Document:

Exhibit 10.1

 

SETTLEMENT
AND LICENSE AGREEMENT

THIS SETTLEMENT AND LICENSE AGREEMENT (“Agreement”) is entered into
effective as of the 2nd day of August, 2006 (“Effective Date”), by and between
CEPHALON, INC., a corporation organized and existing under the laws of the
State of Delaware, with its principal place of business at 41 Moores Road,
Frazer, Pennsylvania (“Cephalon”), CARLSBAD TECHNOLOGY, INC., a corporation
organized and existing under the laws of the State of California, with its
principal place of business at 5923 Balfour Court, Carlsbad, California (“Carlsbad”),
and WATSON PHARMACEUTICALS, INC., a corporation organized and existing under
the laws of the State of Nevada, with its principal place of business at 311
Bonnie Circle, Corona, California (“Watson”). 
Each of Cephalon, Carlsbad and Watson are sometimes referred to herein,
individually, as a “Party” and, collectively, as the “Parties.”

WHEREAS, Cephalon is the owner by assignment of all right and title in
U.S. Reissue Patent No.  RE37,516 (the “Patent
in Suit”), issued by the United States Patent and Trademark Office on January
15, 2002.

WHEREAS, PROVIGIL® (modafinil) is the commercial formulation of
modafinil developed, manufactured and sold by Cephalon pursuant to FDA approval
of Cephalon’s NDA No. 20-717.

WHEREAS, by letter dated January 10, 2005, Carlsbad notified Cephalon
that Carlsbad had submitted ANDA No. 76-715 to the FDA under Section 505(j) of
the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 355(j)), seeking approval
to engage in the commercial manufacture, use, and sale of tablets containing
100 mg and 200 mg of modafinil, as a generic version of PROVIGIL® (modafinil)
tablets, before the expiration date of the Patent in Suit.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

WHEREAS, Carlsbad and Watson are parties to a joint development
agreement and a supply agreement pursuant to which: (i) Carlsbad is obligated
to assign the Carlsbad Modafinil ANDA (as defined below) to Watson upon approval by the
FDA; (ii) Watson has the sole discretion as to whether or not to commercialize
the Carlsbad Generic Modafinil Product (as defined below); (iii) Carlsbad is
obligated to manufacture and supply the Carlsbad Generic Modafinil Product to
Watson exclusively during the term of the agreement; and (iv) Watson controls
the Action (as defined below) with respect to Carlsbad.

WHEREAS, Cephalon filed the Action, seeking, among other things, a
declaration that Carlsbad’s making, using, offering to sell, selling, or
importing the tablets described in ANDA No. 76-715 would infringe the Patent in
Suit, an order providing that the effective date of any approval of Carlsbad’s
ANDA No. 76-715 shall be a date which is not earlier than the date of the
expiration of the Patent in Suit, and an order permanently enjoining Carlsbad
from making, using, offering to sell, selling, or importing tablets as
described in Carlsbad’s ANDA No. 76-715 until the date of the expiration of the
Patent in Suit.

WHEREAS, Carlsbad answered Cephalon’s complaint by asserting that
Carlsbad’s generic version of PROVIGIL® (modafinil) tablets described in ANDA
No. 76-715 would not infringe the Patent in Suit and affirmative defenses that
the Patent in Suit is invalid and unenforceable, and by filing counterclaims
seeking declaratory judgments of invalidity and unenforceability.

WHEREAS, Cephalon and Carlsbad have taken discovery, but no partial or
final judgment has entered in the Action as to any issue in dispute.

WHEREAS, to avoid the time and expense of further litigation, and in
compromise of the disputed claims set forth above, the Parties now desire to
resolve their disputes by settlement.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions herein set forth, the receipt and sufficiency of which
consideration is hereby acknowledged, the Parties agree as follows:

1.             DEFINITIONS

1.1.          “Action” shall mean Cephalon, Inc. v. Carlsbad Technology, Inc., Civil Action
No. 05-CV-1089 (JCL), pending in the United States District Court for the
District of New Jersey.

1.2.          “Affiliate” shall mean
any corporation, partnership, joint venture or firm which controls, is
controlled by or under common control with a specified person or entity.  For purposes of this definition, “control”
shall mean the actual power, either directly or indirectly through one or more intermediaries, to
direct the management and policies of a entity whether by (a) in the case of
corporate entities, direct or indirect ownership of at least fifty percent
(50%) of the stock or shares having the right to vote for the election of directors
(it being understood that the direct or indirect ownership of a lesser
percentage of such stock shall not necessarily preclude the existence of
control) or (b) in the case of non-corporate entities, direct or indirect
ownership of at least fifty percent (50%) of the equity interest with the power
to direct the management and policy decisions of such non-corporate entities or
by contract or otherwise.

1.3.          “ANDA” shall mean an Abbreviated New
Drug Application filed with the FDA pursuant to 21 U.S.C. 355(j) and 21 C.F.R §
314.3, or any similar or successor statute or regulation.

1.4.          “API” shall mean an active pharmaceutical ingredient.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

1.5.           “Carlsbad” shall mean CARLSBAD
TECHNOLOGY, INC., a corporation organized and existing under the laws of the State
of California, with its principal place of business at 5923 Balfour Court, Carlsbad, California, and
its directors, officers, employees, agents and representatives, predecessors,
successors, and assigns; its subsidiaries, divisions, groups, and the respective
directors, officers, employees, agents and representatives, successors, and
assigns of each.

1.6.           “Carlsbad Generic Modafinil Product”
shall mean any Generic Modafinil Product marketed and sold by or on behalf of Carlsbad and/or Watson
and/or their respective Affiliates or sublicensees in the Territory.

1.7.          “Carlsbad Modafinil ANDA” shall mean
ANDA No. 76-715.

1.8.          “Cephalon” shall mean CEPHALON, INC.,
a corporation organized and existing under the laws of the State of Delaware,
with its principal place of business at 41 Moores Road, Frazer, Pennsylvania,
and its directors, officers, employees, agents and representatives,
predecessors, successors, and assigns; its subsidiaries, divisions, groups, and
the respective directors, officers, employees, agents and representatives,
successors, and assigns of each.

