Document:

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                                                                    Exhibit 10.3

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                  AMENDED AND RESTATED LICENSE, DEVELOPMENT AND
                           COMMERCIALIZATION AGREEMENT

                                 BY AND BETWEEN

                          BRISTOL-MYERS SQUIBB COMPANY
                            (A DELAWARE CORPORATION)

                                       AND

                           VANDA PHARMACEUTICALS, INC.
                            (A DELAWARE CORPORATION)

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CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

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                                TABLE OF CONTENTS

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ARTICLE 1    DEFINITIONS.................................................     1
ARTICLE 2    LICENSE GRANT...............................................     8
   2.1     Exclusive License Grant.......................................     8
   2.2     Non Exclusive License Grant...................................     8
   2.3     Sublicense....................................................     8
   2.4     No Trademark License..........................................     8
   2.5     No Implied Licenses...........................................     8
   2.6     Marketing Arrangements........................................     9
   2.7     Retained Rights...............................................     9
ARTICLE 3    OPTION GRANTS...............................................     9
   3.1     Vanda's Option: Third Party Development Partners..............     9
   3.2     BMS Option Exercisable Upon Completion of Phase III Clinical
           Studies: Commercialization....................................    10
   3.3     Right of First Negotiation to Act as a Co-Promotion Partner
           in Commercialization of a Product By Either Party.............    11
   3.4     Responsibilities Regulatory Affairs...........................    12
ARTICLE 4    TRANSFER OF BMS KNOW-HOW;...................................    13
   4.1     Transfer of BMS Compound Know-How.............................    13
   4.2     Non-Solicitation..............................................    14
ARTICLE 5    DEVELOPMENT.................................................    14
   5.1     Program Liaison...............................................    14
   5.2     Development...................................................    14
   5.3     Development Reports...........................................    15
   5.4     Records.......................................................    15
   5.5     Development Responsibilities and Costs........................    15
   5.6     Regulatory Responsibilities and Costs.........................    15
ARTICLE 6    COMMERCIALIZATION...........................................    18
   6.1     Commercializing Party's Responsibilities......................    18
ARTICLE 7    MANUFACTURE AND SUPPLY......................................    19
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   7.1     Responsibility................................................    19
   7.2     Provision of Compound.........................................    19
   7.3     Right to Manufacture Commercial Supply........................    19
ARTICLE 8    PAYMENTS....................................................    20
   8.1     Technology Access Fee.........................................    20
   8.2     Milestone Payments............................................    20
   8.3     Timing........................................................    21
   8.4     Development Costs.............................................    21
   8.5     Royalty Payment...............................................    21
   8.6     Third Party Royalty Payments..................................    22
   8.7     [*] Third Party Royalty Payments..............................    22
   8.8     Term for Royalty Payments.....................................    22
   8.9     Sales Reports.................................................    23
   8.10    Currency Exchange.............................................    24
   8.11    Tax Withholding...............................................    24
   8.12    Interest Due..................................................    24
ARTICLE 9    REPRESENTATIONS AND WARRANTIES; DISCLAIMER; LIMITATION OF
             LIABILITY...................................................    24
   9.1     Mutual Warranties.............................................    24
   9.2     BMS Warranties and Covenants..................................    25
   9.3     Vanda Warranties and Covenants................................    25
   9.4     DISCLAIMER....................................................    25
   9.5     Limitation of Liability.......................................    26
ARTICLE 10   PATENT MAINTENANCE; INFRINGEMENT; CONFIDENTIALITY...........    26
   10.1    Inventions....................................................    26
   10.2    Patent Maintenance; Abandonment...............................    26
   10.3    Enforcement of BMS Patent Rights Against Infrigers............    27
   10.4    Defense of Third Party Claims.................................    28
ARTICLE 11   NONDISCLOSURE OF CONFIDENTIAL INFORMATION...................    29
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                                TABLE OF CONTENTS
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   11.1    Nondisclosure.................................................    29
   11.2    Authorized Disclosure.........................................    29
   11.3    Terms of this Agreement.......................................    30
   11.4    Exception for Disclosure [*]..................................    30
ARTICLE 12   INDEMNITY...................................................    31
   12.1    Vanda Indemnity...............................................    31
   12.2    BMS Indemnity.................................................    31
   12.3    Indemnification Procedures....................................    32
   12.4    Insurance.....................................................    32
ARTICLE 13   TERM AND TERMINATION........................................    33
   13.1    Term..........................................................    33
   13.2    Termination By BMS............................................    33
   13.3    Termination by Vanda..........................................    34
   13.4    Effect of Termination.........................................    34
   13.5    Survival......................................................    37
   13.6    Bankruptcy....................................................    37
ARTICLE 14   MISCELLANEOUS...............................................    38
   14.1    Provisions Contrary to Law....................................    38
   14.2    Third Party Rights............................................    38
   14.3    Notices.......................................................    39
   14.4    Force Majeure.................................................    39
   14.5    Use of Names..................................................    39
   14.6    Assignment....................................................    40
   14.7    Further Assurances............................................    40
   14.8    Waivers and Modifications.....................................    40
   14.9    Choice of Law and Jurisdiction................................    41
   14.10   Publicity.....................................................    41
   14.11   Entire Agreement..............................................    42
   14.12   Counterparts..................................................    42
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                                TABLE OF CONTENTS
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   14.13   Relationship of the Parties...................................    42
   14.14   Headings......................................................    42
   14.14   Dispute Resolution............................................    42
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                  AMENDED AND RESTATED LICENSE, DEVELOPMENT AND
                           COMMERCIALIZATION AGREEMENT

     THIS AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION
AGREEMENT (this "Agreement"), effective as of the Effective Date (defined
below), is made and entered into by and between BRISTOL-MYERS SQUIBB COMPANY, a
Delaware corporation headquartered at 345 Park Avenue, New York, New York 10154
USA ("BMS") and VANDA PHARMACEUTICALS, INC., a Delaware corporation having its
principal place of business at 47 Hulfish Street, Suite 310, Princeton, NJ 08542
("Vanda"). Each of BMS and Vanda is referred to herein as a "Party" and BMS and
Vanda are collectively referred to herein as the "Parties."

                                    ARTICLE 1
                                   DEFINITIONS

For the purposes of this Agreement, the following definitions shall apply, and
the terms defined herein in plural shall include the singular and vice-versa:

     1.1 "AFFILIATE" means any corporation, company, partnership, joint venture
and/or firm which controls, is controlled by, or is under common control with a
specified person or entity. For purposes of this Section 1.1, "control" means
the power, direct or indirect, to direct the management and policies of an
entity, and shall be presumed to exist if one of the following conditions is
met: (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, and (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 policies of such non-corporate
entities. The Parties acknowledge that in the case of certain entities organized
under the laws of certain countries outside of the United States, the maximum
percentage ownership permitted by law for a foreign investor may be less than
fifty percent (50%), and that in such cases such lower percentage shall be
substituted in the preceding sentence, provided that such foreign investor has
the power to direct the management and policies of such entity. Care Capital LLC
shall not be considered an Affiliate of Vanda and shall be considered a Third
Party if and only if Care Capital LLC (a) is not involved in the Development,
manufacture or Commercialization of a Product and (b) does not Control any
know-how or patent relating to any composition, formulation, method of use or
manufacture of a Compound or a Product that is not Controlled by Vanda and
Vanda's Affiliates (i.e., Care Capital does not Control any know-how or patent
that would be subject to Section 13.4.1(g) if Care Capital LLC was considered
an Affiliate of Vanda).

