  	
  47

  
	
   

  	
  3.9

  	
  Global
  Commercialization Coordination

  	
  47

  
	
   

  	
  3.10

  	
  Reports; Information;
  Updates

  	
  47

  
	
   

  	
  3.11

  	
  Development
  Cost Sharing; Reconciliation

  	
  51

  
	
   

  	
  3.12

  	
  Co-Commercialization
  Option

  	
  53

  
	
   

  	
  3.13

  	
  Expansion of
  the Field

  	
  57

  
	
   

  	
  3.14

  	
  Additional
  Cancer Indications

  	
  58

  
	
   

  	
  3.15

  	
  Additional
  Phase 5 Clinical Trials

  	
  60

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  PAYMENTS

  	
  60

  
	
   

  	
  4.1

  	
  Up-front Fee

  	
  60

  
	
   

  	
  4.2

  	
  Milestone
  Payments

  	
  61

  
	
   

  	
  4.3

  	
  Payment of
  Royalties; Royalty Rates; Accounting and Records

  	
  64

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  CONFIDENTIALITY

  	
  69

  
	
   

  	
  5.1

  	
  Confidentiality

  	
  69

  
	
   

  	
  5.2

  	
  Publicity

  	
  70

  
	
   

  	
  5.3

  	
  Publications
  and Presentations

  	
  71

  
	
   

  	
  5.4

  	
  Prior
  Approved Publication

  	
  72

  
	
   

  	
  5.5

  	
  Mechanism of
  Inhibition Information

  	
  72

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  LICENSE GRANTS; EXCLUSIVITY

  	
  72

  
	
   

  	
  6.1

  	
  Licenses

  	
  72

  

 

i

 

	
   

  	
  6.2

  	
  Right to
  Sublicense

  	
  74

  
	
   

  	
  6.3

  	
  No Other
  Rights

  	
  75

  
	
   

  	
  6.4

  	
  Exclusivity

  	
  75

  
	
   

  	
  6.5

  	
  Use of Third
  Party Technology

  	
  76

  
	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  INTELLECTUAL PROPERTY RIGHTS

  	
  77

  
	
   

  	
  7.1

  	
  ARQULE
  Intellectual Property Rights

  	
  77

  
	
   

  	
  7.2

  	
  DS
  Intellectual Property Rights

  	
  77

  
	
   

  	
  7.3

  	
  Joint
  Intellectual Property Rights

  	
  77

  
	
   

  	
  7.4

  	
  Patent
  Coordinators

  	
  78

  
	
   

  	
  7.5

  	
  Inventorship

  	
  78

  
	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  FILING, PROSECUTION AND
  MAINTENANCE OF PATENT RIGHTS

  	
  79

  
	
   

  	
  8.1

  	
  Patent
  Filing, Prosecution and Maintenance

  	
  79

  
	
   

  	
  8.2

  	
  Legal
  Actions

  	
  82

  
	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  TERM AND TERMINATION

  	
  86

  
	
   

  	
  9.1

  	
  Term

  	
  86

  
	
   

  	
  9.2

  	
  Termination

  	
  86

  
	
   

  	
  9.3

  	
  Consequences
  of Termination of Agreement

  	
  88

  
	
   

  	
  9.4

  	
  Surviving
  Provisions

  	
  92

  
	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  REPRESENTATIONS AND WARRANTIES

  	
  92

  
	
   

  	
  10.1

  	
  Mutual
  Representations and Warranties

  	
  92

  
	
   

  	
  10.2

  	
  Additional
  Representations of ARQULE

  	
  93

  
	
   

  	
  10.3

  	
  Covenants of
  DS Relating to Existing License Agreement

  	
  94

  
	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
  INDEMNIFICATION

  	
  95

  
	
   

  	
  11.1

  	
  Indemnification
  of ARQULE by DS

  	
  95

  
	
   

  	
  11.2

  	
  Indemnification
  of DS by ARQULE

  	
  95

  
	
   

  	
  11.3

  	
  Conditions
  to Indemnification

  	
  96

  
	
   

  	
  11.4

  	
  Warranty
  Disclaimer

  	
  96

  
	
   

  	
  11.5

  	
  No Warranty
  of Success

  	
  96

  
	
   

  	
  11.6

  	
  Limited
  Liability

  	
  97

  
	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
  MISCELLANEOUS

  	
  97

  
	
   

  	
  12.1

  	
  Arbitration

  	
  97

  
	
   

  	
  12.2

  	
  Notices

  	
  98

  
	
   

  	
  12.3

  	
  Governing
  Law

  	
  99

  
	
   

  	
  12.4

  	
  Binding
  Effect

  	
  100

  
	
   

  	
  12.5

  	
  Headings

  	
  100

  
	
   

  	
  12.6

  	
  Counterparts

  	
  100

  
	
   

  	
  12.7

  	
  Amendment;
  Waiver

  	
  100

  
	
   

  	
  12.8

  	
  No Third
  Party Beneficiaries

  	
  100

  
	
   

  	
  12.9

  	
  Purposes and
  Scope

  	
  100

  
	
   

  	
  12.10

  	
  Assignment
  and Successors

  	
  101

  
	
   

  	
  12.11

  	
  Force
  Majeure

  	
  101

  

 

ii

 

	
   

  	
  12.12

  	
  Interpretation

  	
  101

  
	
   

  	
  12.13

  	
  Integration;
  Severability

  	
  101

  
	
   

  	
  12.14

  	
  Further
  Assurances

  	
  102

  
	
   

  	
  12.15

  	
  Effective
  Date

  	
  102

  

 

List of Schedules

	
  Schedule 1

  	
  Description of ARQ 197

  	
   

  
	
  Schedule 2

  	
  ARQULE Patent Rights

  	
   

  
	
  Schedule 3

  	
  Material Terms to be Included in Co-Commercialization Agreement

  	
   

  

 

iii

 

LICENSE, CO-DEVELOPMENT AND
CO-COMMERCIALIZATION AGREEMENT

 

This LICENSE, CO-DEVELOPMENT AND CO-COMMERCIALIZATION AGREEMENT (this “Agreement”) is entered into as of December 18, 2008
(the “Execution Date”) and effective as of
the Effective Date (as defined below), by and between ArQule, Inc., a
Delaware corporation with offices at 19 Presidential Way, Woburn, Massachusetts
01801 (“ARQULE”), and Daiichi Sankyo Co., Ltd,
a Japanese company organized under the laws of Japan with offices at 3-5-1
Nihonbashi Honcho, Chuo-ku, Tokyo 103-8426, Japan (“DS”).  Each of DS and ARQULE is sometimes referred
to individually herein as a “Party” and
collectively as the “Parties.”

 

WHEREAS, ARQULE has developed and controls certain technology and
proprietary materials related to its proprietary compound ARQ 197 and is
engaged in the research, development and commercialization of human
therapeutics; and

 

WHEREAS, DS is engaged in the research, development and
commercialization of human therapeutics; and

 

WHEREAS, the Parties desire to enter into a collaboration for the
purpose of developing and commercializing products containing ARQ 197 for the
prevention, diagnosis, delay and treatment of cancer.

 

NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the Parties hereto,
intending to be legally bound, hereby agree as follows:

 

1.                                      DEFINITIONS

 

Whenever used in this Agreement with an initial capital letter, the
terms defined in this Article 1 and in Schedule 3 attached hereto shall have
the meanings specified.

 

1.1                                 “AAA” means the
American Arbitration Association.

 

1.2                                 “Acceptance” means, with respect to a Drug
Approval Application filed for a Product (a) in the United States, the
receipt of written notice from the FDA in accordance with

 

1

 

21 CFR
314.101(a)(2) that such Drug Approval Application is officially “filed”,
and (b) in the European Union, receipt of written notice of acceptance by
the EMEA of such Drug Approval Application for filing under the centralized
European procedure; provided, that, if the centralized filing procedure is not
used, then Acceptance shall be determined upon the acceptance of such Drug
Approval Application by the applicable Regulatory Authority in any Major
European Country.

 

1.3                                 “Adverse Event” means any unfavorable and
unintended change in the structure (signs), function (symptoms), or chemistry
(laboratory data), of the body temporally associated with the use of a Licensed
Product, whether or not considered related to the use of such Licensed
Product.  Changes resulting from normal
growth and development which do not vary significantly in frequency or severity
from expected levels are not Adverse Events.

 

1.4                                 “Affiliate” means, with respect to any
Person, any other Person that, directly or indirectly through one or more
affiliates, controls, or is controlled by, or is under common control with,
such Person.  For purposes of this
definition, “control” means (a) ownership of fifty percent (50%) or more
of the shares of stock entitled to vote for the election of directors in the
case of a corporation, or fifty percent (50%) or more of the equity interests
in the case of any other type of legal entity, (b) status as a general
partner in any partnership, or (c) any other arrangement whereby a Person
controls or has the right to control the board of directors of a corporation or
equivalent governing body of an entity other than a corporation.

 

1.5                                 “Annual Net Sales” means, with respect to
any Calendar Year, the aggregate amount of the Net Sales for such Calendar
Year.

 

1.6                                 “API” means the active pharmaceutical
ingredient known as ARQ 197 and/or any other Collaboration Compound Developed
and Commercialized under this Agreement.

 

1.7                                 “Applicable Laws” means any Federal, state,
local, national and supra-national laws, statutes, rules and regulations,
including any rules, regulations, guidance, guidelines or requirements of
Regulatory Authorities, national securities exchanges or securities listing
organizations, that are in effect from time to time during the Term and
applicable to a particular activity hereunder.

 

2

 

1.8                                 “Approved Non-Cancer Indication” means any
Non-Cancer Indication which the Parties agree to add to the Field pursuant to Section 3.13.

 

1.9                                 “ARQ 197” means the c-Met Inhibitor
Controlled by ARQULE and described more fully on Schedule 1 attached
hereto.

 

1.10                           “ARQULE Background Technology” means any Technology that is
used by ARQULE, or provided by ARQULE for use, in the Development Program or
that is disclosed by ARQULE to DS or of which DS otherwise becomes aware solely
as a result of this Agreement and that is (a) Controlled by ARQULE as of
the Effective Date, or (b) conceived or first reduced to practice by
employees of, or consultants to, ARQULE after the Effective Date other than in
the conduct of ARQULE Development Activities and without the use in any
material respect of any DS Technology, DS Patent Rights or DS Materials.  For purposes of clarity, ARQULE Background
Technology shall not include ARQULE Program Technology or ARQULE’s interest in
Joint Technology, but shall include all Technology relating to the mechanism of
inhibition of ARQ 197.

 

1.11                           “ARQULE Co-Commercialization Activities” means, with respect
to each Co-Commercialized Licensed Product, the Commercialization activities specified to
be conducted by ARQULE in the Co-Commercialization Territory in any Product
Commercialization Plan applicable thereto (or amendment thereto) and/or in the
Co-Commercialization Agreement.

 

1.12                           “ARQULE Cost-Sharing Percentage” means fifty percent (50%).

 

1.13                           “ARQULE Decision” means all
decisions concerning *.

 

1.14                           “ARQULE Development Activities” means all Development
activities (including without limitation all Development activities conducted
with respect to Co-Commercialized Licensed Products) specified to be conducted
by ARQULE in any Global Development Plan (or any amendment thereto), as well as
all Development activities conducted by ARQULE not specified in a Global
Development Plan but approved by the JSC as a Unanimous Decision.

 

3

 

1.15                           “ARQULE Materials” means any Proprietary Materials that are
Controlled by ARQULE and used by ARQULE, or provided by ARQULE for use, in the
Development Program.  For purposes of
clarity, ARQULE Materials shall include the Collaboration Compounds.

 

1.16                           “ARQULE Patent Rights” means any Patent Rights that contain
one or more claims that cover ARQULE Technology, including, but not limited to, the Patent Rights listed in Schedule 2
attached hereto.  For purposes of
clarity, ARQULE Patent Rights includes all ARQULE Program Patent Rights.

 

1.17                           “ARQULE Program Patent Rights” means any Patent Rights
Controlled by ARQULE that contain one or more claims that cover ARQULE Program
Technology.

 

1.18                           “ARQULE Program Technology” means (a) any Product
Technology; (b) any Program Technology that is conceived or first reduced
to practice by employees of, or consultants to, ARQULE, alone or jointly with
any Third Party, without the use in any material respect of any DS Technology,
DS Patent Rights, DS Materials or Joint Technology; and (c) all
Collaboration Compounds.

 

1.19                           “ARQULE Technology” means, collectively, ARQULE Background
Technology and ARQULE Program Technology.

 

1.20                           “Asian Territory” means Japan, China (including Hong Kong),
South Korea and Taiwan.

 

1.21                           “Back-Up Compound” means any c-MET Inhibitor * or any other
c-MET Inhibitor that has been discovered or, is discovered during the Term, by
ARQULE, DS or jointly by ARQULE and DS, (as designated by the JSC, pursuant to Section 3.2,
to use Commercially Reasonable Efforts to deliver a Back-Up Compound) and that
is designated by the JSC for further Development as a Back-Up Compound pursuant
to Section 3.2.

 

1.22                           “Business Day” means any day on which banking institutions in
New York, New York and Tokyo are
open for business.

 

4

 

1.23                           “Calendar Quarter” means the period beginning on the Effective
Date and ending on the last day of the calendar quarter in which the Effective
Date falls, and thereafter each successive period of three (3) consecutive
calendar months ending on March 31, June 30, September 30 or December 31.

 

1.24                           “Calendar Year” means each successive period of twelve (12)
months commencing on January 1 and ending on December 31.

 

1.25                           “Cancer
Indication” means any and all Indications for cancer or
metastasis.

 

1.26                           “Challenge” means any challenge to the validity or
enforceability of any of the ARQULE Patent Rights, including without limitation
by (a) filing a declaratory judgment action in which any of the ARQULE
Patent Rights is alleged to be invalid or unenforceable; (b) citing prior
art pursuant to 35 U.S.C. §301, filing a request for re-examination of any of
the ARQULE Patent Rights pursuant to 35 U.S.C. §302 and/or §311, or provoking
an interference with an application for any of the ARQULE Patent Rights
pursuant to 35 U.S.C. §135; or (c) filing or commencing any
re-examination, opposition, cancellation, nullity or similar proceedings
against any of the ARQULE Patent Rights in any country.

 

1.27                           “Clinical Trial” means a clinical study of a Licensed Product
involving the administration of such Licensed Product to patients for any
Targeted Indication, and includes any Phase 1 Clinical Trial, Phase 2 Clinical
Trial, Phase 3 Clinical Trial, Phase 4 Clinical Trial and Phase 5 Clinical
Trial, as applicable.

 

1.28                           “c-MET Inhibitor” means
ARQ 197 and any therapeutic agent that binds the c-MET RTK and inhibits *.

 

1.29                           “Co-Commercialize” or “Co-Commercialization
Activities” means with respect to any Co-Commercialized Licensed
Product, the joint Detailing of such Co-Commercialized Licensed Product in the
Co-Commercialization Territory using a coordinated sales force consisting of
representatives of both Parties.

 

1.30                           “Co-Commercialization Territory” means the U.S. Territory.

 

5

 

1.31         “Collaboration”
means the alliance of ARQULE and DS established pursuant to this Agreement for
the purposes of Developing Collaboration Compounds and Licensed Products and
Commercializing Licensed Products in the Field in the Territory.

 

1.32         “Collaboration
Compound” means, collectively, ARQ 197 and any Back-Up Compound, as well as any * or other compositions
consisting of ARQ 197 or any Back-Up Compound *.

 

1.33         “Commercially
Reasonable Efforts” means (a) with respect to activities of
ARQULE in the Development Program and/or in the Commercialization of any
Co-Commercialized Licensed Product, the efforts and resources comparable to
those undertaken by ARQULE in pursuing intellectual property protection and the
research, discovery or commercialization of proprietary materials and the
development of product candidates, as applicable, that are not subject to the
Collaboration and that are at an equivalent stage of development or
commercialization and have similar market potential and are at a similar stage
in their lifecycle; and (b) with respect to activities of DS in the
Development Program, the Development of a particular Licensed Product or the
Commercialization of a particular Licensed Product (including any
Co-Commercialized Licensed Product), the efforts and resources comparable to
those undertaken by DS in pursuing intellectual property protection and
development of product candidates and commercialization of products, as
applicable, that are not subject to the Collaboration and that are at an equivalent
stage of development or commercialization and have similar market potential and
are at a similar stage in their lifecycle. 
For purposes of both (a) and (b) above, all relevant factors
as measured by the facts and circumstances at the time such efforts are due
shall be taken into account, including, as applicable and without limitation,
mechanism of action; efficacy and safety; product profile; actual or
anticipated Regulatory Authority approved labeling; and the nature and extent
of market exclusivity (including patent coverage, proprietary position and
regulatory exclusivity; cost, time required for and likelihood of obtaining
Commercialization Regulatory Approval; competitiveness of alternative products
and market conditions; actual or projected profitability and availability of
capacity to manufacture and supply for commercial sale).

 

6

 

1.34         “Commercialization”
or “Commercialize” means any and
all activities directed to the commercialization of a Licensed Product after
Commercialization Regulatory Approval has been obtained, including marketing,
development and scale-up of processes for Manufacture of API and Licensed
Product for commercial sale, Manufacturing for commercial sale, promoting,
detailing, distributing, offering to sell and selling a Licensed Product,
importing a Licensed Product for sale under the Product Trademarks selected by
DS, conducting post-marketing human clinical studies and interacting with
Regulatory Authorities regarding the foregoing. 
When used as a verb, “to Commercialize” and “Commercializing” means to
engage in Commercialization and “Commercialized” has a corresponding meaning.

 

1.35         “Commercialization
Regulatory Approval” means, with respect to any Licensed Product,
the Regulatory Approval required by Applicable Laws to sell such Licensed
Product for use for a Targeted Indication in the Field in a country or region
in the Territory, as well as, to the extent required by Applicable Laws for the
sale of the Licensed Product, Pricing Approvals and government reimbursement
approvals.  For purposes of clarity, (a) “Commercialization
Regulatory Approval” in the United States means final approval of an NDA or
sNDA permitting marketing of the applicable Licensed Product in interstate
commerce in the United States; (b) “Commercialization Regulatory Approval”
in the European Union means marketing authorization for the applicable Licensed
Product granted either by a Regulatory Authority in any Major European Country
or by the EMEA pursuant to Council Directive 2001/83/EC, as amended, or Council
Regulation 2309/93/EEC, as amended, together, if required by Applicable Laws,
with the first Price approval and government reimbursement approval for the
applicable Licensed Product granted by a Regulatory Authority in any Major
European Country; and (c) “Commercialization Regulatory Approval” in any
country outside of the United States or the European Union means the equivalent
approval in such country.

 

1.36         “Committee” means,
collectively, the JSC and the JDC, or any
other committee or sub-committee to be established hereunder.

 

1.37         “Completion”
means, with respect to any Clinical Trial, the date on which all
material data reasonably expected to be derived therefrom has been generated
and the final study report with respect thereto has been finalized.

 

7

 

1.38         “Confidential
Information” means (a) with respect to ARQULE, all tangible
embodiments of ARQULE Technology, (b) with respect to DS, all tangible
embodiments of DS Technology and (c) with respect to each Party, (i) all
tangible embodiments of Joint Technology and (ii) all information,
Technology and Proprietary Materials that are disclosed or provided by or on
behalf of such Party (the “disclosing Party”)
to the other Party (the “receiving Party”)
or to any of the receiving Party’s employees, consultants, Affiliates,
sublicensees or Third Party subcontractors hereunder or of which the receiving
Party or any of its employees, consultants, Affiliates, sublicensees or Third
Party subcontractors has become aware or hereafter becomes aware solely as a
result of this Agreement; provided, that, none of the foregoing shall be
Confidential Information if: (A) as of the date of disclosure, it is known
to the receiving Party or its Affiliates as demonstrated by contemporaneous
credible written documentation, other than by virtue of a prior confidential
disclosure to such receiving Party; (B) as of the date of disclosure it is
in the public domain, or it subsequently enters the public domain through no
fault of the receiving Party; (C) it is obtained by the receiving Party
from a Third Party having a lawful right to make such disclosure free from any
obligation of confidentiality to the disclosing Party; or (D) it is
independently developed by or for the receiving Party without reference to or
use of any Confidential Information of the disclosing Party as demonstrated by
contemporaneous credible written documentation.  For purposes of clarity,
unless excluded from Confidential Information pursuant to the proviso at the
end of the preceding sentence, any scientific, technical or financial
information of a Party that is disclosed at any meeting of any Committee or
disclosed through an audit report shall constitute Confidential Information of
the disclosing Party.  Subject to the
rights of the Parties to make disclosures as set forth in Article 5, the
terms of this Agreement shall constitute Confidential Information of each
Party.  Notwithstanding the proviso (A), (C) and (D) at the end of
the third preceding sentence, all Mechanism of Inhibition Information shall be
ARQULE Confidential Information.

 

1.39         “Control”
or “Controlled” means (a) with
respect to Technology (other than Proprietary Materials) or Patent Rights, the
possession by a Party of the right to grant a license or sublicense to such
Technology or Patent Rights as provided herein without the payment of
additional consideration to, and without violating the terms of, any agreement
or arrangement with, any Third Party and without violating any Applicable Laws
and (b) with respect to Proprietary Materials, the possession by a Party
of the right to supply such Proprietary Materials

 

8

 

to the other
Party as provided herein without the payment of additional consideration to,
and without violating the terms of any agreement or arrangement with, any Third
Party and without violating any Applicable Laws.

 

1.40         “Detail”
means with respect to a Co-Commercialized Licensed Product, an interactive,
live, face-to-face contact of a Representative within the Co-Commercialization
Territory with a medical professional with prescribing authority or other
individuals or entities that have a significant impact or influence on prescribing
decisions, in an effort to increase physician prescribing preferences of such
Co-Commercialized Licensed Product for its approved uses within the
Co-Commercialization Territory.  When
used as an adjective, “Detailing” means of or related to performing Details.

 

1.41         “Development” or “Develop” means, with respect to each Collaboration Compound
and/or Licensed Product (including without limitation any Co-Commercialized
Licensed Product), all non-clinical and clinical activities performed in order
to develop formulations or forms of a Licensed Product and/or to obtain
Regulatory Approval of a Licensed Product (including without limitation any
Co-Commercialized Licensed Product) derived from such Collaboration Compound or
Licensed Product in accordance with this Agreement.  For purposes of clarity, these activities
include, without limitation, in vivo animal testing, preclinical safety
testing, test method development and stability testing, regulatory toxicology
studies, formulation, process development for Manufacturing of API and Licensed
Product for use in Clinical Trials, scale-up of processes for Manufacturing of
API and Licensed Product for use in Clinical Trials, quality assurance/quality
control development, statistical analysis and report writing, clinical trial
design and operations, the conduct of Clinical Trials (including the
Manufacturing API and Licensed Product for use in Clinical Trials), regulatory
toxicology studies, drug metabolism and pharmacokinetics studies, preparing and
filing Drug Approval Applications, the conduct of Regulatory Activities related
to the foregoing, consultation to key
opinion leaders or outside experts (e.g. KOL meeting), and certain activities
to be performed by the commercial function of the Parties for supporting
Development (e.g., market research). 
When used as a verb, “Developing” means to engage in Development and “Developed”
has a corresponding meaning.

 

9

 

1.42         “Development
Costs” means all out-of-pocket costs and internal costs incurred by
a Party (or for its account by an Affiliate or a Third Party) on or after the
earlier of the Execution Date or January 1,
2009 that are generally consistent with the respective Development
activities of such Party in the applicable Global Development Plan and are
attributable to the Development of a Licensed Product.  For purposes of clarity, Development Costs
includes all External Development Costs and all Other Development Costs.

 

1.43         “Development
Program” means the Development activities to be conducted during the
Term with respect to each Collaboration Compound and Licensed Product
(including without limitation Co-Commercialized Licensed Products) pursuant to
the Global Development Plans, with the objective of developing such
Collaboration Compound into a Licensed Product.

 

1.44         “DMF”
means a Drug Master File maintained with the FDA or its equivalent maintained
with a Regulatory Authority in other countries within the Territory.

 

1.45         “Drug
Approval Application” means, with respect to each Licensed Product
in a particular country or region, an application for Commercialization
Regulatory Approval for such Licensed Product in such country or region,
including without limitation: (a) an NDA or sNDA; (b) a counterpart
of an NDA or sNDA in any country or region in the Territory; and (c) all
supplements and amendments to any of the foregoing.

 

1.46         “DS
Background Technology” means any Technology that is used by DS, or
provided by DS for use, in the Development Program or that is disclosed by DS
to ARQULE or of which ARQULE otherwise becomes aware solely as a result of this
Agreement and that is (a) Controlled by DS as of the Effective Date, or (b) conceived
or first reduced to practice by employees of, or consultants to, DS after the
Effective Date other than in the conduct of DS Development Activities and
without the use in any material respect of any Collaboration Compounds, ARQULE
Technology, ARQULE Patent Rights or ARQULE Materials.  For purposes of clarity, DS Background Technology
shall not include DS Program Technology or DS’s interest in Joint Technology.

 

1.47         “DS
Cost-Sharing Percentage” means fifty percent (50%).

 

10

 

1.48         “DS Decision”
means any decision with respect to the *.

 

1.49         “DS
Development Activities” means all Development activities (including
without limitation all Development activities conducted with respect to
Co-Commercialized Licensed Products) specified to be conducted by DS in any
Global Development Plan (or any amendment thereto), as well as all Development
activities conducted by DS not specified in a Global Development Plan but
approved by the JSC as a Unanimous Decision.

 

1.50         “DS
Materials” means any Proprietary Materials that are Controlled by DS
and used by DS, or provided by DS for use, in the Development Program.

 

1.51         “DS Patent
Rights” means any Patent Rights Controlled by DS that contain one or
more claims that cover DS Technology.

 

1.52         “DS Program
Patent Rights” means any Patent Rights Controlled by DS that contain
one or more claims that cover DS Program Technology.

 

1.53         “DS Program
Technology” means any Program Technology that (a) is not ARQULE
Program Technology or Joint Technology and (b) is conceived or first
reduced to practice by employees of, or consultants to, DS, alone or jointly
with any Third Party, without the use in any material respect of any ARQULE
Technology, ARQULE Patent Rights, ARQULE Materials or Joint Technology.

 

1.54         “DS
Technology” means, collectively, DS Background Technology and DS
Program Technology.

 

1.55         “Effective
Date” means the date of
satisfaction of the HSR Conditions with respect to the transactions
contemplated by this Agreement.

 

1.56         “EMEA”
means the European Medicines Agency or any successor agency or authority
thereto.

 

11

 

1.57         “European
Union” or “EU” means
the countries of the European Union, as the European Union is constituted as of
the Effective Date and as it may be expanded from time to time during the Term.

 

1.58         “Execution
Date” means the date set forth in the first recital above.

 

1.59         “Existing
License Agreement” means the License Agreement dated as of April 27,
2007 by and between ARQULE and Kyowa with respect to the Asian Territory.

 

1.60         “External
Development Costs” means any out-of-pocket external Development
Costs incurred by a Party (or for its account by an Affiliate) on or after the
earlier of the Execution Date or January 1, 2009 and that are payable to
any Third Party.  For purposes of clarity,
External Development Costs (a) shall only include the actual amounts paid
by a Party to a Third Party for specific Development activities conducted by
such Third Party applicable to a Licensed Product, including, without
limitation all filing fees required for, and other costs associated with, the
conduct of Regulatory Activities and Clinical Trials applicable to any Licensed
Product; and (b) shall not include any internal costs incurred by a Party
(or for its account by an Affiliate) on or after the earlier of the Execution Date or January 1, 2009
that are attributable to the Development of a Licensed Product.

 

1.61         “FDA”
means the United States Food and Drug Administration or any successor agency or
authority thereto.

 

1.62         “FDCA”
means the United States Federal Food, Drug, and Cosmetic Act, as amended.

 

1.63         “Field” means
the treatment and prevention in humans of all Targeted Indications.

 

1.64         “First
Co-Commercialization Option Period” means, with respect to each
Licensed Product, the period commencing on the Effective Date and continuing
until * (*) days following the date that the Last Patient/Last Visit Notice is
received by ARQULE.

 

1.65         “First
Commercial Sale” means, with respect to a Licensed Product in a
country in the Territory, the first sale, transfer or disposition for value or
for an end user of such Licensed

 

12

 

Product in
such country.  For purposes of clarity,
the use of any Licensed Product in Clinical Trials or the disposal or transfer
of Licensed Products for a bona fide charitable purpose or a commercially
reasonable sampling program, shall not be deemed to be a sale, transfer or
disposition for value or for an end user, with respect to a Licensed Product in
a country in the Territory.

 

1.66         “Force
Majeure” means any occurrence beyond the reasonable control of a
Party that (a) prevents or substantially interferes with the performance
by such Party of any of its obligations hereunder and (b) occurs by reason
of any act of God, flood, fire, explosion, earthquake, strike, lockout, labor
dispute, casualty or accident, or war, revolution, civil commotion, act of
terrorism, blockage or embargo, or any injunction, law, order, proclamation,
regulation, ordinance, demand or requirement of any government or of any
subdivision, authority or representative of any such government.

 

1.67         “Global
Development Plan” means, with respect to each Collaboration Compound
and Licensed Product, the written plan for, and budget applicable to, the
Development activities to be conducted for such Collaboration Compound and
Licensed Product for the Territory,
as such written plan may be amended, modified or updated in accordance with Section 3.1.2.

 

1.68         “Global
Pricing Policy” means the establishment of the range of published
prices for Licensed Products throughout the Territory.

 

1.69         “GLP”
means the then current Good Laboratory Practice Standards promulgated or
endorsed by the FDA or in the case of foreign jurisdictions, comparable
regulatory standards promulgated or endorsed by the applicable Regulatory
Authority, including those procedures contemplated by any Regulatory Filings.

 

1.70         “GMP”
means current Good Manufacturing Practices that apply to the Manufacture of API
and Clinical Product, including, without limitation, the United States
regulations set forth under Title 21 of the United States Code of Federal
Regulations, parts 210, 211 and 600-680, as may be amended from time-to-time,
as well as all applicable guidance published from time-to-time by the FDA.

 

13

 

1.71         “Hatch-Waxman
Act” means the Drug Price Competition and Patent Term Restoration
Act of 1984, as amended.

 

1.72         “HSR Act” means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.

 

1.73         “IND”
means: (a) an Investigational New Drug Application as defined in the FDCA
and regulations promulgated thereunder or any successor application or
procedure required to initiate clinical testing of a Licensed Product in humans
in the United States; (b) a counterpart of an Investigational New Drug
Application that is required in any other country or region in the Territory
before beginning clinical testing of a Licensed Product in humans in such
country or region; and (c) all supplements and amendments to any of the
foregoing.

 

1.74         “Indication”
means any human disease or condition which can be treated, prevented, cured or
the progression of which can be delayed. 
For purposes of clarity, distinctions between human indications,
diseases or conditions with respect to a Licensed Product shall be made by
reference to the World Health Organization International Classification of
Diseases, version 10 (as revised and updated, the “ICD10”).

 

1.75         “Initiation”
means, with respect to a Clinical Trial, the first date that a subject or
patient is dosed in such Clinical Trial.

 

1.76         “Joint
Decision” means (a) any
decision as set forth in Section 3.1.4(b);
(b) any decision set forth in Section 3.14; (c) any decision set
forth in Section 3.15; and (d) any other decision designated
as a Joint Decision herein.

 

1.77         “Joint
Development Committee” or “JDC”
means the committee composed of ARQULE and DS representatives established
pursuant to Section 2.2.

 

1.78         “Joint
Finance Committee” or “JFC”
means the committee composed of ARQULE and DS representatives established
pursuant to Section 2.4.

 

1.79         “Joint Life
Cycle Management Committee” or “JLCMC”
means the committee composed of ARQULE and DS representatives established
pursuant to Section 2.3.

 

14

 

1.80         “Joint
Patent Rights” means Patent Rights that contain one or more claims
that cover Joint Technology.

 

1.81         “Joint Steering Committee”
or “JSC” means the committee
composed of ARQULE and DS representatives established pursuant to Section 2.1.

 

1.82         “Joint
Technology” means any Program Technology, other than Product
Technology and Collaboration Compounds, that is (a) jointly conceived or
reduced to practice by one or more employees of or consultants to DS and one or
more employees of or consultants to ARQULE, (b) conceived or first reduced
to practice solely by one or more employees of, or consultants to, a Party
resulting from the use in any material respect of any (i) Joint Technology
or (ii) Patent Rights, Technology or Proprietary Materials Controlled by
the other Party.

 

1.83         “Key Regulatory Filings” means (a) any IND, NDA, sNDA,
other Drug Approval Applications, application for designation as an “Orphan
Product(s)” under the Orphan Drug Act, for “Fast Track” status under Section 506
of the FDCA (21 U.S.C. § 356) or for a Special Protocol Assessment under Section 505(b)(4)(B) and
(C) of the FDCA (21 U.S.C. § 355(b)(4)(B)) and counterparts to the
foregoing in the EU or any Major European Country, periodic safety update
reports, and briefing documents presented to the FDA, the EMEA or any Regulatory Authority in any Major
European Country, (b) all supplements and amendments to any of the
foregoing, and (c) any
Regulatory Filing relating to the Licensed Product label, Targeted Indications, warnings, side
effects and precautions.

 

1.84         “Kyowa”
means Kyowa Hakko Kirin Co., Ltd.

 

1.85         “Last  Patient/Last Visit”
means the date on which the last patient has his or her last visit (either for
therapeutic or follow-up purposes) during a Phase 3 Clinical Trial.

 

1.86         “Licensed Patent Rights” means any ARQULE Patent
Rights and ARQULE’s interest in Joint Patent Rights that (a) contain one
or more claims that cover any Collaboration Compound or Licensed Product,
including its manufacture or its formulation or a method of its delivery or of
its use, or (b) are necessary or useful for DS to exercise the licenses
granted to it hereunder.

 

15

 

 

 

 

1.87         “Licensed
Product” means any pharmaceutical or medicinal item, substance or
formulation that contains, incorporates, comprises or is derived from a
Collaboration Compound.

 

1.88         “Licensed
Technology” means any ARQULE Technology and ARQULE’s interest in
Joint Technology that (a) relates to any Collaboration Compound or
Licensed Product, including its manufacture or its formulation or a method of
its delivery or of its use; and (b) is necessary or useful for DS to
exercise the licenses granted to it hereunder.

 

1.89         “Major
European Country” means each of the United Kingdom, Germany, France,
Italy and Spain.

 

1.90         “Manufacture”
or “Manufacturing” or “Manufactured” means all operations
involved in the manufacture, receipt, incoming inspection, storage and handling
of raw materials, and the manufacture, processing, purification, packaging,
labeling, warehousing, quality control testing (including in-process release
and stability testing), shipping and release of Collaboration Compounds and/or
Licensed Products.

 

1.91         “Manufacturing
Cost” means with respect to any Licensed Product Manufactured by or
on behalf of a Party, such Party’s costs of Manufacturing such Licensed
Product, which shall be the sum of the following components: (a) direct
costs, including manufacturing labor and materials directly used in
Manufacturing such Licensed Product by such Party or its Affiliates and
allocated supervisory costs of the manufacturing department; (b) direct
labor and allocated supervisory costs of non-manufacturing departments (such as
quality and regulatory) attributable to such Licensed Product; (c) an
allocation of depreciation of facilities, machinery and equipment used in
Manufacture of Licensed Product; (d) toll process and other charges
incurred by such Party or its Affiliates for outsourcing the Manufacture of the
Licensed Product and the cost of supervising and managing the Third Party manufacturers, and of receipt, incoming
inspections, storage, packaging, handling quality control testing and release
of the outsourced items; (e) allocated
general and administrative costs, including, without limitation, purchasing,
human resources, payroll, legal, maintenance, information system and
accounting, attributable to such Licensed Product; and (f) any other reasonable and customary out-of-pocket
costs borne by such Party or its Affiliates for the testing, transport, customs
clearance, duty,

 

16

 

insurance
and/or storage of such Licensed Product. 
For purposes of clarity, all allocations under this Section shall
be based on space occupied or head-count or other activity-based method.