1.9.          “Date Certain” shall mean the later
of: (a) October 6, 2011 (three years prior to the expiration of the Patent In
Suit); or (b) in the event that Cephalon obtains a pediatric
extension on the Patent in Suit, April 6, 2012 (three years prior to the
expiration of the pediatric extension, if obtained).

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

1.10.        “Dismissal
Order” shall mean the Joint Stipulation for Dismissal with
Prejudice to be filed in the Action pursuant to the terms of this Agreement, as
set forth in Exhibit A attached hereto.

1.11.        “FDA”
shall mean the United States Food and Drug Administration or any successor
agency thereof.

1.12.        “Final Court Decision” shall mean a
final decision of any federal court from which no appeal has been or can be
taken (other than a petition to the United States Supreme Court for a writ of
certiorari).

1.13.        “Generic Modafinil Product” shall mean [**].

1.14.        “Listed Patents” shall mean [**].

1.15.        “Modafinil Litigation” shall mean any action filed under 35
U.S.C. §§ 271 and 281 against any Modafinil Paragraph IV ANDA Filing Entity.

1.16.        “Modafinil Paragraph IV ANDA Filing
Entity” shall mean any entity, other than Carlsbad or Watson, that has notified
or subsequently notifies Cephalon that it has filed an ANDA with a
Paragraph IV certification concerning a product containing modafinil as an API
and for which PROVIGIL® is the reference listed drug.

1.17.        “NDA” shall mean Cephalon’s NDA No.
20-717 filed with the FDA, and all supplements and amendments filed thereto.

1.18.        “Net Profits” shall mean
the gross receipts derived in arms-length transactions from the sale of
Carlsbad Generic Modafinil Product in the Territory by Watson (or by its

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

Affiliates
and/or sublicensees) to independent third parties in the Territory, less the
sum of the following items:

(a)   Import,
export, excise and sales taxes and custom duties paid or allowed by the selling
party and any other governmental charges imposed upon the production,
importation, use or sale of Carlsbad Generic Modafinil Product by Carlsbad,
Watson and/or their Affiliates and/or sublicensees;

(b)   Credit
for returns, refunds, rebates and allowances, or trades to customers for
returned or recalled Carlsbad Generic Modafinil Product;

(c)   Trade,
quantity and cash discounts;

(d)   Transportation,
freight and insurance allowances;

(e)   Rebates
(direct or indirect) actually granted to wholesalers or other customers,
rebates or administrative fees in lieu of rebates paid to managed care,
institutions, government purchasers, Medicaid and other similar government
programs, chargebacks and retroactive price adjustments, and any other similar
allowances which effectively reduce the net selling price; and

(f)    The
purchase price paid to Cephalon for Carlsbad Generic Modafinil Product pursuant
to Section 3.4 and any applicable license and supply agreement among the
Parties, or the costs incurred by Carlsbad or Watson to make Carlsbad Generic
Modafinil Product.

Net
Profits shall be calculated according to US GAAP consistently applied.  Sales or transfers between or among a party
to this Agreement and its Affiliates shall be excluded from the computation of
Net Profits except where such Affiliates are end users, but Net Profits shall include
the subsequent final sales to third parties by such Affiliates.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

Where
(i) Carlsbad Generic Modafinil Product is sold as one of a number of items
without a separate price; or (ii) the consideration for the Carlsbad Generic
Modafinil Product shall include any non-cash element; or (iii) the Carlsbad
Generic Modafinil Product shall be transferred in any manner other than an
invoiced sale, the gross sales applicable to any such transaction shall be
deemed to be the selling party’s average gross sales for the applicable
quantity of Carlsbad Generic Modafinil Product during the calendar
quarter.  If there are no independent
gross sales of Carlsbad Generic Modafinil Product in the Territory at that
time, then Watson, Carlsbad and Cephalon shall appoint a mutually acceptable
third party (that is not an Affiliate of either Watson, Carlsbad or Cephalon)
to determine in good faith an estimate of the gross sales applicable to any
such transactions based on a consideration of all relevant market factors,
taking into account practices and policies customary in the industry.

In
the event that any discounts, allowances, payments or rebates are offered for
the Carlsbad Generic Modafinil Product where it is sold to a customer as a
grouped set of products, the applicable discount, allowance, payment or rebate
for the Carlsbad Generic Modafinil Product for purposes of calculating Net
Profits under this Agreement shall be based upon the weighted average discount,
allowance, payment or rebate of such grouped set of products; each to the
extent consistent with Watson’s usual course of dealing for its products other
than the Carlsbad Generic Modafinil Product.

1.19.        “Orange Book” shall mean the “Approved
Drug Products with Therapeutic Equivalence Evaluations” published, in written
or electronic form, by the FDA, as may be amended from time to time during the
term of this Agreement.

1.20.        “Patent In Suit” shall have the meaning set forth in the
recitals.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

1.21.        “Product” shall mean a finished dosage form.

1.22.        “Territory” shall mean the United States,
its territories, possessions, protectorates and the Commonwealth of Puerto
Rico.

1.23.        “Valid Claim” shall mean an issued and
unexpired patent claim which has not been held to be invalid or unenforceable
by a court of competent jurisdiction in a Final Court Decision.

1.24.        “Watson” shall mean WATSON
PHARMACEUTICALS, INC., a corporation organized and existing under the laws of
the State of Nevada, with its principal place of business at 311 Bonnie Circle,
Corona, California, and its directors, officers, employees, agents and
representatives, predecessors, successors, and assigns; its subsidiaries,
divisions, groups, and the respective directors, officers, employees, agents
and representatives, successors, and assigns of each.