     1.2 "APPROVAL" means Marketing Authorizations with pricing, labeling, and
reimbursement approvals and any other similar final approvals from the FDA or an

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equivalent Regulatory Authority of another country necessary to manufacture
and/or Commercialize a Product.

     1.3 "BMS COMPOUND PATENT RIGHTS" means (a) all U.S. patents and patent
applications and their foreign counterparts Controlled by BMS as of the
Effective Date covering the composition or utility of a Compound; (b) any
continuation, continuation-in-part (but only to the extent that such application
includes new data in support of claims previously submitted in a prior
originally filed application), divisional, and continued- prosecution
applications of any such patent applications in (a), and (c) any patents granted
on or issuing from any aforesaid applications in (a) and (b), including any
renewals, extensions, patents of addition, revivals, re-examinations, and
reissues thereof. Such Patent Rights are listed on Schedule 1.3.

     1.4 "BMS COMPOUND KNOW-HOW" means all technical information and know-how
known to and Controlled by BMS, Effective Date (including, without limitation,
all biological, chemical, pharmacological, toxicological, clinical, assay, and
related know-how and trade secrets) identified by BMS as directly relating to,
and are reasonably useful for, the Development and/or Commercialization of a
Compound or Product in the manner that the Compound or Product has been
Developed and Commercialized by BMS heretofore.

     1.5 "BMS KNOW-HOW" means the BMS Compound Know-How and the BMS
Manufacturing Know-How.

     1.6 "BMS MANUFACTURING KNOW-HOW" means all technical information and
know-how known to and Controlled by BMS as of the Effective Date (including,
without limitation, all manufacturing data, the percentages and specifications
of ingredients, the manufacturing processes, specifications, technology, assays,
quality control and testing procedures, and related know-how and trade secrets)
identified by BMS as directly relating to, and are reasonably useful for, the
manufacture of a Compound or Product in the manner that the Compound or Product
has been manufactured by BMS heretofore.

     1.7 "BMS MANUFACTURING PATENT RIGHTS" means those U.S. or foreign patents,
if any, Controlled by BMS as of the Effective Date, including any renewals,
extensions, patents of addition, revivals, re-examinations, and reissues
thereof, for which any claim covers the manufacture of a Compound in the same
manner that such Compound has heretofore been manufactured by BMS. Such patent
rights are listed on Schedule 1.7.

     1.8 "BMS PATENT RIGHTS" means the BMS Compound Patent Rights and the BMS
Manufacturing Patent Rights.

     1.9 "BUSINESS DAY" means a day other than Saturday, Sunday or any day on
which commercial banks located in New York are authorized or obligated by law to
close.

     1.10 "COMBINATION PRODUCT" means a Product including [*]. For clarity, drug
delivery vehicles, adjuvants,

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and excipients shall not be deemed to be "active ingredients" the presence of
which in a Product would be deemed to create a Combination Product.

     1.11 "COMMERCIALIZING PARTY" has the meaning set forth in Section 6.1.1.

     1.12 "COMPOUNDS" means the compounds identified as BMS-214778 and
BMS-330446 each as specifically described in Schedule 1.3 and including without
limitation metabolites or prodrugs thereof, and any hydrates, conjugates, salts,
esters, isomers, polymorphs or analogues of any of the foregoing.

     1.13 "COMMERCIALLY REASONABLE EFFORTS" means, with respect to a Product,
the carrying out of obligations [*], based on conditions then prevailing.
Commercially Reasonable Efforts requires that each Party: (a) [*] (b) [*] (c)
[*] and (d) [*].

     1.14 "COMMERCIALIZATION" or "COMMERCIALIZE" means activities directed to
obtaining pricing and reimbursement approvals, marketing, promoting,
distributing, importing or selling a product

     1.15 "CONFIDENTIAL INFORMATION" means all trade secrets, processes,
formulae, data, know-how, improvements, inventions, chemical or biological
materials, techniques, marketing plans, strategies, customer lists, or other
information that has been created, discovered, or developed by a Party, or has
otherwise become known to a Party, or which proper rights have been assigned to
a Party, as well as any other information and materials that are deemed
confidential or proprietary to or by a Party (including, without limitation, all
information and materials of a Party's customers and any other third party and
their consultants), regardless of whether any of the foregoing are marked
"confidential" or "proprietary" or communicated to the other by the disclosing
Party in oral, written, graphic, or electronic form. In the case of BMS,
"Confidential Information" shall include, without limitation, the BMS Know-How.

     1.16 "CONTROLLED" OR "CONTROLS", when used in reference to intellectual
property, shall mean the legal authority or right of a Party hereto (or any of
its Affiliates) to grant a license or sublicense of intellectual property rights
to another Party, or to otherwise disclose proprietary or trade secret
information to such other Party, without breaching the terms of any agreement
with a Third Party, infringing upon the intellectual property rights of a Third
Party, or misappropriating the proprietary or trade secret information of a
Third Party.

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     1.17 "DEVELOPMENT" means non-clinical and clinical drug development
activities reasonably related to the development and submission of information
to a Regulatory Authority, including without limitation toxicology, pharmacology
and other discovery efforts, test method development and stability testing,
process development, formulation development, delivery system development,
quality assurance and quality control development, statistical analysis,
clinical studies (including pre- and post- approval studies and specifically
excluding regulatory activities directed to obtaining pricing and reimbursement
approvals). When used as a verb, "Develop" means to engage in Development.

     1.18 "DEVELOPMENT COSTS" means costs incurred by each Party that were
reasonably necessary for, and that reasonably relate to, the Development of a
Product in accordance with this Agreement and the Development Plan for that
Product, including, without limitation, (a) all [*] costs [*] incurred, (b) the
costs of "[*]" (c) [*] (d) [*] and (e) [*] costs [*].

     1.19 "DEVELOPMENT PLAN" means the drug development plan for a Product
mutually agreed to in writing by the Parties, and as it may be amended by mutual
written agreement from time to time. It shall include, among other things,
budgets for Development of the Product that are planned to be conducted to
achieve each step towards preparation of an NDA for use of the Product in the
Field. The preliminary Development Plan for a Product containing the Compound
identified as BMS-214778 is attached hereto as Schedule 1,19.

     1.20 "DOLLAR" means the lawful currency of the United States of America.

     1.21 "EFFECTIVE DATE" means February 25, 2004.

     1.22 "FDA" means the U.S. Food and Drug Administration or its successor
agency.

     1.23 "FIELD" means the application to any human disease, disorder or
condition, including without limitation sleep disorders such as insomnia and
disorders of circadian rhythm.

     1.24 "FIRST COMMERCIAL SALE" means, with respect to any Product, the first
sale for use or consumption by the general public of such Product in any country
in the

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Territory after Marketing Authorization has been granted, or otherwise
permitted, by the governing health authority of such country.

     1.25 "FTE RATE" means [*].

     1.26 "IND" means an Investigational New Drug Application, as defined in the
United States Federal Food, Drug and Cosmetic Act filed with the FDA or its
foreign counterparts.

     1.27 "INDEMNIFICATION CLAIM" has the meaning set forth in Section 12.1.

     1.28 "JOINT INVENTIONS" has the meaning set forth in Section 10.1.

     1.29 "LOSSES AND CLAIMS" has the meaning set forth in Section 12.1.

     1.30 "MAJOR MARKET COUNTRY" means [*].