 

1.92         “Manufacturing
Development” means, with respect to a Collaboration Compound and/or
Licensed Product, all activities related to the optimization of a
commercial-grade Manufacturing process for the Manufacture of such
Collaboration Compound and/or Licensed Product including, without limitation,
test method development and stability testing, formulation, validation,
productivity, trouble shooting and next generation formulation, process
development, Manufacturing scale-up, strain improvements, development-stage
Manufacturing, and quality assurance/quality control development.

 

1.93         “Mechanism
of Inhibition Information” means any information or Technology relating to, or arising out of, the
mechanism by which ARQ 197, any Back-Up Compound or any proposed Back-Up
Compound inhibits *, including without limitation, any information or
Technology relating to the binding of ARQ 197, any Back-Up Compound or any
proposed Back-Up Compound to its target.

 

1.94         “MiT Tumor” means
a microphthalmia transcription factor tumor, including clear cell sarcoma,
alveolar soft part sarcoma and renal call carcinoma.

 

1.95         “NDA”
means a New Drug Application, as defined in the FDCA and regulations
promulgated thereunder or any successor application or procedure required to
sell a Product in the United States.

 

1.96         “Net Sales”
means the gross amount billed or invoiced by DS or any of its Affiliates or Sublicensees to Third Parties
throughout the Territory for sales or other dispositions or transfers for value
of Licensed Products less (a) allowances for normal and customary trade,
quantity and cash discounts (including
discounts imposed by way of wholesaler fees) actually allowed and taken, (b) transportation,
insurance and postage charges, if prepaid by DS or any Affiliate or Sublicensee
of DS and included on any such party’s bill or invoice as a separate item, (c) credits,
rebates, returns pursuant to agreements (including, without limitation, managed
care agreements) or government regulations, to the extent actually allowed, and
(d) sales, use and

 

17

 

other
consumption taxes similarly incurred to the extent included on the bill or
invoice as a separate item.  In addition,
Net Sales are subject to the following:

 

(i)            If DS or any of its Affiliates or
Sublicensees effects a sale, disposition or transfer of a Licensed Product to a
customer in a particular country other than on customary commercial terms or as
part of a package of products and services, the Net Sales of such Licensed
Product to such customer shall be deemed to be the “fair market value” of such Licensed Product.  For purposes of this subsection, “fair market
value” shall mean the value that would have been derived had such Licensed
Product been sold as a separate product to another customer in the country
concerned on customary commercial terms.

 

(ii)           In the case of pharmacy incentive programs,
hospital performance incentive program chargebacks, disease management
programs, similar programs or discounts on “bundles” of products, all discounts
and the like shall be allocated among products on the basis on which such
discounts and the like were actually granted or, if such basis cannot be
determined, in proportion to the respective list prices of such products or
such other reasonable allocation method as the Parties shall agree.

 

(iii)          For purposes of clarity, use of any Licensed
Product in Clinical Trials, pre-clinical studies or other research or
development activities, or disposal or transfer of Licensed Products for a bona
fide charitable purpose or a commercially reasonable sampling program, shall
not give rise to any Net Sales.

 

(iv)          Net Sales shall not include sales or
transfers between DS and its Affiliates or Sublicensees unless the Licensed
Product is consumed by the Affiliate or Sublicensee.

 

1.97         “Non-Cancer
Indication” means any Indication that is not a Cancer Indication.

 

1.98         “Ongoing
Regulatory Filing” means the Regulatory Filing with respect to
ARQ-197 filed by or on behalf of ARQULE as of the Effective Date.

 

1.99         “Other
Development Costs” means any Development Costs incurred by a Party
(or for its account by an Affiliate) on or after the earlier of the Execution Date or January 1, 2009
that are not External Development Costs.

 

18

 

1.100       “Patent Rights”
means the rights and interests in and to issued patents and pending patent
applications (which, for purposes of this Agreement, include certificates of
invention, applications for certificates of invention and priority rights) in
any country or region, including all provisional applications, substitutions,
continuations, continuations-in-part, divisions, renewals, all letters patent
granted thereon, and all reissues, re-examinations and extensions thereof, and
all foreign counterparts of any of the foregoing.  Patent Rights shall include pediatric
exclusivity attached to issued patents pursuant to 21 U.S.C. 355a (Section 505A
of the FDCA) and pediatric
exclusivity under analogous laws in countries other than the United States of
America.

 

1.101       “Permitted
Transactions” means any agreement by and between a Party and (a) any
Third Party pursuant to which such Third Party conducts contract services
permitted pursuant to Section 6.2.1 of this Agreement or (b) any
Third Party non-profit or academic institution, which agreement provides for
the grant to the Party entering into the agreement of all rights to Technology
and Patent Rights relating to the use of Collaboration Compounds that are
conceived or reduced to practice by the Third Party non profit or academic
institution under such agreement, with the right to sublicense to the other
Party.

 

1.102       “Person”
means an individual, sole proprietorship, partnership, limited partnership,
limited liability partnership, corporation, limited liability company, business
trust, joint stock company, trust, incorporated association, joint venture or
similar entity or organization, including a government or political
subdivision, department or agency of a government.

 

1.103       “Phase 1
Clinical Trial” means a Clinical Trial in humans conducted in normal
volunteers or in patients, to get information on product safety, tolerability, pharmacological
activity or pharmacokinetics, as more fully defined in Federal Regulation 21
C.F.R. § 312.21(a).  Any clinical trial
in any country that would satisfy the requirements of 21 CFR § 312.21(a) shall
be a Phase 1 Clinical Trial.

 

1.104       “Phase 2
Clinical Trial” means, as to a particular Licensed Product for any
Targeted Indication, a Clinical Trial in humans of the safety and/or dose
ranging and/or efficacy of such Licensed Product, which is prospectively
designed to generate sufficient data (if

 

19

 

successful) to
commence Phase 3 Clinical Trials, as further defined in Federal Regulation 21
C.F.R. § 312.21(b).  Any clinical trial
in any country that would satisfy the requirements of 21 CFR § 312.21(b) shall
be a Phase 2
Clinical Trial.

 

1.105       “Phase 3
Clinical Trial” means, a Clinical Trial in humans of the efficacy
and safety of a Licensed Product, which is prospectively designed to
demonstrate statistically whether such Product is effective and safe for use in
a particular indication in a manner sufficient to file an NDA or other Drug
Approval Application to obtain regulatory approval to market the Licensed
Product, as further defined in Federal Regulation 21 C.F.R. § 312.21(c);
provided that if the results of any Clinical Trial are used as the basis for
filing a Drug Approval Application, then such Clinical Trial will be deemed to
be a Phase 3 Clinical Trial, whether or not it meets the requirements of
21C.F.R §312.21(c).  Any clinical trial
in any country that would satisfy the requirements of 21 CFR § 312.21(c) shall
be a Phase 3 Clinical Trial.

 

1.106       “Phase 4
Clinical Trial” means a post-registrational Clinical Trial conducted
in any country or countries and required as a condition to, or for the
maintenance of, any Regulatory Approval for a Licensed Product in the
Territory.

 

1.107       “Phase 5
Clinical Trial” means a post-registrational Clinical Trial conducted
in any country or countries and not required as a condition to, or for the
maintenance of, any Regulatory Approval for a Licensed Product in the
Territory.  For purposes of clarity,
Phase 5 Clinical Trials are commonly referred to as “marketing” Clinical
Trials.

 

1.108       “Phase 2
Development Activities” means, with respect to each Collaboration Compound,
all clinical Development activities conducted by the Parties in accordance with
any Global Development Plan up to and including the Completion of Phase 2
Clinical Trials, including without limitation, the conduct of activities
related to the Manufacture of Collaboration Compounds for such Phase 2 Clinical
Trials.

 

1.109       “Phase 3
Development Activities” means, with respect to each Collaboration
Compound, all clinical Development activities conducted by the Parties in
accordance with any Global Development Plan with respect to Phase 3 Clinical
Trials of such Collaboration Compound and including the Completion of Phase 3
Clinical Trials, including without limitation,

 

20

 

the conduct of
activities related to the Manufacture of Collaboration Compounds for such Phase
3 Clinical Trials.

 

1.110       “Post-Registration
Activities” means, with respect to each Collaboration Compound or
Licensed Product, all clinical Development activities conducted by the Parties
in accordance with any Global Development Plan for a specific Targeted
Indication after the filing of an NDA with respect to such Collaboration
Compound or Licensed Product for which an NDA has been filed for such Targeted
Indication, up to and including the Completion of Phase 4 Clinical Trials and
Phase 5 Clinical Trials with respect to such Collaboration Compound or Licensed
Product and the conduct of activities related to the Manufacture of
Collaboration Compounds or Licensed Products for such Clinical Trials.

 

1.111       “Pricing”
means the determination of Licensed Product pricing at all levels, including
wholesale, retail, hospital, clinic, health care provider, HMO, non-profit
entity or government entities, including average sales price, average wholesale
price and best price.

 

1.112       “Pricing Approval” means the approval by
the appropriate Regulatory Authority in a country or jurisdiction of the price
and reimbursement for a Licensed Product.

 

1.113       “Primary Detail Equivalent” means (i) if only a Licensed Product is Detailed, one Detail of such
Licensed Product or (ii) if a Licensed Product is Detailed with another
product, * percent (*%) of a Detail if the Licensed Product is Detailed in the
first position and * percent (*%) of a Detail if the Licensed Product is
Detailed in the second position or (iii) if a Licensed Product is Detailed
other than in the first or second position, such percentage of a Detail as the
Parties shall agree upon in the Co-Commercialization Agreement.

 

1.114       “Product
Commercialization Plan” means, with respect to each Licensed Product
(including without limitation any Co-Commercialized Licensed Product), the
written plan for the Commercialization of such Licensed Product in the
Territory (including, without limitation, expected pre-launch and launch
activities (other than for Development),
Manufacturing scale-up, Manufacture, formulation and filling requirements for
such Licensed Product and a detailed strategy, budget and proposed timelines),
as such plan may be amended or updated. 
Each Product Commercialization Plan, and each amendment, modification or
update to

 

21

 

each Product
Commercialization Plan, shall be prepared by, or at the direction of, DS, and
approved by the JSC
at such time as the JSC may from
time to time direct and in any event, on or prior to the initiation of
Commercialization activities with respect to the Licensed Product.

 

1.115       “Product
Technology” means any Program Technology that covers the composition
of matter, synthesis, formulation, delivery, mechanism of action, mechanism of
inhibition and/or use of a Collaboration Compound and/or Licensed Product.

 

1.116       “Product
Trademark” means any trademark or trade name, whether or not
registered, or any trademark application or renewal, extension or modification
thereof, in the Territory, or any trade dress and packaging, in each case that
are used with any Licensed Product by DS, together with all goodwill associated
therewith and promotional materials relating thereto.

 

1.117       “Program
Technology” means any Technology (including, without limitation, any
new and useful process, method of manufacture or composition of matter) or
Proprietary Material (a) that is conceived and first reduced to practice
(actually or constructively) by either Party or jointly by both Parties in the
conduct of the Development Program and/or in the Commercialization of Licensed
Products, or (b) that is conceived and first reduced to practice by
employees of, or consultants to, one Party after the Effective Date other than
in the conduct of Development activities with the use in any material respect
of any Technology, Patent Rights or Proprietary Materials of the other
Party.  For purposes of clarity, Program Technology
shall include any such Technology that is a process for modifying, optimizing,
using, formulating, delivering and/or stabilizing any Collaboration Compound or
Licensed Product.

 

1.118       “Proprietary
Materials” means any tangible chemical, biological or physical
materials (a) that are furnished by or on behalf of one Party to the other
Party in connection with this Agreement, whether or not specifically designated
as proprietary by the transferring Party, or (b) that are otherwise
conceived or reduced to practice in the conduct of the Development Program
and/or in connection with the Commercialization of Licensed Products.

 

1.119       “Regulatory
Activities” means all activities relating to the obtaining and maintaining of any Regulatory
Approval with respect to a Licensed Product, including without

 

22

 

limitation,
the preparation and filing of Regulatory Filings and interacting with
Regulatory Authorities with respect to such Regulatory Filings.

 

1.120       “Regulatory
Approval” means, with respect to any country or region in the
Territory, any approval, product and establishment license, registration or
authorization of any Regulatory Authority required for the Manufacture, use,
storage, importation, exportation, transport, distribution or sale of a Licensed
Product in such country or region.

 

1.121       “Regulatory
Authority” means the FDA, or any counterpart of the FDA outside the
United States, or any other national, supra-national, regional, state or local
regulatory agency, department, bureau, commission, council or other
governmental entity with authority over the distribution, importation,
exportation, Manufacture, production, use, storage, transport, clinical testing
or sale of a Licensed Product.

 

1.122       “Regulatory
Filings” means, collectively: (a) all INDs, NDAs, BLAs,
establishment license applications, DMFs, applications for designation as an “Orphan
Product(s)” under the Orphan Drug Act, for “Fast Track” status under Section 506
of the FDCA (21 U.S.C. § 356) or for a Special Protocol Assessment under Section 505(b)(4)(B) and
(C) of the FDCA (21 U.S.C. § 355(b)(4)(B)) and all other similar filings
(including, without limitation, counterparts of any of the foregoing in any
country or region in the Territory); (b) all supplements and amendments to
any of the foregoing; and (c) all data and other information contained in,
and correspondence relating to, any of the foregoing.

 

1.123       “ROW Territory”
means all of the countries and territories of the world other than the U.S.
Territory and the Asian Territory.

 

1.124       “Royalty Term”
means on a Licensed Product-by-Licensed Product and country-by-country basis,
the period beginning on the date of First Commercial Sale of a Licensed Product
in a country and ending on the later to occur of (a) expiration of the last
to expire of the Licensed Patent Rights or Joint Patent Rights having a Valid
Claim in such country that Covers such Licensed Product or its manufacture,
use, import, offer for sale or sale or (b) * (*) years from the date of
the First Commercial Sale of such Licensed Product in such country, and “Cover” as used herein means, with respect to a Licensed Product,
composition, technology,

 

23

 

process or
method that, in the absence of ownership of or a license granted under a Valid
Claim, the manufacture, use, offer for sale, sale or importation of such
Licensed Product or the practice of such technology, process or method would
infringe such Valid Claim of the Licensed Patent Rights or Joint Patent Rights (or,
in the case of a Valid Claim of the Licensed Patent Rights or Joint Patent
Rights that has not yet issued, would infringe such Valid Claim if it were to
issue).

 

1.125       “Second
Co-Commercialization Option Period” means, with respect to each
Licensed Product, the period commencing on the date that the NDA Filing Notice
is received by ARQULE and continuing for a period of * (*) days thereafter.

 

1.126       “Shared
Development Costs” means, with respect to a Party, * percent (*%) of the aggregate amount of the External
Development Costs incurred by such Party in the conduct of Development
activities.

 

1.127       “sNDA” means
a Supplemental New Drug Application, as defined in the FDCA and applicable
regulations promulgated thereunder.

 

1.128       “Sublicensee”
means any Third Party to which a Party grants a sublicense in accordance with Section 6.2.2.

 

1.129       “Targeted
Indications” means (a) all human Cancer Indications and (b) any Approved Non-Cancer Indications.

 

1.130       “Technology”
means, collectively, inventions, discoveries, improvements, trade secrets and
proprietary methods, whether or not patentable, including without limitation: (a) methods
of Manufacture or use of, and structural and functional information pertaining
to, chemical compounds or other therapeutic agents and (b) compositions of
matter, data, formulations, processes, techniques, know-how and results
(including any negative results).

 

1.131       “Territory”
all countries and territories of the world other than the Asian Territory,
consisting of the U.S. Territory and the ROW Territory.

 

1.132       “Third Party”
means a Person other than DS and ARQULE and their respective Affiliates.

 

24

 

1.133       “Third Party
Data Provider” means IMS Health and/or any other Third Party reasonably
acceptable to the Parties that performs market analyses and provides sales data
for the biotechnology or pharmaceutical industry.

 

1.134       “Unanimous
Decision” means (a) any decision with respect to * and any
amendment to any such *; (b) any decision that would *; (c) any
decision to *; (d) any
decision requiring a Party to *; (e) any
decision applicable to * and any *; (f) any
decision to * and (g) any other decision designated as a Unanimous
Decision herein.

 

1.135       “US Joint Marketing
Committee” or “USJMC” means
the committee composed of ARQULE and DS representatives established pursuant to
Section 2.5.

 

1.136       “U.S.
Territory” means the United States of America and its territories,
including, without limitation, Puerto Rico and the U.S. Virgin Islands.

 

1.137       “Valid Claim”
means (a) any claim of an issued unexpired patent that, (i) has not
been permanently revoked, held invalid, or declared unpatentable or
unenforceable in a decision of a court or other body of competent jurisdiction
that is unappealable or unappealed within the time allowed for appeal, (ii) has
not been rendered unenforceable through disclaimer or otherwise, and (iii) is
not lost through an interference proceeding; or (b) any claim of a pending
patent application that has not been finally cancelled, withdrawn, abandoned or
rejected by any administrative agency or other body of competent jurisdiction,
and which pending patent application has been pending for less than * (*) years
since its earliest priority date.  In the
event subsequent to such * (*) year period, such pending claim is issued as a
claim of an issued and unexpired patent included within (a) above, such
claim shall be reinstated thereafter as a “Valid Claim” in accordance with
clause (a) above.

 

25

 

 

 

1.138       Additional
Definitions.  In addition,
each of the following definitions shall have the respective meanings set forth
in the section of this Agreement indicated below:

 

	
  Definition

  	
   

  	
  Section

  
	
   

  	
   

  	
   

  
	
  Abandoning Party

  	
   

  	
  8.1.5(b)

  
	
  Agreement

  	
   

  	
  Preamble

  
	
  Alliance Manager

  	
   

  	
  2.6.1

  
	
  Appointing Party

  	
   

  	
  2.8

  
	
  ARQULE

  	
   

  	
  Preamble

  
	
  ARQULE Indemnitees

  	
   

  	
  11.1

  
	
  Back-Up Compound

  	
   

  	
  3.2

  
	
  Claims

  	
   

  	
  11.1

  
	
  Combination Product

  	
   

  	
  4.3.1(a)(i)

  
	
  Co-Commercialization Agreement

  	
   

  	
  3.12.1(c)(i)

  
	
  Co-Commercialization Option

  	
   

  	
  3.12.1(b)

  
	
  Co-Commercialization Option Notice

  	
   

  	
  3.12.1(b)

  
	
  Co-Commercialization Plan

  	
   

  	
  3.12.2

  
	
  Co-Commercialized Licensed Product

  	
   

  	
  3.12.1(b)

  
	
  Cost Audited Party

  	
   

  	
  3.11.2(b)

  
	
  Cost Auditing Party

  	
   

  	
  3.11.2(b)

  
	
  Deferred Development Costs

  	
   

  	
  3.11.2(a)(ii)

  
	
  Designated Senior Officers

  	
   

  	
  2.1.5

  
	
  disclosing Party

  	
   

  	
  1.38

  
	
  Dispute

  	
   

  	
  12.1

  
	
  Disputed Matter

  	
   

  	
  2.1.5

  
	
  DS

  	
   

  	
  Preamble

  
	
  DS Indemnitees

  	
   

  	
  11.2

  
	
  DS Manufacturing Know-How

  	
   

  	
  9.3.1(e)(xi)

  
	
  Execution Date

  	
   

  	
  Preamble

  
	
  Filing Party

  	
   

  	
  8.1.4

  
	
  Generic Licensed Product

  	
   

  	
  4.3.1(a)(ii)

  
	
  HSR Conditions

  	
   

  	
  12.15

  
	
  ICD10

  	
   

  	
  1.74

  
	
  Indemnified Party

  	
   

  	
  11.3

  
	
  Indemnifying Party

  	
   

  	
  11.3

  
	
  Indication Proposal Notice

  	
   

  	
  3.13

  
	
  Infringement

  	
   

  	
  8.2.1(a)

  
	
  Infringement Notice

  	
   

  	
  8.2.1(a)

  
	
  INN

  	
   

  	
  8.2.5

  
	
  Last Patient/Last Visit Notice

  	
   

  	
  3.12.1(a)

  
	
  Losses

  	
   

  	
  11.1

  
	
  Maintaining Party

  	
   

  	
  8.1.5(b)

  
	
  Manufacturing Plan

  	
   

  	
  3.3.1

  
	
  Manufacturing Plan Completion Notice

  	
   

  	
  3.3.1

  

 

26

 

	
  MiT Tumor Milestones

  	
   

  	
  4.2.2(d)

  
	
  NDA Filing Notice

  	
   

  	
  3.12.1(a)

  
	
  New Cancer Indication

  	
   

  	
  3.14

  
	
  Non-Filing Party

  	
   

  	
  8.1.4

  
	
  Other Products

  	
   

  	
  4.3.1(a)(i)

  
	
  Party/Parties

  	
   

  	
  Preamble

  
	
  Patent Coordinator

  	
   

  	
  7.4

  
	
  Permitted Employee

  	
   

  	
  5.1.2

  
	
  Phase 3 Costs

  	
   

  	
  3.11.2(a)(ii)

  
	
  Prior CDA

  	
   

  	
  12.13

  
	
  Product-Related
  Data

  	
   

  	
  3.10.3

  
	
  receiving Party

  	
   

  	
  1.38

  
	
  Recipient Party

  	
   

  	
  3.4

  
	
  Regulatory Transition Plan

  	
   

  	
  3.1.4(a)

  
	
  Supply Agreement

  	
   

  	
  3.3.3

  
	
  Term

  	
   

  	
  9.1

  
	
  Third Party Development Technology

  	
   

  	
  6.5.2

  
	
  Total Reimbursable Costs

  	
   

  	
  3.14

  
	
  Transferring Party

  	
   

  	
  3.4

  
	
  Upfront Fee

  	
   

  	
  4.1

  

 

2.             ADMINISTRATION
OF THE COLLABORATION

 

2.1           Joint
Steering Committee.

 

2.1.1        Establishment.  As soon as practicable after the Execution Date, ARQULE and DS
shall establish the Joint Steering Committee. 
The JSC shall have and perform the responsibilities set forth in Section 2.1.4.

 

2.1.2        Membership.  Upon establishment of the JSC, each of ARQULE
and DS shall designate in writing four (4) representatives,
or such other equal number of representatives as the Parties agree,
to the JSC, who shall be senior level personnel.  One (1) representative of each Party
shall be designated as a co-chair of the JSC. 
Each Party shall have the right at any time to substitute individuals,
on a permanent or temporary basis, for any of its previously designated
representatives to the JSC by giving written notice to the other Party.

 

2.1.3        Meetings.

 

(a)           Schedule of Meetings; Agenda.  The JSC shall establish a schedule of times
for regular meetings, taking into account, without limitation, the planning
needs of the

 

27

 

Collaboration
and the responsibilities of the JSC. 
Special meetings of the JSC may be convened by any member upon not less
than thirty (30) days (or, if such meeting is proposed to be conducted by
teleconference, upon not less than ten (10) days) written notice to the
other members; provided, that, (i) notice of any such special meeting may
be waived at any time, either before or after such meeting and (ii) attendance
of any member at a special meeting shall constitute a valid waiver of notice
from such member.  Unless otherwise agreed by the Parties, the JSC
shall meet four (4) times in each Calendar Year.  Regular and special meetings of the JSC may
be held in person or by teleconference or videoconference; provided, that,
meetings held in person shall alternate between the respective offices of the
Parties or at other locations mutually agreeable to the JSC members.  The co-chairs shall prepare and circulate an
agenda for each JSC meeting not later than one (1) week prior to such
meeting.

 

(b)           Quorum; Voting; Decisions.  At each JSC meeting, the presence in person
of the co-chairs shall constitute a quorum provided that minutes of the meeting
are prepared as set forth below.  All members designated by a Party shall have
one (1) collective vote, to be cast by such Party’s co-chair (or his
designee), on all matters before the JSC at such meeting.  All decisions of the JSC shall be made by
unanimous vote.  Alternatively, the JSC
may act by written consent signed by the co-chairs.  Whenever any
action by the JSC is called for hereunder during a time period in which the JSC
is not scheduled to meet, either co-chair shall cause the JSC to meet to take
the action in the requested time period by calling a special meeting or the co-chairs shall act by written
consent.  Representatives of each Party
or of its Affiliates who are not members of the JSC may attend JSC meetings as
guests with the consent of the other Party, which shall not be unreasonably
withheld, conditioned or delayed.

 

(c)           Minutes.  The JSC shall keep minutes of its meetings
that record all decisions and all actions recommended or taken in reasonable
detail.  Drafts of the minutes shall be
prepared and circulated to the members of the JSC within a reasonable time
after the meeting, not to exceed ten (10) Business Days, and the co-chairs
shall alternate responsibility for the preparation and circulation of draft
minutes.  Each member of the JSC shall
have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved
and revised as soon as practicable.  Upon
approval, final minutes of each meeting

 

28

 

shall be
circulated to the members of the JSC by the co-chair with responsibility for
preparing such minutes.

 

(d)           Expenses.  ARQULE and DS shall each bear all expenses of
their respective JSC representatives related to their participation on the JSC
and attendance at JSC meetings.  If any meeting is held off-site, the expense
for using the necessary meeting facility is to be  born by the Party hosting such meeting.

 

2.1.4        Responsibilities.  The JSC shall be responsible for general
oversight of the conduct and progress of the Development Program, and the
global Development and Commercialization of Licensed Products.  Without limiting the generality of the
foregoing, the JSC shall have the following responsibilities:

 

(a)           reviewing and approving the overall goals
and strategy of the Development Program;

 

(b)           reviewing budgets, data, reports or other
information submitted to it by any other Committee from time to time;

 

(c)           overseeing the activities and performance by
each of the other Committees of its respective duties;

 

(d)           reviewing and approving each Global
Development Plan (as a Unanimous Decision) and reviewing Product
Commercialization Plan (as a DS Decision);

 

(e)           appointing the appropriate Committee or
people for review of commercialization issues outside the United States;

 

(f)            appointing the appropriate Committee or
people for review and approval of, or variances from, Global Pricing Policy (as
a Unanimous Decision);

 

(g)           resolving all Committee matters that are in
dispute; and

 

(h)           making such other decisions as may be
delegated to the JSC pursuant to this Agreement or by mutual written agreement
of the Parties during the Term.

 

29

 

2.1.5        Dispute Resolution.  The JSC members shall use reasonable efforts
to reach agreement on any and all matters. 
In the event that, despite such reasonable efforts, agreement on a
particular matter cannot be reached by the JSC within * (*) days after the JSC
first meets to consider such matter (each such matter, a “Disputed Matter”), then, (a) if the
Disputed Matter involves a DS Decision, DS shall have the right to make the
final decision on such Disputed Matter but shall only exercise such right in
good faith after full consideration of the positions of both Parties; (b) if the Disputed Matter involves an
ARQULE Decision, ARQULE shall have the right to make the final decision on such
Disputed Matter but shall only exercise such right in good faith after full consideration
of the positions of both Parties; (c) if the Disputed Matter involves a
Joint Decision or a Unanimous Decision, (i) the co-chairs of the JSC shall
refer such Disputed Matter to the CEO of ARQULE and the senior officer of DS or
its Affiliates to be designated by the CEO of DS (the “Designated Senior Officers”), who shall
promptly initiate discussions in good faith to resolve such Disputed Matter and
(ii) if such Disputed Matter is not resolved by the Designated Senior
Officers within * (*) days after the date the Designated Senior Officers first
met to consider such Disputed Matter or * (*) days after the date the JSC first
met to consider such Disputed Matter, the Disputed Matter shall be resolved in
accordance with Section 12.1; and (d) if the Disputed Matter involves
a Unanimous Decision, such matter must be resolved by the JSC or the Designated
Senior Officers, and shall not be submitted to the arbitration pursuant to Section 12.1.

 

2.2           Joint Development Committee.

 

2.2.1        Establishment.   As
soon as practicable after the Execution
Date, ARQULE and DS shall establish the Joint Development
Committee.  The JDC shall have and
perform the responsibilities set forth in Section 2.2.4.

 

2.2.2        Membership.   Upon establishment of the JDC, each of ARQULE
and DS shall designate in writing five (5) representatives
(representing each key function such as clinical development, regulatory,
commercial, CM&C and project management), or such other number of
representatives as the Parties agree, to the JDC.  Unless otherwise agreed by the Parties, one
representative of each Party shall be designated as a co-chair of the JDC.  Each Party shall have

 

30

 

the right at
any time to substitute individuals, on a permanent or temporary basis, for any
of its previously designated representatives to the JDC by giving written
notice to the other Party.

 

2.2.3        Meetings.

 

(a)           Schedule of Meetings; Agenda.  The JDC shall establish a schedule of times
for regular meetings, taking into account, without limitation, the planning
needs of the Development Program and the responsibilities of the JDC.  Special meetings of the JDC may be convened
by any member upon not less than thirty (30) days (or, if such meeting is
proposed to be conducted by teleconference, upon not less than ten (10) days)
written notice to the other members; provided, that, (i) notice of any
such special meeting may be waived at any time, either before or after such
meeting and (ii) attendance of any member at a special meeting shall
constitute a valid waiver of notice from such member.  In no event shall the JDC meet less
frequently than four (4) times
each Calendar Year.  Regular and special
meetings of the JDC may be held in person or by teleconference or
videoconference; provided, that, meetings held in person shall alternate
between the respective offices of the Parties or at other locations mutually
agreeable to the JDC members.  The
co-chairs shall prepare and circulate an agenda for each JDC meeting not later
than one (1) week prior to such meeting.

 

(b)           Quorum; Voting; Decisions.  At each JDC meeting, the presence in person
of the co-chairs shall constitute a quorum provided that minutes of the meeting
are prepared as set forth below.  All members designated by a Party shall
have one (1) collective vote, to be cast by such Party’s co-chair (or his
designee), on all matters before the JDC at such meeting.  All decisions of the JDC shall be made by
unanimous vote.  Alternatively, the JDC
may act by written consent signed by the co-chairs.  Whenever any action by the JDC is called for
hereunder during a time period in which the JDC is not scheduled to meet,
either co-chair shall cause the JDC to meet to take the action in the requested
time period by calling a special meeting or the co-chairs shall act by written
consent.  Representatives of each Party
or of its Affiliates who are not members of the JDC may attend JDC meetings as
guests with the consent of the other Party, which shall not be unreasonably
withheld, conditioned or delayed.

 

(c)           Minutes.  The JDC shall keep minutes of its meetings
that record all decisions and all actions recommended or taken in reasonable
detail.  Drafts of the minutes

 

31

 

shall be
prepared and circulated to the members of the JDC within a reasonable time
after the meeting, not to exceed ten (10) Business Days, and the Parties
shall alternate responsibility for the preparation and circulation of draft
minutes.  Each member of the JDC shall
have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved
and revised as necessary at the next JDC meeting.  Upon approval, final minutes of each meeting
shall be circulated to the members of the JDC by the co-chair with
responsibility for preparing such minutes.

 

(d)           Expenses.  ARQULE and DS shall each bear all expenses of
their respective JDC representatives related to their participation on the JDC
and attendance at JDC meetings.  If any meeting is held off-site, the expense
for using the necessary meeting facility is to be  born by the Party hosting such meeting.

 

2.2.4        Responsibilities.  The JDC shall be responsible for overseeing
the conduct and progress of the Development Program and the global Development
of Licensed Products.  Without limiting
the generality of the foregoing, the JDC shall have the following
responsibilities:

 

(a)           preparing, or directing the preparation by
the Parties of, the Development Program;

 

(b)           preparing, or directing the preparation by
the Parties of, each Global Development Plan applicable to the Development of
Licensed Products in the Territory, including the budget with respect thereto;

 

(c)           preparing, or directing the preparation by
the Parties of, each amendment to any Global Development Plan applicable to the
Development of Licensed Products in the Territory or the budget with respect
thereto;

 

(d)           approving the Manufacturing Plan to be
proposed by DS for the Manufacture of Licensed Products;

 

32

 

(e)           monitoring the progress of the Development
Program under each Global Development Plan applicable to the Development of
Licensed Products in the Territory and of each Party’s activities thereunder;

 

(f)            reconciling issues between the Parties with
respect to the Parties’ respective share of Shared Development Costs with
respect to Licensed Products;

 

(g)           reviewing and circulating to the Parties
data, reports or other information submitted by either Party with respect to
work conducted under the Development Program;

 

(h)           overseeing the conduct of Clinical Trials
for Licensed Products in the Territory;

 

(i)            reviewing and approving any agreement
entered into by a Party with a Third Party pursuant to Section 6.2.1; and

 

(j)            making such other decisions as may be
delegated to the JDC pursuant to this Agreement or by the JSC or by mutual
written agreement of the Parties during the Term.

 

2.2.5        Dispute
Resolution.  The JDC
members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable
efforts, agreement on a particular matter cannot be reached by the JDC within *
(*) days after the JDC first meets to consider such matter, then the matter
shall be referred to the JSC for resolution pursuant to Section 2.1.5.

 

2.3           Joint
Life Cycle Management Committee.  The JSC may establish the
Joint Life Cycle Management Committee as
a sub-Committee to the JDC, the primary purpose of which shall be to generate
concepts and direct, plan, manage handoff to execution teams and joint
governing committees, and monitor strategies for product innovations for the
Licensed Product(s), including new indications, new combinations, dosing
regimens, new formulations, and line extensions.  The
JLCMC shall also ensure that critical success factors, timelines and issues are
transparent to the JDC.  The JLCMC shall
consist of three (3) representatives, or such

 

33

 

other equal number of
representatives as the Parties agree, from each Party.  The JLCMC shall establish a life-cycle
management plan for the Licensed Product on an annual basis for approval by the
JDC.  In the event of a dispute, the
matter shall be referred to the JDC.  If
the JLCMC is not established, the functions set forth above and below shall be
performed by the JDC.  If established,
the JLCMC shall be responsible for (a) directing, planning and managing the
transition to the applicable Committees of responsibilities with respect to the
Development and Commercialization of Licensed Products and (b) generating and
monitoring strategies for innovation of Licensed Products, including any
strategies related to the pursuit of Non-Cancer Indications, new combinations,
dosing regimens and/or line extensions with respect to Licensed Products.

 

2.4           Joint
Finance Committee.  The
JSC may establish the Joint Finance Committee as a sub-Committee to the JDC,
the primary purpose of which shall be to provide monthly standardized financial
information and analysis to project team and joint governing committees to
facilitate planning, decision making, and controls in the United States.  The JFC shall consist of three (3)
representatives, or such other equal number of representatives as the Parties
agree, from each Party.  In the event of
a dispute, the matter shall be referred to the JDC.  If the JFC is not established, the functions
set forth above and below shall be performed by the JDC, or in the case of
Section 3.11.2(a)(i), by the Party designated by the JSC under such
section.  If established, the JFC shall
be responsible for coordinating the financial information and analyses prepared
by the Parties in connection with the Commercialization of Licensed Products in
the U.S. Territory.

 

2.5           US Joint
Marketing Committee.

 

2.5.1        Establishment.  As soon as practicable following the exercise
by ARQULE of a Co-Commercialization Option with respect to a Co-Commercialized
Licensed Product in accordance with Section 3.12, ARQULE and DS shall establish
the US Joint Marketing Committee which shall have and perform the
responsibilities set forth in Section 2.5.4. 
Unless otherwise agreed by the Parties, the term for the USJMC shall
commence at such time and continue for so long as a Co-Commercialized Product
is being Commercialized.

 

34

 

2.5.2        Membership.  Upon establishment of the USJMC, each of
ARQULE and DS shall designate in writing three (3) representatives, or such other equal number of
representatives as the Parties agree,
to the USJMC.  Unless otherwise agreed by
the Parties, one representative of each Party shall be designated as a co-chair
of the USJMC.  Each Party shall have the
right at any time to substitute individuals, on a permanent or temporary basis,
for any of its previously designated representatives to the JDC by giving
written notice to the other Party.

 

2.5.3        Meetings.

 

(a)           Schedule of Meetings; Agenda.  The USJMC shall establish a schedule of times
for regular meetings, taking into account, without limitation, the planning
needs for the Commercialization of Co-Commercialized Products and the
responsibilities of the USJMC.  Special
meetings of the USJMC may be convened by any member upon not less than thirty
(30) days (or, if such meeting is proposed to be conducted by teleconference,
upon ten (10) days) written notice to the other members; provided, that, (i) notice
of any such special meeting may be waived at any time, either before or after
such meeting and (ii) attendance of any member at a special meeting shall
constitute a valid waiver of notice from such member.  Unless
otherwise agreed by the Parties, the USJMC shall meet two (2) times
each Calendar Year.  Regular and special
meetings of the USJMC may be held in person or by teleconference or
videoconference; provided, that, meetings held in person shall alternate
between the respective offices of the Parties or at other locations mutually
agreeable to the USJMC members.  The
co-chairs shall prepare and circulate an agenda for each USJMC meeting not
later than one (1) week prior to such meeting.