2.             OBLIGATIONS OF THE PARTIES

2.1.          Carlsbad and Watson Warranty.

The Parties agree that
this Agreement includes a settlement which is a compromise of a disputed claim
and that acceptance of the consideration herein is not to be construed as an
admission by any Party as to the underlying merits of the Action.  However, as an express inducement to Cephalon
to enter into this settlement, in consideration of the terms hereof, Carlsbad
and Watson each hereby warrant, represent and agree that Carlsbad and Watson,
on behalf of themselves and their Affiliates, will not make, use, offer to
sell, or sell, or actively induce or assist any other entity to make, use,
offer to sell, or sell any Generic Modafinil Product 

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

within the
Territory, or import or cause to be imported any Generic Modafinil Product into
the Territory, except as otherwise permitted under, and according to the terms
of, the license granted by Cephalon in connection with this Agreement.  The Parties agree that,
subject to Section 3.3 of this Agreement, as used in this Section 2.1, “induce”
and “assist” shall include Carlsbad’s provision of modafinil API to parties it
knows or has reason to know will make, use, offer to sell, sell, import or
cause to be imported a Generic Modafinil Product in the Territory prior to the
Date Certain.

2.2.          Within [**] of the execution by all Parties of this
Agreement, Cephalon shall make a [**] payment to Watson of [**], in recognition
of the savings inuring to Cephalon in terms of the avoidance of costs,
expenditure of time and resources, disruption and burden associated with
prosecuting the Action.  Carlsbad
acknowledges and agrees that, as between Watson and Carlsbad, such payment to
Watson is appropriate, since Watson controls the Action with respect to
Carlsbad.

3.             WATSON GENERIC RIGHTS

3.1.          Cephalon grants to Watson the non-exclusive,
sublicensable right and license under the Listed Patents to manufacture,
have manufactured, use, market and sell Carlsbad Generic Modafinil Product in
the Territory (the “License”) according to the following terms:

3.1.1.       The
License shall be effective on or after the Date Certain.  Watson shall pay to Cephalon a royalty equal
to [**].

3.1.2.       Notwithstanding
Section 3.1.1, in the event that Cephalon licenses or permits any entity other
than Cephalon or its Affiliates to sell any Generic Modafinil

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

Product in the Territory prior to the Date
Certain (other than pursuant to a license granted to a third party, whether by
settlement or otherwise, that is subject to suspension provisions similar to
those set forth in Sections 3.1.3.3 and 3.1.3.6), the License shall be
effective on the date on which such other licensed entity begins selling a
Generic Modafinil Product in the Territory. 
In the event that the License becomes effective prior to the Date
Certain under the terms of this Section, Watson shall pay Cephalon a royalty
equal to [**] Carlsbad Generic Modafinil Product sold by the
Licensees prior to the Date Certain.

3.1.3.       Notwithstanding
Section 3.1.1, in the event that any Modafinil Paragraph IV ANDA Filing Entity
sells in the Territory any Generic Modafinil Product prior to the Date Certain,
the License shall be effective at the same time, subject to the following
restrictions:

3.1.3.1.    Watson
shall pay to Cephalon a royalty equal to [**] Carlsbad
Generic Modafinil Product sold by the Licensees pursuant to Section 3.1.3.

3.1.3.2.    In
the event that Cephalon seeks a temporary restraining order or other relief
against such Modafinil Paragraph IV ANDA Filing Entity to stop such Entity from
offering to sell or selling in the Territory its Generic Modafinil Product, the
Licensees may continue to market and sell Carlsbad Generic Modafinil Product in
the Territory until a court of competent jurisdiction renders a decision on
Cephalon’s request for a temporary restraining order or other relief, as
further described in Sections 3.1.3.3 through 3.1.3.4.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

3.1.3.3.    If
Cephalon obtains a temporary restraining order or other relief sufficient to
stop further offers to sell or sales in the Territory of Generic Modafinil
Product by any Modafinil Paragraph IV ANDA Filing Entity, the License shall be
suspended until the Date Certain, and the Licensees shall immediately cease
offering to sell and/or selling any Carlsbad Generic Modafinil Product as of
the earliest date on which such injunctive or other relief may be enforced.

3.1.3.4.    If
Cephalon requests but does not obtain a temporary restraining order or other
relief, the Licensees may continue to market and sell Carlsbad Generic
Modafinil Product in the Territory until the resolution of pending Modafinil
Litigation.  Watson shall continue to pay
to Cephalon a royalty equal to [**] Carlsbad Generic Modafinil Product
sold by the Licensees as set forth in Section 3.1.3.1 above.

3.1.3.5.    Nothing
in this Section or the Agreement shall obligate Cephalon to seek injunctive or
other relief to stop such Modafinil Paragraph IV ANDA Filing Entity from
offering to sell or selling Generic Modafinil Product in the Territory.

3.1.3.6.    In
the event that Cephalon prevails against such Modafinil Paragraph IV ANDA Filing
Entity in Modafinil Litigation, such that offers to sell or sales in the
Territory of Generic Modafinil Product by such Modafinil Paragraph IV ANDA
Filing Entity are admitted by such Modafinil Paragraph IV ANDA Filing Entity or
held by the court to infringe one or more valid and

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

enforceable claims of the Listed Patents, the
License shall be suspended until the Date Certain and the Licensees shall
immediately cease marketing and/or selling Carlsbad Generic Modafinil Product
until the Date Certain.

3.1.3.7.    Notwithstanding
Section 3.1.1, in the event that a Final Court Decision in Modafinil Litigation
is entered prior to the Date Certain declaring that one or more Modafinil
Paragraph IV ANDA Filing Entities may offer to sell or sell Generic Modafinil
Product in the Territory without infringing any valid, enforceable claim of any
Listed Patent on which Cephalon has brought suit, the Licensees may then market
and sell Carlsbad Generic Modafinil Product in the Territory.  If such Final Court Decision is based on a
finding of the invalidity and/or unenforceability of the Patent in Suit, no
royalty will thereafter be due to Cephalon, and royalties paid by Watson to
Cephalon under Section 3.1.3.1 and 3.1.3.4 for sales made by the Licensees of
Carlsbad Generic Modafinil Product in the Territory from the date of the
district court decision finding invalidity or unenforceability of the Patent in
Suit until the date of the Final Court Decision will be refunded by Cephalon to
Watson, within sixty (60) days of the entry of such Final Court Decision.  Otherwise, Watson shall pay to Cephalon a
royalty of [**] Carlsbad Generic Modafinil Product sold by the
Licensees.