     1.31 MANUFACTURING COST" means (i) [*] plus (ii) [*]. Annual adjustments to
variable overhead charges will be based on actual costs, while fixed overhead
will be adjusted annually based on changes from the previous year to the
Producer Price Index- Commodities Index for Drugs and Pharmaceuticals, as
published by U.S. Department of Labor, Bureau of Statistics (or successor
governmental authority). As an example of idle capacity charges, if a Party
reserves a capacity of [*] and actual demand is [*], then the idle plant for the
balance of [*] capsules will be included in the Manufacturing Cost; however, if
a Party needs [*] capsule capacity and BMS were to build a new plant for [*]
capsule capacity, then [*] capsule idle plant will not be part of the
Manufacturing Cost.

     1.32 "MARKETING AUTHORIZATION" means, with respect to a country, the
regulatory authorization required to market and sell a Product in such country.

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     1.33 "MGH LICENSE AGREEMENT" means the agreement between The General
Hospital Corporation d/b/a Massachusetts General Hospital ("MGH") and
Bristol-Myers Squibb Company that is currently being negotiated and that will be
entered into after the Effective Date, and as it may be modified or supplemented
after being entered into, under which BMS will be obligated to pay MGH a royalty
on the sales of Products.

     1.34 "NDA" means a New Drug Application, as defined in the United States
Federal Food, Drug and Cosmetic Act and applicable regulations promulgated
thereunder as amended from time to time.

     1.35 "NET SALES" means the [*] by the Royalty Paying Party, its Affiliates
or sublicensees for sales of Product in finished package form (ready for use by
the ultimate consumer) in the Territory to a Third Party, including, but not
limited to, sales to wholesalers or other customers typical in each country in
bona fide, arm's length transactions. In determining Net Sales, certain
deductions may be taken against [*] to the extent not reimbursed by a Third
Party. These allowable deductions are:

          1.35.1 [*];

          1.35.2 [*];

          1.35.3 [*];

          1.35.4 [*]; and

          1.35.5 [*];

A "sale" of a Product is deemed to occur upon [*].

With respect to a Combination Product, Net Sales for such Combination Product
sold by the Royalty Paying Party shall be determined [*].

     1.36 "PHASE II CLINICAL STUDY" means a clinical study of a Product in human
subjects for the purpose of identifying a dose or doses at which there is
evidence of

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efficacy and acceptable safety and tolerability, which shall be deemed commenced
upon the dosing of the first subject in such study.

     1.37 "PHASE III CLINICAL STUDY" means a clinical study of a Product in
human subjects the results of which could be used to establish safety and
efficacy of the Product as a basis for Marketing Authorization of the Product
which shall be deemed commenced upon the dosing of the first subject in such
study.

     1.38 "PRODUCT" means any product or pharmaceutical formulation containing a
Compound as one of its active ingredients (or as the sole active ingredient), in
all dosage forms, formulations, presentations, line extensions, and package
configurations.

     1.39 "REGULATORY AUTHORITY" means any regulatory agency or other
governmental instrumentality that has regulatory authority, anywhere or at any
governmental level, in the Territory over the Development or Commercialization
of the Products.

     1.40 "ROYALTY PAYING PARTY" has the meaning set forth in Section 8.5.

     1.41 "ROYALTY RECEIVING PARTY" has the meaning set forth in Section 8.5.

     1.42 "BMS OPTION" has the meaning set forth in Section 3.2.1.

     1.43 "BMS OPTION PERIOD" has the meaning set forth in Section 3.2.1.

     1.44 "SOLE INVENTIONS" has the meaning set forth in Section 10.1.

     1.45 "SUPPLY AGREEMENT" has the meaning set forth in Section 7.3.

     1.46 "TERRITORY" means any country in the world.

     1.47 "THIRD PARTY" means any business entity other than Vanda, BMS and
their respective Affiliates.

     1.48 "VALID CLAIM" means a claim of an issued and unexpired patent, or a
claim of a pending patent application or a supplementary protection certificate,
which claim has not been held invalid or unenforceable by a court or other
government agency of competent jurisdiction from which no appeal can be or has
been taken and has not been held or admitted to be invalid or unenforceable
through re-examination or disclaimer, opposition procedure, nullity suit or
otherwise, which claim, but for the licenses granted herein, would be infringed
by the sale of a Product; provide however, that if a claim of a pending patent
application shall not have issued within [*] after the filing date from which
such claim takes priority, such claim shall not constitute a Valid Claim for the
purposes of this Agreement unless and until such claim shall issue.

     1.49 "VANDA THIRD PARTY DEVELOPMENT OPTION" has the meaning set forth in
Section 3.1.1.

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     1.50 "VANDA THIRD PARTY DEVELOPMENT OPTION PERIOD" has the meaning set
forth in Section 3.1.1.

                                    ARTICLE 2
                                  LICENSE GRANT

     2.1 EXCLUSIVE LICENSE GRANT. Subject to all of the terms and conditions in
this Agreement, BMS hereby grants to Vanda a non-transferable, exclusive
license, with the limited right to sublicense pursuant to Section 2.3, under the
BMS Compound Patent Rights solely to the extent necessary to Develop, make, have
made, use, import, offer to sell, and Commercialize the Products in the Field in
the Territory.

     2.2 NON EXCLUSIVE LICENSE GRANT. Subject to all of the terms and conditions
in this Agreement, BMS hereby grants to Vanda a non-transferable, nonexclusive
license, with the limited right to sublicense pursuant to Section 2.3, (a) under
the BMS Know How solely to the extent necessary to Develop, make, have made,
use, import, offer to sell, and Commercialize the Products in the Field in the
Territory, and (b) in the event Vanda enters into a Supply Agreement with a
Third Party in accordance with Article 7, under the BMS Manufacturing Patents
solely to the extent necessary to have made the Products or Compounds in the
Field in the Territory for sale to Vanda.

     2.3 SUBLICENSE. The rights licensed to Vanda under Sections 2.1, 2.2(a) and
2.2(b) shall be sublicensable only as part of a license of rights to a Product
in the Field and only for use with such Product, and only where (i) the
sublicensee has agreed first in writing to be bound by the terms and conditions
of this Agreement in the same manner as Vanda, (ii) BMS is made an express third
party beneficiary of the sublicensee's obligations under such sublicense that
relate to compliance with the terms and conditions of this Agreement, and (iii)
a copy of the proposed sublicense shall have been provided to BMS for review
(financial terms not relating to this Agreement may be redacted). A copy of the
sublicense shall be provided to BMS promptly after execution. Vanda shall remain
jointly and severally liable with any such sublicensee for any failure by such
sublicensee to perform or observe the terms and conditions of this Agreement.
Each sublicense granted by Vanda to any right licensed to it hereunder shall
terminate immediately upon the termination of the license from BMS to Vanda with
respect to such right.

     2.4 NO TRADEMARK LICENSE. No right or license, express or implied, is
granted to Vanda to use any trademarks, tradenames or trade dress owned or
Controlled by BMS and its Affiliates.

     2.5 NO IMPLIED LICENSES. Only licenses and rights granted expressly herein
shall be of legal force and effect. No license or other right shall be created
hereunder by implication, estoppel or otherwise. Vanda represents, covenants and
warrants that it will use the rights licensed to it hereunder solely in
accordance with the terms and conditions contained in this Agreement.

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     2.6 MARKETING ARRANGEMENTS. In connection with arrangements with Third
Parties whereby such Third Parties would distribute or otherwise Commercialize
Products, Vanda agrees to comply and to cause such Third Parties to comply with
all terms and conditions of this Agreement.

     2.7 RETAINED RIGHTS. All rights not expressly granted hereunder are
reserved by BMS and may be used by BMS for any purpose.