 

(b)           Quorum; Voting; Decisions.  At each USJMC meeting, (i) the presence
in person of at least two (2) members designated by each Party shall
constitute a quorum and (ii) all members designated by a Party shall have
one (1) collective vote on all matters before the USJMC at such
meeting.  All decisions of the USJMC
shall be made by unanimous vote. 
Alternatively, the USJMC may act by written consent signed by the
co-chairs.  Whenever any action by the
USJMC is called for hereunder during a time period in which the USJMC is not
scheduled to meet, the co-chairs shall cause the USJMC to meet to take the
action in the requested time period by calling a special meeting or the
co-chairs shall act by written

 

35

 

consent.  Representatives of each
Party or of its Affiliates who are not members of the USJMC may attend USJMC
meetings as guests with the consent of the other Party, which shall not be
unreasonably withheld, conditioned or delayed.

 

(c)           Minutes.  The USJMC shall keep minutes of its meetings
that record all decisions and all actions recommended or taken in reasonable
detail.  Drafts of the minutes shall be
prepared and circulated to the members of the USJMC within a reasonable time
after the meeting, not to exceed ten (10) Business Days, and the Parties
shall alternate responsibility for the preparation and circulation of draft
minutes.  Each member of the USJMC shall
have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and
revised as necessary at the next USJMC meeting. 
Upon approval, final minutes of each meeting shall be circulated to the
members of the USJMC by the by the co-chair with responsibility for preparing
such minutes.

 

(d)           Expenses.  ARQULE and DS shall each bear all expenses of
their respective USJMC representatives related to their participation on the
USJMC and attendance at USJMC meetings.  If any meeting is held off-site, the expense
for using the necessary meeting facility is to be  born by the Party hosting such meeting.

 

2.5.4        Responsibilities.  The USJMC shall be responsible for overseeing
the conduct and progress of the Co-Commercialization of each Co-Commercialized
Product in the Co-Commercialization Territory. 
Without limiting the generality of the foregoing, the USJMC shall have
the following responsibilities:

 

(a)           preparing or directing the preparation by
the Parties of, each Co-Commercialization Plan for Co-Commercialized Products
in the Co-Commercialization Territory, including the budgets with respect
thereto;

 

(b)           preparing or directing the preparation by
the Parties of each amendment to any Co-Commercialization Plan for
Co-Commercialized Products in the Co-Commercialization Territory or the related
budget with respect thereto;

 

36

 

(c)           determining style guidelines and the
appearance of Co-Commercialized Products in the Co-Commercialization Territory,
including packaging and promotional materials;

 

(d)           determining managed health care strategy and
tactics, including Pricing, rebates, discounts and charge-backs for
Co-Commercialized Products in the Co-Commercialization Territory;

 

(e)           determining the appropriate use of medical
science liaisons in support of the Co-Commercialized Products;

 

(f)            determining the format and quantities of
promotional sales, marketing and educational materials for the
Co-Commercialized Products;

 

(g)           reviewing and approving any proposals for
modifications of existing Co-Commercialized Products, including, without
limitation, new formulations after First Commercial Sale and line extensions;

 

(h)           agreeing upon the design and implementation
of all Co-Commercialized Product launch activities;

 

(i)            monitoring the progress of
Commercialization of Co-Commercialized Products in the Co-Commercialization
Territory under each Co-Commercialization Plan and of each Party’s activities
thereunder;

 

(j)            reviewing and circulating to the Parties
data, reports or other information submitted by either Party with respect to
the Commercialization of Co-Commercialized Products in the Co-Commercialization
Territory;

 

(k)           determining appropriate targets for sales
force staffing and territory mapping purposes, determining the appropriate
level of Detailing effort to be provided by each Party in Co-Commercializing
such Co-Commercialized Product and coordinating the Detailing efforts of both
Parties with respect to Co-Commercialized Products;

 

37

 

(l)            overseeing all recalls, market withdrawals
and any other corrective actions related to Co-Commercialized Products;

 

(m)          receiving and providing to the Parties sales
reports pertaining to Co-Commercialized Products;

 

(n)           approving all Third Parties to be engaged by
either Party to provide representatives to Commercialize Co-Commercialized
Products, which approval shall be reflected in the minutes of the USJMC; and

 

(o)           making such other decisions as may be
delegated to the USJMC pursuant to this Agreement or by the JSC or by mutual
written agreement of the Parties during the Term.

 

2.5.5        Dispute
Resolution.  The USJMC
members shall use reasonable efforts to reach agreement on any and all
matters.  In the event that, despite such
reasonable efforts, agreement on a particular matter cannot be reached by the
USJMC within * (*) days after the USJMC first meets to consider such matter,
then the matter shall be referred to the JSC for resolution pursuant to Section 2.1.5.

 

2.6           Alliance Managers.

 

2.6.1        Appointment.  Each Party shall have the right to appoint a
person who shall oversee interactions between the Parties for all matters
related to the Development and Commercialization of Licensed Products between
Committee meetings (each, an “Alliance
Manager”).  The Alliance
Managers shall have the right to attend all Committee meetings as non-voting
participants and may bring to the attention of the applicable Committee any
matters or issues either of them reasonably believes should be discussed and
shall have such other responsibilities as the Parties may mutually agree in writing.  Each Party may replace its Alliance Manager
at any time or may designate different Alliance Managers with respect to
Development and Commercialization, respectively, by notice in writing to the
other Party.

 

2.6.2        Responsibilities.   The
Alliance Managers, if appointed, shall have the responsibility of creating and
maintaining a constructive work environment within the

 

38

 

Committees and between the Parties for all matters related to the
Collaboration.  Without limiting the
generality of the foregoing, each Alliance Manager shall:

 

(a)           identify and bring to the attention of the
JSC, as applicable, any disputes arising between the Parties related to the
Collaboration in a timely manner, including, without limitation, any asserted
occurrence of a material breach by a Party, and function as the point of first
referral in the resolution of each dispute;

 

(b)           provide a single point of communication for
seeking consensus within the Parties’ respective organizations and between the
Parties with respect to the Collaboration;

 

(c)           plan and coordinate cooperative efforts,
internal communications and external communications between the Parties with
respect to the Collaboration; and

 

(d)           take such steps as may be required to ensure
that Committee meetings occur as set forth in this Agreement, that procedures
are followed with respect to such meetings (including, without limitation, the
giving or proper notice and the preparation and approval of minutes) and that
relevant action items resulting from such meetings are appropriately carried
out or otherwise addressed.

 

2.7           Decision
Making.  All decisions
made and all actions taken by any Committee or the officers of the Parties
pursuant to Section 2.1.5 shall be made or taken in the best interest of
the Collaboration.

 

2.8           Appointment
Not an Obligation; No Breach. 
The appointment of members of any Committee and the Alliance Managers is
a right of each Party and not an obligation and shall not be a “deliverable” as
defined in EITF Issue No. 00-21. 
Each Party shall be free to determine not to appoint members to the JSC,
JDC, and USJMC, and not to appoint an Alliance Manager.  If a Party (an “Appointing
Party”) does not appoint members of a Committee or an Alliance
Manager, it shall not be a breach of this Agreement, nor shall any
consideration be required to be returned, and unless and until such persons are
appointed, the other Party may discharge the roles of the Committee for which
members were not appointed by an Appointing Party.

 

39

 

3.             DEVELOPMENT AND
COMMERCIALIZATION OF PRODUCTS

 

3.1           Implementation of
Development Program.

 

3.1.1        Objectives
of the Development Program. 
The objectives of the Development Program shall be the Development of
Licensed Products in order to obtain, as expeditiously as possible,
Commercialization Regulatory Approval of one or more Licensed Products in the
Field in the Territory pursuant to the Global Development Plans.

 

3.1.2        Preparation
of Global Development Plan. 
A clinical development plan for the Development of the Collaboration
Compound for each Targeted Indication has been agreed upon in writing by the
Parties.  Within * (*) months of the Execution
Date, a Global Development
Plan, which includes at least the Phase 2 Clinical Trials described in such
clinical development plan, will be
prepared by the JDC and approved by the
JSC.  Until a Global Development Plan is
approved by the JSC, the clinical development plan described above shall be the
Global Development Plan.  At least annually, during the Term, a
Global Development Plan for each Collaboration Compound and Licensed Product
and Targeted Indication shall be prepared or updated by the JDC and submitted to the JSC for approval at least * (*) days
before the meeting of the JSC at
which it will be considered.  Each Global
Development Plan shall: (a) set forth *.

 

40

 

3.1.3        Responsibility
for Development of Licensed Products.

 

(a)           Phase 2 Development Activities.  Except as otherwise set forth in the Global
Development Plan, the Parties shall collaborate in the conduct of all Phase 2
Development Activities (including, without limitation the conduct of any Phase
2 Clinical Trials), and each Party shall have the responsibility for the
conduct of all Phase 2 Development Activities (including, without limitation
the conduct of all Phase 2 Clinical Trials) designated as the responsibility of
such Party in any Global Development Plan.

 

(b)           Phase 3 Development Activities.  Except as otherwise set forth in the Global Development Plan, the Parties
shall collaborate in the conduct of all Phase 3 Development Activities
(including, without limitation the conduct of any Phase 3 Clinical Trials), and
each Party shall conduct the Phase 3 Development Activities specified as its
responsibility in any Global Development Plan.

 

(c)           Post-Registration Activities.  Except as otherwise set forth in the Global
Development Plan, the Parties shall collaborate in the conduct of all
Post-Registration Activities (including, without limitation the conduct of any
Phase 4 Clinical Trials and Phase 5 Clinical Trials), and each Party shall
conduct the Post-Registration Activities specified as its responsibility in any
Global Development Plan.

 

(d)           Engagement
of Third Parties.  Each Party shall
have the right to engage Third Party contractors to perform some or all of its
Development Activities in connection with the Development of Licensed Products
hereunder pursuant to Section 6.2.1.

 

(e)           Conduct of
Clinical Trials.  Neither Party shall
conduct any Clinical Trial unless such Clinical Trial is specified to be
conducted in the Global Development Plan, except as set forth in Sections 3.14
and 3.15.

 

3.1.4        Regulatory
Filings; Adverse Event Reporting.

 

(a)           Regulatory Transition Activities.  As soon as practicable, but in any event on
or before * (*) days from the Execution Date, ARQULE shall prepare and submit
to the JDC for its review and approval a mutually-acceptable regulatory
transition plan which shall

 

41

 

describe with reasonable specificity the steps to be followed, and the
timelines applicable to, the transfer by ARQULE of the Ongoing Regulatory
Filing (the “Regulatory Transition Plan”).  As soon as practicable following the JDC’s
approval of the Regulatory Transition Plan, (i) ARQULE shall use
Commercially Reasonable Efforts to conduct the activities described in the
Regulatory Transition Plan and (ii) DS shall provide such assistance as
may be reasonably necessary to complete such activities.

 

(b)           Responsibility for Regulatory Filings.  Subject to the Regulatory Transition Plan and
Section 3.10.6, *.  In addition, DS shall be obligated to
prepare and file a Drug Approval Application based on data from Phase 2
Clinical Trials and/or Phase 3 Clinical Trials if the JSC determines, as a
Joint Decision, that (i) the primary endpoints for efficacy and safety of
such Clinical Trials have been met in all material respects, and (ii) there
is a reasonable likelihood of approval with a label substantially equivalent to
the label that will be requested in the Drug Approval Application, unless the
JSC determines as a Joint Decision to delay the preparation and filing of such
Drug Approval Application in order to conduct additional Clinical Trials to
obtain data to maximize the likelihood of obtaining Commercialization
Regulatory Approval or optimize the label.  ARQULE (i) shall, at DS’s
request, provide to DS, and DS shall have the right to provide to its
Sublicensees or Affiliates, copies of a drug approval application filed by
Kyowa with the Regulatory Authorities in the Field outside the Territory, and
grants to DS and its Sublicensees or Affiliates the right to access, reference,
use and incorporate such drug approval application in the Territory; and (ii) agrees
that ARQULE shall, at DS’s request, provide to DS, and that DS shall have the
right to provide to its Sublicensees or Affiliates, copies of any additional
information or data with respect to the Licensed Product generated by, or on
behalf of, Kyowa and owned or otherwise controlled by Kyowa and necessary or
useful for DS and its Sublicensees or Affiliates to obtain any Regulatory
Approvals or perform such other Regulatory Activities under this Agreement, and
to Develop, Manufacture and Commercialize Licensed Products.  For the avoidance of doubt, DS’s

 

42

 

obligations under this Section 3.1.4(b) shall apply to
Regulatory Filings and Drug Approval Applications for Licensed Products in New
Cancer Indications (as defined in Section 3.14 below).

 

3.2           Identification
of Back-Up Compounds.  If the JSC determines, as a Unanimous
Decision, to seek to identify a Back-up Compound for Development under this Agreement,
and upon agreement by the Parties on a research plan, including the allocation
of research responsibilities, a budget, and responsibility for all costs of
performing such research plan, ARQULE, DS or ARQULE and DS jointly (as
designated by the JSC) will use Commercially Reasonable Efforts to deliver *
(*) or more c-MET Inhibitors in addition to ARQ 197 which may be Developed as a
follow-up compound or simultaneously with ARQ 197 for Targeted Indications
(each such compound, a “Back-Up Compound”).
 The rights and obligations of the
Parties relating to each Back-Up Compound shall be identical to those
applicable to ARQ 197, except as otherwise expressly provided herein.  Either Party shall notify the JSC in writing
in the event it wishes to replace ARQ 197 with a specified c-MET Inhibitor
developed hereunder as a Back-Up Compound or to Develop such c-MET Inhibitor as
a Back-Up Compound in addition to ARQ 197. 
Within * (*) days after its receipt of such notice, the JSC shall review
the data information and determine, as a Unanimous Decision, whether to so
designate the proposed c-MET Inhibitor as a Back-Up Compound.  Subsequent to such designation, as
applicable, any reference to the Licensed Product shall be deemed to include or
to be made to the Back-Up Compound for purposes of this Agreement.

 

3.3           Supply of Licensed
Products for Development and Commercialization.

 

3.3.1        Manufacturing
Plan.   Within * (*) days of the Execution Date, DS
will propose to the JDC a plan for establishing manufacturing capabilities
necessary for DS to manufacture the Licensed Product for use in the Territory
(the “Manufacturing Plan”).  Following approval of the Manufacturing Plan
by the JDC, DS will use Commercially Reasonable Efforts to complete the
activities and establish manufacturing capabilities in accordance with such
Manufacturing Plan.  ARQULE will assist with such activities
by providing DS with technical documentation as may be reasonably requested to
inform DS about the Manufacturing process. 
Notwithstanding the foregoing, DS will (a) retain sole
responsibility

 

43

 

for the implementation and progress of the Manufacturing Plan and (b) provide
ARQULE and the JDC with written notice upon its completion of the activities
contemplated by the Manufacturing Plan (the “Manufacturing
Plan Completion Notice”).

 

3.3.2        Development
Supply.  During the period
commencing on the Effective Date and continuing until the date of receipt by
ARQULE of the Manufacturing Plan Completion Notice, ARQULE will be solely
responsible for supplying DS with API
and/or finished Licensed Product necessary for the conduct of the
Development Program under the Global Development Plan in such quantities as may
be mutually agreed by the Parties.  After receipt of the Manufacturing Plan
Completion Notice, DS will be solely responsible for supplying DS and ARQULE
with API and/or finished Licensed Product necessary for the conduct of the
Development Program under the Global Development Plan in such quantities as may
be mutually agreed by the Parties.

 

3.3.3        Commercial
Supply.  During the period
commencing on the date of receipt by ARQULE of the Manufacturing Plan
Completion Notice and continuing for the remainder of the Term, DS will be
solely responsible, at its sole cost and expense, for supplying all API and
finished Licensed Product necessary for Commercialization of Licensed Products
in the Territory.  In the event that ARQULE requests in
writing that DS supply ARQULE’s Third Party licensees and collaborators with
API and/or unlabeled finished and filled Licensed Product necessary for
Commercialization of Licensed Product outside of the Territory, ARQULE and DS
shall negotiate in good faith and enter into a manufacture and supply agreement
(the “Supply Agreement”) detailing
the terms of supply for such API and/or finished
and filled Licensed Product, which Supply Agreement shall include, without
limitation, the transfer price for such API and/or Licensed Product.

 

3.4           Supply of
Proprietary Materials. 
From time to time during the Term, either Party (the “Transferring Party”) may supply the other Party (the “Recipient Party”) with Proprietary Materials of the
Transferring Party for use in the Development Program.  In connection therewith, each Recipient Party
hereby agrees that (a) it shall not use such Proprietary Materials for any
purpose other than exercising its rights or performing its obligations
hereunder; (b) it shall use such Proprietary Materials only in compliance
with all Applicable Laws; (c) it

 

44

 

shall not transfer any such
Proprietary Materials to any Third Party without the prior written consent of
the Transferring Party, except for (i) the transfer of Licensed Products
for use in Clinical Trials or (ii) in a Permitted Transaction or as
otherwise expressly permitted hereby; (d) the Recipient Party shall not
acquire any right, title or interest in or to such Proprietary Materials as a
result of such supply by the Transferring Party; and (e) upon the
expiration or termination of the Development Program, the Recipient Party
shall, if and as instructed by the Transferring Party, either destroy or return
any such Proprietary Materials that are not the subject of the grant of a
continuing license hereunder.

 

3.5           Licensed Product
Commercialization.

 

3.5.1        Product
Commercialization Plans.  Within * (*) days after the
Initiation of a Phase 3 Clinical Trial with respect to each Licensed Product,
DS shall, with advance input from ARQULE, prepare and provide to the JSC for its review a Product
Commercialization Plan for each such Licensed Product, and shall inform the JSC with respect to all significant
Commercialization decisions to be made with respect to such Licensed
Product.  The Product Commercialization
Plan shall be updated and reviewed
at such times as the JSC may
determine, not less than annually.

 

3.5.2        Responsibility
for Commercialization of Licensed Products.  Subject to ARQULE’s Co-Commercialization
Option, DS shall have the sole right and responsibility, at its sole expense,
for all aspects with respect to the Commercialization of Licensed Products in
accordance with the applicable Product Commercialization Plan, in the Field and
in the Territory and shall have the sole right and responsibility, at its sole
expense, for order fulfillment and distribution of Licensed Product and for
booking all sales of Licensed Product in the Territory, including, without
limitation, the conduct of: (a) all activities relating to the development
and scale-up of processes for Manufacture of API and Licensed Product for
commercial sale and the Manufacture and supply of Licensed Products for
Commercialization; and (b) all marketing, promotion, sales, distribution,
import and export activities (including securing reimbursement, conducting
sales and marketing activities, post-marketing safety surveillance (other than
Phase 4 Clinical Trials or Phase 5 Clinical Trials) and maintaining databases).

 

45

 

3.6                                 Development
and Commercialization Diligence.

 

3.6.1                        DS Diligence.  DS
shall use Commercially Reasonable Efforts during the Term to Develop and
Commercialize Licensed Products for all Targeted Indications in the Field and
in the Territory (including the conduct of those Development activities in the
Territory set forth in any Global Development Plan, the conduct of those
Commercialization activities in the Territory set forth in any Product
Commercialization Plan and/or those Co-Commercialization Activities for which
it is responsible in the Co-Commercialization Territory as set forth in the
Co-Commercialization Agreement) and shall commit such resources (including
employees, consultants, contractors, facilities, equipment and materials) as
are commercially reasonable to conduct such Development activities and
Commercialize such Licensed Products in the Territory.  Notwithstanding the
foregoing, DS’s obligations with respect to the Commercialization of Licensed
Products under this Section 3.6.1 shall also apply to Licensed Products
for New Cancer Indications.

 

3.6.2                        ARQULE Diligence. 
ARQULE shall use Commercially Reasonable Efforts during the Term to
conduct ARQULE Development Activities in the Territory set forth in any Global
Development Plan, if any, and to the extent applicable, all ARQULE
Co-Commercialization Activities for which it is responsible in the
Co-Commercialization Territory as set forth in the Co-Commercialization
Agreement.

 

3.7                                 Compliance.  Each Party shall perform its obligations
under each Global Development Plan and Product Commercialization Plan in good
scientific manner and in compliance in all material respects with all
Applicable Laws.  For purposes of
clarity, with respect to each activity performed under a Global Development
Plan and/or Product Commercialization Plan that will or would reasonably be
expected to be submitted to a Regulatory Authority in support of a Regulatory
Filing or Drug Approval Application, the Party performing such activity shall
comply in all material respects with GLPs, GMPs or Good Clinical Practices (or,
if and as appropriate under the circumstances, International Conference on
Harmonization (ICH) guidance or other comparable regulation and guidance of any
Regulatory Authority in any country or region in the Territory).

 

46

 

3.8                                 Cooperation.  ARQULE and DS shall cooperate in the
performance of the Development Program and, subject to the terms of this
Agreement and any confidentiality obligations to Third Parties, shall exchange
such data, information and materials as is reasonably necessary for the other
Party to perform its obligations under any Global Development Plan and Product
Commercialization Plan.

 

3.9                                 Global Commercialization Coordination.  At meetings of the JSC, representatives of the Parties will interact to ensure that the
Commercialization activities and strategy are consistent on a global
basis.  In connection therewith, ARQULE
will have the right to (i) provide
input into the global strategy applicable to the Commercialization of a
Licensed Product and (ii) review
the status of all significant Regulatory Filings applicable to the
Commercialization of a Licensed Product.

 

3.10                           Reports;
Information; Updates.

 

3.10.1                  Development
Program Reports.  Each
Party shall keep the JDC regularly informed of the progress of its efforts to
Develop Licensed Products in the Field in the Territory.  Without limiting the generality of the
foregoing, each Party shall, on at least a quarterly basis, provide the JDC
with reports in reasonable detail regarding the status of all Clinical Trials,
Manufacturing Development and other activities conducted under the Development
Program, together with all raw data and results generated in each such Clinical
Trial and such additional information that it has in its possession as may be
reasonably requested from time to time by the JDC.

 

3.10.2                  Commercialization
Reports.  Each Party shall
keep the JSC regularly informed of the progress of its efforts to Commercialize
Licensed Products in the Field in the Territory through periodic updates in
advance of each JSC meeting.  Without
limiting the generality of the foregoing, DS shall provide the JSC with annual
written updates to each Product Commercialization Plan, which shall (a) summarize
DS’s efforts to Commercialize Licensed Products, (b) identify the
Regulatory Filings and Drug Approval Applications with respect to such Licensed
Product that DS or any of its Affiliates or Sublicensees have filed, sought or
obtained in the prior * (*) month period or reasonably expect to make, seek or
attempt to obtain in the following * (*) month period and (c) summarize
all clinical and other data

 

47

 

generated by DS with respect to Licensed Products.  In addition, DS shall provide such additional
information that it has in its possession as may be reasonably requested by
ARQULE regarding the Commercialization of any Licensed Product, which request
shall not be made more than * each Calendar Year.

 

3.10.3                  Right
of Access.  Each Party
shall provide the other Party with access to all clinical project plans and
clinical data, results and information derived from or relating to all Clinical
Trials conducted, and all Regulatory Filings prepared, with respect to
Collaboration Compounds and/or Licensed Products (collectively, “Product-Related Data”) in English and at
no additional cost or expense. 
Notwithstanding anything to the contrary in this Agreement, ARQULE (a) may
use, and provide to its Third Party licensees and collaborators, such
Product-Related Data; provided, that, (i) ARQULE
shall only have the right to share such Product-Related Data to its Third Party
collaborators and licensees that have granted ARQULE the reciprocal right to
share with DS clinical data, results and information, and information derived
from or related to Regulatory Filings controlled by such Third Party
collaborators and licensees for use with Licensed Products under this Agreement and (ii) ARQULE shall, upon DS’s request,
use Commercially Reasonable Efforts to coordinate a global clinical trial
targeting both within the Territory and the Asian Territory involving its Third
Party collaborators and DS; (b) may use such Product-Related Data
for the performance of its obligations and exercise of its rights under this
Agreement; and (c) shall have a right of access, a right of reference and
a right to use and incorporate all such Product-Related Data in any Regulatory
Filings and Drug Approval Applications it makes with respect to Licensed
Products.  The Parties shall cooperate so
that such Product-Related Data is transferred to ARQULE as expeditiously as
possible.

 

3.10.4                  Pharmacovigilence;
Adverse Event Reports.

 

(a)                                  Adverse Events.  Subject to the Regulatory Transition Plan, DS
shall have the sole right and responsibility for furnishing timely notice to
the applicable governmental agencies within the Territory of all side effects,
drug interactions and other adverse effects identified or suspected with
respect to the Licensed Products for the Targeted Indications administered,
distributed, marketed and sold under authority of any IND, NDA or Regulatory
Approvals issued by such governmental agencies. 
ARQULE shall provide DS with any

 

48

 

assistance that may be reasonably necessary to comply with all adverse
reaction reporting requirements established by, or required under, any
applicable IND, NDA or Regulatory Approvals and/or Applicable Laws within the
Territory.  In addition to the updates
described in Sections 3.10.1 and 3.10.2, DS shall provide ARQULE with all
Adverse Event information and product complaint information relating to the
Licensed Product as such information is compiled or prepared by DS in the
normal course of business in connection with the Development or
Commercialization of the Licensed Product and, in any event, within time frames
consistent with reporting obligations under Applicable Laws.  DS shall provide such Adverse Event and
product complaint information hereunder to ARQULE’s Alliance Manager unless
ARQULE otherwise notifies DS.  At the
request of ARQULE, DS and ARQULE shall meet with Kyowa to discuss information
sharing and coordination with respect to reporting of Adverse Events and other safety matters.

 

(b)                                 Global Safety Data Base.  Subject to the Regulatory Transition Plan, Adverse
Events related to the use of the Licensed Product in the Territory shall be
recorded in a single, centralized database, which shall be held by DS at DS’s
facility.  The listings of all safety data will be provided to ARQULE and to
Kyowa on the 1st and 15th of every month;
provided, however, that in the event that either the 1st or
the 15th  of a month is not a Business Day, then DS
shall provide such listings on the next Business Day following such date.  Details of safety reporting activities
relating to the Licensed Product in the Territory will be addressed in a pharmacovigilance agreement, which the
Parties shall enter into after the Effective Date.

 

3.10.5                  Review
of Regulatory Filings; Regulatory Meetings.

 

(a)                                  Regulatory Filings.  DS shall (i) consult with ARQULE in good
faith in the preparation of Key
Regulatory Filings for Licensed Products and (ii) consider all
comments of ARQULE in good faith, taking into account the due interests of
ARQULE and the Development and Commercialization of the Licensed Product on a
global basis.  In addition, subject to
any Third Party confidentiality obligations, DS shall (i) provide ARQULE
with drafts of each Key Regulatory
Filing or correspondence pertaining to a Licensed Product and prepared for
submission to the FDA or other Regulatory Authority at the same time as it is
provided to internal reviewers at DS, and
(ii) provide ARQULE with
contemporaneous comments from

 

49

 

internal reviewers at DS regarding such
drafts and (iii) promptly provide ARQULE with copies of the
document or other correspondence received from the FDA or other Regulatory
Authority which relates to
such Key Regulatory Filings
pertaining to any Licensed Product.  DS shall advise ARQULE of the time
period in which DS’s internal reviewers are required to complete their reviews
and if ARQULE has not commented on such Key
Regulatory Filing, or correspondence within such period, then ARQULE
shall be deemed to have no comments on such Key Regulatory Filing or correspondence.  DS shall consider all
comments of ARQULE in good faith, taking into account the best interests of the
Collaboration and of the Development or Commercialization of the Licensed
Product on a global basis.

 

(b)                                 Regulatory Meetings.  DS shall provide ARQULE with at least thirty
(30) days’ advance notice for a face-to-face meeting (and reasonable notice for
telephonic meetings) with the FDA or other Regulatory Authority regarding a
Drug Approval Application relating to, or Regulatory Approval for, any Licensed
Product and ARQULE may provide advice to DS with respect to such meeting and
elect to send up to two (2) persons to participate as an observer (at
ARQULE’s sole cost and expense) in such meeting.

 

3.10.6                  Licensed
Product Recalls.  In the
event that any Regulatory Authority issues or requests a recall or takes
similar action in connection with a Licensed Product, or in the event a Party
reasonably believes that an event, incident or circumstance has occurred that
may result in the need for a recall, market withdrawal or other corrective
action regarding a Licensed Product
either in the Territory or outside the Territory, such Party shall
promptly advise the designated senior officer (the Vice-President of Regulatory
Affairs in the case of ARQULE and the Vice-President of EU/US Quality Assurance,
Daiichi Sankyo Pharma Development in the case of DS (or other respective
designees)) of the other Party thereof by telephone or facsimile.  Except with respect to Co-Commercialized Licensed Products
(for which recalls shall be covered in the Co-Commercialization Agreement),
following such notification, DS shall decide and have control of whether to
conduct a recall or market withdrawal in the Territory (except in the event of
a recall or market withdrawal mandated by a Regulatory Authority, in which case
it shall be required) or to take other corrective action in any country in the
Territory and the manner in which any such recall, market withdrawal or
corrective action shall be conducted; provided, that, DS shall keep ARQULE
regularly informed regarding any such recall, market withdrawal or

 

50

 

corrective action.  All expenses
incurred by DS in connection with any such recall, market withdrawal or
corrective action (including, without limitation, expenses for notification,
destruction and return of the affected Licensed Product and any refund to
customers of amounts paid for such Licensed Product) shall be the sole
responsibility of DS.

 

3.11                           Development
Cost Sharing; Reconciliation.

 

3.11.1                  Development
Cost Sharing.  ARQULE
shall be responsible for (a) * percent (*%) of all Other Development Costs
incurred by ARQULE; (b) the ARQULE Cost-Sharing Percentage of all Shared
Development Costs incurred by DS; and (c) all Shared Development Costs
incurred by ARQULE that DS is not obligated to reimburse pursuant to Section 3.11.2.  DS shall be responsible for (a) *
percent (*%) of all Other Development Costs incurred by DS; (b) the DS
Cost-Sharing Percentage of all Shared Development Costs incurred by ARQULE; and
(c) all Shared Development Costs incurred by DS that ARQULE is not
obligated to reimburse pursuant to Section 3.11.2.

 

3.11.2                  Reconciliation
of Shared Development Costs.

 

(a)                                  Reports;
Reconciliation Payments.

 

(i)                                     Within * following
the end of each Calendar Quarter during the Term, each of ARQULE and DS shall
submit to the other Party, and the Joint Finance Committee if it
is established, a written report setting forth in reasonable detail all
Shared Development Costs incurred by each such Party over such Calendar Quarter
applicable to the conduct of the Development Program.  If the JFC has not been established, the JSC
will designate one Party to prepare a report as set forth below. Within *
following the receipt by the designated
Party or the Finance Committee of such written reports, the designated Party or the Joint Finance Committee shall issue a written consolidated report setting forth in reasonable detail (a) the
calculation of all such Shared Development Costs incurred by both Parties over
such Calendar Quarter, (b) the
calculation of the net amount owed by DS to ARQULE or by ARQULE to DS in order
to ensure the appropriate sharing of such Shared Development Costs, and (c) the cumulative amount of
the Deferred Development Costs to be recovered by DS from milestones and
royalties.  Unless disputed, amounts
reimbursed to

 

51

 

either Party in respect of the Shared Development Costs shall be paid
in U.S. Dollars according to the exchange procedure set forth in Section 4.3.5
within * (*) days of the time the consolidated
report is provided.  In the event
of a dispute concerning reimbursement settlement amounts, the portion in
dispute shall be placed in an interest-bearing escrow account and allocated
between the Parties upon good faith resolution of the dispute or by arbitration
pursuant to Section 12.1.  If
necessary, mutually agreed to adjustments or corrections to the reimbursement
costs shall be made to the consolidated report before it is submitted for
payment.  Otherwise, adjustments shall be made in
the subsequent consolidated report.  Each Party shall have the right to
audit the other Party’s records with respect to such consolidated report, in
accordance with Section 3.11.2(b).

 

(ii)                                  Notwithstanding
anything to the contrary in Section 3.11.2(a)(i), that portion of Shared
Development Costs incurred by DS for which ARQULE is otherwise responsible
under Section 3.11.1 that are attributable to the conduct of any Phase 3
Development Activities (“Phase 3 Costs”)
and that, together with Phase 3 Costs previously borne by ARQULE, exceed
milestone payments and royalties previously paid to ARQULE (“Deferred Development Costs”) shall be
borne by DS; provided, that, notwithstanding the foregoing, the Parties shall
continue to have the responsibility to exchange the reports contemplated by Section 3.11.2
with respect to such Deferred Development Costs.  The aggregate amount of the Deferred
Development Costs borne by DS shall be creditable by DS against the amount of (A) any
milestone payments due and payable by DS to ARQULE on and after the date of
deferral and (B) any royalty payments due and payable by DS to ARQULE on
and after the date of deferral, until the Deferred Development Costs are
recovered in full.

 

(b)                                 Records; Audit
Rights.  Each Party shall keep and
maintain for * (*) years, or such other
period of time as required by Applicable Laws if longer than * (*) years,
complete and accurate records of Shared Development Costs incurred with respect
to Licensed Products in sufficient detail to allow confirmation of same by the
JSC and the other Party.  Each Party (the
“Cost Auditing Party”) shall have
the right for a period of * (*) years, or
such other period of time as required by Applicable Laws if longer than * (*)
years, after such Shared Development Cost is reconciled in accordance
with Section 3.11.2(a) to appoint at its expense an independent
certified public accountant reasonably acceptable to the other Party (the “Cost

 

52

 

Audited Party”) to
audit the relevant records of the Cost Audited Party and its Affiliates to
verify that the amount of such Development Costs was correctly determined.  The Cost Audited Party and its Affiliates
shall each make its records available for audit by such independent certified
public accountant during regular business hours at such place or places where
such records are customarily kept, upon thirty (30) days written notice from
the Cost Auditing Party.  Such audit
right shall not be exercised by the Cost Auditing Party more than once in any
Calendar Year and the records of Shared Development Costs for a given period
may not be audited more than once.  All
records made available for audit shall be deemed to be Confidential Information
of the Cost Audited Party.  The results
of each audit, if any, shall be binding on both Parties absent manifest
error.  In the event there was an error
in the amount of Shared Development Costs reported by the Cost Audited Party
hereunder, (a) if the amount of Shared Development Costs was over
reported, the Cost Audited Party shall promptly (but in any event no later than
* (*) days after the Cost Audited Party’s receipt of the report so concluding)
make payment to the Cost Auditing Party of the Cost Audited Party’s
Cost-Sharing Percentage of over
reported amount and (b) if the amount of Shared Development Costs was
underreported, the Cost Auditing Party shall promptly (but in any event no
later than * (*) days after the Cost Auditing Party’s receipt of the report so
concluding) make payment to the Cost Audited Party of the Cost Audited Party’s
Cost-Sharing Percentage of underreported
amount.  The Cost Auditing Party shall
bear the full cost of such audit unless such audit discloses an over reporting
by the Cost Audited Party of more than * percent (*%) of the aggregate amount
of Shared Development Costs reportable in any Calendar Year, in which case the
Cost Audited Party shall reimburse the Cost Auditing Party for all costs
incurred by the Cost Auditing Party in connection with such audit.

 

3.12                           Co-Commercialization
Option.

 

3.12.1                  Exercise
of Co-Commercialization Option.

 

(a)                                  Notice of Last
Patient/Last Visit and Anticipated NDA Filing.  DS shall give ARQULE written
notice of (i) the date of the Last Patient/Last Visit in the last Phase 3
Clinical Trial for a Licensed Product to be conducted for the first Targeted
Indication prior to the filing of an NDA for such Licensed Product for such
Targeted Indication (“Last Patient/Last

 

53

 

Visit Notice”), and (ii) its
decision to file the NDA covering each Licensed Product for a second Targeted
Indication after the unblinding of the data (if a blinded trial) for such
Targeted Indication but at least * (*) days prior to the anticipated date of
such anticipated filing (the “NDA Filing
Notice”).