3.2.          (a)           Watson
shall have the [**] right, to be exercised upon thirty (30) days’
written notice from Watson to Cephalon, and at any time following Watson’s or
Carlsbad’s first commercial marketing of Carlsbad Generic Modafinil Product in
accordance with the terms of this Agreement, to request that Cephalon provide
to a mutually agreeable independent third-party accounting firm [**].  The [**] provided by Cephalon to the
third-party

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

accounting firm [**], and Cephalon shall take any other
steps necessary to facilitate compliance with any confidentiality obligations
owed by Cephalon and the requirements of applicable laws, while still providing
sufficient information about [**].  These [**] shall
not be disclosed to Carlsbad or Watson, except to the extent contemplated in
Section 3.2(d) below.

 

(b)           The information provided to the third-party accounting
firm shall be limited solely to [**], and shall not include [**].

(c)           Cephalon shall provide [**] to the third-party accounting firm for the sole
purpose of enabling said accounting firm [**], so that said accounting firm may determine (in
good faith and in accordance with the professional standards of the industry
and principles of US GAAP, consistently applied) [**].  All fees and
expenses of the third-party accounting firm shall be paid by Watson.

(d)           In the event that said accounting firm determines in good
faith that [**], the
accounting firm shall promptly notify Watson of [**] (and also provide Cephalon a copy of such
notice).  By way of clarification, the
accounting firm is not to determine [**], but rather is simply to provide Watson with a copy
of [**].  Watson shall then have the one-time option
(exercisable upon written notice to Cephalon, to be given within ten days of
receipt of the notice from the accounting firm) to elect [**].

(e)           The agreements contemplated by Section 8.1 below shall
include a dispute resolution provision pursuant to which Cephalon can submit
any dispute it might have with the conclusion reached by the third-party
accounting firm.  In the event of such a
dispute, [**] shall continue
to apply until the dispute is resolved, [**].

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

 

3.3.          Carlsbad and/or Watson shall have the right to commence, or
have commenced, manufacturing activities in preparation of launch a reasonable
period of time prior to a reasonably anticipated effective date of the License,
provided however, that Carlsbad and/or Watson shall not have the right to
launch, or otherwise use or sell such preparation materials, in advance of such
effective date.

3.4.          On Watson’s or Carlsbad’s request, Cephalon shall supply
Watson and/or Carlsbad with modafinil Product, on terms to be mutually agreed
in good faith, for sale by Carlsbad and/or Watson as Carlsbad Generic Modafinil
Product in accordance with the terms of this Agreement.

3.5.          Cephalon covenants that it will not sue Carlsbad and/or
Watson for infringement under the Listed Patents, or any other patents now
owned or subsequently acquired by Cephalon, or any other patents to which
Cephalon now has or subsequently acquires license rights, for any sales by
Carlsbad and/or Watson in the Territory of a Generic Modafinil Product,
provided that any such sales are in accordance with the terms of this
Agreement.  Carlsbad and Watson agree
that they will not challenge the validity or enforceability of the Patent in
Suit.  Cephalon covenants that it
will not sue Carlsbad and/or Watson for infringement under the Patent in Suit for any sales in the Territory by Carlsbad
and/or Watson of a Product containing modafinil as an API that is manufactured
or sold [**].

4.             DISMISSAL

4.1.          Upon the execution of this Agreement, Cephalon and Carlsbad
shall execute and file in the Action the Dismissal Order.  Each Party shall bear its own costs with
respect to the settlement of the Action.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

4.2.          Cephalon and
Carlsbad waive any right to appeal any order previously entered in the Action.

5.             INDEMNIFICATION BY CEPHALON

5.1.          Cephalon shall defend, indemnify and
hold harmless Carlsbad and/or Watson and their respective Affiliates and
subsidiaries, and the officers, directors, and employees of each of them
(collectively, the “Indemnitees”), from and against any and all losses, liabilities,
penalties, obligations (including those arising out of settlement), claims, and
damages, and from any direct or indirect costs or expenses (including attorneys’
fees and expert fees), arising from or in connection with any action,
investigation, inquiry, demand, lawsuit or (formal or informal) proceeding
brought or threatened by a governmental entity or third party against an
Indemnitee (“Proceeding”) related to or arising from the entering into of this
agreement or the settlement of the Action, provided that each of the foregoing
losses, liabilities, penalties, obligations, claims, and damages, and costs or
expenses have been or are reasonably and in good faith incurred by or on behalf
of the Indemnitees.  This indemnification
also requires that Carlsbad and/or Watson has given Cephalon notice of such
Proceeding as set forth in Section 5.2 below. Notwithstanding the foregoing,
the failure to give timely notice to Cephalon as required in Section 5.2 shall
not release Cephalon from any liability to an Indemnitee except to the extent
Cephalon is prejudiced thereby.  Cephalon’s
obligations under this Section 5.1 to indemnify the Indemnitees shall [**].

5.2.          (a)           Carlsbad
and/or Watson shall provide written notice to Cephalon of any Proceeding for
which indemnification will be sought by the Indemnitees within twenty (20)
business days of Carlsbad’s and/or Watson’s receipt of notice of such
Proceeding.  This notice to Cephalon (“Indemnification
Notice”) shall include: (i) a request for indemnification pursuant to the terms
of this Section; (ii) a copy of any informal or formal notice of investigation,
summons,

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

subpoena, complaint, or other document relating to such Proceeding with
which any of the Indemnitees are served; and (iii) any other documentation and
information available to Carlsbad and/or Watson as is reasonably necessary to
determine whether and to what extent the Indemnitees are entitled to
indemnification under this Section.

 

(b)           Within ten (10) business days of Cephalon’s receipt of an
Indemnification Notice, Cephalon shall provide a written acknowledgement (“Indemnification
Acknowledgement”) in which Cephalon shall: 
(i) agree that the Indemnitees are entitled to indemnification under
this Section in connection with the Proceeding; or (ii) dispute that the
Indemnitees are entitled to such indemnification.