                                    ARTICLE 3
                                  OPTION GRANTS

     3.1 VANDA'S OPTION. THIRD PARTY DEVELOPMENT PARTNERS.

          3.1.1 Vanda Development Option Period. Vanda will have the right,
anytime prior to [*] ("Vanda Third Party Development Option Period"), to
negotiate an agreement to sublicense Vanda's rights to Develop and Commercialize
a Product (a "Development and Commercialization Agreement") with a Third Party
in at least one Major Market Country ("Vanda Third Party Development Option");
provided, however, that with respect to each Product,[*] Vanda shall have a
limited time in which to exercise the Vanda Third Party Development Option for
the Product before the right to exercise such option is suspended. Vanda shall
have [*] from the [*] to exercise such option. If Vanda exercises such option
during such [*] period, BMS shall have a right of first negotiation to enter
into a Development and Commercialization Agreement for the Product with Vanda.
[*] Vanda shall timely provide BMS with copies of any reports, data, results or
information, material to the Development of the Product that are or may become
available, including but not limited to [*]. BMS will have a [*] period of
exclusivity in which to negotiate and execute a Development and
Commercialization Agreement, and Vanda shall negotiate in good faith during such
[*] period. During such [*] period and such [*] period of exclusivity, Vanda
shall not approach any Third Party concerning a Development and
Commercialization Agreement or disclose [*]. If, [*] BMS does not [*] during
such [*] period of exclusivity, then Vanda shall have [*] from the end of the
[*] review period if BMS does not provide Vanda with [*]

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during such [*] period, or [*] for the Product or [*] from the end of the [*]
period of exclusivity if BMS [*] but the parties do not enter into a such an
agreement during such [*] period, as the case may be, to negotiate and enter
into a Development and Commercialization Agreement with a Third Party for the
Product. If Vanda does not enter into such an agreement with a Third Party
during such [*] period, then the Vanda Third Party Development Option shall be
suspended from the end of such [*] period (the Option Suspension Date) until
the  end of the BMS Option Period for the Product. The Vanda Third Party
Development Option is exercisable by written notice from Vanda to BMS of
Vanda's intention to seek a Third Party partner. Such option shall be
exercisable on a [*] basis. For the avoidance of doubt, [*] shall be referred
to as the "Remaining Countries."

          3.1.2 Option Exercise. Except as provided in Section 3.1.1 for the
period following the [*], in the event that Vanda exercises its Vanda Third
Party Development Option for a Product in a particular Major Market Country in
the Vanda Third Party Development Option Period, BMS shall have a right of first
negotiation to enter into a Development and Commercialization Agreement for that
Product in that Major Market Country. BMS shall have a [*] period, from the
receipt of Vanda's written notice to seek a Third Party partner, to elect to
enter into negotiations with Vanda. During the [*] review period, Vanda shall
timely provide BMS with copies of any reports, data, results or information,
material to the Development of a Product that are or may become available.
Thereafter BMS will have a [*] period of exclusivity in which to negotiate and
execute a Development and Commercialization Agreement for the Product, and Vanda
shall negotiate in good faith during such [*] period. If during the [*] review
period BMS [*] or if BMS does not enter into such an agreement during the [*]
period of exclusivity, then Vanda may enter into a Development and
Commercialization Agreement for the Product with a Third Party. The Parties will
use reasonable efforts to make decisions earlier than the final day of each
period allowed by this section 3.1.2 to the extent practicable. In the event
that Vanda enters into one or more Development and Commercialization Agreements
for a Product pursuant to the provisions of Section 3.1.1 and/or this Section
3.1.2 prior to the Option Suspension Date, then BMS will [*].

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          3.1.3 Vanda Third Party Development Option Not Exercised. In the event
Vanda does not exercise its Vanda Third Party Development Option for a Product
or enter into any Development and Commercialization Agreements for the
Product/prior to [*] then BMS will have an opportunity to exercise its BMS
Option for the Product in all countries on the terms and conditions described in
Section 3.2.

     3.2 BMS OPTION EXERCISABLE UPON COMPLETION OF PHASE III CLINICAL STUDIES:
COMMERCIALIZATION.

          3.2.1 BMS Option Period. The BMS Option Period for a Product will
commence for the Remaining Countries (providing Vanda has not entered into one
or more Development and Commercialization Agreements for the Product which when
taken together include all of the Major Market Countries prior to the Option
Suspension Date for the product) on the date that (1) [*] and (2) [*]. The BMS
Option Period shall terminate [*] later ("BMS Option Period"). At any time
during the BMS Option Period, BMS may provide Vanda with written notice that
either: (a) it does not wish to Develop or Commercialize the Product in the
Remaining Countries; or (b) it wishes to reacquire all rights to the Product in
the Remaining Countries ((b) shall be referred to as the "BMS Option"). [*] For
the avoidance of doubt, if BMS does not exercise the BMS Option for the
Remaining Countries within the BMS Option Period, then upon completion of the
BMS Option Period, the Vanda Third Party Development Option shall be exercisable
for the Remaining Countries for the remainder of the Vanda Third Party
Development Option Period.

          3.2.2 BMS Option Diligence Materials. Vanda shall provide to BMS on or
prior to the commencement of the BMS Option Period, any additional data
(including without limitation, copies of all case report forms, if requested by
BMS) or information relating to the Development of the Product that is in
Vanda's possession which BMS reasonably believes to be necessary or useful for
its review of the opportunity. At [*] intervals during the BMS Option Period,
Vanda will promptly provide any reports, data, results or information, material
to the Development of a Product that may become available.

          3.2.3 Option Exercised. In the event BMS exercises its BMS Option for
a Product, then, among other things,

               (a) LICENSE GRANT. The licenses granted to Vanda pursuant to
Section 2.1 and 2.2 will immediately terminate with respect to the Product in
the Remaining Countries without further action on the part of either Party, and
Vanda shall cease all use of the BMS Patent Rights, and BMS Know-How with
respect to the Product in the Remaining Countries;

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               (b) TRANSFER OF DATA, INFORMATION AND REGULATORY FILINGS. Vanda
shall promptly assign to BMS all rights, title and interests in any INDs,
Marketing Authorizations, and Approvals that it shall have filed in the
Remaining Countries with respect to the Product and the Compound contained in
the Product and all data generated by it with respect to the Product and the
Compound contained in the Product in the Remaining Countries, and will promptly
transfer to BMS originals or copies of all pertinent documents relating to same
as requested by BMS. In the event that Vanda fails to effectuate the transfer of
the foregoing within [*] after the date that BMS exercises its BMS Option, then,
in addition to any other recourse or remedy that BMS may be entitled to at law
or in equity, BMS shall [*]. BMS will reimburse Vanda for any out-of-pocket
expenses incurred in connection with such assignment. Within [*] following any
such assignment to BMS, the Parties will finalize and enter into a Data Safety
Exchange covering such matters as adverse event reporting, data safety exchange
and response to physician inquiries so that BMS may fulfill its reporting
responsibilities on a timely basis to Regulatory Authorities;

               (c) DEVELOPMENT BMS will thereafter be solely responsible for any
further Development activities needed to achieve Approvals in the Remaining
Countries for the Product, and will use Commercially Reasonable Efforts to
achieve same;

               (d) COMMERCIALIZATION. Provided the United States is included in
the Remaining Countries, as soon as reasonably necessary, and in no event later
than [*], BMS will advise Vanda in writing whether it intends to seek a
co-promotion partner in the United States for the Product. In the event that BMS
seeks a co-promotion partner in the United States, and provided that Vanda is
able to meet the requirements established by BMS at that time for a co-promotion
partner, the Parties will have [*] in which to negotiate a mutually acceptable
co-promotion agreement in accordance with Section 3.3; and

               (e) OTHER TERMS. The provisions of Section 13.4. l(e), (g), (h)
and (i) shall also apply as though set forth herein. It is understood and agreed
that BMS shall [*].