 

(b)                                 Exercise of
Co-Commercialization Option.  During
the First Co-Commercialization Option Period, or in the event that ARQULE does
not exercise the Co-Commercialization Option during the First
Co-Commercialization Option Period, the Second Co-Commercialization Option
Period, ARQULE shall have the option (the “Co-Commercialization
Option”), in its sole discretion, to Co-Commercialize any Licensed
Product in the Co-Commercialization Territory by providing written notice to DS
(the “Co-Commercialization Option Notice”)
which notice shall identify the Licensed Product (each, such Licensed Product,
a “Co-Commercialized Licensed Product”).
 If
ARQULE exercises its Co-Commercialization Option with respect to any Licensed
Product, (i) such Licensed Product will be deemed to be a
Co-Commercialized Licensed Product for purposes of this Agreement, and (ii) the
Parties shall (A) negotiate a Co-Commercialization Agreement for such
Co-Commercialized Licensed Product in accordance with Section 3.12.1(c) and
(B) form the USJMC in accordance with Section 2.5.

 

(c)                                  Negotiation of
Co-Commercialization Agreement.

 

(i)                                     Preparation,
Negotiation, Execution and Delivery. 
Within * (*) days after ARQULE provides a Co-Commercialization Option
Notice, the Parties shall commence the preparation of a Co-Commercialization
Agreement (the “Co-Commercialization
Agreement”) which shall (1) provide for the terms applicable to
such Co-Commercialization; (2) conform in all material respects with the
terms and conditions set forth in this Agreement and on Schedule 3
attached hereto; and (3) include such additional provisions as are usual
and customary for inclusion in a co-promotion agreement between companies in
the pharmaceutical industry.  For
purposes of clarity, any additional terms negotiated by the Parties for
inclusion in the Co-Commercialization Agreement shall supplement and shall not
materially expand, limit or change the terms set forth in this Agreement and on
Schedule 3 attached hereto.  The
Parties hereby acknowledge and agree that the Co-Commercialization Agreement
shall provide that (1)

 

54

 

the Parties shall share Co-Commercialization Activities with respect to
such Co-Commercialization Licensed Product in the Co-Commercialization
Territory with ARQULE providing, on an Indication-by-Indication basis, at its
option, up to *
percent (*%) (which may include no
Primary Detail Equivalents for a particular Targeted Indication) of all required
Primary Detail Equivalents, but no more than * (*) representatives
unless a Licensed Product is approved for * or more Targeted Indications,
pursuant to the Co-Commercialization Plan; (2) DS shall be responsible for all account management of community, academic
and Veterans hospitals and associated activities, including, but not limited
to, communication with hospital pharmacy and the pharmacy and therapeutics
committee, formulary management and contracting; (3) DS shall
reimburse ARQULE for the fully-burdened cost incurred by ARQULE in conducting
such Co-Commercialization Activities, but in no event shall such rate be in excess of the fully burdened cost
to DS of employing or otherwise
engaging its own representatives who detail its oncology products in the
Co-Commercialization Territory (including incentive compensation for the ARQULE
sales personnel on the same basis as the incentive compensation of DS personnel
in the Co-Commercialization Territory); (4) such
ARQULE sales personnel shall engage in Detailing the Co-Commercialized
Licensed Product and any other product
being co-promoted by ARQULE and DS in the first position, but shall not expend
more than * percent (*%) of the detailing effort on any other products unless
the Parties agree, and shall not promote any other product that is
directly competitive with the Co-Commercialized
Licensed Product or any other product of
DS; provided, that in the event ARQULE’s sales personnel promote any product
that is not being co-promoted by ARQULE and DS, there shall be a reduction in
DS’s reimbursement of ARQULE’s cost that is proportional to the percentage of
detailing effort expended on products that are not being co-promoted by ARQULE
and DS; and (5) the Parties shall create the USJMC with equal
representation to oversee the global Commercialization of the Licensed Product,
including the Co-Commercialization of the Co-Commercialized Licensed Product in
the Co-Commercialization Territory. 
Disputes shall be referred to the JSC for resolution in accordance with Section 2.1.5.
 For
clarity, in the event that ARQULE exercises the Co-Commercialization Option,
the Parties shall negotiate and execute the Co-Commercialization Agreement as
set forth herein and form the
USJMC as set forth in Section 2.5, whether or not ARQULE will provide any
Primary Detail Equivalents for any particular Indication.  The
Parties shall negotiate the Co-Commercialization Agreement in good faith and
with sufficient diligence as is required to

 

55

 

execute and deliver the Co-Commercialization Agreement within * (*)
days after ARQULE provides the Co-Commercialization Option Notice.

 

(ii)                                  Dispute Resolution.  In the event the Parties fail to execute and
deliver the Co-Commercialization Agreement within the * (*) day period
described in Section 3.12.1(c)(i), the Parties shall (1) use
reasonable efforts to complete such negotiations and to execute and deliver the
Co-Commercialization Agreement as soon as possible after such * (*) day period
and (2) without limiting the generality of the foregoing, after the
expiration of such * (*) day period, each produce a list of issues on which
they have failed to reach agreement and submit its list to the JSC to be
resolved in accordance with Section 2.1.5.

 

3.12.2                          Co-Commercialization
Plan.  As soon as
practicable following the exercise by ARQULE of a Co-Commercialization Option,
the USJMC shall prepare a co-commercialization plan (the “Co-Commercialization Plan”) for each
Co-Commercialized Licensed Product for the Co-Commercialization Territory which
shall include, but not be limited to, (a) demographics and market dynamics,
market strategies, and estimated launch date of such Co-Commercialized Licensed
Product in the Co-Commercialization Territory, (b) a sales and expense
forecast (including at least five (5) years of estimated sales and
expenses), manufacturing plans and targeted label claims for such
Co-Commercialized Licensed Product in the Co-Commercialization Territory, (c) a
marketing plan (including five (5) year advertising and Detailing
forecasts and Pricing strategies) for such Co-Commercialized Licensed Product
in the Co-Commercialization Territory, (d) a five (5) year budget for
such Co-Commercialized Licensed Product for the Co-Commercialization Territory,
and (e) sales force strategy, training plans, territorial divisions and
allocation of targeted audience.  The
USJMC shall use reasonable commercial efforts to prepare such
Co-Commercialization Plan within *
(*) days after ARQULE’s exercise
of its Co-Commercialization Option.  The
Co-Commercialization Plan shall be updated by the USJMC not less than annually.  The Co-Commercialization Plan and annual
written updates thereto shall be approved by the USJMC by a date to be
established by the USJMC taking into account DS’s and ARQULE’s annual budget
planning calendars, but no later than December 31 of each Calendar Year.

 

56

 

3.12.3         Labeling.  All product labels for Co-Commercialized
Licensed Products shall include, in equal prominence, the names of both DS and
ARQULE.  The JSC shall have the
responsibility of meeting not less frequently than annually and deciding
whether changes in the particular appearance in labeling of packaging and
containers of Co-Commercialized Licensed Products or in the product information
are required.

 

3.12.4         Cooperation; Additional Information.  In connection with ARQULE’s consideration of
the exercise of a Co-Commercialization Option with respect to each Licensed
Product, DS shall provide ARQULE with any information Controlled by DS and
reasonably requested by ARQULE that is necessary or useful to ARQULE in
determining whether to exercise such Co-Commercialization Option.

 

3.13         Expansion of the Field.  If at any time during the Term of this
Agreement, either Party desires to add one or more Non-Cancer Indications to
the Field that it wishes to pursue with respect to a Collaboration Compound or
Licensed Product for purposes of this Agreement, such Party shall give written
notice to the other Party, specifying the particular Collaboration Compound or
Licensed Product and Non-Cancer Indication (each, an “Indication
Proposal Notice”).  The other
Party shall consider each such Indication Proposal Notice in good faith and
shall, on or before * (*) days from the date of the Indication Proposal Notice,
provide the proposing Party with a written response as to whether or not it is
willing to add such Non-Cancer Indication to the Field, which consideration
shall include a determination by the other Party in good faith as to whether it
Controls the Technology and Patent Rights applicable to such Collaboration
Compound or Licensed Product for such Non-Cancer Indication.  If the other Party indicates in its response
that it is willing to add such Non-Cancer Indication to the Field, the Parties
shall for a period of * (*) days from the date the proposing Party receives the
written response from the other Party negotiate in good faith to complete and
execute any amendment to this Agreement that may be required to add the
Non-Cancer Indication to the definition of Field for purposes of this
Agreement, including, without limitation, the inclusion of any amendments to the
applicable Global Development Plans, and/or Product Commercialization Plans, as
well as any amendments to the compensation payable by DS pursuant to Article 4,
that may be required to add such Non-Cancer Indication to the Field; provided,
that, (a) if any such Non-Cancer Indication is added to the Field, the
royalties for such Non-Cancer Indication will be the same as 

 

57

 

for the other Targeted
Indications and (b) such Non-Cancer Indication will be included as a Targeted
Indication for purposes of determining whether a Milestone Event has been
achieved in Section 4.2.1.  Upon the
execution of such amendment by the Parties, any Non-Cancer Indication on which
the Parties so agree shall be referred to herein as an “Approved Non-Cancer
Indication” for purposes of this Agreement.

 

3.14         Additional Cancer
Indications.  Either Party
may at any time propose to the JDC a Clinical Trial of a Licensed Product for a
Cancer Indication for the treatment of a type of tumor that is not already
included in the Global Development Plan, and is not a type of tumor that is
within the scope of an approved Cancer Indication for a Licensed Product that
has received Commercialization Regulatory Approval (a “New Cancer
Indication”).  The JDC shall
consider such proposal and if such Clinical Trial is not approved by the JDC
within * (*) days of the date that such trial was proposed to the JDC (or in
the event such trial was proposed to the JDC other than at a meeting of the
JDC, within * (*) days of the date that the JDC first meets (whether in person
or by teleconference) following the date such trial was proposed to the JDC),
then the matter shall be resolved as a Joint Decision as set forth in Section
2.2.5.  During the decision period, the
proposing Party shall timely provide all information reasonably requested by
any member of the JDC that would be material to making a determination as to
whether such proposed Clinical Trial should be approved.  If such Clinical Trial is not approved by the
JSC or the Designated Senior Officers, then the proposing Party shall have the
right to conduct such Clinical Trial, at is own expense, unless the JSC or the
Designated Senior Officers determine, as a Joint Decision, that there is a
substantial safety risk in the proposed Clinical Trial that is greater than the
safety risk in other Clinical Trials of the same Licensed Product being
conducted by the Parties for other Targeted Indications, or that there is a
material risk of adversely affecting the label of the Licensed Product for
other Targeted Indications as a result of the proposed Clinical Trial.  The Party conducting such proposed Clinical
Trial shall furnish the other Party with a copy of the proposed protocol at
least * (*) days prior to submission to the FDA or EMEA, as applicable, and
shall give good faith consideration to comments received from the other Party
within such * (*) day period.  If the
Licensed Product involved in such Clinical Trial receives Commercialization
Regulatory Approval in the United States, in any Major European Country or from
the EMEA for the New Cancer Indication, then the other Party shall reimburse
the proposing Party for *% of the External Development Costs relating to such
Clinical Trial (“Total 

 

58

 

Reimbursable
Costs”) that the other Party would have otherwise been
responsible for if the JDC would have approved such trial (i.e., *% of *% of
the External Development Costs incurred in such Clinical Trial), provided that,
(a) in the event that Commercialization Regulatory Approval is obtained in the
United States prior to its being obtained from the EMEA or in any Major
European Country, then the other Party shall reimburse the proposing Party for
* percent (*%) of the Total Reimbursable Costs and shall only be responsible
for reimbursing the remaining * (*%) of the Total Reimbursable Costs at such
time as Commercialization Regulatory Approval is obtained from either the EMEA
or in any Major European Country and (b) in the event that Commercialization
Regulatory Approval is obtained from either the EMEA or in any Major European
Country prior to its being obtained in the United States, then the other Party
shall reimburse the proposing Party for * percent (*%) of the Total
Reimbursable Costs and shall only be responsible for reimbursing the remaining
* percent (*%) of the Total Reimbursable Costs at such time as
Commercialization Regulatory Approval is obtained in the United States.  The foregoing right may only be exercised
once in any twenty-four month period by each Party.  No milestone payments will be due for such a
Clinical Trial until Commercialization Regulatory Approval is obtained in the
United States, the EMEA or any Major European Country, as applicable; provided
that if Commercialization Regulatory Approval is obtained in a “niche” Targeted
Indication that will not materially increase the sale of the Licensed Product,
as determined by the JSC as a Joint Decision, then no milestone payments will
be due for the conduct of such Clinical Trial or as a result of such
Commercialization Regulatory Approval. 
If Commercialization Regulatory Approval is obtained in the Target
Indication that is not in a “niche” Targeted Indication that will materially
increase the sale of the Licensed Product, as determined by the JSC as a Joint
Decision, then all milestones based on Clinical Trials and Commercialization
Regulatory Approval of the Targeted Indication will be due upon receipt of
Commercialization Regulatory Approval (unless the relevant number of milestones
have been fully paid for other Targeted Indications).  The rights provided by this section shall
apply only to New Cancer Indications. 
Neither Party shall, unless expressly approved by the JDC, have the
right to conduct a Clinical Trial for a Cancer Indication that is not a New
Cancer Indication.  Examples of Cancer
Indications that are not New Cancer Indications, include, but are not limited
to, new dosing regimens, combinations with other therapeutic agents, patient sub-sets,
and line of therapy for a tumor when the tumor is already within the Global
Development Plan, or the tumor 

 

59

 

is already within the scope of
an approved Cancer Indication for a Licensed Product that has received
Commercialization Regulatory Approval. 
For the avoidance of doubt, DS’s obligations with respect to Regulatory
Filings of Licensed Products under Section 3.1.4(b) and the Commercialization
of Licensed Products under Section 3.6.1 shall apply to Licensed Products for
New Cancer Indications.

 

3.15         Additional Phase 5
Clinical Trials.  In the
event that DS proposes a Phase 5 Clinical Trial that is not approved by the JDC
or the JSC, DS may, at its option, conduct such Phase 5 Clinical Trial at its
sole expense, unless the JSC or the Designated Senior Officers determine, as a
Joint Decision, that there is a substantial safety risk in such Phase 5
Clinical Trial that is greater than the safety risk in other Clinical Trials of
the same Licensed Product being conducted by the Parties, or that there is a
material risk of adversely affecting the label of the Licensed Product as a
result of such Phase 5 Clinical Trial. 
DS shall furnish ARQULE with a copy of the proposed protocol at least *
(*) days prior to the submission to the FDA, the EMEA or the Regulatory
Authority in any Major European Country, if so submitted and as applicable, and
shall give good faith consideration to comments received from ARQULE within
such * (*) day period.  The out of pocket
costs and internal costs incurred by DS in conducting such Phase 5 Clinical
Trial shall not constitute a Shared Development Cost that is reimbursable under
Section 3.11.

 

4.             PAYMENTS

 

4.1          Up-front Fee.  DS shall pay ARQULE a non-refundable,
non-creditable up-front fee (the “Upfront Fee”)
in the aggregate amount of Sixty Million Dollars (U.S. $60,000,000), payable by
wire transfer in accordance with the wire transfer instructions of ARQULE
provided in writing to DS, at the later of (i) thirty (30) days after the
execution of the Binding Letter of Intent or (ii) within five (5) Business Days
after the waiting period under the Hart-Scott-Rodino Act has expired or earlier
been terminated.

 

60

 

4.2           Milestone Payments.

 

4.2.1        Milestones.

 

(a)           Development
and Regulatory Milestones.  Subject
to Sections 4.2.2(c) and (d), DS shall make the following non-refundable payments to
ARQULE within * (*) days after the occurrence of each of the following
milestone events for each Licensed Product that achieves each such milestone:

 

	
  Milestone
  Event

  	
   

  	
  Milestone

  Payment

  
	
   

  	
   

  	
   

  
	
  1. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  2. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  3. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  4. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  5. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  6. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  7. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  8. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  9. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  10. *

  	
   

  	
  $* million

  

 

61

 

	
  Milestone
  Event

  	
   

  	
  Milestone

  Payment

  
	
   

  	
   

  	
   

  
	
  11. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  12. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  13. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  14. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  15. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  16. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  17. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  18. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  19. *

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  20. *

  	
   

  	
  $* million

  

 

(b)           Sales
Milestones.  In addition to the
milestone payments contemplated by Section 4.2.1(a), DS shall make each of
the following non-refundable, one-time 

 

(1)           DS agrees to use best industry practices in order to
execute the First Commercial Sale.

 

62

 

payments to ARQULE within * (*) days after the first occurrence of the
corresponding milestone event for the applicable Licensed Product:

 

	
  Milestone Event

  	
   

  	
  Milestone Payment

  
	
   

  	
   

  	
   

  
	
  Annual Net Sales in a Calendar Year of $* million

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  Annual Net Sales in a Calendar Year of $* million

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  Annual Net Sales in a Calendar Year of $* billion

  	
   

  	
  $* million

  
	
   

  	
   

  	
   

  
	
  Annual Net Sales in a Calendar Year of $* billion

  	
   

  	
  $* million

  

 

4.2.2        Notice and Payment of
Milestones.

 

(a)           Definition
of Indication.  For purposes of
clarity, the use of the term Targeted Indication, if it is
a Cancer Indication, in Section 4.2.1(a) above shall refer to
a particular tumor type and not to changes in, or expansion of, the regulatory
label applicable to a given tumor type.

 

(b)           Notice
of Milestone Events.  DS shall
provide ARQULE with prompt written notice upon each occurrence of a milestone
event set forth in Section 4.2.1. 
In the event that, notwithstanding the fact that DS has not given such a
notice, and ARQULE believes any such milestone event has occurred, it shall so
notify DS in writing and shall provide to DS the data, documentation or other
information that supports its belief. 
Any dispute under this Section 4.2.2 that relates to whether or not
a milestone event has occurred shall first be referred to the JSC to be
resolved in accordance with Section 2.1.5, but if not resolved as set
forth in Section 2.1.5, shall be subject to arbitration under Section 12.1.

 

(c)           Skipped
Milestones.  If at the time any given
milestone payment set forth in Section 4.2.1 is due and one or more
preceding milestone payments for antecedent milestone events,  for the same Indication in the case of
development and regulatory milestones, have not been paid, then such unpaid
preceding milestone payments shall be paid at such time as well.  For example, (i) if a milestone payment
is made for the Acceptance of a Drug Approval Application with respect to a
Licensed Product for the second Indication but no Phase 3 Clinical 

 

63

 

Trials were conducted with respect to that Licensed Product for the
second Indication, the milestone payment associated with the Initiation of a
Phase 3 Clinical Trial for that Licensed Product will be paid concurrently with
the milestone payment for the Acceptance of a Drug Approval Application for the
second Indication and (ii) if the first Calendar Year in which Net Sales
reach $* million is also the first Calendar Year in which Net Sales reach $*
million, then both the milestone payment for achievement of $* million of Net
Sales and the milestone payment for achievement of $* million of Net Sales will
be paid concurrently.

 

(d)           MiT
Tumor Milestones.  Notwithstanding
anything to the contrary in this Section 4.2.1, in the event both of (i) the
milestone event numbers 4, 8, 12, 16 or 20 in Section 4.2.1(a) above
(the “MiT Tumor Milestones”) and (ii) milestone
event numbers 3, 7, 11, 15 or 19 in Section 4.2.1(a) above occurs,
only the corresponding milestone payments to the early to occur milestone
events between (i) and (ii) shall be paid.  For the purposes of determining occurrence of
other milestone events, the MiT Tumor Milestones shall not be counted in the
first, second or third Indications.

 

4.3          Payment of
Royalties; Royalty Rates; Accounting and Records.

 

4.3.1        Payment of Royalties.  DS shall pay ARQULE a royalty based on Annual
Net Sales of each Licensed Product in the Territory in each Calendar Year (or
partial Calendar Year) commencing with the First Commercial Sale of such
Licensed Product in any country in the Territory and ending upon the last day
of the last Royalty Term for such Licensed Product, at the following rates:

 

	
  Annual Net Sales Increment in
  the Territory

  	
   

  	
  Royalty Rate 

  applicable for such tier

  
	
   

  	
   

  	
   

  
	
  Up to $* million

  	
   

  	
  *%

  
	
   

  	
   

  	
   

  
	
  Above $* million, but less than or equal to $* billion

  	
   

  	
  *%

  
	
   

  	
   

  	
   

  
	
  Above $* billion

  	
   

  	
  *%

  

 

64

 

(a)           Adjustments
to Royalties.

 

(i)            In
the event that a Licensed Product is sold as part of a Combination Product,
where “Combination Product” means
any unified dose (e.g., not a kit of two separate and distinct drug dosage
forms) of pharmaceutical product which is comprised of Licensed Product and
other therapeutically active compound(s) and/or ingredients (collectively
the “Other Products”), Net Sales
of Licensed Product, for the purposes of determining royalty payments, shall be
determined by multiplying the Net Sales of the Combination Product by the
fraction, A / (A+B) where A is the weighted average sale price of the Licensed
Product when sold separately in finished form, and B is the weighted average
sale price of the Other Products sold separately in finished form, in each case
in the country of sale of the Combination Product in the Calendar Quarter of
such sale.  In the event that no separate
sales are made of either the Licensed Product or the Other Products, the
reasonably estimated commercial value thereof will be used instead of the sale
price.  Each of “weighted average sale price” and “reasonably estimated commercial value”
shall be determined as set forth below:

 

“Weighted average sale price” and “reasonably estimated commercial
value,” as the case may be, for a Licensed Product and Other Products shall be
calculated once at the commencement of each Calendar Year and such amount shall
be used during all applicable royalty reporting periods for the entire
following Calendar Year.  When determining
the weighted average sale price of a Licensed Product or Other Products, the
weighted average sale price shall be calculated by dividing the Net Sales
(translated into U.S. dollars in accordance with Section 4.3.5 hereof) by
the units of active ingredient sold during the twelve (12) months (or the
number of months sold in a partial Calendar Year) of the preceding Calendar
Year for the respective Licensed Product or Other Products.  “Estimated commercial value” shall be
determined by agreement of the Parties using criteria to be mutually agreed
upon by the Parties.  If the Parties do
not agree, such dispute shall be first referred to the JSC to be resolved in
accordance with Section 2.1.5, but if not resolved as set forth in
Section 2.1.5, shall be resolved in accordance with Section 12.1
hereof.  In the Calendar Year in which
the First Commercial Sale occurs, a forecasted weighted average sale price will
be used for the License Product and Other Products, if applicable.  Any over or under payment due to a difference
between forecasted 

 

65

 

and actual weighted average sale prices will be paid or credited in the
first royalty payment of the following Calendar Year.

 

(ii)           Generic
Licensed Products.  In the event that
one or more Third Parties sell a Generic Licensed Product (as defined below) in
any country in which a Licensed Product is then being sold by DS, then,
(i) during any Calendar Quarter in which sales of the Generic Licensed
Product by such Third Parties are equal to or greater than * percent (*%) but
less than * percent (*%) of aggregate unit sales of Licensed Products and
Generic Licensed Products in such country (as measured by prescriptions or
other similar information available from a Third Party Data Provider and
applicable to such country) the applicable royalties in effect with respect to
such Licensed Product in such country as specified in Section 4.3.1 shall
be reduced by * percent (*%) and (ii) during any Calendar Quarter in which
sales of the Generic Licensed Products by such Third Parties are equal to or
greater than * percent (*%) of aggregate unit sales of Licensed Products and
Generic Licensed Products in such country (as measured by prescriptions or
other similar information available from a Third Party Data Provider and
applicable to such country) the applicable royalties in effect with respect to
such Licensed Product in such country as specified in Section 4.3.1 shall
be reduced by * percent (*%). 
Notwithstanding the foregoing, (i) DS’s obligation to pay royalties
at * percent (*%) of the applicable royalty rates shall be reinstated on the
first day of the Calendar Quarter immediately following the Calendar Quarter in
which sales of such Generic Licensed Products account for less than * percent
(*%) but more than * percent (*%) of aggregate unit sales of Licensed Products
and Generic Licensed Products in such country and (ii) DS’s obligation to
pay royalties at the full royalty rates shall be reinstated on the first day of
the Calendar Quarter immediately following the Calendar Quarter in which sales
of such Generic Licensed Products account for * percent (*%) or less of
aggregate unit sales of Licensed Products and Generic Licensed Products in such
country.  For purposes of this Section 4.3.1(a)(ii),
a “Generic Licensed Product” means
a pharmaceutical product that contains the same active ingredient as a Licensed
Product and is bioequivalent to such Licensed Product; provided, that, any
product sold by DS or any Affiliate or licensee of DS shall not be a Generic
Licensed Product for purposes of this Agreement.

 

(b)           Limit
on Royalty Reductions. 
Notwithstanding Sections 4.3.1(a)(ii), in no event shall the royalties
owed under Sections 4.3.1 with respect to a Licensed 

 

66

 

Product in a country be reduced by operation of Sections 4.3.1(a)(ii),
by more than * percent (*%) of what would otherwise be owed under
Section 4.3.1 with respect to such Licensed Product in such country.

 

(c)           Payment
Dates and Reports.  Royalty payments
shall be made by DS within * (*) days after the end of each Calendar Quarter,
commencing with the Calendar Quarter in which the First Commercial Sale of a
Licensed Product occurs.  DS shall also
provide, at the same time each such payment is made, a report showing:
(a) the Net Sales of each Licensed Product by type of Licensed Product and
country in the Territory; (b) the total amount of deductions from gross
sales to determine Net Sales; (c) the applicable royalty rates for
Licensed Products in each country in the Territory after applying any
reductions set forth above; and (d) a calculation of the amount of royalty
due to ARQULE.

 

4.3.2        Records; Audit Rights.  DS
and its Affiliates and Sublicensees shall keep and maintain for * (*) years, or such other period of time as required by
Applicable Laws if longer than * (*) years, from the date of each
payment of royalties hereunder complete and accurate records of gross sales and
Net Sales by DS and its Affiliates and Sublicensees of each Licensed Product,
in sufficient detail to allow royalties to be determined accurately.  ARQULE shall have the right for a period of *
(*) years, or such other period of time
as required by Applicable Laws if longer than * (*) years, after receiving
any such payment to appoint at its expense an independent certified public
accountant reasonably acceptable to DS to audit the relevant records of DS and
its Affiliates and Sublicensees to verify that the amount of such payment was
correctly determined.  DS and its
Affiliates and Sublicensees shall each make its records available for audit by
such independent certified public accountant during regular business hours at
such place or places where such records are customarily kept, upon thirty (30)
days written notice from ARQULE.  Such
audit right shall not be exercised by ARQULE more than once in any Calendar
Year or more than once with respect to sales of a particular Licensed Product
in a particular period.  All records made
available for audit shall be deemed to be Confidential Information of DS.  The results of each audit, if any, shall be
binding on both Parties absent manifest error. 
In the event there was an underpayment by DS hereunder, DS shall
promptly (but in any event no later than * (*) days after DS’s receipt of the
report so concluding) make payment to ARQULE of any shortfall.  Should the audit lead to the discovery 

 

67

 

of a discrepancy to DS’s detriment, then DS may credit the amount of the
discrepancy without interest against any future payments due to ARQULE under
Section 4.3.1.  ARQULE shall bear
the full cost of such audit unless such audit discloses an underreporting by DS
of more than * percent (*%) of the aggregate amount of royalties payable in any
Calendar Year, in which case DS shall reimburse ARQULE for all costs incurred
by ARQULE in connection with such audit.

 

4.3.3        Overdue Payments.   All
royalty payments not made within the time period set forth in
Section 4.3.1(c), including underpayments discovered during an audit, and
all milestone payments not made within the time period specified in
Section 4.3.1, shall bear interest at a rate of * percent (*%) per month
from the due date until paid in full or, if less, the maximum interest rate
permitted by Applicable Laws.  Any such
overdue royalty or milestone payment shall, when made, be accompanied by, and
credited first to, all interest so accrued.

 

4.3.4        Payments; Withholding Tax.

 

(a)           Payments
in U.S. Dollars.  All payments made
by DS under this Article 4 shall be made by wire transfer in U.S. dollars
in accordance with instructions given in writing from time to time by ARQULE.

 

(b)           Withholding
Taxes.  If Applicable Laws require
withholding of income or other taxes imposed upon any payments made by DS to
ARQULE under this Agreement, DS shall (i) make such withholding payments
as may be required, (ii) subtract such withholding payments from such
payments, (iii) submit appropriate proof of payment of the withholding taxes
to ARQULE within a reasonable period of time, and (iv) promptly provide
ARQULE with all official receipts with respect thereto.  DS shall render ARQULE reasonable assistance
in order to allow ARQULE to obtain the benefit of any present or future treaty
against double taxation which may apply to such payments.

 

4.3.5        Foreign Currency Exchange.  All payments to be made by DS to ARQULE or by ARQULE to DS under this Agreement
shall be made in United States dollars and shall be paid by bank wire transfer
to such bank account as may be designated in writing by the other Party from time to time. 
If, in any Calendar Quarter, Net Sales are made in any currency other
than United States dollars, such Net Sales shall be converted into United
States 

 

68

 

dollars using the conversion rate as of the last day of such Calendar
Quarter as published in the Wall Street Journal.

 

5.             CONFIDENTIALITY

 

5.1           Confidentiality.

 

5.1.1        Confidentiality Obligations.  ARQULE and DS each recognizes that the other Party’s Confidential
Information and Proprietary Materials constitute highly valuable assets
of such other Party.  ARQULE and DS each
agrees that, subject to Sections 5.1.2 and 5.3, (a) it will not disclose, and will cause its
Affiliates and sublicenses (or Sublicensees, as the case may be) not to
disclose, any Confidential Information or Proprietary Materials of the other
Party, and (b) it will not use, and will cause its Affiliates and
Sublicensees not to use, any Confidential Information or Proprietary Materials
of the other Party except as expressly permitted hereunder.  The obligations of each Party under this
Section 5.1.1 shall remain in effect during the Term and for an additional
ten (10) years following the expiration or termination of this Agreement.

 

5.1.2        Limited Disclosure. 
ARQULE and DS each agrees that disclosure of its Confidential
Information or any transfer of its Proprietary Materials may be made by the
other Party to (a) any employee, consultant or Affiliate of such other Party
who requires such Confidential Information or Proprietary Materials for a Party
to exercise its rights or carry out its responsibilities under this Agreement
or (b) Third Party subcontractor engaged by a Party under an agreement
approved by the JDC pursuant to Section 6.2.1 to enable such other Party
to exercise its rights or to carry out its responsibilities under this
Agreement; provided, that, any such disclosure or transfer shall only be made
to Persons who are bound by written obligations as described in
Section 5.1.3.  In addition, ARQULE
and DS each agrees that the other Party may disclose its Confidential
Information (a) on a need-to-know basis to such other Party’s legal and
financial advisors, (b) as reasonably necessary in connection with an
actual or potential (i) permitted sublicense of such other Party’s rights
hereunder, (ii) debt or equity financing of such other Party or
(iii) merger, acquisition, consolidation, share exchange or other similar
transaction involving such Party and any Third Party, and (c) for any
other purpose with the other Party’s consent, not to be unreasonably
withheld.  In addition, each Party agrees
that the other Party may disclose such Party’s Confidential Information or
provide such Party’s Proprietary Materials (A) 

 

69

 

as reasonably necessary to file, prosecute or maintain Patent Rights,
or to file, prosecute or defend litigation related to Patent Rights, in
accordance with this Agreement; or (B) as required by Applicable Laws as
determined by the disclosing Party in its reasonable discretion; provided,
that, in the case of any disclosure under this clause (B), the disclosing Party
shall (1) if practicable, provide the other Party with reasonable advance
notice of and an opportunity to comment on any such required disclosure and
(2) if requested by the other Party, cooperate in all reasonable respects
with the other Party’s efforts to obtain confidential treatment or a protective
order with respect to any such disclosure, at the other Party’s expense.  Notwithstanding
the foregoing, (x) DS may disclose Mechanism of Inhibition Information
only to individuals who are employees of DS and its Affiliates, who are directly engaged in the Development of
a Collaboration Compound and who require such Mechanism of Inhibition
Information in order to perform the Development activities assigned to them
(each, a “Permitted Employee”), and not to
consultants, Third Party subcontractors and (y) DS may not include any
Mechanism of Inhibition Information in any hardcopy or electronic database or
other archive to which any person who is not a Permitted Employee has access.

 

5.1.3        Employees, Consultants and Third Party
Subcontractors.  ARQULE
and DS each hereby represents that all of its employees and consultants, all of
the employees and consultants of its Affiliates, and all of its Third Party
subcontractors who participate in the activities of the Collaboration or have
access to Confidential Information or Proprietary Materials of the other Party
are or will, prior to their participation or access, be bound by written
obligations to maintain such Confidential Information or Proprietary Materials
in confidence.  Each Party agrees to use,
and to cause its Affiliates to use, reasonable efforts to enforce such
obligations and to prohibit its employees and consultants from using such
information except as expressly permitted hereunder.  Each Party will be liable to the other for
any disclosure or misuse by its employees, consultants, Affiliates or Third
Party subcontractors of Confidential Information or Proprietary Materials of
the other Party.

 

5.2           Publicity.  The Parties acknowledge that the terms of
this Agreement constitute Confidential Information of each Party and may not be
disclosed except as permitted by Sections 5.1.2 and 5.2.  Notwithstanding the foregoing, the terms of
this Agreement may be disclosed by a Party to investment bankers, analysts,
investors and potential investors, lenders and potential 

 

70

 

lenders and other sources and
other potential sources of financing, or any acquirer or merger partner and
potential acquirer or merger partner but only to the extent reasonably
necessary.  In addition, a copy of this
Agreement may be filed by either Party with the Securities and Exchange
Commission if such filing is required by law or regulation.  In connection with any such filing, such
Party shall endeavor to obtain confidential treatment of economic and trade
secret information, and shall provide the other Party with the proposed
confidential treatment request with reasonable time for such other Party to
provide comments, which comments shall be reasonably considered by the filing
Party.  Except for public announcements
of the occurrence of any milestone event and any event that ARQULE reasonably
believes is material under Applicable Laws, neither Party shall issue a press
or news release or make any similar public announcement (it being understood
that publication in scientific journals, presentation at scientific conferences
and meetings and the like are intended to be covered by Section 5.3 and not
subject to this Section 5.2) related to the Development Program without the
prior written consent of the other Party. 
Each Party shall provide the other Party an advance copy of any proposed
press release relating to this Agreement or any Licensed Product to the extent
reasonably practicable and shall consider any comments or proposals for a joint
press release if agreed to by the Parties.

 

5.3           Publications
and Presentations.  The
Parties acknowledge that scientific publications and presentations must be
strictly monitored to prevent any adverse effect from premature publication or
dissemination of results of the activities hereunder.  Each Party agrees that, except as required by
Applicable Laws, it shall not publish or present, or permit to be published or
presented, the results of the Development Program without the prior review by
and written approval of the other Party.  Each
Party shall provide to the other Party the opportunity to review each of the
submitting Party’s proposed abstracts, manuscripts or presentations (including,
without limitation, information to be presented verbally) that relate to the
Development Program at least * (*) days prior to its intended presentation or
submission for publication, and such submitting Party agrees, upon written
request from the other Party given within such * (*) day period, not to submit
such abstract or manuscript for publication or to make such presentation until
the other Party is given up to * (*) days from the date of such written request
to seek appropriate patent protection for any material in such publication or
presentation that it reasonably believes may be patentable.  Notwithstanding
the foregoing, in the event that a 

 

71

 

Party reasonably requests a response by the other Party in less than *
(*) days, then the reviewing Party shall use Commercially Reasonable Efforts to
respond in the time period requested.  Once
such abstracts, manuscripts or presentations have been reviewed and approved by
each Party, the same abstracts, manuscripts or presentations do not have to be
provided again to the other Party for review for a later submission for publication.  Each Party also shall have the right to
require that any of its Confidential Information that is disclosed in any such
proposed publication or presentation be deleted prior to such publication or
presentation.  In any permitted
publication or presentation by a Party, the other Party’s contribution shall be
duly recognized, and co-authorship shall be determined in accordance with
customary standards.  Each Party
(a) expressly acknowledges that the other Party’s business may be
substantially dependent on its ability to publish results in scientific
journals, presentation at scientific conferences and meetings and
(b) agrees that it shall not unreasonably withhold, condition or delay its
consent to any request by the other Party to publish results of the Development
Program in accordance with its internal publication guidelines.