(c)           During the thirty (30) day period following the date of an
Indemnification Acknowledgement that reflects a dispute, Cephalon and Carlsbad
and/or Watson shall use good faith efforts to resolve the dispute.  In the absence of an agreement, such dispute
shall be resolved in accordance with Sections 8.4 and 8.5 of this Agreement.

5.3.          Carlsbad and/or Watson shall have the
right to select their own legal counsel in connection with such Proceeding,
subject to Cephalon’s consent which shall not be unreasonably withheld.  Carlsbad and/or Watson shall notify and keep
Cephalon apprised in writing of such Proceeding, and shall consider and take
into account Cephalon’s reasonable interests and requests regarding such
Proceeding.  Cephalon shall have the
right, in Cephalon’s sole discretion and at Cephalon’s expense, to join or
otherwise participate in such Proceeding, with legal counsel selected by
Cephalon.  Notwithstanding the above,
nothing in this Section 5.3 shall be construed as limiting or interfering with
Carlsbad’s and/or Watson’s right to pursue its own interests in the conduct of
such Proceeding.

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

5.4.          In order to obtain payment for any
indemnified expenses pursuant to this Section, Carlsbad and/or Watson shall
submit to Cephalon (either periodically while the Proceeding is ongoing, or
after final disposition of such Proceeding) a statement of the expenses
actually incurred by or on behalf of the Indemnitees in connection with a
Proceeding.  Such statement shall include
a copy of any invoices reflecting expenses for which Carlsbad or Watson is
seeking payment from Cephalon.  Cephalon
shall make payment to Carlsbad and/or Watson within [**] after
the receipt by Cephalon of each such statement.

6.             MUTUAL RELEASES

6.1.          Carlsbad, on behalf of itself and its
subsidiaries, successors, and assigns, hereby releases, acquits, and forever
discharges Cephalon from and against any and all claims, demands, liabilities,
causes of action, damages, duties, or obligations arising under, concerning, or
relating to the Action, including without limitation all claims that were or
could have been brought in the Action, but specifically excluding a breach by
Cephalon of its covenants and obligations under this Agreement.

6.2.          Watson, on behalf of itself and its
subsidiaries, successors, and assigns, hereby releases, acquits, and forever
discharges Cephalon from and against any and all claims, demands, liabilities,
causes of action, damages, duties, or obligations arising under, concerning, or
relating to the Action, including without limitation all claims concerning or
relating to the Listed Patents or the Carlsbad Modafinil ANDA, but specifically
excluding a breach by Cephalon of its covenants and obligations under this
Agreement.

6.3.          Cephalon, on behalf of itself and its
subsidiaries, successors, and assigns, hereby releases, acquits, and forever
discharges Carlsbad and Watson from any and all claims, demands, 

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

 

liabilities, causes of action, damages,
duties, or obligations arising under, concerning, or relating to the Action,
including without limitation all claims that were or could have been brought in
the Action, but specifically excluding a breach by Carlsbad or Watson of their
covenants and obligations under this Agreement.

7.             CONFIDENTIALITY

7.1.          Cephalon, Carlsbad, and Watson agree that the terms of this
Agreement shall remain confidential and shall not be disclosed to third parties
except subject to a nondisclosure agreement, and pursuant to business discussions
relating to asset sales, mergers, or change of control transactions, or upon
order of a court of competent jurisdiction or to the extent required by law or
governmental regulation.  Cephalon,
Carlsbad, and Watson agree that within ten (10) days of the execution of this
Agreement, they will jointly agree in good faith upon the text of and
disseminate appropriate press releases respecting the subject matter of this
agreement, and that they will not otherwise publicize the terms and conditions
of this Agreement or make any statements or comments to any news media and/or
trade publication, or any third person or entity (except as set forth above)
regarding the terms and conditions of this Agreement, except as may be required
by law, and then only after having conferred in good faith to obtain the
reasonable agreement of the other Parties. 
Information otherwise in the public domain is not subject to the
provisions of this Section.

8.             MISCELLANEOUS

8.1.          Cephalon, Carlsbad, and Watson agree that, within [**] of
the date of this Agreement, they shall prepare and execute whatever documents
are necessary to carry out the terms of Section 3 above.  However, subject to applicable laws, the
terms and conditions

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

 

contained
in this Agreement are binding notwithstanding the failure of the parties to
enter into the agreements referenced in this Section 8.1.

8.2.          The terms of this Agreement shall be binding upon and inure
to the benefit of the Parties hereto, their respective successors, heirs, and
permitted assigns; and nothing in this Agreement, express or implied, is
intended to or shall confer upon any third party any right, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.

8.3.          No Party shall assign any of its rights or obligations
hereunder to any non-Affiliated third party without first obtaining the written
consent of the other Parties hereto, which consent may not be unreasonably
withheld or delayed.  Any assignment or
transfer in contravention of the terms of this Agreement shall be null and
void.

8.4.          The Agreement shall be interpreted in accordance with and
governed by the law of the State of Delaware, without giving effect to
principles of conflicts of law that would require the application of the laws
of another jurisdiction.

8.5.          Cephalon, Carlsbad and Watson each agree that the United
States District Court for the District of New Jersey shall be the proper and
exclusive forum for any action to enforce this Agreement.  Each party consents to the personal
jurisdiction of that court for such purposes.

8.6.          Attorneys’ Fees.  In any action or proceeding initiated to
enforce or interpret the rights under this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys’ fees and costs incurred
in connection with such action or proceeding.

8.7.          Notices under this Agreement shall be sent by overnight or
first class mail, return receipt or other proof of delivery requested, to the
following:

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

If to Cephalon:

Legal Department

Cephalon, Inc.

41 Moores Road

Frazer, PA  19355

Attn:  John E. Osborn

Sr. Vice President,
General Counsel & Secretary

Telephone:  (610) 738-6337

Fax:  (610) 738-6590

If to Carlsbad:

Carlsbad Technology,
Inc.

5923 Balfour Court

Carlsbad, CA  92008

Attn:  Robert Wan

Chief Financial Officer

Telephone: (760)
431-8284

Fax: (760) 431-7507

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

If to Watson:

Legal Department

Watson Pharmaceuticals,
Inc.