          3.2.4 BMS Option Not Exercised. In the event that BMS does not
exercise its BMS Option for a Product with respect to the Remaining Countries,
Vanda will, subject to Section 3.3, Develop and Commercialize the Product in the
Remaining Countries pursuant to the terms and conditions set forth in this
Agreement.

          3.3 RIGHT OF FIRST NEGOTIATION TO ACT AS A CO-PROMOTION PARTNER IN
COMMERCIALIZATION OF A PRODUCT BY EITHER PARTY.

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          3.3.1 Vanda's Right to Co-Promote. If BMS is Developing and/or
Commercializing a Product in the U.S. pursuant to this Agreement and decides to
co-promote the Product with a Third Party marketing partner in the U.S., BMS
shall promptly notify Vanda in writing of its intention to co-promote the
Product with such Third Party marketing partner in the U.S. Vanda will have [*]
from the date BMS notifies Vanda of its intention to co-promote the Product with
such Third Party marketing partner to provide written notice of its intent to
exercise its option to co-promote the Product with BMS in the U.S. and
demonstrate that it has, or is reasonably likely to have at the time required,
the capabilities to undertake such co-promotion effort, including without
limitation, sufficient numbers of Vanda employees with sufficient experience as
sales representatives and sales and marketing managers and executives to allow
it to fulfill the obligations established by BMS for the co-promotion partner
(including without limitation minimum number of details, minimum primary detail
equivalents, sales force size and training, advertising and promotional spend
requirements, etc.). Vanda may not delegate or subcontract such co-promotion
responsibilities to a Third Party, unless such Third Party (a) has been an
alliance partner of Vanda's for at least [*] prior to the date Vanda receives
notice under this Section 3.2.1 from BMS of BMS' intention to co-promote the
Product with a Third Party marketing partner, and (b) has the capabilities to
undertake such co-promotion effort, including without limitation, sufficient
numbers of employees with sufficient experience as sales representatives and
sales and marketing managers and executives to allow it to fulfill the
obligations established by BMS for the co-promotion partner (including without
limitation minimum number of details, minimum primary detail equivalents, sales
force size and training, advertising and promotional spend requirements, etc.).
If Vanda exercises its option and demonstrates to BMS' satisfaction that it can
meet, or is reasonably likely to be able to meet at the necessary time, such
capabilities and fulfill such obligations by itself or with such an alliance
partner, the Parties will, for a period not longer than [*] after Vanda's
exercise of the option, exclusively negotiate with each other in good faith a
Co-Promotion Agreement on commercially reasonable terms and conditions [*]. If
after such [*] period, the Parties have not entered into a co-promotion
agreement, BMS would be free to enter into an arrangement with a Third Party
marketing partner.

          3.3.2 BMS' Right to Co-Promote. If Vanda is Commercializing a Product
pursuant to this Agreement and decides to co-promote the Product with a Third
Party marketing partner, Vanda shall promptly notify BMS in writing of its
intention to co-promote the Products with such Third Party marketing partner.
BMS will have [*] from the date Vanda notifies BMS of its intention to
co-promote the Product with such Third Party marketing partner to provide
written notice of its intent to exercise its option to co-promote the Product
with Vanda. If BMS exercises its option, the Parties will, for a period not
longer than [*] after BMS' exercise of the option, negotiate exclusively with
each other in good faith a co-promotion agreement on commercially reasonable
terms and conditions [*]. If after such [*] period, the Parties have not entered
into a co-promotion agreement, Vanda would be free to enter into an arrangement
with a Third Party marketing partner.

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     3.4 RESPONSIBILITIES REGULATORY AFFAIRS. Following the date that the IND,
Marketing Authorization or Approval in a given country for a Product has been
assigned to BMS, BMS shall have sole responsibility for preparing, all
regulatory filings and related submissions with respect to the Product and the
Compound contained in the Product in such country and making all final decisions
relating thereto. BMS shall be the primary interface with and otherwise handle
all interactions with Regulatory Authorities concerning the Product and the
Compound contained in the Product. Pursuant to Section 14.7, Vanda shall be
obliged to render whatever assistance BMS may reasonably request to allow BMS to
fulfill its obligations under this Section 3.4. To the extent not prohibited by
law or regulation, in the event that BMS is Developing and Commercializing a
Product in the United States, Vanda shall have the right to have one
representative participate in all material meetings pertaining to Development of
the Product between representatives of BMS and the FDA. BMS will provide Vanda,
at least five (5) business days before any such meeting, with copies of all
documents, correspondence and other materials in its possession which are
relevant to the matters to be addressed at any such meeting. BMS will provide
Vanda with draft and final copies (which may be wholly or partly in electronic
form) of all material correspondence with the Regulatory Authorities in each of
the Major Market Countries relating to the Product, including any draft
Marketing Authorizations and Approvals, for Vanda's review and comment within a
reasonable time prior to filing with the appropriate Regulatory Authority. BMS
shall give due consideration to Vanda's comments, however, BMS shall not-be
bound thereby.

                                    ARTICLE 4
                            TRANSFER OF BMS KNOW-HOW;

     4.1  TRANSFER OF BMS COMPOUND KNOW-HOW.

          4.1.1 TRANSFER. During the [*] period following the Effective Date,
BMS shall provide Vanda with the assistance of certain BMS employees having
knowledge relevant to the Compounds to provide Vanda with a reasonable level of
technical assistance and consultation in connection with the transfer of BMS
Know-How (provided that BMS shall only be required to make a good faith effort
to provide the BMS Know How but shall not be in default hereunder for
inadvertent failure to disclose all or non-material information). Vanda shall be
responsible for ensuring that its personnel who receive such assistance are
appropriately qualified and experienced for such purpose.

          4.1.2 COPIES OF DOCUMENTS. BMS shall provide Vanda with one copy of
all documents, data or other information Controlled by BMS to the extent that
such documents, data and information are the subject of the BMS Know-How
licenses and are, in BMS' good faith judgment, reasonably necessary for the
Development, manufacture or Commercialization of the Compounds and are
reasonably available to BMS without undue searching; provided however, the
foregoing shall in no event require BMS to provide copies of laboratory
notebooks or manufacturing run records required to be maintained by FDA. The BMS
Know-How provided by BMS shall not be used by Vanda for any purpose other than
Development, manufacture or Commercialization of

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<PAGE>

the Compounds and Products and is Confidential Information of BMS. Vanda shall
assume full responsibility and liability to BMS for any unauthorized use or
disclosure of Confidential Information of BMS. BMS shall be responsible for the
cost of providing one set of copies only, and in addition to paper and other
tangible copies, BMS shall, upon Vanda's request and where already available to
BMS, also provide to Vanda electronic copies of such documents, data and other
information, provided, that BMS shall have no obligation to reformat or
otherwise alter or modify any such materials in order to provide them to Vanda.

          4.1.3 ON-SITE CONSULTING. BMS shall not be obligated to provide more
than [*] of consulting advice or on-site consulting advice (including travel
time) over the term of this Agreement, as may be requested by Vanda, with
respect to the transfer of any BMS Know-How. BMS will be reimbursed by Vanda for
[*]. In the event that Vanda requires consultation with BMS over and above the
[*] provided here, Vanda will submit its request for consultation to BMS, in
writing, stating in sufficient detail the subject matter, and the number of
hours required. BMS will consider each such request in good faith, and will
inform Vanda in a timely manner if BMS will be able to provide the consulting
time requested, with the understanding that BMS shall not obligated to provide
more than [*] consulting advice or on-site consulting advice (including travel
time) over the term of this Agreement.