 

5.4           Prior
Approved Publication. 
Notwithstanding Sections 5.2 and 5.3, either Party may include in a
public disclosure or in a scientific or medical publication or representation,
without prior delivery to or review by the other Party, any information which
has previously been included in a public disclosure or scientific or medical
publication that has been reviewed pursuant to Section 5.2 or
Section 5.3 or published or publicly disclosed by the other Party.

 

5.5           Mechanism
of Inhibition Information. 
Notwithstanding anything to the contrary set forth herein, including
without limitation, the right to disclose Confidential Information of ARQULE
set forth in Section 5.2 and the rights to publish set forth in
Section 5.3, DS shall in no event disclose any Mechanism of Inhibition
Information.

 

6.             LICENSE GRANTS;
EXCLUSIVITY

 

6.1           Licenses.

 

6.1.1        ARQULE License Grants.

 

(a)           Development
Program.  Subject to the other terms
of this Agreement, ARQULE hereby grants to DS an exclusive, except as to ARQULE
as set forth 

 

72

 

herein, royalty-free, worldwide license or sublicense (with respect to
Licensed Technology and Licensed Patent Rights licensed by Third Parties to ARQULE) during the
Term, with the right to grant sublicenses solely as provided in
Section 6.2.1, under Licensed Technology and Licensed Patent Rights for
the sole purpose of conducting DS Development Activities as part of the Development
Program, including without limitation, the Manufacture of Collaboration
Compounds and Licensed Products for use in Development.

 

(b)           Commercialization
Licenses.  Subject to the other terms
of this Agreement, ARQULE hereby grants to DS (i) an exclusive, except as
to ARQULE as set forth herein, royalty-bearing license or sublicense (with
respect to Licensed Technology and Licensed Patent Rights licensed by Third Parties to ARQULE) during the
Term, with the right to grant sublicenses subject to Section 6.2.2, under
Licensed Technology and Licensed Patent Rights for the sole purpose of
Commercializing Co-Commercialized Licensed Products in the Field in the U.S.
Territory and (ii) an exclusive (even as to ARQULE), royalty-bearing
license or sublicense (with respect to Licensed Technology and Licensed Patent
Rights licensed by Third Parties
to ARQULE) during the Term, including the right to grant sublicenses solely as
provided in Section 6.2.2, under Licensed Technology and Licensed Patent
Rights for the sole purpose of Commercializing Licensed Products in the Field
in the ROW Territory.

 

6.1.2        DS License Grants.

 

(a)           Development
Program.  Subject to the other terms
of this Agreement, DS hereby grants to ARQULE a non-exclusive, royalty-free,
worldwide license during the Term, with the right to grant sublicenses solely
as provided in Section 6.2.1, under DS Technology, DS Patent Rights for
the sole purpose of conducting ARQULE Development Activities as part of the
Development Program.

 

(b)           Co-Commercialized
Licensed Products. 
Subject to the other terms of this Agreement, DS hereby grants to ARQULE
a non-exclusive, royalty-free license during the Term, without the right to
grant sublicenses, under DS Technology and DS Patent Rights for the sole
purpose of Commercializing Co-Commercialized Licensed Products in the Field in the
U.S. Territory.

 

73

 

(c)           Licensed
Products.  Subject to the other terms
of this Agreement, DS hereby grants to ARQULE a non-exclusive, perpetual,
royalty-free, worldwide license, with the right to grant sublicenses solely as
provided in this Section 6.1.2(c), under DS Technology, DS Patent Rights
and DS’s interest in Joint Technology and Joint Patent Rights, to develop, have
developed, make, have made, sell, have sold, import and have imported Licensed
Products for any and all uses within and outside of the Field outside the Territory.  ARQULE shall have the right to grant
sublicenses under the license granted to it under this Section 6.1.2(c) solely
to Third Party licensees and collaborators (i) that are developing and/or
commercializing Licensed Products outside of the Territory and (ii) that
have granted ARQULE the reciprocal right to include Technology and/or Patent
Rights of such Third Party licensee or collaborator as Licensed Technology
and/or Licensed Patent Rights under this Agreement.

 

6.1.3        Disclosure of Technology.  Each Party shall disclose to the other Party
all Technology and Patent Rights Controlled by such Party that is reasonably
necessary or useful for the Development, or Commercialization of Licensed
Products, and all such Technology and Patent Rights shall be included in the
licenses granted in this Section 6.1.

 

6.2           Right to Sublicense.

 

6.2.1        Development Program Licenses.  Notwithstanding anything contained herein to
the contrary, either Party shall have the right to grant sublicenses under the
license granted to it under Sections 6.1.1(a) and 6.1.2(a), respectively,
solely to Third Party subcontractors engaged by such Party to perform
designated functions related to the conduct of Development activities under the
Development Program or to Affiliates; provided, that, (a) except as to
sublicenses to Affiliates, such Party shall obtain the prior approval of the JDC, as reflected in minutes of the JDC, to each sublicense grant; (b) such
Party shall remain responsible for the satisfactory accomplishment of such work
in accordance with the terms and conditions of this Agreement; and (c) each
such Third Party subcontractor shall enter into a written agreement containing
such provisions as are normal and customary for similar types of agreements.

 

6.2.2        Commercialization Licenses.  DS shall have the right to grant sublicenses
to Sublicensees and Affiliates of DS under the Commercialization license
granted to it under Section 6.1.1(b), with respect to Licensed Products
for sale in the Territory in the Field; 

 

74

 

provided, that, (a) to the extent any such sublicense is with
respect to the Commercialization of a Licensed Product in the United States to
an entity other than an Affiliate of DS, DS shall obtain the prior written
consent of ARQULE, which may be withheld in its sole discretion; (b) it
shall be a condition of any such sublicense that such Sublicensee or Affiliate
of DS agrees to be bound by all terms of this Agreement applicable to the
Commercialization of Licensed Products in the Field in the Territory
(including, without limitation, Article 5); (c) DS shall provide
written notice to ARQULE of any such proposed sublicense at least * (*) days
prior to such execution and provide copies to ARQULE of each such sublicense
within ten (10) days of its execution; (d) if DS grants a sublicense
to a Sublicensee or Affiliate of DS, DS shall be deemed to have guaranteed that
such Sublicensee or Affiliate of DS will fulfill all of DS’s obligations under
this Agreement applicable to the subject matter of such sublicense; (e) DS
shall not be relieved of its obligations pursuant to this Agreement as a result
of such sublicense.

 

6.3           No Other Rights.  DS shall have no rights to use or otherwise
exploit ARQULE Technology, ARQULE Patent Rights, or ARQULE Proprietary
Materials, and ARQULE shall have no rights to use or otherwise exploit DS
Technology, DS Patent Rights or DS Proprietary Materials, in each case, except
as expressly set forth herein.

 

6.4           Exclusivity.

 

6.4.1        ARQULE. 
During the Term of this Agreement, ARQULE shall not, and shall cause
each of its Affiliates to not, conduct any activity, either on its own, or
with, for the benefit of, or sponsored by any Third Party, or sponsor any
activity by a Third Party, in any case that involves the development or
commercialization, or grant any license or other rights to any Third Party to
utilize any Technology or Patent Rights Controlled by ARQULE or any of its
Affiliates for the express purpose of developing or commercializing, any c-MET
Inhibitor in the Territory except *.

 

6.4.2        DS. 
During the Term of this Agreement, DS shall not, and shall cause each of
its Affiliates to not, conduct any activity, either on its own, or with, for
the benefit of, or sponsored by any Third Party, or sponsor any activity by a
Third Party, in any case that that 

 

75

 

involves the development or commercialization, or grant any license or
other rights to any Third Party to utilize any Technology or Patent Rights
Controlled by DS or any of its Affiliates for the express purpose of developing
or commercializing (a) any Collaboration Compound or Licensed Product (i) *
or (ii) within the Territory for any use outside of the Field or (b)*
except (A) hereunder in the Development Program or the Development or
Commercialization of Licensed Products and (B) in connection with the
conduct of any Permitted Transactions.

 

6.4.3        Future Negotiations.  Notwithstanding any provision of this
Agreement or the Existing License Agreement, at the request of DS, ARQULE
agrees to negotiate in good faith with DS (i) to permit DS to negotiate
and enter into an agreement with Kyowa with respect to the Development and/or
Commercialization of Licensed Products in the Asian Territory and (ii) to
discuss the release of DS from the restriction set forth in Section 6.4.2(b) in
order to permit DS to develop and/or commercialize * that is not * of * or * in
the Asian Territory.

 

6.4.4        Permitted Transactions.  If either Party enters into an agreement for
a Permitted Transaction, all Technology and Patent Right granted to such Party
under the Permitted Transaction shall be included without further action in the
licenses granted to the other Party by Section 6.1.1 or 6.1.2.

 

6.5           Use of Third Party
Technology.

 

6.5.1        Existing License Agreement. 
Notwithstanding anything to the contrary set forth in this Agreement,
any royalties (or any other payments) to be paid under the Existing License
Agreement shall be the sole responsibility of ARQULE.

 

6.5.2        Additional Third Party Development Technology. 
Neither Party shall have any obligation to use any Patent Rights (other
than the Licensed Patent Rights, Joint Patent Rights or DS Patent Rights) in
connection with the Development or Commercialization of any Collaboration
Compound or Licensed Product, and each Party hereby agrees that, except as
provided in the Global Development Plan or as agreed to between the Parties
following a proposal submitted in accordance with this Section 6.5.2, it
shall not use any Technology owned or controlled by a Third Party (“Third Party Development Technology”) in
the Development and/or Commercialization of any Collaboration Compound or
Licensed Product if the other Party 

 

76

 

would thereby be required to pay a royalty or other compensation to the
Third Party holder of rights to that Technology in connection therewith.  Either Party may at any time during the Term
submit to the other Party and to the JDC a proposal to license Third Party
Development Technology that such party reasonably believes would be necessary
or useful in order to Develop or Commercialize any Collaboration Compound or
Licensed Product.  Such proposal shall
contain, at a minimum, information supporting the rationale for such license
from a scientific, regulatory and commercial standpoint, an estimated
Development critical path and a good faith estimate of the cost of such
license.  Any decision with respect to
the license of any such Third Party Development Technology shall be a Unanimous
Decision for purposes of this Agreement. 
If, in making any such Unanimous Decision, the JDC is unable to reach a
determination with respect to any issue relating to a proposed license agreement,
then such issue shall be resolved in accordance with the procedures set forth
in Section 2.1.5.  If such issue
cannot be resolved pursuant to Section 2.1.5, then neither Party shall
proceed with the activities in the conduct of the Development Program to the
extent doing so would infringe such Third Party Development Technology.  If the JDC determines, as a Unanimous
Decision, that a license to such Third Party Development Technology should be
obtained, (a) unless otherwise determined by the JDC, the Party that
submitted the proposal shall be responsible for negotiating and executing such
license agreement and (b) the Parties shall * for * percent (*%) of the *
in such license agreement with respect to the license of such Third Party
Development Technology.

 

7.             INTELLECTUAL PROPERTY RIGHTS

 

7.1           ARQULE Intellectual
Property Rights.  ARQULE
shall have sole and exclusive ownership of all right, title and interest, or
exclusive license rights, on a worldwide basis in and to any and all ARQULE
Technology and ARQULE Patent Rights.

 

7.2           DS Intellectual Property
Rights.  DS shall have
sole and exclusive ownership of all right, title and interest on a worldwide
basis in and to any and all DS Technology, Product Trademark and DS Patent
Rights.

 

7.3           Joint Intellectual
Property Rights.  DS and
ARQULE shall jointly own all Joint Technology and Joint Patent Rights.  Notwithstanding anything to the contrary
contained herein or under Applicable Laws, except to the extent exclusively
licensed to one Party under this 

 

77

 

Agreement set forth herein, the
Parties hereby agree that, except as prohibited by Section 6.4, either
Party may use or license or sublicense to Affiliates or Third Parties all or
any portion of its interest in Joint Technology, Joint Patent Rights or jointly
owned Confidential Information or Proprietary Materials for use outside the
Field, or for use in the Field in connection with products that are not c-MET
Inhibitors, without the prior written consent of the other Party, without
restriction and without the obligation to provide compensation to the other
Party; provided, that, during the Term of this Agreement, neither Party may use
or license or sublicense to Third Parties all or any portion of its interest is
Joint Technology and/or Joint Patent rights or jointly owned Confidential
Information or Proprietary Materials for use in the Field in connection with
any product that is a c-MET Inhibitor.

 

7.4           Patent Coordinators.  ARQULE and DS shall, by written notice to the
other Party, each appoint a patent coordinator reasonably acceptable to the
other Party (each, a “Patent Coordinator”)
to serve as such Party’s primary liaison with the other Party on matters
relating to patent filing, prosecution, maintenance and enforcement.  Each Party may replace its Patent Coordinator
at any time by notice in writing to the other Party.  The initial Patent Coordinators shall be:

 

For ARQULE: Robert Connaughton, Deputy General Counsel, ARQULE, INC.

For DS: Dr. Kazuo
Sato, General Manager, Intellectual Property, DAIICHI SANKYO, CO., LTD.

 

7.5           Inventorship.  The Patent Coordinators shall initially
determine inventorship of Program Technology under U.S. patent law.  In case of a dispute between the Patent
Coordinators over inventorship and, as a result, whether any particular
Technology is ARQULE Technology, DS Technology or Joint Technology, such
dispute shall be resolved according to U.S. patent law.

 

78

 

8.             FILING, PROSECUTION AND
MAINTENANCE OF PATENT RIGHTS

 

8.1           Patent Filing, Prosecution
and Maintenance.

 

8.1.1        DS’s Prosecution Rights.

 

(a)           DS
Program Technology.  Subject to
Sections 8.1.4 and 8.1.5, DS, acting through patent counsel or agents of its
choice, shall be responsible for the preparation, filing, prosecution and
maintenance, at its sole cost and expense, of Patent Rights covering DS Program
Technology.  At DS’s request, ARQULE
shall cooperate with DS in all reasonable respects in connection with such
preparation, filing, prosecution and maintenance of such Patent Rights,
including but not limited to obtaining assignments to reflect chain of title
consistent with the terms of this Agreement, gaining United States patent term
extensions, supplementary protection certificates and any other extensions that
are now or become available in the future wherever applicable.

 

(b)           DS
Background Technology.  DS, at its
sole expense and acting through patent counsel or agents of its choice, shall
be responsible for the preparation, filing, prosecution and maintenance of all
Patent Rights covering DS Background Technology.

 

8.1.2        ARQULE Prosecution Rights.

 

(a)           ARQULE
Program Technology.  Subject to
Sections 8.1.4 and 8.1.5, ARQULE, acting through patent counsel or agents of
its choice, shall be responsible for the preparation, filing, prosecution and
maintenance, at its sole cost and expense, of Patent Rights covering ARQULE
Program Technology.  At ARQULE’s request,
DS shall cooperate with and assist ARQULE in all reasonable respects in
connection with such preparation, filing, prosecution and maintenance of such
Patent Rights, including but not limited to obtaining assignments to reflect
chain of title consistent with the terms of this Agreement, gaining United
States patent term extensions, supplementary protection certificates and any
other extensions that are now or become available in the future wherever
applicable.

 

(b)           ARQULE
Background Technology.  ARQULE, at
its sole expense and acting through patent counsel or agents of its choice,
shall be responsible for the preparation, filing, prosecution and maintenance
of all Patent Rights covering ARQULE Background Technology.

 

8.1.3        Joint Prosecution.  In the case of Joint Patent Rights, the
Parties shall meet through the Patent Coordinators or hold a teleconference or
video conference to discuss in 

 

79

 

good faith and agree upon the content and form of any application for a
Joint Patent Right and hereby agree that only the application in the form as
agreed between the Parties may be filed in respect of the Joint Patent
Rights.  Any dispute between the Patent
Coordinators shall be released to the JSC for resolution pursuant to Section 2.1.5.  The Parties shall share the costs equally in
respect of the preparation of the application, filing, prosecution, grant and
maintenance of any Joint Patent Right jointly filed; and jointly instruct an
appropriately qualified patent attorney to draft, file and prosecute the
application and each Party will have equal control over the prosecution of the
filing such that the patent attorney will only be able to act on unanimous
instructions.  In the event that one
Party is (i) not interested, or (ii) not willing to equally share the
related cost and expense, with respect to any Joint Patent Rights in a given
country, then the other Party shall have the right, at its own cost and
expense, to file for and prosecute such Joint Patent Rights in such country in
both Parties’ names.

 

8.1.4        Information and Cooperation.  Each Party that has responsibility for filing
and prosecuting any Patent Rights under this Section 8.1 (a “Filing Party”) shall (a) regularly
provide the other Party (the “Non-Filing
Party”) with copies of all patent applications filed hereunder for
Program Technology and other material submissions and correspondence with the
patent offices, in sufficient time to allow for review and comment by the
Non-Filing Party; and (b) provide the Non-Filing Party and its patent
counsel with an opportunity to consult with the Filing Party and its patent
counsel regarding the filing, filing countries or regions, and contents of any such application,
amendment, submission or response.  The
advice and suggestions of the Non-Filing Party and its patent counsel shall be
taken into consideration in good faith by such Filing Party and its patent
counsel in connection with such filing. 
Each Filing Party shall pursue in good faith all reasonable claims and
take such other reasonable actions, as may be requested by the Non-Filing Party
in the prosecution of any Patent Rights covering any Program Technology under
this Section 8.1; provided, however, if the Filing Party incurs any
additional expense as a result of any such request, the Non-Filing Party shall
be responsible for the cost and expenses of pursuing any such additional claim
or taking such other activities.  In
addition, DS agrees that if ARQULE claims any action taken under Section 8.1.1(a) would
be detrimental to Patent Rights covering ARQULE Background Technology, ARQULE
shall provide written notice to DS and the Patent Coordinators shall, as
promptly as possible 

 

80

 

thereafter, meet to discuss and resolve such matter and, if they are
unable to resolve such matter, the Parties shall refer such matter to a
mutually agreeable outside patent counsel for resolution.

 

8.1.5        Abandonment.

 

(a)           Patent Rights owned solely by ARQULE or DS.  If a Filing Party decides to
abandon or to allow to lapse any of the Patent Rights covering any Program
Technology for which it has responsibility, it shall inform the Non-Filing
Party of such decision promptly and, in any event, so as to provide the
Non-Filing Party a reasonable amount of time to meet any applicable deadline to
establish or preserve such Patent Rights in such country or region.  The Non-Filing Party shall have the right to
assume responsibility for continuing the prosecution of such Patent Rights in
such country or region and paying any required fees to maintain such Patent
Rights in such country or region or defending such Patent Rights, through
patent counsel or agents of its choice, which shall be at the Non-Filing
Party’s sole expense.  The Non-Filing
Party shall not become an assignee of any such Patent Rights as a result of its
assumption of any such responsibility. 
Upon transfer of such responsibility under this Section 8.1.5(a),
the Filing Party shall promptly deliver to the Non-Filing Party copies of all
necessary files related to the Patent Rights with respect to which
responsibility has been transferred and shall take all actions and execute all
documents reasonably necessary for the Non-Filing Party to assume such
responsibility.

 

(b)           Joint
Patent Rights.  If one Party decides
to abandon its share of the Joint Patent Rights in any country or region (the “Abandoning Party”), it shall inform the other Party (the “Maintaining Party”) of such decision promptly.  The Maintaining Party shall have the right to
assume all responsibility for continuing the prosecution of such Patent Rights
in such country or region and paying any required fees to maintain such Patent
Rights in such country or region or defending such Patent Rights, through
patent counsel of its choice, which shall be at the Maintaining Party’s sole
expense.  Upon abandonment of the
Abandoning Party’s share of any Joint Patent Rights under this Section 8.1.5(b),
the Abandoning Party shall take all actions and execute all documents
reasonably necessary for the Maintaining Party to assume such responsibility.

 

81

 

8.2           Legal Actions.

 

8.2.1        Third Party Infringement.

 

(a)           Notice.  In the event either Party becomes aware of (i) any
possible infringement of any ARQULE Patent Rights, DS Patent Rights or Joint
Patent Rights through the Development or Commercialization of a c-MET
Inhibitor, or (ii) the submission by any Third Party of an abbreviated new
drug application under the Hatch-Waxman Act for a product that includes a
Licensed Product or Collaboration Compound or Backup Compound (each, an “Infringement”), that Party shall promptly
notify the other Party and provide it with all details of such Infringement of
which it is aware (each, an “Infringement
Notice”).

 

(b)           DS
Right to Enforce.

 

(i)            Enforcement
of DS Background Patent Rights.  In
the event that any Infringement relates to any Patent Rights covering DS
Background Technology, DS shall have the sole right but not the obligation to
enforce such claim.

 

(ii)           Enforcement
of DS Program Patent Rights.  In the
event that any Infringement relates to any DS Program Patent Rights, then DS
shall have the first right (but not the obligation) to enforce such claim,
which may include the institution of legal proceedings or other action.  DS shall keep ARQULE reasonably informed on a
quarterly basis, in person or by telephone, prior to and during any such
enforcement.  ARQULE shall assist DS,
upon request, in taking any action to enforce any such Patent Rights and shall
join in any such action if deemed to be a necessary party.  DS shall incur no liability to ARQULE as a
consequence of such litigation or any unfavorable decision resulting therefrom,
including any decision holding any such claim invalid, not infringed or
unenforceable.  All costs, including
without limitation attorneys’ fees, relating to such legal proceedings or other
action shall be borne by DS.  If DS does
not take commercially reasonable steps to abate the Infringement of such Patent
Rights within * (*) days from any Infringement Notice (or * (*) days in the
case of an Infringement resulting from the submission by any Third Party of an
abbreviated new drug application under the Hatch-Waxman Act), then ARQULE shall
have the right and option to do so at its expense.

 

(c)           ARQULE
Right to Enforce.

 

82

 

(i)            Enforcement
of ARQULE Background Patent Rights. 
In the event that any Infringement relates to any Patent Rights covering
ARQULE Background Technology, ARQULE shall have the sole right but not the
obligation to enforce such claim.

 

(ii)           Enforcement
of ARQULE Program Patent Rights.  In
the event that any Infringement relates to any ARQULE Program Patent Rights,
then ARQULE shall have the first right (but not the obligation) to enforce such
claim, which may include the institution of legal proceedings or other action.  ARQULE shall keep DS reasonably informed on a
quarterly basis, in person or by telephone, prior to and during any such
enforcement.  DS shall assist ARQULE,
upon request, in taking any action to enforce any such Patent Rights and shall
join in any such action if deemed to be a necessary party.  ARQULE shall incur no liability to DS as a
consequence of such litigation or any unfavorable decision resulting therefrom,
including any decision holding any such claim invalid, not infringed or
unenforceable.  All costs, including
without limitation attorneys’ fees, relating to such legal proceedings or other
action shall be borne by ARQULE.  If
ARQULE does not take commercially reasonable steps to abate the Infringement of
such Patent Rights within * (*) days from any Infringement Notice (or * (*)
days in the case of an Infringement resulting from the submission by any Third
Party of an abbreviated new drug application under the Hatch-Waxman Act), then
DS shall have the right and option to do so at its expense.  For purposes of clarity, notwithstanding
anything to the contrary herein, DS shall have no right to enforce any ARQULE
Patents Rights covering Product Technology.

 

(d)           Joint
Patent Rights.  In the event of an
Infringement of a Joint Patent Right, then, the Parties shall enter into good
faith discussions as to whether and how to eliminate the Infringement.  Subject to the foregoing, (i) ARQULE
shall have the first right and option to eliminate such Infringement by
reasonable steps, which may include the institution of legal proceedings or
other action and (ii) all costs, including without limitation attorneys’
fees, relating to such legal proceedings or other action shall be borne by
ARQULE.  If ARQULE does not take or
initiate commercially reasonable steps to eliminate the Infringement within *
(*) days from any Infringement Notice (or * (*) days in the case of an
Infringement resulting from the submission by any Third Party of an abbreviated
new drug application under the Hatch-Waxman Act), then DS shall have the right
and option to do so at its expense.  Neither DS nor ARQULE 

 

83

 

shall admit the invalidity or unenforceability of any Joint Patent
Rights or Valid Claims therein without the other Party’s prior written consent.

 

(e)           Representation
of Either Party.  Each Party shall
have the right to be represented by counsel that it selects in any legal
proceedings or other action instituted under this Section 8.2.1 by the
other Party.

 

(f)            Cooperation
by the Parties.  In any action, suit
or proceeding instituted under this Section 8.2.1, the Parties shall
cooperate with and assist each other in all reasonable respects in the Territory.  Upon the reasonable request of the Party
instituting such action, suit or proceeding, the other Party shall join such
action, suit or proceeding and shall be represented using counsel of its own
choice, at the requesting Party’s expense. 
If a Party with the right to initiate legal proceedings under this Section 8.2.1
lacks standing to do so and the other Party has standing to initiate such legal
proceedings, then the Party with standing shall initiate such legal proceedings
at the request and expense of the other Party.

 

(g)           Allocation
of Recoveries.  Any amounts recovered
by DS pursuant to actions under Section 8.2.1(b)(ii) or 8.2.1(d),
whether by settlement or judgment, shall be allocated in the following order: (i) first,
to reimburse DS and ARQULE for their reasonable out-of-pocket expenses in
making such recovery (which amounts shall be allocated pro rata if insufficient
to cover the totality of such expenses); and (ii) second, (A) with
respect to actual damages, to DS and ARQULE in the * and (B) with respect
to punitive, special or consequential damages, * percent (*%) to DS and *
percent (*%) to ARQULE.  Any amounts
recovered by ARQULE pursuant to actions under Section 8.2.1(c)(ii) or
8.2.1(d) shall be allocated in the following order: (X) first, to
reimburse ARQULE and DS for their reasonable out of pocket expenses in making
such recovery (which amounts shall be allocated pro rata if insufficient to
cover the totality of such expenses); and (Y) then, 100% to ARQULE.

 

8.2.2        Defense of Claims.  In the event that any action, suit or
proceeding is brought against either Party or any Affiliate or Sublicensee of
either Party alleging the infringement of the Technology or Patent Rights of a
Third Party by reason of or the 

 

84

 

Development or Commercialization of any
Licensed Product, such Party shall notify the other Party within five (5) days
of the earlier of (a) receipt of service of process in such action, suit
or proceeding, or (b) the date such Party becomes aware that such action,
suit or proceeding has been instituted, and the JSC shall meet as soon as
possible to discuss the overall strategy for defense of such matter.  Except as agreed by the JSC (subject to
dispute resolution as a Unanimous Decision), (a) DS shall have the
obligation to defend such action, suit or proceeding in the Territory; (b) ARQULE
and/or any of its Affiliates or sublicensees shall have the right to separate
counsel at its own expense in any such action, suit or proceeding; and (c) the
Parties shall cooperate with each other in all reasonable respects in any such
action, suit or proceeding.  All expenses
of such action, suit or proceeding shall be borne by DS.  Each Party shall promptly furnish the other
Party with a copy of each communication relating to the alleged infringement
that is received by such Party including all documents filed in any
litigation.  In no event shall either
Party settle or otherwise resolve any such action, suit or proceeding brought
against the other Party or any of its Affiliates or sublicensees without the
other Party’s prior written consent.

 

8.2.3        Trademark
Prosecution and Registration. 
DS shall be responsible for the filing, prosecution, maintenance,
defense and enforcement of all Product Trademarks created during the
Development and/or Commercialization at DS’s expense.  DS grants ARQULE the non-exclusive,
royalty-free, non-assignable (except in connection with an assignment of this
Agreement pursuant to Section 12.10), non-transferable (except in
connection with an assignment of this Agreement pursuant to Section 12.10)
and non-sublicensable license of the Product Trademark in USA.  All
goodwill deriving from the use of the Product Trademark will accrue solely and
exclusively to DS.  ARQULE shall use the Product Trademark
only in accordance with reasonable standards.  In any circumstances, ARQULE
may not apply or register the same or a confusingly similar trademark without
prior written consent of DS.  ARQULE agrees not to engage in any form
of conduct, or make any statements or representations, that disparage or
otherwise harm the reputation, goodwill or commercial interest related to the
Product Trademark.  In all Licensed
Product primary and secondary packages and labels and all marketing and
promotional literature, ARQULE shall be presented and described as the Party
who developed the Licensed Product, and the ARQULE name and logo shall appear
in the same in size and prominence as the DS name and logo on all Licensed
Product primary and secondary packages and labels and all marketing and
promotional literature used in the 

 

85

 

Territory, unless prohibited by Applicable Laws; provided, however,
that if it is commercially impracticable to do so, the Parties will discuss in
good faith an alternate presentation of their names and logos.

 

8.2.4        Trademark
Infringement
in USA and Kyowa’s Territory.  If, during the Term, any Third
Party uses, infringes, threatens to infringe or otherwise damages the Product
Trademark in the U.S. Territory or Asian Territory, each Party shall
immediately notify the other.  DS shall
have the right, but not the obligation, to take all reasonable steps, whether
by action, suit, proceeding, or otherwise to prevent further infringement of or
damage to the Product Trademark in the U.S. Territory.  The Parties agree to fully cooperate with
each other in the prosecution, defense and/or settlement of any such suits.

 

8.2.5        Domain Name for INN and Trademark.  The
Parties shall collaborate to register and maintain the domain names that
correspond to the International Nonproprietary Names (“INN”) of the Licensed Products and the Product
Trademarks or their candidates for the Licensed Product in the Territory in
order to prevent the registration of such domain names by Third Parties in bad
faith.  ARQULE shall inform DS of (i) the
first to the third INN candidates for registering the related domain name
considering the priority of INN candidates, and (ii) the INN selected by
WHO, so that DS may register the corresponding domain names in timely and
efficient manner.

 

9.             TERM AND TERMINATION

 

9.1           Term.  This Agreement shall commence on the
Effective Date and shall continue in full force and effect, unless otherwise
terminated pursuant to Section 9.2, until (a) such time as DS is no longer
Developing at least * (*) Licensed Product or (b) if, as of the time DS is no
longer Developing at least * (*) Licensed Product, DS is Commercializing a
Licensed Product, such time as all Royalty Terms for all Licensed Products have
ended, whichever is later (the “Term”).  Upon the expiration of this Agreement as set
forth in this Section 9.1, the license rights granted hereunder shall be
converted to perpetual and fully paid-up licenses.

 

9.2           Termination.  Subject to Section 12.1(d), this Agreement
may be terminated by either Party as follows:

 

 

86

 

9.2.1        Unilateral Right to Terminate Agreement.

 

(a)           DS
Rights to Terminate.  DS may
terminate this Agreement, (A) at any time prior to the Initiation of Phase
3 Clinical Trials with respect to a Licensed Product on not less than ninety
(90) days’ prior written notice to ARQULE and (B) at any time on and after
the Initiation of Phase 3 Clinical Trials with respect to a Licensed Product on
not less than one hundred eighty (180) days’ prior written notice to ARQULE.

 

(b)           ARQULE
Right to Terminate.  Except to the
extent the following is unenforceable under the law of a particular
jurisdiction where a patent application with ARQULE Patent Rights is pending or
a patent within ARQULE Patent Rights is issued, ARQULE may terminate this
Agreement immediately upon written notice to DS in the event that DS or any of
its Affiliates Challenges any ARQULE Patent Right or assists a Third Party in
initiating a Challenge of any ARQULE Patent Right.

 

9.2.2        Termination for Breach.  Except as set forth herein, either Party may
terminate this Agreement, effective immediately upon written notice to the
other Party, for a material breach by the other Party of any obligation under
this Agreement that remains uncured * (*) days (* (*) days in the event that
the breach is a failure of either Party to make any payment required hereunder)
after the non-breaching Party first gives written notice to the other Party of
such breach and its intent to terminate this Agreement if such breach is not
cured.

 

9.2.3        Termination for Insolvency.  In the event that either Party files for
protection under bankruptcy laws, makes an assignment for the benefit of
creditors, appoints or suffers appointment of a receiver or trustee over all or
substantially all of its property, files a petition under any bankruptcy or
insolvency act or has any such petition filed against it which is not
discharged within * (*) days of the filing thereof, then the other Party may
terminate this Agreement effective immediately upon written notice to such
Party.  In connection therewith, all
rights and licenses granted under this Agreement are, and shall be deemed to
be, for purposes of Section 365(n) of the United States Bankruptcy
Code, licenses of rights to “intellectual property” as defined under Section 101(35A)
of the United States Bankruptcy Code.

 

87

 

 

9.3           Consequences of
Termination of Agreement. 
In the event of the termination of this Agreement pursuant to Section
9.2, the following provisions shall apply, as applicable.

 

9.3.1        Termination by ARQULE under 9.2.1(b), 9.2.2 or 9.2.3
or by DS under Section 9.2.1(a).  If this Agreement is terminated by DS
pursuant to Section 9.2.1(a) or by ARQULE pursuant to Section 9.2.1(b),
9.2.2 or 9.2.3:

 

(a)           all
licenses and rights granted to DS, including without limitation, all licenses
granted to DS under Article 6, shall immediately terminate and ARQULE
shall no longer be subject to any obligations under Section 6.4.1;

 

(b)           DS
shall continue to be subject to the obligations set forth in Section 6.4.2
for one (1) year
following such termination;

 

(c)           each
Party shall promptly return all Confidential Information and Proprietary
Materials of the other Party that are not subject to a continuing license
hereunder; provided, that, each Party may retain one copy of the Confidential
Information of the other Party in its archives solely for the purpose of
establishing the contents thereof and ensuring compliance with its obligations
hereunder;

 

(d)           with
respect to a termination of this Agreement by DS pursuant to Section 9.2.1(a) only,
from the period commencing on the date that ARQULE receives the notice
described in Section 9.2.1(a), DS shall (i) relinquish its right to
representation on any Committee that is formed under this Agreement and (ii) all
decisions that were designated as DS Decisions, Joint Decisions and Unanimous
Decisions shall be made solely by ARQULE;

 

(e)           upon
request of ARQULE, DS shall promptly, and in any event within sixty (60) days
after ARQULE’s request (which request may specify any or all of the actions in
clauses (i) through (xii);

 

(i)            assign
to ARQULE, free of charge, the ownership of all Product Trademarks applicable
to Licensed Products; provided that after such assignment ARQULE shall assume
all responsibility for maintaining such Product Trademarks, and if 

 

88

 

ARQULE does not request such assignment, DS may terminate or withdraw
from registration, all such Product Trademarks.

 

(ii)           assign to ARQULE, free of charge, or at DS’s
choice, grant ARQULE an exclusive, worldwide, royalty-free license, with
the unrestricted right to sublicense, under all DS Patent Rights and DS
Technology specific to the Collaboration Compounds and Licensed Products and a
non-exclusive worldwide, royalty-free license, with the unrestricted right to
sublicense, under all other DS Patent Rights and DS Technology necessary or
useful for ARQULE to Develop and Commercialize the Licensed Products.