311 Bonnie Circle

Corona, CA 92880

Attn: General Counsel

Telephone: (951)
493-5900

Fax: (951) 493-5813

8.8.          This Agreement may not be modified, amended, supplemented
or repealed except by written agreement executed by duly authorized
representatives of the Parties.

8.9.          Each Party shall have the right, at
its own expense, once each fiscal year upon reasonable advance notice, to have
a mutually acceptable independent auditor conduct an audit (consistent with US
GAAP and applicable laws) of the financial books and accounts of the other
party for the purposes of ascertaining the payments due under this Agreement as
well as the compliance with all financial obligations hereunder.

8.10.        This Agreement represents the entire agreement as between
Cephalon and Carlsbad and as between Cephalon and Watson with respect to the
subject matter of this Agreement and supersedes all prior or contemporaneous
agreements, proposals or understandings, whether written or oral, between
Cephalon and Carlsbad and between Cephalon and Watson with respect to that
subject matter.

8.11.        In making and performing this Agreement, the Parties are
acting, and intend to be treated, as independent entities; and nothing
contained in this Agreement shall be construed or implied to create an agency,
partnership, joint venture, or employer and employee relationship between the
Parties.  Except as otherwise provided
herein, no Party may make any

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

representation,
warranty or commitment, whether express or implied, on behalf of or incur any
charges or expenses for or in the name of any other Party.

 

8.12.        If one or more provisions of this Agreement are ruled wholly
or partly invalid or unenforceable by a court or other government body of
competent jurisdiction, then the validity and enforceability of all other
provisions of this Agreement shall not in any way be affected or impaired.

8.13.        No waiver of, failure of a party to object to, or failure of
a party to take affirmative action with respect to any default, term, or
condition of this Agreement, or any breach thereof, shall be deemed to imply or
constitute a waiver of any other like default, term, or condition of this
Agreement, or subsequent breach thereof.

8.14.        Nothing in this Agreement shall be construed so as to result
in a license under, or waiver of, any right of a Party, in each case, without
an express license or waiver by such Party in writing, either hereunder or in a
separate writing signed by the Parties.  For the avoidance of doubt:

(a)           Nothing in this Agreement shall
operate or be construed as granting Carlsbad or Watson a license under, or any
other rights with respect to, any patents owned by Cephalon other than [**],
except as specifically stated in Section 3.5; and

(b)           Nothing in this Agreement shall
operate or be construed as a waiver by Carlsbad or Watson of any rights to
challenge any patent owned by Cephalon other than [**].

8.15.        Cephalon, Carlsbad, and Watson have had all desired counsel,
legal and otherwise, in entering into this Agreement, and do so in accordance
with their own free acts and

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

deeds.  This Agreement shall therefore be deemed to
have been negotiated and prepared at the joint request, direction, and instruction
of each of the Parties, at arms length, with the advice and participation of
counsel, and will be interpreted in accordance with its terms without favor to
any Party.

8.16.        The language in all parts of this Agreement shall be
construed, in all cases, according to its fair meaning.  The Section headings are placed herein merely
as a matter of convenience and shall not affect the construction or
interpretation of any of the provisions of this Agreement.  The words “hereof,” “herein,” “hereto” and “hereunder”
and words of similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.  The terms defined in the
singular shall have a comparable meaning when used in the plural, and vice
versa.   Whenever used herein, the words “include,”
“includes” and “including” shall mean “include, without limitation,” “includes,
without limitation” and “including, without limitation,” respectively.  The masculine, feminine or neuter gender and
the singular or plural number shall each be deemed to include the others
whenever the context so indicates. Nothing in this Agreement shall operate to
exclude any provision implied into this Agreement by law and which may not be
excluded by law or limit or exclude any liability, right or remedy to a greater
extent than is permissible under the law.

8.17.        Each of the Parties shall do, execute and perform and shall
procure to be done and perform all such further acts deeds documents and things
as the other Parties may reasonably require from time to time to give full
effect to the terms of this Agreement.

8.18.        Each party represents that it is duly existing; that it has
the full power and authority to enter into this Agreement; that there are no
other persons or entities whose consent

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

to this
Agreement or whose joinder herein is necessary to make fully effective the
provisions of this Agreement; that this Agreement does not and will not
interfere with any other agreement to which it is a party and that it will not
enter into any agreement the execution and/or performance of which would
violate or interfere with this Agreement.

8.19.        Cephalon represents and warrants that it has the sole and
exclusive right and authority to enforce [**], that it has not granted or
assigned to any third party, directly or indirectly, any right or authority to
enforce [**], and that no third party has any right or authority to enforce [**].

8.20.        This Agreement may be signed in counterparts, each of which
shall be deemed an original hereof, but all of which together shall constitute
one and the same instrument.

[Signature Page Follows]

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.

 

IN WITNESS WHEREOF,
Cephalon, Carlsbad, and Watson have executed this Settlement and License
Agreement effective as of the date first written above.

	
  CEPHALON,
  INC.

  	
   

  	
  CARLSBAD
  TECHNOLOGY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Frank Baldino, Jr., Ph.D.

  	
   

  	
   

  	
  By:

  	
  /s/ Robert Wan

  	
   

  
	
   

  	
   

  	
   

  
	
  Printed Name: Frank Baldino, Jr., Ph.D.

  	
   

  	
  Printed Name: Robert Wan

  
	
   

  	
   

  	
   

  
	
  Title: Chairman and CEO

  	
   

  	
  Title: Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
  Date: August 4, 2006

  	
   

  	
  Date: August 7, 2006

  
							

 

 

	
  WATSON
  PHARMACEUTICALS, INC.