          4.1.4 IND. As soon as reasonable practicable after the Effective Date,
BMS will promptly effectuate the assignment of IND 54,776 (the active IND for
the Compound currently identified as BMS-214778) to Vanda. Vanda will [*].

     4.2 NON-SOLICITATION. During the term of this Agreement, and for [*]
thereafter, each Party and its Affiliates shall not solicit, directly or
indirectly, any employee of the other Party or of an Affiliate of the other
Party, wherever located, who is or was involved in the performance of this
Agreement; provided, that the foregoing restriction on solicitation shall not
apply to advertisements run in trade journals or other publications or on the
Internet that are targeted to qualified individuals generally for the position
in question.

                                    ARTICLE 5
                                   DEVELOPMENT

     5.1 PROGRAM LIAISON. As soon as practicable after the Effective Date, each
Party will provide the other, in writing, with the name of its "Program
Liaison." The Program Liaison will act as the primary liaison in coordinating
the activities under this Agreement. The Program Liaisons will review and agree
on the suitability of the Development Plan set forth in Schedule 1.19. Before
Vanda begins Development of a Product under a Development Plan other than the
Development Plan in Schedule 1.19, the Program Liaisons will prepare such
Development Plan, and the Parties must agree in

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writing upon such Development Plan before Vanda commences Development of the
Product under such Development Plan.

     5.2 DEVELOPMENT

          5.2.1 Vanda shall use good faith Commercially Reasonable Efforts to
Develop the Compounds and Products.

          5.2.2 As soon as reasonably practicable after the Effective Date,
Vanda shall commence Phase II Clinical Studies for the Product in accordance
with the Development Plan set forth in Schedule 1.19 and this Agreement. In any
event, Vanda (a) [*], (b) [*], (c) [*], (d) [*]. In the event that any of such
milestones are missed, it shall be deemed a material breach of this Agreement
for the purposes of Article 13. BMS' ability to terminate this Agreement
pursuant to Section 13.2 shall apply [*]. If Vanda misses any of the above
milestone dates, Vanda may request that BMS grant a reasonable extension to
allow it to meet such milestone, and BMS agrees that it will not unreasonably
withhold its assent to any such reasonable revision where supported by clear
evidence that Vanda has been making good faith and diligent efforts to achieve
the milestones but has failed as a result of technical difficulties or delays
that the parties could not have reasonably avoided in the achievement of such
milestones; and provided, that BMS may also need to seek approval of MGH in such
event, and any approval by BMS shall further be conditioned on receipt of
approval of MGH.

     5.3 DEVELOPMENT REPORTS. Vanda shall provide [*] written reports to BMS,
within [*], presenting a meaningful summary of the Development activities
accomplished by Vanda and results obtained through [*]. Such reports shall
include all material results, information and data generated in the course of
Development of Products. Vanda will make Development plans, clinical protocols,
investigator brochures and regulatory submissions available to BMS at
BMS' written request. In addition, on reasonable request by BMS, Vanda will meet
with BMS to make presentations of the Development activities taken relating to
the Products.

     5.4 RECORDS. Vanda shall maintain complete and accurate records of all work
conducted in furtherance of the Development and Commercialization of the
Compounds and Products and all results, data and developments made in
furtherance thereof. Such records shall be complete and accurate and shall fully
and properly reflect all work done and results achieved in sufficient detail and
in good scientific manner appropriate for patent and regulatory purposes.

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     5.5 DEVELOPMENT RESPONSIBILITIES AND COSTS. Except in the case where BMS
enters into a Development and Commercialization Agreement or exercises its BMS
Option, Vanda shall have sole responsibility for, and shall [*] of conducting,
Development with respect to Products and Compounds. Vanda shall Develop the
Compounds and Products in compliance with all applicable legal and regulatory
requirements, including without limitation all legal and regulatory requirements
pertaining to the design and conduct of clinical studies.

     5.6 REGULATORY RESPONSIBILITIES AND COSTS.

          5.6.1 Regulatory Interactions. Only in the case where Vanda does not
enter into any Development and Commercialization Agreements and BMS does not
exercise the BMS Option, Vanda shall have sole responsibility for, and shall
bear the cost of preparing, all regulatory filings and related submissions with
respect to Compounds or Products. Vanda shall be the primary interface with and
otherwise handle all interactions with Regulatory Authorities concerning
Compounds or Products. To the extent not prohibited by law or regulation, BMS
shall have the right to have one representative participate in all material
meetings pertaining to Development of a Product between representatives of Vanda
and Regulatory Authorities of the Major Market Countries and the FDA. Vanda will
provide BMS, at least five (5) business days before any such meeting, with
copies of all documents, correspondence and other materials in its possession
which are relevant to the matters to be addressed at any such meeting. Vanda
will provide BMS with draft and final copies (which may be wholly or partly in
electronic form) of all material correspondence with Regulatory Authorities
relating to the Product, including any draft Marketing Authorizations, for BMS'
review and comment within a reasonable time prior to filing with the Regulatory
Authorities. Vanda will be responsible for meeting the requirements of all
pre-approval inspections required by any Regulatory Authorities.

          5.6.2 Ownership of Regulatory Filings. Vanda shall own all INDs,
Marketing Authorizations, Approvals and submissions in connection therewith and
Approvals shall be obtained by and in the name of Vanda, unless and until BMS
(a) has entered into a Development and Commercialization Agreement with Vanda
pursuant to Section 3.1, or (b) has exercised the BMS Option.

                                    ARTICLE 6
                                COMMERCIALIZATION

     6.1 COMMERCIALIZING PARTY'S RESPONSIBILITIES.

          6.1.1 Introduction. The Party Commercializing a Product in a country
(the "Commercializing Party") shall use Commercially Reasonable Efforts to
Commercialize the Product and, at a minimum, effect introduction of the Product
into such country as soon as reasonably practicable.

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          6.1.2 Continued Availability. Following the First Commercial Sale of a
Product in a country in the Territory and until the expiration or termination of
this Agreement, the Commercializing Party shall use Commercially Reasonable
Efforts to supply and keep the Product reasonably available to the public in
such country.

          6.1.3 Marking. Each Product Commercialized by Vanda under this
Agreement shall be marked (to the extent not prohibited by law): (a) with a
notice that such Product is sold under a license from BMS and (b) with all
patent and other intellectual property notices relating to the BMS Patent Rights
in such a manner as may be required by applicable law.

                                    ARTICLE 7
                             MANUFACTURE AND SUPPLY

     7.1 RESPONSIBILITY. Subject to Section 7.2, the Commercializing Party for a
Product shall be solely responsible at its expense for all of its requirements
in the Territory for any purpose of the Product and the Compound contained in
the Product and shall use Commercially Reasonable Efforts to supply all
requirements of its customers. The Commercializing Party shall manufacture, or
cause to have manufactured, the Product and the Compound contained in the
Product in compliance with all applicable legal and regulatory requirements and
with its internal policies and procedures.

     7.2 PROVISION OF COMPOUND. As soon as possible after the Effective Date,
(and no later than thirty (30) days) BMS will transfer to Vanda [*]active
pharmaceutical ingredient that has been requalified by BMS to be within
specification as well as the most recent reference standard that has been
submitted.