 

(iii)          transfer
to ARQULE all of its right, title and interest in all Regulatory Filings, Drug
Approval Applications and Regulatory Approvals then in its name applicable to
Licensed Products, if any, and all Confidential Information Controlled by it as
of the date of termination relied on by such Regulatory Filings, Drug Approval
Applications and Regulatory Approvals;

 

(iv)          notify
the applicable Regulatory Authorities and take any other action reasonably
necessary to effect such transfer;

 

(v)           provide
ARQULE with copies all correspondence between DS and such Regulatory
Authorities relating to such Regulatory Filings, Drug Approval Applications and
Regulatory Approvals;

 

(vi)          assign
(or cause its Affiliates to assign) to ARQULE all agreements with any Third
Party with respect to Manufacture of Collaboration Compounds and Licensed
Products or the conduct of Clinical Trials for the Licensed Products,  including, without limitation, agreements
with contract research organizations, clinical sites and investigators, unless
expressly prohibited by any such agreement (in which case DS shall cooperate
with ARQULE in all reasonable respects to secure the consent of such Third
Party to such assignment);

 

(vii)         cooperate
with ARQULE, cause its Affiliates to cooperate with ARQULE and use Commercially
Reasonable Efforts to require any Third Party with which DS has an agreement
with respect to the conduct of Clinical Trials for Licensed Products or the 

 

89

 

Manufacture of Licensed Products (including, without limitation,
agreements with contract manufacturing organizations, contract research
organizations, clinical sites and investigators), to cooperate with ARQULE in
order to accomplish the transfer to ARQULE of similar rights as held by DS
under its agreements with such Third Parties;

 

(viii)        provide
ARQULE at cost with all supplies of Collaboration Compounds and Licensed
Products in the possession of DS or any Affiliate or contractor of DS;

 

(ix)           provide
ARQULE with copies of all reports and data generated or obtained by DS or its
Affiliates pursuant to this Agreement that relate to any Licensed Product that
have not previously been provided to ARQULE;

 

(x)            grant
to ARQULE the right to use and disclose in connection with the Development and
Commercialization of Licensed Products all DS Confidential Information
Controlled by DS that is necessary or useful for the Development and
Commercialization of Licensed Products, and agree that all such DS Confidential
Information shall be subject to clause (i) of the second sentence of Section 5.1.1
as if it were ARQULE Confidential Information but shall not be subject to
clause (ii) of the second sentence of Section 5.1.1;

 

(xi)           if
DS has Manufactured, is Manufacturing or is having manufactured such Licensed
Product or any intermediate of such Licensed Product as of the date of
termination, (A) transfer copies of all documents and materials Controlled
by DS and embodying DS Technology and/or DS Patent Rights that are at the time
of such termination being used by DS or its Third Party manufacturers to
Manufacture a Collaboration Compound or Licensed Product, including but not
limited to all suppliers, analytical methods, quality standards,
specifications, commercial API formula, process chemistry, Manufacturing
process descriptions, process flows, cycle times, process parameters, process
equipment type and sizes, cleaning methods, commercial API samples, master
safety data sheets, and stability reports (the “DS Manufacturing Know-How”) solely to enable the Manufacture
of a Collaboration Compound or Licensed Product by ARQULE, its Affiliates or
any Third Party manufacturer of ARQULE; (B) promptly make available to
ARQULE or any such Third Party manufacturer a reasonable number of
appropriately trained personnel to provide, on a mutually convenient 

 

90

 

timetable, technical assistance in the transfer of DS Manufacturing
Know-How to ARQULE at ARQULE’s reasonable expense to reimburse DS for the time
expended by DS personnel; (C) cooperate with ARQULE, cause its Affiliates
to cooperate with ARQULE and use Commercially Reasonable Efforts to require its
Third Party manufacturers of a Collaboration Compound or Licensed Product to
cooperate with ARQULE in order to accomplish the transfer to ARQULE of similar
rights as held by DS under its Third Party manufacturer agreements; and (D) supply
ARQULE with its requirements of such Collaboration Compound or Licensed Product
for up to * (*) months following such termination at a transfer price equal to (1) DS’s
Manufacturing Cost thereof for the first * (*) months and (2) DS’s
Manufacturing Cost thereof, plus * percent (*%) for the second * (*) month
period; and

 

(xii)          enter
into negotiations with ARQULE and agree upon and implement a plan for the
orderly transition of Development and Commercialization from DS to ARQULE in a
manner consistent with Applicable Laws and standards of ethical conduct of
human Clinical Trials, including without limitation, the transfer of the global
safety data to ARQULE, and will seek to replace all DS personnel engaged in any
Development or Commercialization activities, in each case, as promptly as
practicable.

 

(f)            ARQULE
shall reimburse DS for its actual out-of-pocket costs of complying with Section 9.3.1(e)(i), (ii), (iii), (iv), (v), (vi), (vii), (viii) and (ix), up to a total of * dollars (US $*).

 

9.3.2        Termination by DS.  If this Agreement is terminated by DS
pursuant to Section 9.2.2 or 9.2.3:

 

(a)           all
licenses granted by ARQULE to DS pursuant to Section 6.1.1 (including any
additional licenses required to Manufacture API), shall survive the termination
in each case subject to DS’s continued payment of all milestone, royalty and
other payments under and in accordance with this Agreement with respect
thereto;

 

(b)           all
licenses granted by DS to ARQULE pursuant to Section 6.1.2(a) and
6.1.2(b) shall continue, provided, that, the Parties shall negotiate, in
good faith, the terms of payment to DS by ARQULE for any such licenses, and in
the case of termination by DS 

 

91

 

pursuant to Section 9.2.2, ARQULE shall continue to be subject to
the obligations set forth in Section 6.4.1 for one (1) year following
such termination; and

 

(c)           each
Party shall promptly return all Confidential Information and Proprietary
Materials of the other Party that are not subject to a continuing license
hereunder; provided, that, each Party may retain one copy of the Confidential
Information of the other Party in its archives solely for the purpose of
establishing the contents thereof and ensuring compliance with its obligations
hereunder.

 

9.4           Surviving Provisions.  Termination or expiration of this Agreement
for any reason shall be without prejudice to:

 

(a)           survival of rights specifically stated
in this Agreement to survive, including without limitation as set forth in Section 9.3;

 

(b)           the
rights and obligations of the Parties provided in Articles 1, 5, 7, 8 (with respect to Joint
Patent Rights and DS Patent Rights licensed to ARQULE pursuant to Section 9.3.1(e)(ii)),
10, 11 and 12 and Sections 3.10.4(b), 6.3, 9.3 and 9.4 shall survive
such termination except as provided in this Article 9;

 

(c)           the
obligations of either Party that have accrued prior to termination or expiration,
including, without limitation, any milestone, royalty relating to a date or
period prior to termination or expiration; and

 

(d)           any
other rights or remedies provided at law or equity which either Party may
otherwise have.

 

10.          REPRESENTATIONS AND WARRANTIES

 

10.1         Mutual Representations and
Warranties.  ARQULE and DS
each represents and warrants to the other, as of the Effective Date, as
follows:

 

10.1.1      Organization.  It is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and has all requisite power and authority, corporate or
otherwise, to execute, deliver and perform this Agreement.

 

92

 

10.1.2      Authorization.  The execution and delivery of this Agreement
and the performance by it of the transactions contemplated hereby have been
duly authorized by all necessary corporate action and will not violate (a) such
Party’s certificate of incorporation or bylaws, (b) any agreement,
instrument or contractual obligation to which such Party is bound in any
material respect, (c) any requirement of any Applicable Laws, or (d) any
order, writ, judgment, injunction, decree, determination or award of any court
or governmental agency presently in effect applicable to such Party.

 

10.1.3      Binding Agreement.  This Agreement is a legal, valid and binding
obligation of such Party enforceable against it in accordance with its terms
and conditions.

 

10.1.4      No Inconsistent Obligation.  It is not under any obligation, contractual
or otherwise, to any Person that conflicts with or is inconsistent in any
respect with the terms of this Agreement or that would impede the diligent and
complete fulfillment of its obligations hereunder.

 

10.2         Additional Representations
of ARQULE.  ARQULE
represents and warrants to DS as follows:

 

10.2.1      Licensed Technology.  All Licensed Technology existing as of the
Effective Date is Controlled by ARQULE.

 

10.2.2      Licensed Patent Rights.  To the actual knowledge of the Chief
Executive Officer, the President, any Vice President or ARQULE’s internal
patent counsel, as of the Effective Date, except as previously disclosed to DS,
(i) no Third Party has initiated, or threatened in writing to initiate,
any litigation against ARQULE or its Affiliates, including, without limitation,
by initiating any declaratory judgment lawsuit, or by sending a
cease-and-desist letter, alleging that the Licensed Patent Rights are invalid
or unenforceable or that the use of the Licensed Patent Rights or Licensed
Technology as contemplated by this Agreement infringes the Patent Rights of
such Third Party and (ii) the Licensed Patent Rights listed on Schedule
2 are not invalid or unenforceable.

 

93

 

10.3         Covenants of DS
Relating to Existing License Agreement.

 

(a)           DS
acknowledges receipt from ARQULE of a copy of the Existing License Agreement,
with all financial information redacted. 
As used in this Section 10.3, “Licensed Product,” “Back-Up
Compound,” “Cancer Field,” “Regulatory Approval,” “Regulatory Activities,”
“API,” “ARQULE Trademarks” and “Additional Field” shall have the meanings set
forth in the Existing License Agreement.

 

(b)           DS
acknowledges that DS is an “Other Licensee” within the meaning of the Existing
License Agreement and that ARQULE has certain obligations and commitments under
the Existing License Agreement with respect to Technology, Patent Rights and
trademarks of an Other Licensee relating to Licensed Products.  DS agrees that ARQULE shall have the right to
honor such obligations and fulfill such commitments, and that honoring such
obligations and fulfilling such commitments shall not be a breach of this
Agreement, notwithstanding anything to the contrary herein.  Such obligations and commitments include,
without limitation:  (i) the rights
of Kyowa with respect to ARQULE Trademarks set forth in Section 2.1.4 of
the Existing License Agreement, (ii) the obligations of ARQULE and the
rights of Kyowa with respect to Back-Up Compounds set forth in Section 3.7
of the Existing License Agreement, and (iii) the obligations of ARQULE and
rights of Kyowa with respect to Indications in the Additional Field set forth
in Section 3.8 of the Existing License Agreement.

 

(c)           Subject
to reciprocal rights to DS as set forth in Section 3.1.4(b), DS hereby (i) agrees
that DS shall provide to ARQULE, and that ARQULE shall have the right to
provide to Kyowa, copies of any NDA or equivalent Drug Approval Application
filed by DS with the FDA or the EMEA in the Cancer Field, and grants to Kyowa
the right to access, reference, use and incorporate any such NDA consistent
with the terms of the Existing License Agreement; (ii) agrees that DS
shall provide to ARQULE, and that ARQULE shall have the right to provide to
Kyowa, copies of any additional information or data with respect to Licensed
Product generated by, or on behalf of, DS and owned or otherwise controlled by
DS and necessary or useful for Kyowa to obtain any Regulatory Approvals or
perform such other Regulatory Activities under the Existing License Agreement,
or as is otherwise reasonably requested in writing by Kyowa; (iii) agrees
that DS shall, at the request of ARQULE, attend regular meetings with Kyowa and
ARQULE to discuss development and sales strategy with respect to Licensed
Products; (iv) agrees to either grant a royalty-free license to ARQULE or 

 

94

 

Kyowa, in
which case ARQULE or Kyowa shall pay or reimburse all maintenance fees in the
Asian Territory, or at DS’s choice permit ARQULE to obtain, or to grant to
Kyowa the right to obtain, at ARQULE’s or Kyowa’s own expense, registration in
the Asian Territory of any Product Trademark used by DS in the Territory that does
not incorporate the name or logo of DS and (v) grants to ARQULE an
exclusive, royalty-free, fully paid-up, perpetual, irrevocable license, with
the right to grant a sublicense to Kyowa, under DS Technology and DS Patent
Rights and DS’s interest in Joint Technology and Joint Patent Rights to import
and use Collaboration Compounds solely for use in Licensed Products and/or to
develop, use, distribute for sale, offer for sale, sell, import and export
Licensed Products in the Cancer Field, and the Additional Field if applicable
under the Existing License Agreement, in the Asian Territory.

 

11.          INDEMNIFICATION

 

11.1         Indemnification of ARQULE
by DS.  DS shall
indemnify, defend and hold harmless ARQULE, its Affiliates, their respective
directors, officers, employees and agents, and their respective successors,
heirs and assigns (collectively, the “ARQULE Indemnitees”),
against all liabilities, damages, losses and expenses (including, without
limitation, reasonable attorneys’ fees and expenses of litigation) (collectively,
“Losses”) incurred by or imposed upon
ARQULE Indemnitees, or any of them, as a direct result of claims, suits,
actions, demands or judgments of Third Parties, including, without limitation,
personal injury and product liability claims (collectively, “Claims”), arising out of the Development of any
Collaboration Compound or Licensed Product or the Commercialization (including,
without limitation, the production, manufacture, promotion, import, sale or use
by any Person) of any Licensed Product by DS or any of its Affiliates,
Sublicensees, distributors or agents, and the Co-Commercialization of any
Co-Commercialized Licensed Product by DS or any of its Affiliates,
Sublicensees, distributors or agents, except with respect to any Claim or
Losses that result from a breach of this Agreement by, or the gross negligence
or willful misconduct of, ARQULE.

 

11.2         Indemnification of DS by
ARQULE.  ARQULE shall
indemnify, defend and hold harmless DS, its Affiliates, their respective
directors, officers, employees and agents, and their respective successors,
heirs and assigns (collectively, the “DS Indemnitees”),
against all Losses incurred by or imposed upon DS Indemnitees, or any of them,
as a direct result of Claims

 

95

 

arising out of the
Co-Commercialization by ARQULE or any of its Affiliates, sublicensees,
distributors or agents of any Co-Commercialized Licensed Product, except with
respect to any Claim or Losses that result from a breach of this Agreement by,
or the gross negligence or willful misconduct of, DS.

 

11.3         Conditions to
Indemnification.  A Person
seeking recovery under this Article 11 (the “Indemnified
Party”) in respect of a Claim shall give prompt notice of such Claim
to the Party from which indemnification is sought (the “Indemnifying
Party”); provided, that, the Indemnifying Party is not contesting
its obligation under this Article 11, shall permit the Indemnifying Party
to control any litigation relating to such Claim and the disposition of such Claim;
provided, that, the Indemnifying Party shall (a) act reasonably and in
good faith with respect to all matters relating to the settlement or
disposition of such Claim as the settlement or disposition relates to such
Indemnified Party and (b) not settle or otherwise resolve such claim
without the prior written consent of such Indemnified Party (which consent
shall not be unreasonably withheld, conditioned or delayed).  Each Indemnified Party shall cooperate with the
Indemnifying Party in its defense of any such Claim in all reasonable respects
and shall have the right to be present in person or through counsel at all
legal proceedings with respect to such Claim.

 

11.4         Warranty Disclaimer.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY
TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT
AND EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING,
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NONINFRINGEMENT.

 

11.5         No Warranty of Success.  Nothing contained in this Agreement shall be
construed as a warranty, either express or implied, on the part of either Party
that (a) the Development Program will yield a Licensed Product or
otherwise be successful or meet its goals, time lines or budgets, or (b) the
outcome of the Development Program will be commercially exploitable in any
respect.

 

96

 

11.6         Limited Liability.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN
THIS AGREEMENT, AND EXCEPT WITH RESPECT TO EITHER PARTY’S OBLIGATIONS UNDER SECTION 11.1
AND 11.2 FOR INDEMNIFICATION PAYMENTS WITH RESPECT TO LOSSES PAID TO THIRD
PARTIES, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OF ITS
AFFILIATES FOR (I) ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR LOST
REVENUES, OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR
SERVICES, WHETHER UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY.

 

12.          MISCELLANEOUS

 

12.1         Arbitration.  Any
dispute, controversy or claim arising between the Parties with respect to this
Agreement, including any dispute, controversy or claim relating to any Joint Decision (each, a “Dispute”), shall be resolved by binding arbitration before
a panel of three (3) arbitrators in accordance with the rules of the
AAA in effect at the time the proceeding is initiated.  In any such arbitration, the following
procedures shall apply:

 

(a)           The
panel will be comprised of one arbitrator chosen by DS, one by ARQULE and the
third by the two so chosen.  If either,
or both, of DS or ARQULE fails to choose an arbitrator or arbitrators within thirty
(30) days after receiving notice of commencement of arbitration or if the two
arbitrators fail to choose a third arbitrator within thirty (30) days after
their appointment, then either or both Parties shall immediately request that
the AAA select the remaining number of arbitrators to be selected, which
arbitrator(s) shall have the requisite scientific background, experience
and expertise.  The place of arbitration
shall be Boston, Massachusetts.

 

(b)           Either
Party may apply to the arbitrators for interim injunctive relief until the
arbitration decision is rendered or the Dispute is otherwise resolved.  Either Party also may, without waiving any
right or remedy under this Agreement, seek from any court having jurisdiction
any injunctive or provisional relief necessary to protect the rights or
property of that Party pending resolution of the Dispute pursuant to this Section 12.1. 
The arbitrators 

 

97

 

shall have no
authority to award punitive or any other type of damages not measured by a
Party’s compensatory damages.  Each Party
shall bear its own costs and expenses and attorneys’ fees in connection with
any such arbitration; provided, that, the non-prevailing Party shall pay the
costs and expenses incurred by the prevailing Party in connection with any such
arbitration, including reasonable attorneys’ fees and costs.  The Parties acknowledge that while Section 12.3
shall apply to any such Dispute, it is the intention of the Parties not to use
the discovery rules of the Commonwealth of Massachusetts in connection
with any such Dispute.

 

(c)           Except
to the extent necessary to confirm an award or decision or as may be required
by Applicable Laws, neither Party nor any arbitrator may disclose the existence
or results of any arbitration without the prior written consent of both
Parties.  In no event shall any
arbitration be initiated after the date when commencement of a legal or
equitable proceeding based on the Dispute would be barred by the applicable
Massachusetts statute of limitations.

 

(d)           In
the event of a Dispute involving the alleged breach of this Agreement
(including, without limitation, whether a Party has satisfied its diligence
obligations hereunder), (i) neither Party may terminate this Agreement
under Section 9.2.2 until resolution of the Dispute pursuant to this Section 12.1 and (ii) if the arbitrators
render a decision that a breach of this Agreement has occurred, the arbitrators
shall have no authority to modify the right of the non-breaching Party to
terminate this Agreement in accordance with Section 9.2.2.

 

(e)           Any
disputed performance or suspended performance pending the resolution of a
Dispute that the arbitrators determine to be required to be performed by a
Party shall be completed within a reasonable time period following the final
decision of the arbitrators.

 

(f)            The
decision of the arbitrators shall be the sole, exclusive and binding remedy
between the Parties regarding the determination of all Disputes presented.  Any monetary payment to be made by a Party
pursuant to a decision of the arbitrators shall be made in United States
dollars, free of any tax or other deduction.

 

12.2         Notices.  All notices and communications shall be in
writing and delivered personally or by internationally-recognized overnight
express courier providing evidence of 

 

98

 

delivery or mailed via
certified mail, return receipt requested, addressed as follows, or to such
other address as may be designated from time to time:

 

	
   

  	
  If to DS:

  	
   

  	
  If to ARQULE:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Daiichi Sankyo Co.,
  Ltd.

  	
   

  	
  ArQule, Inc.

  
	
   

  	
  3-5-1, Nihonbashi Honcho, Chuo-ku

  	
   

  	
  19 Presidential Way

  
	
   

  	
  Tokyo 103-8426,
  Japan

  	
   

  	
  Woburn, MA 01801, U.S.A.

  
	
   

  	
  Tel: +81-3-6225-1008

  	
   

  	
  Tel: (781) 994-0300

  
	
   

  	
  Fax: +81-3-6225-1903

  	
   

  	
  Fax: (781) 376-6019

  
	
   

  	
  Attention: Vice President, Licensing

  	
   

  	
  Attention: General Counsel

  
	
   

  	
   

  	
   

  	
  Attention Vice President, Business Development

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  With a copy to:

  
	
   

  	
   

  	
   

  	
  Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

  
	
   

  	
   

  	
   

  	
  One Financial Center

  
	
   

  	
   

  	
   

  	
  Boston, Massachusetts 02111, U.S.A.

  
	
   

  	
   

  	
   

  	
  Attention: Jeffrey Wiesen, Esq.

  
	
   

  	
   

  	
   

  	
  Tel: (617) 542-6000

  
	
   

  	
   

  	
   

  	
  Fax: (617) 542-2241

  

 

In addition, all notices to any Committee shall be sent to each Party’s
designated members of such committees at such Party’s address stated above or
to such other address as such Party may designate by written notice given in
accordance with this Section 12.2.

 

Except as otherwise expressly provided in this Agreement or mutually
agreed in writing, any notice, communication or document (excluding payment)
required to be given or made shall be deemed given or made and effective upon
actual receipt or, if earlier, (a) three (3) Business Days after
deposit with an internationally-recognized overnight express courier with
charges prepaid, or (b) five (5) Business Days after mailed by
certified, registered or regular mail, postage prepaid, in each case addressed
to a Parties at its address stated above or to such other address as such Party
may designate by written notice given in accordance with this Section 12.2.

 

12.3         Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts
(U.S.A.), without regard to the application of principles of conflicts of law.

 

99

 

12.4         Binding Effect.  This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective legal representatives,
successors and permitted assigns.

 

12.5         Headings.  Section and
subsection headings are inserted for convenience of reference only and do not
form a part of this Agreement.

 

12.6         Counterparts.  This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original and both
of which, together, shall constitute a single agreement.

 

12.7         Amendment; Waiver.  This Agreement may be amended, modified,
superseded or canceled, and any of the terms of this Agreement may be waived,
only by a written instrument executed by each Party or, in the case of waiver,
by the Party or Parties waiving compliance. 
The delay or failure of either Party at any time or times to require
performance of any provisions shall in no manner affect the rights at a later
time to enforce the same.  No waiver by
either Party of any condition or of the breach of any term contained in this
Agreement, whether by conduct, or otherwise, in any one or more instances,
shall be deemed to be, or considered as, a further or continuing waiver of any
such condition or of the breach of such term or any other term of this
Agreement.

 

12.8         No Third Party
Beneficiaries.  Except as
set forth in Sections 11.1 and 11.2, no Third Party (including, without
limitation, employees of either Party) shall have or acquire any rights by
reason of this Agreement.

 

12.9         Purposes and Scope.  The Parties hereto understand and agree that
this Collaboration is limited to the activities, rights and obligations as set
forth in this Agreement.  Nothing in this
Agreement shall be construed (a) to create or imply a general partnership
between the Parties, (b) to make either Party the agent of the other for
any purpose, (c) to alter, amend, supersede or vitiate any other
arrangements between the Parties with respect to any subject matters not
covered hereunder, (d) to give either Party the right to bind the other, (e) to
create any duties or obligations between the Parties except as expressly set
forth herein, or (f) to grant any direct or implied licenses or any other
right other than as expressly set forth herein.

 

100

 

12.10       Assignment
and Successors.  Neither this Agreement nor any obligation of
a Party hereunder may be assigned by either Party without the consent of the
other which shall not be unreasonably withheld, except that each Party may
assign this Agreement and the rights, obligations and interests of such Party, (i) in
whole or in part, to any of its Affiliates, or (ii) to any purchaser of
all or substantially all of its assets to which this Agreement relates or to
any successor corporation resulting from any merger, consolidation, share
exchange or other similar transaction.

 

12.11       Force
Majeure.  Neither DS nor ARQULE shall be liable for
failure of or delay in performing obligations set forth in this Agreement, and
neither shall be deemed in breach of its obligations, if such failure or delay
is due to a Force Majeure.  In event of
such Force Majeure, the Party affected shall use reasonable efforts to cure or
overcome the same and resume performance of its obligations hereunder.

 

12.12       Interpretation. 
The Parties hereto acknowledge and agree that: (a) each Party and
its counsel reviewed and negotiated the terms and provisions of this Agreement
and have contributed to its revision; (b) the rule of construction to
the effect that any ambiguities are resolved against the drafting Party shall
not be employed in the interpretation of this Agreement; and (c) the terms
and provisions of this Agreement shall be construed fairly as to each Party and
not in a favor of or against either Party, regardless of which Party was
generally responsible for the preparation of this Agreement.  In addition, unless a context otherwise
requires, wherever used, the singular shall include the plural, the plural the
singular, the use of any gender shall be applicable to all genders, the word
“or” is used in the inclusive sense (and/or) and the word “including” is used
without limitation and means “including without limitation”.

 

12.13       Integration;
Severability.  This Agreement is the entire agreement with
respect to the subject matter hereof and supersedes all other agreements and
understandings between the Parties with respect to such subject matter.  Notwithstanding the foregoing, this Agreement
shall not supersede the Confidential Disclosure Agreement dated August 11, 2008 (the “Prior
CDA”) between ARQULE and DS, which shall continue to be in full
force and effect in accordance with its terms and conditions.  All disclosures and information from ARQULE
to DS prior to the Effective Date shall be governed by the Prior CDA, and all disclosures and
information from 

 

101

 

ARQULE to DS after the
Effective Date shall be governed by this Agreement.  If any provision of this Agreement is or
becomes invalid or is ruled invalid by any court of competent jurisdiction or
is deemed unenforceable, it is the intention of the Parties that the remainder
of the Agreement shall not be affected.

 

12.14       Further
Assurances.  Each of ARQULE and DS agrees to duly execute
and deliver, or cause to be duly executed and delivered, such further
instruments and do and cause to be done such further acts and things,
including, without limitation, the filing of such additional assignments,
agreements, documents and instruments, as the other Party may at any time and
from time to time reasonably request in connection with this Agreement or to
carry out more effectively the provisions and purposes of, or to better assure
and confirm unto such other Party its rights and remedies under, this Agreement.

 

12.15       Effective
Date.  The Effective Date shall not occur until such
time as the waiting period under the HSR Act shall have expired or earlier been
terminated; provided, that, (a) no injunction (whether temporary,
preliminary or permanent) prohibiting consummation of the transactions
contemplated by this Agreement or any material portion hereof shall be in
effect; and (b) no requirements or conditions shall have been imposed in
connection therewith that are not otherwise reasonably satisfactory to the
Parties (collectively, the “HSR Conditions”).

 

[Remainder of page intentionally left
blank.]

 

102

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives.

 

	
   

  	
   

  	
  ARQULE, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Paolo Pucci

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Paolo Pucci

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  DAIICHI SANKYO CO., LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Takashi
  Shoda

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  Takashi Shoda

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive
  Officer

  
						

 

103

 

SCHEDULE 1

 

DESCRIPTION OF ARQ 197

 

ARQ 197 is a totally synthetic small molecule having a *.

 

	
  Chemical Name:

  	
  *

  	
   

  
	
  Molecular Weight:

  	
  *

  	
   

  
	
  Molecular Formula:

  	
  *

  	
   

  

 

1-1

 

SCHEDULE 2

 

ARQULE PATENT RIGHTS

 

	
  Country/Code

  	
   

  	
  Application Number

  	
   

  	
  Filed

  	
   

  	
  Publication

  Number

  	
   

  	
  Publication

  Date

  
	
  *

  	
   

  	
  *

  	
   

  	
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  *

  
	
  *

  	
   

  	
  *

  	
   

  	
  *

  	
   

  	
  *

  	
   

  	
  *

  

 

2-1

 

SCHEDULE 3

 

MATERIAL TERMS TO BE INCLUDED IN

 

CO-COMMERCIALIZATION AGREEMENT

 

The Co-Commercialization Agreement to be
negotiated by the Parties shall contain the following material terms in
addition to the provisions set forth in Section 3.12.1(c)(i) of the LICENSE, CO-DEVELOPMENT AND
CO-COMMERCIALIZATION AGREEMENT. 
Capitalized terms used in this Schedule 3 and not otherwise
defined have the meanings given to them in the Agreement.

 

1.             Co-Commercialization
Rights.

 

(a)           All Detailing calls
shall be made in such markets as the USJMC reasonably considers to be appropriate
for the successful Commercialization of Co-Commercialized Products based on
objective, quantifiable information and market research data with the
objectives of allocating to each of ARQULE and DS target audience and accounts
from which each such Party will have the opportunity to attain its Detailing
target.  The Parties recognize that it may be
necessary from time to time to reassign individual accounts and/or target
audience between the Parties and the USJMC shall be entitled to review the
allocation of accounts as it reasonably determines to be appropriate.

 

(b)           Each Party shall use
Commercially Reasonable Efforts to execute its responsibilities under each
Co-Commercialization Plan, consistent with the applicable budget and in
accordance with all Applicable Laws, and to cooperate diligently with each
other in carrying out such Co-Commercialization Plan.

 

(c)           Except as otherwise specified in the
Agreement or the Co-Commercialization Agreement, all decisions of the USJMC
regarding the Co-Commercialization of Co-Commercialized Products (including,
without limitation, managed care strategy) shall, if referred to the JSC for
resolution of disagreements, be DS Decisions.

 

3-1

 

2.             Integrated
Sales Force.

 

(a)           ARQULE and DS shall
use an integrated sales force to Detail each Co-Commercialized Product.  ArQule shall provide a sales force (secondary
sales force) as set forth in Section 3.12(c)(i).  The ARQULE salesforce shall be deployed in
overlap in high potential territories (as identified by ZS mapping) already
covered by DS sales force (primary sales force).  The aggregate number of PDE’s for the primary
and secondary sales force as well as the respective deployment will be
determined by the USJMC and established pursuant to the Co-Commercialization
Plan.

 

(b)           Each Party shall be
responsible for ensuring that its sales personnel Detail each Co-Commercialized
Product in a manner consistent with the Co-Commercialization Plan and/or the
decisions of the USJMC.  In performing
their respective Detailing obligations hereunder, each of the Parties agrees to
(i) use sales personnel with an experience profile appropriate for the
target audience and Detailing role as described in the Co-Commercialization
Plan and (ii) in addition to DS providing the infrastructure contained in Section 8(c),
provide its own sales management organization and infrastructure for its sales
personnel.  All ARQULE sales personnel
will be recruited by ARQULE at ARQULE’s sole expense, and all DS
representatives will be recruited by DS at DS’s sole expense.

 

(c)           Each Party shall
provide Scientific Affairs Liaisons (“SALs”), in
proportion to the number of sales personnel provided by them.  DS will manage the SALs, develop the training
program for SALs and train the SALs at DS’s expense.

 

(d)           The Parties will
strive to establish a transparent and compatible sales reporting system for
Co-Commercialized Products to facilitate call planning and sales personnel
activities, and all costs related to such integration shall be borne by DS.

 

3.             Co-Commercialization
Plan.

 

(a)           Preparation of
Annual Co-Commercialization Plan.  The
USJMC will prepare and amend the Co-Commercialization Plan (including the
related budget) and update the Co-Commercialization Plan (and related budget)
as set forth in the Agreement.

 

(b)           Reporting.  DS shall provide an update on the performance
of the Co-Commercialization Plan to the USJMC no less frequently than
quarterly.

 

3-2

 

(c)           Detail
Audit Rights.  Each of DS and ARQULE
shall maintain written records of Details performed for a period of * (*) years
from the date of performance.  Each Party
shall have the right to inspect such records of the other Party to verify
Detailing reports provided to the USJMC under the Co-Commercialization
Agreement.  Each Audited Party shall make
its records available for inspection by appropriate representatives of the
Auditing Party during regular business hours at such place or places where such
records are customarily kept, upon reasonable notice from the Auditing Party,
solely to verify the accuracy of such statements.  Such inspection right shall not be exercised
more than once in any Calendar Year.  All
information concerning such statements, and all information learned in the
course of any audit or inspection, shall be Confidential Information of the
Audited Party.  The Auditing Party shall
pay the costs of such inspections, except that in the event there is any
downward adjustment in the number of Details shown by such inspection of more
than *  percent (*%) of the number
of Details reported in such statement, the Audited Party shall pay the costs of
such inspection.

 

4.             Control
Over Marketing, Advertising and Detailing.

 

(a)           DS
shall be responsible for the creation, preparation, production and reproduction
of all marketing or promotional materials, as approved by the USJMC pursuant to
procedures and timelines to be mutually agreed upon, consistent with the
Co-Commercialization Plan. Whenever marketing or promotional materials are
presented and described to the medical community (including, for example, the
physician, pharmacy, governmental, reimbursement and hospital sectors), the
Parties will be presented and described as joining in the promotion of the Co-Commercialization Product in the
United States.  All marketing or
promotional materials will state this arrangement and will display the names
and logos of the Parties with equal prominence, as and to the extent permitted
by Applicable Laws.

 

(b)           Neither
Party shall engage in any advertising or use any label, package, literature or
other written material in connection with a Co-Commercialized Product in the
Co-Commercialization Territory, unless the specific form and content thereof is
approved by the USJMC.

 

(c)           General public
relations materials of either Party need not be approved by the USJMC, but all
representations and statements pertaining to Co-Commercialized Products 

 

3-3

 

that appear in general public
relations materials of ARQULE or DS and include subject matter not previously
approved by the USJMC shall be subject to the approval of the USJMC.

 

(d)           Each Party shall annually certify to
the other Party that its field sales force (including persons responsible for
managing the field sales force) is properly trained with respect to both
C-Commercialized Product information and compliance with Applicable Laws.

 

5.             Sales Efforts in
the U.S. Territory.  As part of each
Co-Commercialization Plan for the U.S. Territory, the USJMC shall determine the
targeted level of sales of the applicable Co-Commercialized Product for the
target audience for the Calendar Year covered by such Co-Commercialization
Plan. The Co-Commercialization Plan shall include the number of Details and the
allocation between the Parties of such Details to the defined target
audience.  The Co-Commercialization Plan
shall also establish a minimum and maximum number of total Details by position
(i.e., first or second position) to be conducted by the Parties each year for
the Co-Commercialized Product. During the launch period for a Product for an
Indication, a majority of Details will be in the first position.  The Co-Commercialized Product shall be
included in each Party’s respective sales incentive bonus program for the
corresponding sales representatives, with specified links to sales
performance.  The Parties shall allocate
physicians in the Co-Promotion target audience in an unbiased manner based on
objective, quantifiable information and market research data with the
objectives of allocating to each Party those physicians in the Co-Promotion
target audience with the appropriate Detailing frequency to optimize the
penetration of such Co-Commercialized Product and achieve such Co-Promotion’s
sales target.  The Parties recognize that
it may be necessary from time to time to reassign individual medical
professionals in the target audience to optimize the targeted market
opportunity, and, as a result, the USJMC shall be entitled to review the
allocation of medical professionals in the target audience as it reasonably
determines to be appropriate.  Neither Party may utilize
Third Party contracted sales representatives without the express written
consent of the other Party.  Such consent
shall not be unreasonably withheld and shall be deemed given if not expressly
denied in writing within fifteen (15) days of a request for such consent.

 

6.             Performance
Criteria/Detailing Shortfall.  The
Parties shall agree on criteria for measuring each Party’s performance under the Co-
Commercialization Agreement.

 

3-4

 

7.             Training Program.  DS shall (a) develop a training program
for the promotion of all Co-Commercialized Products in the U.S. Territory and (b) train
all sales personnel of both Parties to be used for the Co-Commercialization of
Co-Commercialized Products in the U.S. Territory prior to commencement of
Detailing.  The Parties agree to utilize
such training programs on an ongoing basis to assure a consistent, focused
promotional strategy and all such training shall be carried out at a time that
is mutually acceptable to ARQULE and DS. 
No sales personnel of either Party may Detail a Co- Commercialized
Product unless such person successfully completes the training program
described in this Section 7.  The
costs of such training programs (including, without limitation, the
out-of-pocket costs of the development, production, printing of such training
materials) shall be borne by DS.

 

8.             Co-Promotion
Mechanism.

 

(a)           Sales.  All sales of Co-Commercialized Products in
the U.S. Territory shall be booked by DS. 
If, during the term of the Co-Promotion Agreement, ARQULE receives
orders from customers for a Co-Commercialized Product, it shall refer such
orders to DS.

 

(b)           Processing of
Orders for Co-Commercialized Products.

 

(i)            DS
shall have sole responsibility for arranging for the distribution and
warehousing of Co-Commercialized Products and for all billing and collections
for Co-Commercialized Products.

 

(ii)           All
orders for Co-Commercialized Products received and accepted by DS during the
term of the Co-Promotion Agreement shall be executed by DS in a reasonably
timely manner consistent with the general practices applied by it in executing
orders for other pharmaceutical products sold by it or its Affiliates.

 

(iii)          DS
shall have the discretion to reject any order received by it for a
Co-Commercialized Product; provided, however, that DS shall not reject such
orders on an arbitrary basis, but only with reasonable justification and
consistent with the general policies applied by it with respect to orders for
other pharmaceutical products sold by it or its Affiliates.

 

(iv)          DS
shall comply with all Applicable Laws in selling any Co-Commercialized Product.

 

3-5

 

(c)           DS shall supply the
following functions in relation to the Co-Commercialization of
Co-Commercialized Product (i) customer operations/service; (ii) production
forecasting and inventory control; (iii) strategic contracting (rebates,
Medicaid, Medicare, contract analysis); (iv) managed care internal
management (including managed care account managers), (v) managed care
external distribution, (vi) sales operations/services, (vii) freight,
(viii) accounts payable, (ix) credit and collections, (x) state
and federal government affairs representatives, (xi) reimbursement of Medicare
and Medicaid expenses and (xii) operation of a vendor hotline.

 

9.             Regulatory
Matters.

 

(a)           DS shall furnish
ARQULE with efficacy and safety information reasonably requested by ARQULE to
assist ARQULE in promoting the Co-Commercialized Product in the United States,
including without limitation relevant clinical and safety data included in the
NDA for the Co-Commercialized Product and additional information, if any,
related to the efficacy and safety profile of the Co-Commercialized Product.