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Richard A. Yannone

  	
   

  
	
   

  
	
  Printed Name: Richard A. Yannone

  
	
   

  
	
  Title: Executive Director Finance and
  Assistant Treasurer

  
	
   

  
	
  Date: August 4, 2006

  

 

**Portions of the Exhibit have been omitted
and have been filed separately pursuant to an application for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.Exhibit 10.2

 

SEPARATION OF EMPLOYMENT AGREEMENT

AND GENERAL RELEASE, DATED AUGUST 31, 2006

WHEREAS Paul Blake, FRCP (“Blake”)
has been employed by Cephalon, Inc. (hereinafter “Employer”) as Executive Vice
President, Worldwide Medical and Regulatory Operations, and because, as Blake
acknowledges, Blake and Employer desire to end Blake’s employment with Employer
in an amicable fashion, Blake and Employer agree as follows:

1.     In consideration of the
promises of the Employer set forth in the memorandum attached to the Separation
of Employment Agreement and General Releases to provide lump severance payment
in an amount corresponding to one and a half (1.5) times his current gross
annualized salary of $465,000, less applicable taxes and customary deductions,
for the period commencing September 1, 2006 and ending on March 1, 2008, which
corresponds to a total gross amount of $697,500, Blake (and his heirs,
executors, and administrators) intending to be legally bound, hereby
permanently and irrevocably terminates his employment with his Employer, and
releases and discharges his Employer (and its parents, subsidiaries,
affiliates, and its and their officers, directors, shareholders, employees,
agents, successors, assigns, heirs, benefit plans, benefit plan fiduciaries,
benefit plan administrators, executors, and administrators), and any individual
or organization related to his Employer, and against whom or which Blake could
claim (hereinafter referred to collectively as “Releasees”) from any and all
causes of actions, suits, debts, claims, and demands whatsoever, which he had,
has, or may have against Releasees up until the date of his execution of the
Separation of Employment Agreement and General Release (Agreement and
Release).  Particularly, but without
limitation, Blake so releases any claims relating in any way to his employment
or the termination of his employment relationship with his Employer, including,
but not limited to claims arising under the Pennsylvania Human Relations Act (“PHRA”)
Pennsylvania Wage Payment and Collection Law, 43 Pa. Stat. Ann. §§260.1-260.11a,
Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. S2000c et
seq. (Title VII), (“Title VII”), the

Age
Discrimination in Employment Act, 29 U.S.C., Section 621 et  seq.
(the “ADEA”), the Americans with Disabilities Act, 42 U.S.C. § 12101 et  seq.,
(the “ADA”), and the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et
seq. (“ERISA”) and all other claims under any federal, state, or common
law, statutory or regulatory provisions, now or hereafter recognized and all
claims for counsel fees and costs.  Blake
further agrees that he will not seek personal legal or equitable relief against
the Releasees involving any matters released in this paragraph.

2.     Except as set forth in this
Agreement and its Release, it is expressly agreed and understood that his
Employer does not have, and will not have, any obligation to provide at any
time in the future with any payments, benefits, or consideration other than
those recited in the attached memorandum, which in any event will be subject to
applicable taxes including Federal Insurance Contribution Act tax (hereinafter “FICA”),
and/or other federal, state and/or local taxes.

3.     Blake hereby agrees and
recognizes that his employment relationship with his Employer has been
permanently and irrevocably severed. 
Blake further recognizes that Employer is under no obligation to hire,
rehire or employ him in the future.  Blake
agrees that he will not seek or accept employment with Releasees in the future.  Also, to the best of his ability and upon
reasonable request, from time to time, Blake will cooperate with Employer, and
will answer for Employer, any questions regarding matters related to his
employment at Employer.  It is understood
that this will not detract from Blake’s other full time employment activities.

4.     Blake recognizes that many employees and Employer have access to
varying levels and degrees of confidential information, and that Blake’s
solicitation or assistance of such persons may be seriously disruptive to the
buiness of Employer in that such solicitations may result in disclosure of such
proprietary information and could impair the relationship between Employer and
its employees.

 2
 

5.     The parties acknowledge that the performance of the promises of
each are expressly contingent upon the fulfillment and satisfaction of the
obligations of the other party as set forth in this Agreement and Release and
its attached Exhibits.

6.     Blake agrees and
acknowledges that this Agreement and Release is not and shall not be construed
to be an admission of any violation of any federal, state or local statute or
regulation, or of any duty owed by Employer.

7.     Blake agrees, convenants,
and promises that he will not communicate or disclose the terms of this Agreement
and Release to any persons with the exception of members of his immediate
family and his attorney or financial advisors.

8.     Blake hereby certifies that
he has read the terms of this Agreement and Release, that he has had adequate
time to consider it fully, and that he understands its terms and effects.  Blake further certifies that neither his
Employer, nor any of its agents, representatives, employees or attorneys have
made any representations to Blake, construing the terms or effects of the Separation
of Employment Agreement and General Release other than those expressly
contained herein.

9.     Both parties agree that
this Agreement and Release, along with the attachments, represents the entire
agreement between the parties and fully supersedes any and all other oral and
written understandings or agreements between the parties.  Neither party shall have any duty to the
other that is not specifically set forth in these documents.

10.   Blake certifies and
acknowledges as follows:

a.               That he has read the terms of this Agreement
and Release and that he understands its terms and effects, including the fact
that he has agreed to RELEASE AND FOREVER DISCHARGE his Employer in accordance
with Paragraph 1;

b.              That he has signed this Agreement and Release
voluntarily and knowingly in exchange for the consideration described in the
attached memorandum;

 3
 

c.               That he has been advised by his Employer
through this document to consult with an attorney prior to signing this
Agreement and Release;

d.              That neither his Employer, nor any of its
agents, representatives, employees or attorneys have made any representations
to him construing the terms or effects of this Agreement and Release other than
those expressly set forth in this Agreement and Release;

e.               That he has been given a reasonable period of
at least 21 days to review and consider this Agreement and Release with an
attorney of his choice; and

f.                 That he may revoke the Agreement and Release
for a period of seven (7) days following the day he signs it by submitting (by
hand delivery) written notice of the revocation to Carl A. Savini, Executive
Vice President and Chief Administrative Officer.  The Agreement and Release shall become
effective and enforceable upon expiration of the seven-day revocation period.

 4
 

IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties have executed the foregoing Separation of Employment Agreement and
General Release this 23rd day of
August, 2006.