     7.3 RIGHT TO MANUFACTURE COMMERCIAL SUPPLY. In the event that BMS has
entered into a Development and Commercialization Agreement or exercised its BMS
Option for a particular Product, BMS will have the first right to manufacture
and supply such Product or the Compound contained in such Product at any time
thereafter for clinical and commercial use, as applicable. In the event that BMS
does not enter into a Development and Commercialization Agreement or exercise
its BMS Option for a particular Product, and Vanda enters into negotiations with
a Third Party to manufacture a clinical or commercial supply of such Product or
the Compound contained in such Product (the "Supply Agreement"), it will
promptly notify BMS and provide [*]. BMS will have [*] from receipt of the data
summary to notify Vanda that it will [*]. The Parties will then negotiate a
Supply Agreement in good faith for [*] or such longer period as agreed between
the Parties. In the event the Parties do not enter into a Supply Agreement
within such [*] period, or the agreed extension thereof, Vanda is free to enter
into an agreement with any other entity with respect to such clinical or
commercial supply.

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                                    ARTICLE 8
                                    PAYMENTS

     8.1 TECHNOLOGY ACCESS FEE. On [*], Vanda will pay to BMS the sum of five
hundred thousand Dollars ($500,000) as partial reimbursement for BMS' previously
incurred research and development expenses for the Compounds.

     8.2 MILESTONE PAYMENTS.

          8.2.1 Milestone Payments By Vanda. In the event that Vanda is
Developing or Commercializing a Product in any country and/or has entered into a
Development and Commercialization Agreement for the Product with a Third Party,
then Vanda will pay BMS, as partial reimbursement for research and development
expenses for the Compounds, upon Vanda or such Third Party achieving the
following milestones for that Product:

<TABLE>
<CAPTION>
MILESTONE   DOLLARS
---------   -------
<S>         <C>
   [*]        [*]

   [*]        [*]

   [*]        [*]

   [*]        [*]
</TABLE>

          8-2.2 "BMS Option" Milestone Payments by BMS. In the event that BMS
exercises its BMS Option for a particular Product, then BMS will pay Vanda, as
partial reimbursement for research and development expenses for the Compounds,
upon BMS achieving the following milestones for that Product:

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<PAGE>

<TABLE>
<CAPTION>
MILESTONE   DOLLARS
---------   -------
<S>         <C>
   [*]        [*]

   [*]        [*]

   [*]        [*]
</TABLE>

          8.2.3 [*]

     8.3 TIMING. Payment shall be made [*] following the occurrence of an event
giving rise to a payment obligation hereunder. All payments to BMS shall be made
by wire transfer in Dollars to the credit of the bank account indicated below or
to such other account as may be designated, from time to time, by BMS in
writing. All Payments to Vanda shall be made by wire transfer in Dollars to the
credit of such bank account as may be designated, from time to time, by Vanda in
writing.

Bank: [*]

ABA No.: [*]

Account No.: [*]

Account Name: [*]

Company Details: [*]

     8.4 DEVELOPMENT COSTS.

          8.4.1 Vanda Development Costs. Vanda will be responsible for all
Development Costs, unless BMS enters into a Development and Commercialization
Agreement prior to the BMS Option Period, in which the terms may involve sharing
in Development Costs for that Product.

     8.5 ROYALTY PAYMENT.

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          8.5.1 Vanda Royalty to BMS. In the event that Vanda Commercializes a
Product and/or enters into a Development and Commerdalization Agreement with a
Third Party for the Product, then Vanda will pay BMS a [*] percent ([*]%)
royalty on annual Net Sales of that Product by Vanda, its Affiliates, and
sublicensees, including but not limited to such Third Party, in the Territory.
In the event that Vanda enters into one or more Development and
Commercialization Agreements for a particular Product, Vanda will also pay BMS
[*] percent ([*]%) of [*] that are received by Vanda in consideration of each
such Development and Commercialization Agreement. Vanda agrees that it shall
also pay MGH, on behalf of BMS, all financial obligations of BMS under the MGH
License Agreement arising from the Development, manufacture and
Commercialization of Products by Vanda, its Affiliates and sublicensees,
including but not limited to any royalty obligation under the MGH license
Agreement arising from the sale of any Product by Vanda, its Affiliates or
sublicensees in the Territory, and shall comply with and fulfill all applicable
terms and conditions of the MGH License Agreement. Without limiting the
foregoing, with respect to each Product, Vanda shall comply with and fulfill all
of the applicable terms and conditions of the MGH License Agreement relating to
the Development, manufacture and Commercialization of Products by Vanda, its
Affiliates and sublicensees, which shall include making the royalty payments in
accordance with the terms and conditions of the MGH license Agreement, keeping
books of accounting and making them available for inspection by MGH in
accordance with the terms and conditions of the MGH License Agreement, providing
any information and reports to MGH required by the terms and conditions of the
MGH License Agreement in connection with the sale of any Product, and obtaining
and maintaining the type and amounts of insurance required of BMS under the MGH
License Agreement. Vanda shall provide BMS with a copy of each document provided
to MGH in accordance with the terms and conditions of the MGH License Agreement,
including but not limited to a copy of each royalty report and a copy of any
other document providing information to MGH.

          8.5.2 BMS Royalty to vanda. In the event that BMS exercises its BMS
Option for a particular Product, BMS will pay directly to Vanda a [*] percent
([*]%)royalty on annual Net Sales of that Product by BMS, its Affiliates and
sublicensees in the Remaining Countries. If, however, BMS entered into a
Development and Commercialization Agreement, BMS would pay [*].

     Each of the foregoing shall be collectively and individually referred to as
"Royalties." The Party paying Royalties shall be referred to as the "Royalty
Paying Party". The Party receiving Royalty payments shall be referred to as the
"Royalty Receiving Party".

     8.6 THIRD PARTY ROYALTY PAYMENTS. The Royalty Paying Party shall be
responsible for making any Third Party license payments, whether existing as of
or arising after the Effective Date and reasonably necessary to Develop or
Commercialize the Product.

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     8.7 [*] THIRD PARTY ROYALTY PAYMENTS. Other than any royalties due to a
Third Party under the MGH License Agreement or under agreements existing as of
the Effective Date with respect to the manufacture, use or sale of a Product,
the Royalty paying party, its Affiliates and sublicensees shall, except where
Section 8.8.2 applies, be entitled to offset up to [*] of any royalties due to
the Royalty Receiving Party by the amount of any royalties and license fees paid
to a Third Party reasonably necessary to enable the Royalty Paying Party to sell
the Product in a country in the Territory; provided, that the royalty payable
to the Royalty Receiving Party shall not be reduced below [*] of what it would
otherwise have received in the absence of this Section 8.7.

     8.8 TERM FOR ROYALTY PAYMENTS.

          8.8.1 Term. Royalties shall be payable on a country by country basis
from the First Commercial Sale until the later of (a) [*] from the First
Commercial Sale and (b) the expiration of the last to expire patent owned or
Controlled by the Royalty Receiving Party (including extensions thereof) with a
Valid Claim directed to the Product, including, without limitation, a method of
use thereof.

          8.8.2 Countries With No Valid Claim Covering Product. If at any time
during the royalty period set forth in 8.8.1 there is in a country no patent
owned or Controlled by the Royalty Receiving Party with a Valid Claim directed
to the Product or a method of use thereof, then the royalties shall be reduced
[*] with respect to the Net Sales of the Product in such country.