 

(b)           DS
and ARQULE will have joint responsibility for and will make all decisions with
respect to any recall, market withdrawal, or any other corrective action
related to the Co-Commercialized Product in the United States.  DS will notify and consult with ARQULE prior
to implementation of any such actions that are reasonably likely to result in a
material adverse effect on the marketability of the Co-Commercialized Product
in the United States and shall consider in good faith any comments ARQULE may
have with respect to such implementation. 
DS and ARQULE will be jointly responsible for interactions with the FDA
or other Regulatory Authorities with regard to such corrective action.

 

(c)           In
accordance with Section 3.10.4(b), the parties shall exercise Commercially
Reasonable Efforts to execute a mutually satisfactory pharmacovigilance
agreement for the Territory
(the “Pharmacovigilance
Agreement”)
at least ninety (90) days prior to the date of Commercialization Regulatory
Approval in the United States.  The
Pharmacovigilance Agreement shall provide for, but not be limited to, the
exchange of (i) drug safety information; (ii) Co-Commercialized
Product defect information; (iii) reporting data regarding lack of
efficacy; (iv) International Conference on Harmonisation (ICH) seven (7) and
fifteen (15) day reports; (v) the creation and maintenance of a Master
Drug Safety Database; (vi) 

 

3-6

 

evaluations derived from drug
safety data; and (vii) such other information and data as may be
reasonably agreed upon by the parties.  DS
will be solely responsible for submitting, recording and storing all data to
the FDA and other appropriate regulatory authorities.

 

(d)           DS
will be solely responsible for submitting, recording and storing all FDA 2253
submissions.

 

10.           Miscellaneous.  Other customary terms, including
confidentiality, indemnification and termination.

 

3-7Exhibit 10.7

 

2003
EQUITY INCENTIVE PLAN

OF

DTS,
INC.

 

1.                                           Purpose of this Plan

 

The purpose of this 2003
Equity Incentive Plan is to enhance the long-term stockholder value of DTS, Inc.
by offering opportunities to eligible individuals to participate in the growth
in value of the equity of DTS, Inc.

 

2.                                           Definitions and Rules of Interpretation

 

2.1         Definitions

 

This Plan uses the
following defined terms:

 

(a)       “Administrator”
means the Board, the Committee, or any officer or employee of the Company to
whom the Board or the Committee delegates authority to administer this Plan.

 

(b)       “Affiliate”
means a “parent” or “subsidiary” (as each is defined in Section 424 of the
Code) of the Company and any other entity that the Board or Committee
designates as an “Affiliate” for purposes of this Plan.

 

(c)       “Applicable
Law” means any and all laws of whatever
jurisdiction, within or without the United States, and the rules of any
stock exchange or quotation system on which Shares are listed or quoted,
applicable to the taking or refraining from taking of any action under this
Plan, including the administration of this Plan and the issuance or transfer of
Awards or Award Shares.

 

(d)       “Award”
means a Stock Award, SAR, Cash Award, or Option granted in accordance with the
terms of this Plan.

 

(e)       “Award
Agreement” means the document evidencing the grant
of an Award.

 

(f)        “Award
Shares” means Shares covered by an outstanding
Award or purchased under an Award.

 

(g)       “Awardee”
means: (i) a person to whom an Award has been granted, including a holder
of a Substitute Award, (ii) a person to whom an Award has been transferred
in accordance with all applicable requirements of Sections 6.5, 7(h), and 17.

 

(h)       “Board”
means the Board of Directors of the Company.

 

(i)        “Cash
Award” means the right to receive cash as
described in Section 8.3.

 

 

(j)        “Change
in Control” means any transaction or event that
the Board specifies as a Change in Control under Section 10.4.

 

(k)       “Code”
means the Internal Revenue Code of 1986.

 

(l)        “Committee”
means a committee composed of Company Directors appointed in accordance with
the Company’s charter documents and Section 4.

 

(m)      “Company”
means DTS, Inc., a Delaware corporation.

 

(n)       “Company
Director” means a member of the Board.

 

(o)       “Consultant”
means an individual who, or an employee of any entity that, provides bona fide
services to the Company or an Affiliate not in connection with the offer or
sale of securities in a capital-raising transaction, but who is not an
Employee.

 

(p)       “Director”
means a member of the Board of Directors of the Company or an Affiliate.

 

(q)       “Divestiture”
means any transaction or event that the Board specifies as a Divestiture under Section 10.5.

 

(r)        “Domestic Relations Order” means a “domestic relations order” as
defined in, and otherwise meeting the requirements of, Section 414(p) of
the Code, except that reference to a “plan” in that definition shall be to this
Plan.

 

(s)        “Effective
Date” means the first date of the sale by the
Company of shares of its capital stock in an initial public offering pursuant
to a registration statement on Form S-1 filed with the SEC.

 

(t)        “Employee”
means a regular employee of the Company or an Affiliate, including an officer
or Director, who is treated as an employee in the personnel records of the Company
or an Affiliate, but not individuals who are classified by the Company or an
Affiliate as: (i) leased from or otherwise employed by a third party, (ii) independent
contractors, or (iii) intermittent or temporary workers.  The Company’s
or an Affiliate’s classification of an individual as an “Employee” (or as not
an “Employee”) for purposes of this Plan shall not be altered retroactively
even if that classification is changed retroactively for another purpose as a
result of an audit, litigation or otherwise.  An Awardee shall not cease
to be an Employee due to transfers between locations of the Company, or between
the Company and an Affiliate, or to any successor to the Company or an
Affiliate that assumes the Awardee’s Options under Section 10. 
Neither service as a Director nor receipt of a director’s fee shall be
sufficient to make a Director an “Employee”.

 

(u)       “Exchange
Act” means the Securities Exchange Act of 1934.

 

2

 

(v)       “Executive”
means, if the Company has any class of any equity security registered under Section 12
of the Exchange Act, an individual who is subject to Section 16 of the
Exchange Act or who is a “covered employee” under Section 162(m) of
the Code, in either case because of the individual’s relationship with the
Company or an Affiliate.  If the Company does not have any class of any
equity security registered under Section 12 of the Exchange Act, “Executive”
means any (i) Director, (ii) officer elected or appointed by the
Board, or (iii) beneficial owner of more than 10% of any class of the
Company’s equity securities.

 

(w)      “Expiration
Date” means, with respect to an Award, the date
stated in the Award Agreement as the expiration date of the Award or, if no
such date is stated in the Award Agreement, then the last day of the maximum
exercise period for the Award, disregarding the effect of an Awardee’s
Termination or any other event that would shorten that period.

 

(x)       “Fair
Market Value” means the value of Shares as
determined under Section 18.2.

 

(y)       “Fundamental
Transaction” means any transaction or event
described in Section 10.3.

 

(z)        “Grant
Date” means the date the Administrator approves
the grant of an Award.  However, if the Administrator specifies that an
Award’s Grant Date is a future date or the date on which a condition is
satisfied, the Grant Date for such Award is that future date or the date that
the condition is satisfied.

 

(aa)     “Incentive
Stock Option” means an Option intended to qualify
as an incentive stock option under Section 422 of the Code and designated
as an Incentive Stock Option in the Award Agreement for that Option.

 

(bb)     “Nonstatutory
Option” means any Option other than an Incentive
Stock Option.

 

(cc)     “Non-Employee
Director” means any person who is a member of the
Board but is not an Employee of the Company or any Affiliate of the Company and
has not been an Employee of the Company or any Affiliate of the Company at any
time during the preceding twelve months. Service as a Director does not in
itself constitute employment for purposes of this definition.

 

(dd)     “Objectively
Determinable Performance Condition” shall mean a
performance condition (i) that is established (A) at the time an
Award is granted or (B)  no later than the earlier of (1) 90 days
after the beginning of the period of service to which it relates, or (2) before
the elapse of 25% of the period of service to which it relates, (ii) that
is uncertain of achievement at the time it is established, and (iii) the
achievement of which is determinable by a third party with knowledge of the
relevant facts.  Examples of measures that may be used in Objectively
Determinable Performance Conditions include net order dollars, net profit
dollars, net profit growth, net revenue dollars, revenue growth, individual
performance, earnings per share, return on assets, return on equity, and other
financial objectives, objective customer 

 

3

 

satisfaction indicators
and efficiency measures, each with respect to the Company and/or an Affiliate
or individual business unit.

 

(ee)     “Officer”
means an officer of the Company as defined in Rule 16a-1 adopted under the
Exchange Act.

 

(ff)       “Option”
means a right to purchase Shares of the Company granted under this Plan.

 

(gg)     “Option
Price” means the price payable under an Option for
Shares, not including any amount payable in respect of withholding or other
taxes.

 

(hh)     “Option
Shares” means Shares covered by an outstanding
Option or purchased under an Option.

 

(ii)       “Plan”
means this 2003 Equity Incentive Plan of DTS, Inc.

 

(jj)       “Prior Plans” means
the Company’s 1997 Stock Option Plan and the 2002 Stock Option Plan in effect.

 

(kk)     “Purchase
Price” means the price payable under a Stock Award
for Shares, not including any amount payable in respect of withholding or other
taxes.

 

(ll)       “Rule 16b-3”
means Rule 16b-3 adopted under Section 16(b) of the Exchange
Act.

 

(mm)   “SAR” or “Stock
Appreciation Right” means a right to receive cash
based on a change in the Fair Market Value of a specific number of Shares
pursuant to an Award Agreement, as described in Section 8.1.

 

(nn)     “Securities
Act” means the Securities Act of 1933.

 

(oo)     “Share”
means a share of the common stock of the Company or other securities
substituted for the common stock under Section 10.

 

(pp)     “Stock
Award” means an offer by the Company to sell
shares subject to certain restrictions pursuant to the Award Agreement as
described in Section 8.2.

 

(qq)     “Substitute
Award” means a Substitute Option, Substitute SAR
or Substitute Stock Award granted in accordance with the terms of this Plan.

 

(rr)      “Substitute
Option” means an Option granted in substitution
for, or upon the conversion of, an option granted by another entity to purchase
equity securities in the granting entity.

 

4

 

(ss)      “Substitute
SAR” means a SAR granted in substitution for, or
upon the conversion of, a stock appreciation right granted by another entity
with respect to equity securities in the granting entity.

 

(tt)       “Substitute
Stock Award” means a Stock Award granted in
substitution for, or upon the conversion of, a stock award granted by another
entity to purchase equity securities in the granting entity.

 

(uu)     “Termination”
means that the Awardee has ceased to be, with or without any cause or reason,
an Employee, Director or Consultant.  However, unless so determined by the
Administrator, or otherwise provided in this Plan, “Termination” shall not
include a change in status from an Employee, Consultant or Director to another
such status.  An event that causes an Affiliate to cease being an
Affiliate shall be treated as the “Termination” of that Affiliate’s Employees,
Directors, and Consultants.

 

2.2         Rules of Interpretation

 

Any reference to a “Section,”
without more, is to a Section of this Plan.  Captions and titles are
used for convenience in this Plan and shall not, by themselves, determine the
meaning of this Plan.  Except when otherwise indicated by the context, the
singular includes the plural and vice versa.  Any reference to a statute
is also a reference to the applicable rules and regulations adopted under
that statute.  Any reference to a statute, rule or regulation, or to
a section of a statute, rule or regulation, is a reference to that
statute, rule, regulation, or section as amended from time to time, both before
and after the Effective Date and including any successor provisions.

 

3.             Shares
Subject to this Plan; Term of this Plan

 

3.1         Number of Award Shares

 

The Shares issuable under
this Plan shall be authorized but unissued or reacquired Shares, including
Shares repurchased by the Company on the open market. The number of Shares
initially reserved for issuance over the term of this Plan shall not exceed
3,000,000 Shares.  Such reserve shall consist of (i) the number of
Shares available for issuance, as of the Effective Date, under the Prior Plans
as last approved by the Company’s stockholders, including the Shares subject to
outstanding options under the Prior Plans, plus (ii) those Shares issued
under the Prior Plans that are forfeited or repurchased by the Company or that
are issuable upon exercise of options granted pursuant to the Prior Plans that
expire or become unexercisable for any reason without having been exercised in
full after the Effective Date, plus (iii) an additional increase of
approximately 928,949 Shares to be approved by the Company’s stockholders prior
to the Effective Date.  The maximum number of Shares shall be cumulatively
increased on the first January 1 after the Effective Date and each January 1
thereafter for 10 years, by a number of Shares equal to the least of (a) 4%
of the number of Shares issued and outstanding on the immediately preceding December 31,
(b) 1,500,000 Shares, and (c) a number of Shares set by the
Board.  When an Award is granted, the maximum number of Shares that may be
issued under this Plan shall be reduced by the number of Shares covered by that
Award.  However, if an 

 

5

 

Award later terminates or
expires without having been exercised in full, the maximum number of shares
that may be issued under this Plan shall be increased by the number of Shares
that were covered by, but not purchased under, that Award.  By contrast,
the repurchase of Shares by the Company shall not increase the maximum number
of Shares that may be issued under this Plan.  Notwithstanding anything in
this Plan to the contrary, at no time during the eighteen (18) months following
the Effective Date may the sum of the number of Shares subject to Awards under
this Plan and the number of Shares subject to options under the Prior Plans
exceed 15% of the outstanding Shares on a “fully diluted” basis.  For
the purposes of this Section 3.1, outstanding Shares on a “fully diluted”
basis shall be the number of Shares that is equal to (x) the number of
Shares issued and outstanding plus (y) all Shares subject to or
available for Awards or options under this Plan and the Prior Plans,
respectively, and 50% of the Shares then issuable upon the exercise of warrants
that were outstanding on the Effective Date of the Plan.

 

3.2         Source of Shares

 

Award Shares may
be:  (a) Shares that have never been issued, (b) Shares that
have been issued but are no longer outstanding, or (c) Shares that are
outstanding and are acquired to discharge the Company’s obligation to deliver
Award Shares.

 

3.3         Term of this Plan

 

(a)       This Plan shall be
effective on, and Awards may be granted under this Plan on and after, the
earliest the date on which the Plan has been both adopted by the Board and
approved by the Company’s stockholders.

 

(b)       Subject to the
provisions of Section 14, Awards may be granted under this Plan for a
period of ten years from the earlier of the date on which the Board approves
this Plan and the date the Company’s stockholders approve this Plan. 
Accordingly, Awards may not be granted under this Plan after the earlier of
those dates.

 

4.                                           Administration

 

4.1         General

 

(a)       The Board shall have
ultimate responsibility for administering this Plan.  The Board may
delegate certain of its responsibilities to a Committee, which shall consist of
at least two members of the Board.  The Board or the Committee may further
delegate its responsibilities to any Employee of the Company or any
Affiliate.  Where this Plan specifies that an action is to be taken or a
determination made by the Board, only the Board may take that action or make
that determination.  Where this Plan specifies that an action is to be
taken or a determination made by the Committee, only the Committee may take
that action or make that determination.  Where this Plan references the “Administrator,”
the action may be taken or determination made by the Board, the Committee, or
other Administrator.  However, only the Board or the Committee may approve
grants of Awards to Executives, and an Administrator other than the Board or
the Committee may grant Awards only within guidelines established by 

 

6

 

the Board or
Committee.  Moreover, all actions and determinations by any Administrator
are subject to the provisions of this Plan.

 

(b)       So long as the Company
has registered and outstanding a class of equity securities under Section 12
of the Exchange Act, the Committee shall consist of Company Directors who are “Non-Employee
Directors” as defined in Rule 16b-3 and, after the expiration of any
transition period permitted by Treasury Regulations Section 1.162-27(h)(3),
who are “outside directors” as defined in Section 162(m) of the Code.

 

4.2         Authority of the Board or the Committee

 

Subject to the other
provisions of this Plan, the Board or the Committee shall have the authority
to:

 

(a)       grant Awards, including
Substitute Awards;

 

(b)       determine the Fair
Market Value of Shares;

 

(c)       determine the Option
Price and the Purchase Price of Awards;

 

(d)       select the Awardees;

 

(e)       determine the times
Awards are granted;

 

(f)        determine the number
of Shares subject to each Award;

 

(g)       determine the methods
of payment that may be used to purchase Award Shares;

 

(h)       determine the methods
of payment that may be used to satisfy withholding tax obligations;

 

(i)        determine the other
terms of each Award, including but not limited to the time or times at which
Awards may be exercised, whether and under what conditions an Award is
assignable, and whether an Option is a Nonstatutory Option or an Incentive
Stock Option;

 

(j)        modify or amend any
Award;

 

(k)       authorize any person to
sign any Award Agreement or other document related to this Plan on behalf of
the Company;

 

(l)        determine the form of
any Award Agreement or other document related to this Plan, and whether that
document, including signatures, may be in electronic form;

 

(m)      interpret this Plan and
any Award Agreement or document related to this Plan;

 

7

 

(n)       correct any defect,
remedy any omission, or reconcile any inconsistency in this Plan, any Award
Agreement or any other document related to this Plan;

 

(o)       adopt, amend, and
revoke rules and regulations under this Plan, including rules and
regulations relating to sub-plans and Plan addenda;

 

(p)       adopt, amend, and
revoke special rules and procedures which may be inconsistent with the
terms of this Plan, set forth (if the Administrator so chooses) in sub-plans
regarding (for example) the operation and administration of this Plan and the
terms of Awards, if and to the extent necessary or useful to accommodate
non-U.S. Applicable Laws and practices as they apply to Awards and Award Shares
held by, or granted or issued to, persons working or resident outside of the
United States or employed by Affiliates incorporated outside the United States;

 

(q)       determine whether a
transaction or event should be treated as a Change in Control, a Divestiture or
neither;

 

(r)        determine the effect
of a Fundamental Transaction and, if the Board determines that a transaction or
event should be treated as a Change in Control or a Divestiture, then the
effect of that Change in Control or Divestiture; and

 

(s)        make all other
determinations the Administrator deems necessary or advisable for the
administration of this Plan.

 

4.3         Scope of Discretion

 

Subject to the provisions
of this Section 4.3, on all matters for which this Plan confers the
authority, right or power on the Board, the Committee, or other Administrator
to make decisions, that body may make those decisions in its sole and absolute
discretion.  Those decisions will be final, binding and conclusive. 
In making its decisions, the Board, Committee or other Administrator need not
treat all persons eligible to receive Awards, all Awardees, all Awards or all
Award Shares the same way.  Notwithstanding anything herein to the
contrary, and except as provided in Section 14.3, the discretion of the
Board, Committee or other Administrator is subject to the specific provisions
and specific limitations of this Plan, as well as all rights conferred on
specific Awardees by Award Agreements and other agreements.

 

5.             Persons
Eligible to Receive Awards

 

5.1         Eligible Individuals

 

Awards (including
Substitute Awards) may be granted to, and only to, Employees, Directors and
Consultants, including to prospective Employees, Directors and Consultants
conditioned on the beginning of their service for the Company or an
Affiliate.  However, Incentive Stock Options may only be granted to Employees,
as provided in Section 7(g).

 

8

 

5.2         Section 162(m) Limitation

 

(a)       Options and SARs  Subject to the
provisions of this Section 5.2, for so long as the Company is a “publicly
held corporation” within the meaning of Section 162(m) of the Code: (i) no
Employee may be granted one or more SARs and Options within any fiscal year of
the Company under this Plan to purchase more than 1,500,000 Shares under
Options or to receive compensation calculated with reference to more than that
number of Shares under SARs, subject to adjustment pursuant to Section 10,
(ii) Options and SARs may be granted to an Executive only by the Committee
(and, notwithstanding anything to the contrary in Section 4.1(a), not by
the Board).  If an Option or SAR is cancelled without being exercised or
if the Option Price of an Option is reduced, that cancelled or repriced Option
or SAR shall continue to be counted against the limit on Awards that may be
granted to any individual under this Section 5.2.  Notwithstanding
anything herein to the contrary, a new Employee of the Company or an Affiliate
shall be eligible to receive up to a maximum of 2,000,000 Shares under Options
in the calendar year in which they commence employment, or such compensation calculated
with reference to such number of Shares under SARs, subject to adjustment
pursuant to Section 10.

 

(b)       Cash Awards and Stock Awards  Any Cash
Award or Stock Award intended as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Code must vest or become
exercisable contingent on the achievement of one or more Objectively
Determinable Performance Conditions.  The Committee shall have the
discretion to determine the time and manner of compliance with Section 162(m) of
the Code.

 

6.                                           Terms and Conditions of Option

 

The following rules apply
to all Options:

 

6.1         Price

 

No Nonstatutory Option
may have an Option Price less than 85% of the Fair Market Value of the Shares
on the Grant Date.  No Option intended as “qualified incentive-based
compensation” within the meaning of Section 162(m) of the Code may
have an Option Price less than 100% of the Fair Market Value of the Shares on
the Grant Date.  In no event will the Option Price of any Option be less
than the par value of the Shares issuable under the Option if that is required
by Applicable Law.  The Option Price of an Incentive Stock Option shall be
subject to Section 7(f).

 

6.2         Term

 

No Option shall be
exercisable after its Expiration Date.  No Option may have an Expiration
Date that is more than ten years after its Grant Date.  Additional
provisions regarding the term of Incentive Stock Options are provided in
Sections 7(a) and 7(e).

 

9

 

6.3         Vesting

 

Options shall be exercisable:
(a) on the Grant Date, or (b) in accordance with a schedule related
to the Grant Date, the date the Optionee’s directorship, employment or
consultancy begins, or a different date specified in the Option
Agreement.  Additional provisions regarding the vesting of Incentive Stock
Options are provided in Section 7(c).  No Option granted to an
individual who is subject to the overtime pay provisions of the Fair Labor
Standards Act may be exercised before the expiration of six months after the
Grant Date.

 

6.4         Form and Method of Payment

 

(a)       The Board or Committee
shall determine the acceptable form and method of payment for exercising an
Option.

 

(b)       Acceptable forms of
payment for all Option Shares are cash, check or wire transfer, denominated in
U.S. dollars except as specified by the Administrator for non-U.S. Employees or
non-U.S. sub-plans.

 

(c)       In addition, the
Administrator may permit payment to be made by any of the following methods:

 

(i)       other Shares, or the
designation of other Shares, which (A) are “mature” shares for purposes of
avoiding variable accounting treatment under generally accepted accounting
principles (generally mature shares are those that have been owned by the
Optionee for more than six months on the date of surrender), and (B) have
a Fair Market Value on the date of surrender equal to the Option Price of the
Shares as to which the Option is being exercised;

 

(ii)     provided that a public
market exists for the Shares, consideration received by the Company under a
procedure under which a licensed broker-dealer advances funds on behalf of an
Optionee or sells Option Shares on behalf of an Optionee (a “Cashless Exercise Procedure
“), provided that if the Company extends or arranges for the extension of
credit to an Optionee under any Cashless Exercise Procedure, no Officer or
Director may participate in that Cashless Exercise Procedure;

 

(iii)    with respect only to
Optionees who are neither Officers nor Directors as of the date of exercise,
one or more promissory notes meeting the requirements of Section 6.4(e) provided,
however, that promissory notes may not be used for any portion of an Award
which is not vested at the time of exercise;

 

(iv)     cancellation of any debt
owed by the Company or any Affiliate to the Optionee by the Company including
without limitation waiver of compensation due or accrued for services
previously rendered to the Company; and

 

(v)      any combination of the
methods of payment permitted by any paragraph of this Section 6.4.

 

(d)       The Administrator may
also permit any other form or method of payment for Option Shares permitted by
Applicable Law.

 

10

 

(e)                      The
promissory notes referred to in Section 6.4(c)(iii) shall be full
recourse.  Unless the Committee specifies otherwise after taking into
account any relevant accounting issues, the promissory notes shall bear
interest at a fair market value rate when the Option is exercised. 
Interest on the promissory notes shall also be at least sufficient to avoid
imputation of interest under Sections 483, 1274, and 7872 of the
Code.  The promissory notes and their administration shall at all times
comply with any applicable margin rules of the Federal Reserve.  The
promissory notes may also include such other terms as the Administrator
specifies.  Payment may not be made by promissory note by Officers or
Directors if Shares are registered under Section 12 of the Exchange Act.

 

6.5                          Nonassignability of Options

 

Except as determined by
the Administrator, no Option shall be assignable or otherwise transferable by
the Optionee except by will or by the laws of descent and distribution. 
However, Options may be transferred and exercised in accordance with a Domestic
Relations Order and may be exercised by a guardian or conservator appointed to
act for the Optionee.  Incentive Stock Options may only be assigned in
compliance with Section 7(h).

 

6.6                          Substitute Options

 

The Board may cause the
Company to grant Substitute Options in connection with the acquisition by the
Company or an Affiliate of equity securities of any entity (including by
merger, tender offer, or other similar transaction) or of all or a portion of
the assets of any entity.  Any such substitution shall be effective on the
effective date of the acquisition.  Substitute Options may be Nonstatutory
Options or Incentive Stock Options.  Unless and to the extent specified
otherwise by the Board, Substitute Options shall have the same terms and
conditions as the options they replace, except that (subject to the provisions
of Section 10) Substitute Options shall be Options to purchase Shares
rather than equity securities of the granting entity and shall have an Option
Price determined by the Board.

 

6.7                          Repricings

 

In furtherance of, and
not in limitation of the provisions of Section 10, Options may be
repriced, replaced or regranted through cancellation or modification without
stockholder approval.

 

7.                                      Incentive Stock Options

 

The following rules apply
only to Incentive Stock Options and only to the extent these rules are
more restrictive than the rules that would otherwise apply under this
Plan.  With the consent of the Optionee, or where this Plan provides that
an action may be taken notwithstanding any other provision of this Plan, the
Administrator may deviate from the requirements of this Section,
notwithstanding that any Incentive Stock Option modified by the Administrator
will thereafter be treated as a Nonstatutory Option.

 

11

 

(a)                     The
Expiration Date of an Incentive Stock Option shall not be later than ten years
from its Grant Date, with the result that no Incentive Stock Option may be
exercised after the expiration of ten years from its Grant Date.

 

(b)                     No
Incentive Stock Option may be granted more than ten years from the date this
Plan was approved by the Board.

 

(c)                      Options
intended to be incentive stock options under Section 422 of the Code that
are granted to any single Optionee under all incentive stock option plans of
the Company and its Affiliates, including incentive stock options granted under
this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of
stock (measured on the grant dates of the options) during any calendar
year.  For this purpose, an option vests with respect to a given share of
stock the first time its holder may purchase that share, notwithstanding any
right of the Company to repurchase that share.  Unless the administrator
of that option plan specifies otherwise in the related agreement governing the
option, this vesting limitation shall be applied by, to the extent necessary to
satisfy this $100,000 rule, treating certain stock options that were intended
to be incentive stock options under Section 422 of the Code as
Nonstatutory Options.  The stock options or portions of stock options to
be reclassified as Nonstatutory Options are those with the highest option
prices, whether granted under this Plan or any other equity compensation plan
of the Company or any Affiliate that permits that treatment.  This Section 7(c) shall
not cause an Incentive Stock Option to vest before its original vesting date or
cause an Incentive Stock Option that has already vested to cease to be vested.

 

(d)                     In order
for an Incentive Stock Option to be exercised for any form of payment other
than those described in Section 6.4(b), that right must be stated at the
time of grant in the Option Agreement relating to that Incentive Stock Option.

 

(e)                      Any
Incentive Stock Option granted to a Ten Percent Stockholder, must have an
Expiration Date that is not later than five years from its Grant Date, with the
result that no such Option may be exercised after the expiration of five years
from the Grant Date.  A “Ten Percent Stockholder “ is any person who, directly or
by attribution under Section 424(d) of the Code, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Affiliate on the Grant Date.

 

(f)                         The
Option Price of an Incentive Stock Option shall never be less than the Fair
Market Value of the Shares at the Grant Date.  The Option Price for the
Shares covered by an Incentive Stock Option granted to a Ten Percent
Stockholder shall never be less than 110% of the Fair Market Value of the
Shares at the Grant Date.

 

(g)                     Incentive
Stock Options may be granted only to Employees.  If an Optionee changes
status from an Employee to a Consultant, that Optionee’s Incentive Stock
Options become Nonstatutory Options if not exercised within the time period
described in Section 7(i) (determined by treating that change in
status as a Termination solely for purposes of this Section 7(g)).

 

12

 

(h)                     No rights
under an Incentive Stock Option may be transferred by the Optionee, other than
by will or the laws of descent and distribution.  During the life of the
Optionee, an Incentive Stock Option may be exercised only by the
Optionee.  The Company’s compliance with a Domestic Relations Order, or
the exercise of an Incentive Stock Option by a guardian or conservator
appointed to act for the Optionee, shall not violate this Section 7(h).

 

(i)                        An
Incentive Stock Option shall be treated as a Nonstatutory Option if it remains
exercisable after, and is not exercised within, the three-month period
beginning with the Optionee’s Termination for any reason other than the
Optionee’s death or disability (as defined in Section 22(e) of the
Code).  In the case of Termination due to death, an Incentive Stock Option
shall continue to be treated as an Incentive Stock Option if it remains
exercisable after, and is not exercised within, the three-month period after
the Optionee’s Termination provided it is exercised before the Expiration
Date.  In the case of Termination due to disability, an Incentive Stock
Option shall be treated as a Nonstatutory Option if it remains exercisable
after, and is not exercised within, one year after the Optionee’s Termination.

 

(j)                         An
Incentive Stock Option may only be modified by the Board.

 

8.                                      Stock Appreciation Rights, Stock Awards and Cash
Awards

 

8.1                          Stock Appreciation Rights

 

The following rules apply
to SARs:

 

(a)                     General.  SARs may be granted
either alone, in addition to, or in tandem with other Awards granted under this
Plan. The Administrator may grant SARs to eligible participants subject to
terms and conditions not inconsistent with this Plan and determined by the
Administrator. The specific terms and conditions applicable to the Awardee
shall be provided for in the Award Agreement. SARs shall be exercisable, in
whole or in part, at such times as the Administrator shall specify in the Award
Agreement.  The grant or vesting of a SAR may be made contingent on the
achievement of Objectively Determinable Performance Conditions.

 

(b)                     Exercise of SARs.  Upon the
exercise of an SAR, in whole or in part, an Awardee shall be entitled to a
payment in an amount equal to the excess of the Fair Market Value of a fixed
number of Shares covered by the exercised portion of the SAR on the date of
exercise, over the Fair Market Value of the Shares covered by the exercised
portion of the SAR on the Grant Date.  The amount due to the Awardee upon
the exercise of a SAR shall be paid in cash, Shares or a combination thereof,
over the period or periods specified in the Award Agreement.  An Award
Agreement may place limits on the amount that may be paid over any specified
period or periods upon the exercise of a SAR, on an aggregate basis or as to
any Awardee.  A SAR shall be considered exercised when the Company
receives written notice of exercise in accordance with the terms of the Award
Agreement from the person entitled to exercise the SAR.  If a SAR has been
granted in tandem with an Option, upon the exercise of the SAR, the number of
shares that may be purchased pursuant to the Option shall be reduced by the
number of shares with respect to which the SAR is exercised.

 

13

 

(c)                      Nonassignability of SARs.  Except
as determined by the Administrator, no SAR shall be assignable or otherwise
transferable by the Awardee except by will or by the laws of descent and
distribution.  Notwithstanding anything herein to the contrary, SARs may
be transferred and exercised in accordance with a Domestic Relations Order.

 

(d)                     Substitute SARs.  The Board may
cause the Company to grant Substitute SARs in connection with the acquisition
by the Company or an Affiliate of equity securities of any entity (including by
merger) or all or a portion of the assets of any entity.  Any such
substitution shall be effective on the effective date of the acquisition. 
Unless and to the extent specified otherwise by the Board, Substitute SARs
shall have the same terms and conditions as the options they replace, except
that (subject to the provisions of Section 10) Substitute SARs shall be
exercisable with respect to the Fair Market Value of Shares rather than equity
securities of the granting entity and shall be on terms that, as determined by
the Board in its sole and absolute discretion, properly reflects the
substitution.

 

(e)                      Repricings.  A SAR may be
repriced, replaced or regranted, through cancellation or modification without
stockholder approval.

 

8.2                          Stock Awards

 

The following rules apply
to all Stock Awards:

 

(a)                     General.  The specific terms and
conditions of a Stock Award applicable to the Awardee shall be provided for in
the Award Agreement. The Award Agreement shall state the number of Shares that
the Awardee shall be entitled to receive or purchase, the terms and conditions
on which the Shares shall vest, the price to be paid and, if applicable, the
time within which the Awardee must accept such offer. The offer shall be
accepted by execution of the Award Agreement.  The Administrator may require
that all Shares subject to a right of repurchase or risk of forfeiture be held
in escrow until such repurchase right or risk of forfeiture lapses.  The
grant or vesting of a Stock Award may be made contingent on the achievement of
Objectively Determinable Performance Conditions.

 

(b)                     Right of Repurchase.  If so
provided in the Award Agreement, Award Shares acquired pursuant to a Stock
Award may be subject to repurchase by the Company or an Affiliate if not vested
in accordance with the Award Agreement.

 

(c)                      Form of Payment.  The
Administrator shall determine the acceptable form and method of payment for
exercising a Stock Award.  Acceptable forms of payment for all Award
Shares are cash, check or wire transfer, denominated in U.S. dollars except as
specified by the Administrator for non-U.S. Employees or non-U.S.
sub-plans.  In addition, the Administrator may permit payment to be made
by any of the methods permitted with respect to the exercise of Options
pursuant to Section 6.4.

 

(d)                     Nonassignability of Stock Awards.  Except as determined by the
Administrator, no Stock Award shall be assignable or otherwise transferable by
the Awardee except by will or by the laws of descent and distribution. 
Notwithstanding anything to the 

 

14

 

contrary herein, Stock
Awards may be transferred and exercised in accordance with a Domestic Relations
Order.

 

(e)                      Substitute Stock Award.  The Board
may cause the Company to grant Substitute Stock Awards in connection with the
acquisition by the Company or an Affiliate of equity securities of any entity
(including by merger) or all or a portion of the assets of any entity. 
Unless and to the extent specified otherwise by the Board, Substitute Stock
Awards shall have the same terms and conditions as the stock awards they
replace, except that (subject to the provisions of Section 10) Substitute
Stock Awards shall be Stock Awards to purchase Shares rather than equity
securities of the granting entity and shall have a Purchase Price that, as
determined by the Board in its sole and absolute discretion, properly reflects
the substitution.  Any such Substituted Stock Award shall be effective on
the effective date of the acquisition.

 

8.3                          Cash Awards

 

The following rules apply
to all Cash Awards:

 

Cash Awards may be
granted either alone, in addition to, or in tandem with other Awards granted
under this Plan. After the Administrator determines that it will offer a Cash
Award, it shall advise the Awardee, by means of an Award Agreement, of the
terms, conditions and restrictions related to the Cash Award.

 

9.                                           Exercise of Awards

 

9.1                          In General

 

An Award shall be
exercisable in accordance with this Plan and the Award Agreement under which it
is granted.

 

9.2                          Time of Exercise

 

Options and Stock Awards
shall be considered exercised when the Company receives: (a) written
notice of exercise from the person entitled to exercise the Option or Stock
Award, (b) full payment, or provision for payment, in a form and method
approved by the Administrator, for the Shares for which the Option or Stock
Award is being exercised, and (c) with respect to Nonstatutory Options,
payment, or provision for payment, in a form approved by the Administrator, of
all applicable withholding taxes due upon exercise.  An Award may not be
exercised for a fraction of a Share.  SARs shall be considered exercised
when the Company receives written notice of the exercise from the person
entitled to exercise the SAR.

 

9.3                          Issuance of Award Shares

 

The Company shall issue
Award Shares in the name of the person properly exercising the Award.  If
the Awardee is that person and so requests, the Award Shares shall be issued in
the name of the Awardee and the Awardee’s spouse.  The Company shall
endeavor to issue Award Shares promptly after an Award is exercised or after
the Grant Date of a Stock 

 

15

 

Award, as
applicable.  Until Award Shares are actually issued, as evidenced by the
appropriate entry on the stock register of the Company or its transfer agent,
the Awardee will not have the rights of a stockholder with respect to those
Award Shares, even though the Awardee has completed all the steps necessary to
exercise the Award.  No adjustment shall be made for any dividend,
distribution, or other right for which the record date precedes the date the
Award Shares are issued, except as provided in Section 10.