	
  Witness:

  	
  /s/ Beverly Wrightstone

  	
   

  	
  /s/ Paul Blake, FRCP

  	
   

  
	
   

  	
   

  	
  Paul Blake, FRCP

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Employer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   Witness:

  	
  /s/ Beverly Wrightstone

  	
   

  	
  By:

  	
  /s/ Carl A. Savini

  	
   

  
	
   

  	
   

  	
   

  	
   Carl A.
  Savini

  
	
   

  	
   

  	
   

  	
   Executive
  Vice President and Chief

  
	
   

  	
   

  	
   

  	
   Administrative
  Officer

  
	
   

  	
   

  	
   

  	
   Cephalon,
  Inc.

  
							

 

 5

EXHIBIT A

	
  TO:

  	
  Paul Blake, FRCP

  	
   

  
	
  FROM:

  	
  Carl A. Savini

  	
   

  
	
  DATE:

  	
  August 22, 2006

  	
   

  
	
  SUBJECT:

  	
  Agreement to End Employment

  	
   

  

 

This
memo will confirm that we have agreed to end your employment with Cephalon,
Inc. (“Employer”), effective August 31, 2006. 
This is a Termination Prior to Change in Control on account of an
involuntary termination by the Company for any reason other than Cause, death
or Disability (“Involuntary Termination”), as defined in your Executive
Severance Agreement of July 25, 2002.

The
details of your severance package are as follows:

1)              You will receive a lump sum severance payment
equal to one and a half (1.5) times your current gross annualized salary of
$465,000 for the period commencing September 1, 2006 and ending on March 1,
2008, which corresponds to a total gross amount of $697,500, less applicable
taxes and customary deductions.

2)              To assist you in your job search, we are
providing you with outplacement assistance. 
A representative from Right Management will provide you with additional
details of this program.

3)              For a period of eighteen (18) months
following your termination date, you shall continue to receive the medical and
dental coverage in effect for yourself and your spouse and dependents.  The COBRA health care continuation coverage
period under section 4980B of the CODE shall run concurrently with the
foregoing eighteen (18) month benefit period. 
Your participation in all other Company benefits, including the 401(k)
will cease August 31, 2006.  You will
receive information on the Life and LTD Insurances under separate cover.

4)              In accordance with our Equity Compensation
and Stock Option plans, you will have ninety (90) days following your
termination in which to exercise any previously unexercised options which have
vested as of August 31, 2006.  All
vesting ends as of August 31, 2006 and any stock awards or options that have
not vested as of such date will immediately terminate and revert to the
Company.

5)              You should be advised that the terms of your separation
must be disclosed under the federal securities laws, and that we plan to issue
the following disclosure statement:

“On August 31, 2006, Cephalon, Inc. (the “Company”)
and Dr. Paul Blake agreed to end Dr. Blake’s employment as the Company’s Executive
Vice President, Worldwide Medical and Regulatory Operations effective as of
August 31, 2006.  In connection with this
matter, the Company and Dr. Blake executed a Separation Agreement dated as of
August 31, 2006 (the “Separation Agreement”), providing for compensation and
benefits that would have been paid under an existing Severance Agreement dated
July 25, 2002 between the Company and Dr. Blake, including (i) a lump sum
payment of $697,000, which is equal to one and a half (1.5) times Dr. Blake’s
current annual base salary (or 18 months thereof); (ii) dental and medical
coverage continuation for Dr. Blake, his spouse

and dependents until February 2008; and (iii)
payment of up to $15,000 to cover the costs of outplacement assistance
services.  In consideration of such
benefits, Dr. Blake agreed pursuant to the terms of the Separation Agreement to
release the Company from all claims, demands and causes of action related to
his employment with the Company.”

This
severance package is conditional upon the following:

1.     According to Section 5 of your Executive Severance Agreement, in
order to receive the severance payment, on or after August 31, 2006, you will
sign without alteration, and not thereafter revoke and you will at all times
comply with the terms and conditions of Employer’s attached form of Separation
of Employment Agreement and General Release Statement dated August 31, 2006.

2.     You agree to preserve the confidential nature of all trade
secrets and other proprietary information of the Employer; immediately deliver
to the Employer all documents and other materials acquired during the course of
your employment; and keep confidential any information or documents concerning
or relating to the Employer that you have acquired to date for your own or anyone
else’s benefit, without the prior written consent of the Employer.

3.     To the best of your ability and upon reasonable request, you
will cooperate with Employer, and you will answer for Employer, any questions
regarding matters in your area or expertise as long as you conintue to receive
payments from the Employer.  In addition,
you will not make any comment or statement, orally or in writing that is
designed to, or does, disparage the personal or business reputation of
Employer, its related companies, directors, officers, employees or agents.

4.     You will surrender immediately all company property including
files, memos and primary data to your supervisor.  This includes copies of these data and
materials.  You are also advised that
these data and materials are the intellectual property of Employer and may not
be used in any manner without written permission.

5.     During the severance periods, if necessary you will answer
Employer’s questions concerning your previous duties, upon Employer’s
reasonable request.  You will not receive
any additional compensation for such services, other than the salary or
benefits continuation or severance described above.  Without in any manner limiting the foregoing,
you acknowledge and agree that you will not be eligible for, nor will you
receive any bonuses or incentive compensation payments for calendar years 2006
or 2007.

You
will not receive any payment until at least eight (8) days after you execute
the applicable attached Separation of Employment Agreement and General Release
in order to allow for the expiration of the seven (7) day revocation period of
that agreement.

 2
 

If
I can be of any assistance to you now, or during the salary continuation or
severance periods, please do not hesitate to contact me.

	
  /s/ Carl A. Savini

  	
   

  
	
  Carl A. Savini

  
	
  Executive Vice
  President and Chief Administrative Officer

  
	
  Cephalon, Inc.

  
	
   

  
	
  Agreed to and Accepted:

  
	
   

  
	
   

  
	
  /s/ Paul Blake, FRCP

  	
   

  
	
  Paul Blake, FRCP

  
	
   

  
	
  23rd August 2006

  	
   

  	
   

  
	
  Date

  
	
   

  
	
  Attachment

  
					

 

 3

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