 

9.4                          Termination

 

(a)                     In General  Except as provided in
an Award Agreement or in writing by the Administrator, including in an Award
Agreement, and as otherwise provided in Sections 9.4(b), (c), (d) and
(e) after an Awardee’s Termination, the Awardee’s Awards shall be
exercisable to the extent (but only to the extent) they are vested on the date
of that Termination and only during the three months after the Termination, but
in no event after the Expiration Date.  To the extent the Awardee does not
exercise an Award within the time specified for exercise, the Award shall
automatically terminate.

 

(b)                     Leaves of Absence  Unless
otherwise provided in the Award Agreement, no Award may be exercised more than
three months after the beginning of a leave of absence, other than a personal
or medical leave approved by an authorized representative of the Company with
employment guaranteed upon return.  Awards shall not continue to vest
during a leave of absence, unless otherwise determined by the Administrator
with respect to an approved personal or medical leave with employment
guaranteed upon return.

 

(c)                      Death or Disability  Unless
otherwise provided by the Administrator, if an Awardee’s Termination is due to
death or disability (as determined by the Administrator with respect to all
Awards other than Incentive Stock Options and as defined by Section 22(e) of
the Code with respect to Incentive Stock Options), all Awards of that Awardee
to the extent exercisable at the date of that Termination may be exercised for
one year after that Termination, but in no event after the Expiration
Date.  In the case of Termination due to death, an Award may be exercised
as provided in Section 17.  In the case of Termination due to
disability, if a guardian or conservator has been appointed to act for the
Awardee and been granted this authority as part of that appointment, that
guardian or conservator may exercise the Award on behalf of the Awardee. 
Death or disability occurring after an Awardee’s Termination shall not cause
the Termination to be treated as having occurred due to death or
disability.  To the extent an Award is not so exercised within the time
specified for its exercise, the Award shall automatically terminate.

 

(d)                     Divestiture  If an Awardee’s
Termination is due to a Divestiture, the Board may take any one or more of the
actions described in Section 10.3 or 10.4 with respect to the Awardee’s
Awards.

 

(e)                      Termination for Cause  In the
discretion of the Administrator, which may be exercised on the date of grant,
or at a date later in time, if an Awardee’s Termination is due to Cause, all of
the Awardee’s Awards shall automatically terminate and cease to be exercisable
at the time of Termination and the Administrator may rescind any and all
exercises of Awards by 

 

16

 

the Awardee that occurred
after the first event constituting Cause.  “Cause” means employment-related
dishonesty, fraud, misconduct or disclosure or misuse of confidential
information, or other employment-related conduct that is likely to cause
significant injury to the Company, an Affiliate, or any of their respective
employees, officers or directors (including, without limitation, commission of
a felony or similar offense), in each case as determined by the
Administrator.  “Cause” shall not require that a civil judgment or
criminal conviction have been entered against or guilty plea shall have been
made by the Awardee regarding any of the matters referred to in the previous
sentence.  Accordingly, the Administrator shall be entitled to determine “Cause”
based on the Administrator’s good faith belief.  If the Awardee is
criminally charged with a felony or similar offense, that shall be a
sufficient, but not a necessary, basis for such a belief.

 

(f)                         Administrator Discretion 
Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan
Administrator shall have complete discretion, exercisable either at the time an
Award is granted or at any time while the Award remains outstanding, to:

 

(i)                    Extend the
period of time for which the Award is to remain exercisable, following the
Awardee’s Termination, from the limited exercise period otherwise in effect for
that Award to such greater period of time as the Administrator shall deem
appropriate, but in no event beyond the Expiration Date; and/or

 

(ii)                Permit the
Award to be exercised, during the applicable post-Termination exercise period,
not only with respect to the number of vested Shares for which such Award may
be exercisable at the time of the Awardee’s Termination but also with respect
to one or more additional installments in which the Awardee would have vested
had the Awardee not been subject to Termination.

 

(g)                     Consulting or Employment Relationship 
Nothing in this Plan or in any Award Agreement, and no Award or the fact that
Award Shares remain subject to repurchase rights, shall:  (A) interfere
with or limit the right of the Company or any Affiliate to terminate the
employment or consultancy of any Awardee at any time, whether with or without
cause or reason, and with or without the payment of severance or any other
compensation or payment, or (B) interfere with the application of any
provision in any of the Company’s or any Affiliate’s charter documents or
Applicable Law relating to the election, appointment, term of office, or
removal of a Director.

 

10.                                    Certain Transactions and Events

 

10.1                   In General

 

Except as provided in
this Section 10, no change in the capital structure of the Company,
merger, sale or other disposition of assets or a subsidiary, change in control,
issuance by the Company of shares of any class of securities or securities
convertible into shares of any class of securities, exchange or conversion of
securities, or other transaction or event shall require or be the occasion for
any adjustments of the type described in this Section 10.  Additional
provisions with respect to the foregoing transactions are set forth in Section 14.3.

 

17

 

10.2                   Changes in Capital Structure

 

In the event of any stock
split, reverse stock split, recapitalization, combination or reclassification
of stock, stock dividend, spin-off, or similar change to the capital structure
of the Company (not including a Fundamental Transaction or Change in Control),
the Board shall make whatever adjustments it concludes are appropriate to: (a) the
number and type of Awards that may be granted under this Plan, (b) the
number and type of Options that may be granted to any individual under this
Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock
Award, (e) the Option Price and number and class of securities issuable
under each outstanding Option, and (f) the repurchase price of any
securities substituted for Award Shares that are subject to repurchase
rights.  The specific adjustments shall be determined by the Board. 
Unless the Board specifies otherwise, any securities issuable as a result of
any such adjustment shall be rounded down to the next lower whole
security.  The Board need not adopt the same rules for each Award or
each Awardee.

 

10.3                   Fundamental Transactions

 

Except for grants to
Non-Employee Directors pursuant to Section 11 herein, in the event of (a) a
merger or consolidation in which the Company is not the surviving corporation
(other than a merger or consolidation with a wholly-owned subsidiary, a
reincorporation of the Company in a different jurisdiction, or other
transaction in which there is no substantial change in the stockholders of the
Company or their relative stock holdings and the Awards granted under this Plan
are assumed, converted or replaced by the successor corporation, which
assumption shall be binding on all Participants), (b) a merger in which
the Company is the surviving corporation but after which the stockholders of
the Company immediately prior to such merger (other than any stockholder that
merges, or which owns or controls another corporation that merges, with the
Company in such merger) cease to own their shares or other equity interest in
the Company, (c) the sale of all or substantially all of the assets of the
Company, or (d) the acquisition, sale, or transfer of more than 50% of the
outstanding shares of the Company by tender offer or similar transaction (each,
a “Fundamental
Transaction “), any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement shall be binding on all participants under this
Plan.  In the alternative, the successor corporation may substitute
equivalent Awards or provide substantially similar consideration to
participants as was provided to stockholders (after taking into account the
existing provisions of the Awards).  The successor corporation may also
issue, in place of outstanding Shares held by the participants, substantially
similar shares or other property subject to repurchase restrictions no less
favorable to the participant. In the event such successor corporation (if any)
does not assume or substitute Awards, as provided above, pursuant to a
transaction described in this Subsection 10.3, the vesting with respect to such
Awards shall fully and immediately accelerate or the repurchase rights of the
Company shall fully and immediately terminate, as the case may be, so that the
Awards may be exercised or the repurchase rights shall terminate before, or
otherwise in connection with the closing or completion of the Fundamental
Transaction or event, but then terminate.  Notwithstanding anything in
this Plan to the contrary, the Committee may, in its sole discretion, provide
that the vesting of any or all Award Shares subject to vesting or a right of
repurchase shall accelerate or 

 

18

 

lapse, as the case may
be, upon a transaction described in this Section 10.3. If the Committee
exercises such discretion with respect to Options, such Options shall become
exercisable in full prior to the consummation of such event at such time and on
such conditions as the Committee determines, and if such Options are not
exercised prior to the consummation of the Fundamental Transaction, they shall
terminate at such time as determined by the Committee.  Subject to any
greater rights granted to participants under the foregoing provisions of this Section 10.3,
in the event of the occurrence of any Fundamental Transaction, any outstanding
Awards shall be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.

 

10.4                   Changes of Control

 

The Board may also, but
need not, specify that other transactions or events constitute a “Change in Control “. 
The Board may do that either before or after the transaction or event
occurs.  Examples of transactions or events that the Board may treat as
Changes of Control are: (a) any person or entity, including a “group” as
contemplated by Section 13(d)(3) of the Exchange Act, acquires
securities holding 30% or more of the total combined voting power or value of
the Company, or (b) as a result of or in connection with a contested
election of Company Directors, the persons who were Company Directors
immediately before the election cease to constitute a majority of the
Board.  In connection with a Change in Control, notwithstanding any other
provision of this Plan, the Board may, but need not, take any one or more of
the actions described in Section 10.3.  In addition, the Board may
extend the date for the exercise of Awards (but not beyond their original
Expiration Date).  The Board need not adopt the same rules for each
Award or each Awardee.  Notwithstanding anything in this Plan to the
contrary, in the event of a Termination of services for any reason other than
death, disability or Cause, within 18 months following the consummation of a
Fundamental Transaction or Change in Control, any Awards, assumed or
substituted in a Fundamental Transaction or Change in Control, which are
subject to vesting conditions and/or the right of repurchase in favor of the
Company or a successor entity, shall accelerate fully so that such Award Shares
are immediately exercisable upon Termination or, if subject to the right of
repurchase in favor of the Company, such repurchase rights shall lapse as of
the date of Termination. Such Awards shall be exercisable for a period of three
(3) months following termination.

 

10.5                   Divestiture

 

If the Company or an
Affiliate sells or otherwise transfers equity securities of an Affiliate to a
person or entity other than the Company or an Affiliate, or leases, exchanges
or transfers all or any portion of its assets to such a person or entity, then
the Board may specify that such transaction or event constitutes a “Divestiture “. 
In connection with a Divestiture, notwithstanding any other provision of this
Plan, the Board may, but need not, take one or more of the actions described in
Section 10.3 or 10.4 with respect to Awards or Award Shares held by, for
example, Employees, Directors or Consultants for whom that transaction or event
results in a Termination.  The Board need not adopt the same rules for
each Award or each Awardee.

 

19

 

10.6                   Dissolution

 

If the Company adopts a
plan of dissolution, the Board may cause Awards to be fully vested and
exercisable (but not after their Expiration Date) before the dissolution is
completed but contingent on its completion and may cause the Company’s
repurchase rights on Award Shares to lapse upon completion of the
dissolution.  The Board need not adopt the same rules for each Award
or each Awardee.  Notwithstanding anything herein to the contrary, in the
event of a dissolution of the Company, to the extent not exercised before the
earlier of the completion of the dissolution or their Expiration Date, Awards
shall terminate immediately prior to the dissolution.

 

10.7                   Cut-Back to Preserve Benefits

 

If the Administrator
determines that the net after-tax amount to be realized by any Awardee, taking
into account any accelerated vesting, termination of repurchase rights, or cash
payments to that Awardee in connection with any transaction or event set forth
in this Section 10 would be greater if one or more of those steps were not
taken or payments were not made with respect to that Awardee’s Awards or Award Shares,
then, at the election of the Awardee, to such extent, one or more of those
steps shall not be taken and payments shall not be made.

 

11.                               Automatic Option Grants to Non-Employee Directors and
Non-Employee Director Fee Option Grants

 

11.1                   Automatic Option Grants to Non-Employee Directors

 

(a)                     Grant Dates  Option grants to
Non-Employee Directors shall be made on the dates specified below:

 

(i)                    Each
Non-Employee Director who is then serving as a member of the Board on the
Effective Date (the “Current
Directors “) and each Non-Employee Director who is first elected
or appointed to the Board at any time after the effective date of this Plan
shall automatically be granted, on the date of such initial election or
appointment, a Nonstatutory Option to purchase 7,500 Shares (the “Initial Grant “).

 

(ii)                Commencing in
2004, on the date of each annual stockholders meeting, each individual who is
to continue to serve as a Non-Employee Director shall automatically be granted
a Nonstatutory Option to purchase 3,750 Shares (the “Annual Grant”),
provided, however, that such individual has served as a Non-Employee Director
for at least six (6) months.

 

(b)                     Exercise Price

 

(i)                    The Option
Price shall be equal to one hundred percent (100%) of the Fair Market Value of
the Shares on the Option grant date.

 

(ii)                The Option
Price shall be payable in one or more of the alternative forms authorized
pursuant to Section 6.4.  Except to the extent the sale and
remittance procedure 

 

20

 

specified thereunder is
utilized, payment of the Option Price must be made on the date of exercise.

 

(c)                      Option Term   Each Option shall
have a term of ten (10) years measured from the Option grant date.

 

(d)                     Exercise and Vesting of Options 
Except as otherwise determined by the whole Board, the Shares underlying each
Option granted pursuant to Section 11.1 shall vest and be exercisable as
set forth below.

 

(i)                    Initial Grant.  The Shares
underlying each Option issued pursuant to the Initial Grant shall vest and be
exercisable as to 4.1666% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a
Consultant to, the Company provided, however, that the Shares underlying each
Option issued to Current Directors, pursuant to the Initial Grant, shall be
fully vested and immediately exercisable on the grant date.

 

(ii)                Annual Grant.  The Shares
underlying each Option issued pursuant to the Annual Grant shall vest and be
exercisable as to 8.3333% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a
Consultant to, the Company.

 

(e)                      Termination of Board Service  The
following provisions shall govern the exercise of any Options held by the
Awardee at the time the Awardee ceases to serve as a Non-Employee Director:

 

(i)                    In General  Except as otherwise
provided in Section 11.3, after cessation of service as a Director (the “Cessation Date “),
the Awardee’s Options shall be exercisable to the extent (but only to the
extent) they are vested on the Cessation Date and only during the three months
after such Cessation Date, but in no event after the Expiration Date.  To
the extent the Awardee does not exercise an Option within the time specified
for exercise, the Option shall automatically terminate.

 

(ii)                Death or Disability  If an Awardee’s
cessation of service on the Board is due to death or disability (as determined
by the Board), all Options of that Awardee, to the extent exercisable upon such
Cessation Date, may be exercised for one year after the Cessation Date, but in
no event after the Expiration Date.  In the case of a cessation of service
due to death, an Option may be exercised as provided in Section 17. 
In the case of a cessation of service due to disability, if a guardian or
conservator has been appointed to act for the Awardee and been granted this
authority as part of that appointment, that guardian or conservator may
exercise the Option on behalf of the Awardee.  Death or disability
occurring after an Awardee’s cessation of service shall not cause the cessation
of service to be treated as having occurred due to death or disability. 
To the extent an Option is not so exercised within the time specified for its
exercise, the Option shall automatically terminate.

 

21

 

11.2                   Director Fee Option Grants

 

(a)                     Option Grants.  The Board shall have
the sole and exclusive authority to determine the calendar year or years for
which the Director fee option grant program (the “Director Fee Option Program”) is to be
in effect.  For each such calendar year the program is in effect, each
Non-Employee Director may elect to apply all or any portion of the annual
retainer fee otherwise payable in cash, for his or her service on the Board for
that year, to the acquisition of a special Option grant under this Director Fee
Option Program.  Such election must be filed with the Company’s Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. 
Each Non-Employee Director who files such a timely election shall automatically
be granted an Option under this Director Fee Option Program on the first
trading day in January in the calendar year for which the annual retainer
fee which is the subject of that election would otherwise be payable in cash.

 

(b)                     Option Terms  Each Option shall be a
Nonstatutory Option governed by the terms and conditions specified below.

 

(i)                    Exercise Price

 

A.                  The Purchase
Price shall be thirty-three and one-third percent (33-1/3%) of the Fair Market
Value per Share on the Option grant date.

 

B.                  The Purchase
Price shall become immediately due upon exercise of the Option and shall be
payable in one or more of the alternative forms authorized pursuant to Section 6.4
of this Plan.  Except to the extent the sale and remittance procedure
specified thereunder is utilized, payment of the Purchase Price must be made on
the date that the Option is exercised.

 

(ii)                Number of Option Shares.  The
number of Shares subject to the Option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):

 

X = A ÷ (B x 66-2/3%),
where

 

X is the number of Option
Shares,

 

A is the portion of the
annual retainer fee subject to the Non-Employee Director’s election, and

 

B is the Fair Market
Value of a Share on the option grant date.

 

(iii)            Exercise and Term of Options  The
Option shall become exercisable in a series of twelve (12) equal monthly
installments upon the Awardee’s completion of each month of Board service over
the twelve (12)-month period measured from the grant 

 

22

 

date.  Each Option shall have a maximum term of ten (10) years
measured from the Option grant date.

 

(iv)              Termination of Board Service 
Should the Awardee cease Board service for any reason (other than death or
permanent disability) while holding one or more Options under this Director Fee
Option Program, then each such Option shall remain exercisable, for any or all
of the Shares for which the Option is exercisable at the time of such cessation
of Board service, until the earlier of (x) the expiration of the ten
(10)-year Option term or (y) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.  However, each
Option held by the Awardee under this Director Fee Option Program at the time
of his or her cessation of Board service shall immediately terminate and cease
to remain outstanding with respect to any and all Shares for which the Option
is not otherwise at that time exercisable.

 

(v)                  Death or Permanent Disability 
Should the Awardee’s service as a Board member cease by reason of death or
permanent disability, then each Option held by such Awardee under this Director
Fee Option Program shall immediately become exercisable for all the Shares at
the time subject to that Option, and the Option may be exercised for any or all
of those Shares as fully-vested Shares until the earlier of (x) the
expiration of the ten (10)-year option term or (y) the expiration of the
three (3)-year period measured from the date of such cessation of Board
service.

 

Should the Awardee die
after cessation of his or her Board service but while holding one or more
Options under this Director Fee Option Program, then each such Option may be
exercised, for any or all of the shares for which the Option is exercisable at
the time of the Awardee’s cessation of Board service (less any Shares
subsequently purchased by the Awardee prior to death), by the personal
representative of the Awardee’s estate or by the person or persons to whom the
Option is transferred pursuant to the Awardee’s will or in accordance with the
laws of descent and distribution or by the designated beneficiary or
beneficiaries of such option.  Such right of exercise shall lapse, and the
Option shall terminate, upon the earlier of (xx) the expiration of the ten
(10)-year Option term or (yy) the three (3)-year period measured from the date
of the Awardee’s cessation of Board service.

 

11.3                   Certain Transactions and Events

 

(a)                     In the
event of a Fundamental Transaction while the Awardee remains a Non-Employee
Director, the Shares at the time subject to each outstanding Option held by
such Awardee pursuant to Section 11, but not otherwise vested, shall
automatically vest in full so that each such Option shall, immediately prior to
the effective date of the Fundamental Transaction, become exercisable for all
the Shares as fully vested Shares and may be exercised for any or all of those
vested Shares. Immediately following the consummation of the Fundamental
Transaction, each Option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or Affiliate thereof).

 

(b)                     In the
event of a Change in Control while the Awardee remains a Non-Employee Director,
the Shares at the time subject to each outstanding Option held by such 

 

23

 

Awardee pursuant to Section 11,
but not otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the Shares as fully vested Shares and may be exercised for
any or all of those vested Shares. Each such Option shall remain exercisable
for such fully vested Shares until the expiration or sooner termination of the
Option term in connection with a Change in Control.

 

(c)                      Each
Option which is assumed in connection with a Fundamental Transaction shall be
appropriately adjusted, immediately after such Fundamental Transaction, to
apply to the number and class of securities which would have been issuable to
the Awardee in consummation of such Fundamental Transaction had the Option been
exercised immediately prior to such Fundamental Transaction. Appropriate adjustments
shall also be made to the Option Price payable per share under each outstanding
Option, provided the aggregate Option Price payable for such securities shall
remain the same. To the extent the actual holders of the Company’s outstanding
Common Stock receive cash consideration for their Common Stock in consummation
of the Fundamental Transaction, the successor corporation may, in connection
with the assumption of the outstanding Options granted pursuant to Section 11,
substitute one or more shares of its own common stock with a fair market value
equivalent to the cash consideration paid per share of Common Stock in such
Fundamental Transaction.

 

(d)                     The grant
of Options pursuant to Section 11 shall in no way affect the right of the
Company to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

 

(e)                      The
remaining terms of each Option granted pursuant to Section 11 shall, as
applicable, be the same as terms in effect for Awards granted under this
Plan.  Notwithstanding the foregoing, the provisions of Section 9.4
and Section 10 shall not apply to Options granted pursuant to Section 11.

 

11.4                   Limited Transferability of Options

 

Each Option granted
pursuant to Section 11 may be assigned in whole or in part during the
Awardee’s lifetime to one or more members of the Awardee’s family or to a trust
established exclusively for one or more such family members or to an entity in
which the Awardee is majority owner or to the Awardee ‘s former spouse, to the
extent such assignment is in connection with the Awardee ‘s estate or financial
plan or pursuant to a Domestic Relations Order. The assigned portion may only
be exercised by the person or persons who acquire a proprietary interest in the
Option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator may deem appropriate. The Awardee may also designate one or
more persons as the beneficiary or beneficiaries of his or her outstanding
Options under Section 11, and those Options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Awardee ‘s death while holding those Options. Such beneficiary or
beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable Award Agreement evidencing each such transferred
Option, including (without 

 

24

 

limitation) the limited
time period during which the Option may be exercised following the Awardee ‘s
death.

 

12.                                    Withholding and Tax Reporting

 

12.1                   Tax Withholding Alternatives

 

(a)                     General  Whenever Award Shares are
issued or become free of restrictions, the Company may require the Awardee to
remit to the Company an amount sufficient to satisfy any applicable tax
withholding requirement, whether the related tax is imposed on the Awardee or
the Company.  The Company shall have no obligation to deliver Award Shares
or release Award Shares from an escrow or permit a transfer of Award Shares
until the Awardee has satisfied those tax withholding obligations. 
Whenever payment in satisfaction of Awards is made in cash, the payment will be
reduced by an amount sufficient to satisfy all tax withholding requirements.

 

(b)                     Method of Payment  The Awardee
shall pay any required withholding using the forms of consideration described
in Section 6.4(b), except that, in the discretion of the Administrator,
the Company may also permit the Awardee to use any of the forms of payment
described in Section 6.4(c).  The Administrator, in its sole
discretion, may also permit Award Shares to be withheld to pay required
withholding.  If the Administrator permits Award Shares to be withheld,
the Fair Market Value of the Award Shares withheld, as determined as of the
date of withholding, shall not exceed the amount determined by the applicable
minimum statutory withholding rates.

 

12.2                   Reporting of Dispositions

 

Any holder of Option
Shares acquired under an Incentive Stock Option shall promptly notify the
Administrator, following such procedures as the Administrator may require, of
the sale or other disposition of any of those Option Shares if the disposition
occurs during:  (a) the longer of two years after the Grant Date of
the Incentive Stock Option and one year after the date the Incentive Stock
Option was exercised, or (b) such other period as the Administrator has
established.

 

13.                               Compliance with Law

 

The grant of Awards and
the issuance and subsequent transfer of Award Shares shall be subject to
compliance with all Applicable Law, including all applicable securities
laws.  Awards may not be exercised, and Award Shares may not be
transferred, in violation of Applicable Law.  Thus, for example, Awards
may not be exercised unless:  (a) a registration statement under the
Securities Act is then in effect with respect to the related Award Shares, or (b) in
the opinion of legal counsel to the Company, those Award Shares may be issued
in accordance with an applicable exemption from the registration requirements
of the Securities Act and any other applicable securities laws.  The
failure or inability of the Company to obtain from any regulatory body the
authority considered by the Company’s legal counsel to be necessary or useful
for the lawful issuance of any Award Shares or their subsequent transfer shall
relieve the Company of 

 

25

 

any liability for failing
to issue those Award Shares or permitting their transfer.  As a condition
to the exercise of any Award or the transfer of any Award Shares, the Company
may require the Awardee to satisfy any requirements or qualifications that may
be necessary or appropriate to comply with or evidence compliance with any
Applicable Law.

 

14.                               Amendment or Termination of this Plan or Outstanding
Awards

 

14.1                   Amendment and Termination

 

The Board may at any time
amend, suspend, or terminate this Plan.

 

14.2                   Stockholder Approval

 

The Company shall obtain
the approval of the Company’s stockholders for any amendment to this Plan if
stockholder approval is necessary or desirable to comply with any Applicable
Law or with the requirements applicable to the grant of Awards intended to be
Incentive Stock Options.  The Board may also, but need not, require that
the Company’s stockholders approve any other amendments to this Plan.

 

14.3                   Effect

 

No amendment, suspension,
or termination of this Plan, and no modification of any Award even in the
absence of an amendment, suspension, or termination of this Plan, shall impair
any existing contractual rights of any Awardee unless the affected Awardee
consents to the amendment, suspension, termination, or modification. 
Notwithstanding anything herein to the contrary, no such consent shall be
required if the Board determines, in its sole and absolute discretion, that the
amendment, suspension, termination, or modification:  (a) is required
or advisable in order for the Company, this Plan or the Award to satisfy
Applicable Law, to meet the requirements of any accounting standard or to avoid
any adverse accounting treatment, or (b) in connection with any
transaction or event described in Section 10, is in the best interests of
the Company or its stockholders.  The Board may, but need not, take the
tax or accounting consequences to affected Awardees into consideration in
acting under the preceding sentence.  Those decisions shall be final,
binding and conclusive.  Termination of this Plan shall not affect the
Administrator’s ability to exercise the powers granted to it under this Plan
with respect to Awards granted before the termination of Award Shares issued
under such Awards even if those Award Shares are issued after the termination.

 

15.                               Reserved Rights

 

15.1                   Nonexclusivity of this Plan

 

This Plan shall not limit
the power of the Company or any Affiliate to adopt other incentive arrangements
including, for example, the grant or issuance of stock options, stock, or other
equity-based rights under other plans.

 

26

 

15.2                   Unfunded Plan

 

This Plan shall be
unfunded.  Although bookkeeping accounts may be established with respect
to Awardees, any such accounts will be used merely as a convenience.  The
Company shall not be required to segregate any assets on account of this Plan,
the grant of Awards, or the issuance of Award Shares.  The Company and the
Administrator shall not be deemed to be a trustee of stock or cash to be
awarded under this Plan.  Any obligations of the Company to any Awardee
shall be based solely upon contracts entered into under this Plan, such as
Award Agreements.  No such obligations shall be deemed to be secured by
any pledge or other encumbrance on any assets of the Company.  Neither the
Company nor the Administrator shall be required to give any security or bond
for the performance of any such obligations.

 

16.                               Special Arrangements Regarding Award Shares

 

16.1                   Escrow of Stock Certificates

 

To enforce any
restrictions on Award Shares, the Administrator may require their holder to
deposit the certificates representing Award Shares, with stock powers or other
transfer instruments approved by the Administrator endorsed in blank, with the
Company or an agent of the Company to hold in escrow until the restrictions
have lapsed or terminated.  The Administrator may also cause a legend or
legends referencing the restrictions to be placed on the certificates.

 

16.2                   Repurchase Rights

 

(a)                     General  If a Stock Award is
subject to vesting conditions, the Company shall have the right, during the
seven months after the Awardee’s Termination, to repurchase any or all of the
Award Shares that were unvested as of the date of that Termination.  The
repurchase price shall be determined by the Administrator in accordance with
this Section 16.2 which shall be either (i) the Purchase Price for
the Award Shares (minus the amount of any cash dividends paid or payable with
respect to the Award Shares for which the record date precedes the repurchase)
or (ii) the lower of (A) the Purchase Price for the Shares or (B) the
Fair Market Value of those Award Shares as of the date of the
Termination.  The repurchase price shall be paid in cash.  The
Company may assign this right of repurchase.

 

(b)                     Procedure  The Company or its
assignee may choose to give the Awardee a written notice of exercise of its
repurchase rights under this Section 16.2.  However, the Company’s
failure to give such a notice shall not affect its rights to repurchase Award
Shares.  The Company must, however, tender the repurchase price during the
period specified in this Section 16.2 for exercising its repurchase rights
in order to exercise such rights.

 

17.                               Beneficiaries

 

An Awardee may file a
written designation of one or more beneficiaries who are to receive the Awardee’s
rights under the Awardee’s Awards after the Awardee’s death.  An Awardee
may change such a designation at any time by written notice.  If an
Awardee designates a beneficiary, the beneficiary may exercise the Awardee’s
Awards after the Awardee’s death.  If 

 

27

 

an Awardee dies when the
Awardee has no living beneficiary designated under this Plan, the Company shall
allow the executor or administrator of the Awardee’s estate to exercise the
Award or, if there is none, the person entitled to exercise the Option under
the Awardee’s will or the laws of descent and distribution.  In any case,
no Award may be exercised after its Expiration Date.

 

18.                               Miscellaneous

 

18.1                   Governing Law

 

This Plan, the Award
Agreements and all other agreements entered into under this Plan, and all
actions taken under this Plan or in connection with Awards or Award Shares,
shall be governed by the laws of the State of Delaware.

 

18.2                   Determination of Value

 

Fair
Market Value shall be determined as follows:

 

(a)                     Listed Stock.  If the Shares are
traded on any established stock exchange or quoted on a national market system,
Fair Market Value shall be the closing sales price for the Shares as quoted on
that stock exchange or system for the date the value is to be determined (the “Value Date “) as
reported in 
The Wall Street Journal 
or a similar publication.  If no sales are reported as having
occurred on the Value Date, Fair Market Value shall be that closing sales price
for the last preceding trading day on which sales of Shares are reported as
having occurred.  If no sales are reported as having occurred during the
five trading days before the Value Date, Fair Market Value shall be the closing
bid for Shares on the Value Date.  If Shares are listed on multiple
exchanges or systems, Fair Market Value shall be based on sales or bid prices
on the primary exchange or system on which Shares are traded or quoted.

 

(b)                     Stock Quoted by Securities Dealer 
If Shares are regularly quoted by a recognized securities dealer but selling
prices are not reported on any established stock exchange or quoted on a
national market system, Fair Market Value shall be the mean between the high
bid and low asked prices on the Value Date.  If no prices are quoted for
the Value Date, Fair Market Value shall be the mean between the high bid and
low asked prices on the last preceding trading day on which any bid and asked
prices were quoted.

 

(c)                      No Established Market  If Shares
are not traded on any established stock exchange or quoted on a national market
system and are not quoted by a recognized securities dealer, the Administrator
(following guidelines established by the Board or Committee) will determine
Fair Market Value in good faith.  The Administrator will consider the
following factors, and any others it considers significant, in determining Fair
Market Value: (i) the price at which other securities of the Company have
been issued to purchasers other than Employees, Directors, or Consultants, (ii) the
Company’s stockholder’s equity, prospective earning power, dividend-paying
capacity, and non-operating assets, if any, and (iii) any other relevant
factors, including the economic outlook for the Company and the Company’s
industry, the Company’s 

 

28

 

position in that
industry, the Company’s goodwill and other intellectual property, and the
values of securities of other businesses in the same industry.

 

18.3                   Reservation of Shares

 

During the term of this
Plan, the Company shall at all times reserve and keep available such number of
Shares as are still issuable under this Plan.

 

18.4                   Electronic Communications

 

Any Award Agreement,
notice of exercise of an Award, or other document required or permitted by this
Plan may be delivered in writing or, to the extent determined by the
Administrator, electronically.  Signatures may also be electronic if
permitted by the Administrator.

 

18.5                   Notices

 

Unless the Administrator
specifies otherwise, any notice to the Company under any Option Agreement or
with respect to any Awards or Award Shares shall be in writing (or, if so
authorized by Section 18.4, communicated electronically), shall be
addressed to the Secretary of the Company, and shall only be effective when
received by the Secretary of the Company.

 

29

 

Amendment
to

2003
Equity Incentive Plan

of
DTS, Inc.

 

Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc.
(the “Company
“), the Plan was amended on May 9, 2005 to provide as follows:

 

Any automatic option
grant to newly elected or appointed non-employee directors under the Plan made
during the period from May 19, 2005 to December 31, 2005 shall
consist of an option to purchase 30,000 shares of the Company’s common stock,
vesting monthly over a three year period starting on the date of the grant.

 

Any annual automatic
option grant to non-employee directors under the Plan made during the period
from May 19, 2005 to December 31, 2005 shall consist of an option to
purchase 10,000 shares of the Company’s common stock, vesting monthly over a
one year period starting on the date of the grant, provided that such
individual has served as a non-employee director for at least 6 months.

 

Any automatic option
grant to newly elected or appointed non-employee directors under the Plan made
at any time on or after January 1, 2006 shall consist of an option to
purchase 15,000 shares of the Company’s common stock, vesting monthly over a
three year period starting on the date of the grant.

 

Any annual automatic
option grant to non-employee directors under the Plan made at any time on or
after January 1, 2006 shall consist of an option to purchase 5,000 shares
of the Company’s common stock, vesting monthly over a one year period starting
on the date of the grant, provided that such individual has served as a
non-employee director for at least 6 months.

 

Each non-employee
director first elected or appointed to the Board at any time on or after January 1,
2006 shall automatically be granted on the date of such initial election or
appointment, 7,500 shares of restricted stock under the Plan, which shall vest
over a period of three years in equal installments at the end of each full
month from the date of the grant for so long as the non-employee director
continuously remains a director of, or a consultant to, the Company.

 

On the date of each
annual stockholders’ meeting held on or after January 1, 2006, each
individual who is to continue to serve as a non-employee director shall
automatically be granted 2,500 shares of restricted stock under the Plan,
provided that such individual has served as a non-employee director for at
least 6 months.  Such restricted stock shall vest over a period of one
year in equal installments at the end of each full month from the date of grant
for so long as the non-employee director continuously remains a director of, or
a consultant to, the Company.

 

None of the
above-referenced compensation shall be paid to any member of the Board (or
committees thereof) who is an employee of the Company. 

 

 

Amendment
to

2003
Equity Incentive Plan

of
DTS, Inc.

 

The 2003 Equity Incentive
Plan of DTS, Inc., as amended on May 9, 2005, was further amended on May 15,
2008, by adding a new Section 5.2(c). The new Section 5.2(c) reads
in its entirety as follows:

 

(c)                                  Cash Awards.  Subject
to the provisions of this Section 5.2, so long as the Company is a “publicly
held corporation” within the meaning of Code Section 162(m), no Employee
may be granted one or more Cash Awards within a single fiscal year of the
Company having an aggregate amount of more than $3,000,000, considered without
regard to any number of Options, SARs or Stock Awards that may have been
granted or awarded to such Employee during the applicable fiscal year. With
respect to any Cash Award that is granted with the intent of having it qualify
as “qualified performance-based compensation” under Code Section 162(m),
such Cash Awards may be granted to an Executive only by the Committee (and,
notwithstanding anything to the contrary in Section 4.1(a), not by the
Board). Any Cash Award intended as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Code must be awarded,
vest or become exercisable contingent on the achievement of one or more
Objectively Determinable Performance Conditions. If a Cash Award is cancelled,
the cancelled Cash Award shall continue to be counted toward the foregoing
limitation.

 

 

Amendment
to

2003
Equity Incentive Plan

of
DTS, Inc.

 

Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc.,
as previously amended on May 9, 2005 and May 15, 2008, on February 19,
2009 Section 11 of the Plan was further amended to provide as follows:

 

Any annual
automatic option grant to non-employee directors under the Plan made at any
time after February 19, 2009 shall consist of an option to purchase 7,500
shares of the Company’s common stock, vesting monthly over a one year period
starting on the date of the grant, provided that such individual has served as
a non-employee director for at least 6 months.

 

Each non-employee director
first elected or appointed to the Board at any time after February 19,
2009 shall automatically be granted on the date of such initial election or
appointment, 5,000 shares of restricted stock under the Plan, which shall vest
over a period of three years in equal installments on each annual anniversary
of the date of grant for so long as the non-employee director continuously
remains a director of, or a consultant to, the Company.

 

Each restricted
stock award automatically granted to a non-employee director on the date of
each annual stockholders’ meeting shall vest in a single installment on the
one-year anniversary of the date of grant so long as the non-employee director
continuously remains a director of, or a consultant to, the Company.

 

Except as set forth
above, the terms and conditions of Section 11 of the Plan, as amended on May 9,
2005, shall remain in effect.

 

The above-referenced
equity compensation shall not be paid to any member of the Board (or committees
thereof) who is an employee of the Company.

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