     8.9 SALES REPORTS

          8.9.1 Substance of Reports. After the First Commercial Sale of Product
and during the term of this Agreement, the Royalty Paying Party shall furnish or
cause to be furnished to the Royalty Receiving Party a written report, within 30
days after the end of each calendar quarter, showing the amount of royalty due
calculated for such calendar quarter, with the royalty due paid to the Royalty
Receiving Party at the time such report is provided. With each quarterly
payment, the Royalty Paying Party shall deliver to the Royalty Receiving Party a
full and accurate accounting to include at least the following information:

               (a) Quantity of each Product sold or leased (by country) by the
Royalty Paying Party, and its Affiliates or sublicensees;

               (b) Total billings for each Product (by country);

               (c) Quantities of each Product used by the Royalty Paying Party
and its Affiliates or sublicensees or sold to the U.S. Government;

               (d) Names and Addresses of all sublicensees of the Royalty Paying
Party; and

               (e) Total royalties payable to the Royalty Receiving Party.

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          8.9.2 Sales Record Audit. The Royalty Paying Party shall keep, and
shall cause each of its Affiliates and sublicensees, if any, to keep full and
accurate books of accounting containing all particulars that may be necessary
for the purpose of calculating all royalties payable to the Royalty Receiving
Party. Such books of accounting shall be kept at their principal place of
business and, with all necessary supporting data, shall during all reasonable
times for the [*] next following the end of the calendar year to which each
shall pertain, be open for inspection at reasonable times by an independent
certified accountant selected by the Royalty Receiving Party, and as to which
the Royalty Paying Party has no reasonable objection, at the Royalty Receiving
Party's expenses, for the purpose of verifying royalty statements for compliance
with this Agreement. Such accountant must have agreed in writing to maintain all
information learned in confidence, except as necessary to disclose to the
Royalty Receiving Party such compliance or noncompliance by the Royalty Paying
Party. The results of each inspection, if any, shall be binding on both Parties.
The Royalty Receiving Party shall pay for such inspections, except that in the
event there is any upward adjustment in aggregate royalties payable for any year
shown by such inspection of more than [*] of the amount paid, the Royalty Paying
Party shall pay for such inspection. Any overpayments shall [*].

     8.10 CURRENCY EXCHANGE. With respect to Net Sales invoiced in Dollars, the
Net Sales and the amounts due to the Royalty Receiving Party hereunder shall be
expressed in Dollars. With respect to Net Sales invoiced in a currency other
than Dollars, the Net Sales shall be expressed in the domestic currency of the
entity making the sale, together with the Dollar equivalent, calculated using
the arithmetic average of the spot rates on the close of business on last
Business Day of each month of the calendar quarter in which the Net Sales were
made. The "closing mid-point rates" found in the "dollar spot forward against
the dollar" table published by The Financial Times" or any other publication as
agreed to by the Parties shall be used as the source of spot rates to calculate
the average as defined in the preceding sentence. All payments shall be made in
Dollars. If at any time legal restrictions in any country in the Territory
prevent the prompt remittance of any payments with respect to sales in that
country, the Royalty Paying Party shall have the right and option to make such
payments by depositing the amount thereof in local currency to the Royalty
Receiving Party's account in a bank or depository in such country.

     8.11 TAX WITHHOLDING. The withholding tax, duties, and other levies (if
any) applied by a government of any country of the Territory on payments made by
the Royalty Paying Party, to the Royalty Receiving Party hereunder shall be
borne by the Royalty Receiving Party. The Royalty Paying Party, its Affiliates
and sublicensees shall cooperate with the Royalty Receiving Party to enable the
Royalty Receiving Party to claim exemption therefrom under any double taxation
or similar agreement in force and shall provide to the Royalty Receiving Party
proper evidence of payments of withholding tax and assist the Royalty Receiving
Party by obtaining or providing in as far as possible the required documentation
for the purpose of the Royalty Receiving Party' tax returns.

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     8.12 INTEREST DUE. In case of any delay in payment by the Royalty Paying
Party to the Royalty Receiving Party not occasioned by Force Majeure, interest
on the overdue payment shall accrue [*], as determined for each month on the
last business day of that month, assessed from the day payment was initially
due. The foregoing interest shall be due from the Royalty Paying Party without
any special notice.

                                    ARTICLE 9
       REPRESENTATIONS AND WARRANTIES; DISCLAIMER; LIMITATION OF LIABILITY

     9.1 MUTUAL WARRANTIES. Each Party represents and warrants to the other
Party that (a) it (and in the case of Vanda, its general partner as well) has
all requisite corporate power and authority to enter into this Agreement, to
grant the licenses granted by it hereunder, and to perform its other obligations
under this Agreement, (b) execution of this Agreement and the performance by the
warranting Party (and in the case of Vanda, by its general partner as well) of
its obligations hereunder, including, without limitation, the licenses granted
by that Party hereunder, have been duly authorized, (c) this Agreement is fully
binding and enforceable on each Party (and in the case of Vanda, on its general
partner as well) in accordance with its terms, and (d) the performance of this
Agreement by it does not create a breach or default under any other agreement to
which it (and in the case of Vanda, to which its general partner as well) is a
Party.

     9.2 BMS WARRANTIES AND COVENANTS. As of the Effective Date, BMS represents
and warrants to Vanda that, to the actual knowledge of its in-house patent
counsel (based on such counsels' good faith understanding of the facts and
information in their possession without any duty to conduct any investigation
with respect to such facts and information), (a) there is no pending litigation
which alleges, or any written communication alleging, that BMS(1) activities
with respect to the BMS Patent Rights or the Compounds have infringed or
misappropriated any of the intellectual property rights of any Third Party, (b)
all fees required to be paid by BMS in order to maintain the patents licensed to
Vanda hereunder have been paid to date as of the Effective Date such that the
claims included in any such issued patents are in full force and effect as of
the Effective Date, (c) [*], (d) it has the full right, power and authority to
enter into this Agreement and to grant the licenses granted under Article II
hereof, (e) it has not previously assigned, transferred, conveyed or otherwise
encumbered its right, title and interest in the BMS Patent Rights or the BMS
Know-How, and (f) it is the sole and exclusive owner of the BMS Patent Rights
and the BMS Know-How.

     9.3 VANDA WARRANTIES AND COVENANTS.

          9.3.1 Vanda warrants, represents and covenants that all of its
activities related to its use of the BMS Patent Rights and BMS Know-How, and the
Development and Commercialization of the Compounds and Products, pursuant to
this Agreement shall comply in all material respects with all applicable legal
and regulatory requirements.

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Vanda further warrants and covenants that it shall not engage in any activities
that use the BMS Patent Rights and BMS Know-How in a manner that is outside the
scope of the license rights granted to it hereunder.

          9.3.2 Vanda warrants, represents and covenants that it has [*]

     9.4 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, BMS MAKES
NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, INCLUDING ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE BMS PATENT RIGHTS OR BMS
KNOW-HOW OR ANY LICENSE GRANTED BY BMS HEREUNDER, OR WITH RESPECT TO ANY
COMPOUNDS OR PRODUCTS. FURTHERMORE, NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED
AS A WARRANTY THAT ANY PATENT OR OTHER PROPRIETARY RIGHTS INCLUDED IN THE BMS
PATENT RIGHTS ARE VALID OR ENFORCEABLE OR THAT VANDA'S USE OF THE BMS PATENT
RIGHTS AND BMS KNOW-HOW CONTEMPLATED HEREUNDER DOES NOT INFRINGE ANY PATENT
RIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY.

     9.5 LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT OR
OTHERWISE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER WITH RESPECT TO ANY
SUBJECT MATTER OF THIS AGREEMENT, WHETHER UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY, FOR ANY INCIDENTAL, INDIRECT,
SPECIAL, EXEMPLARY, PUNITIVE, MULTIPLE, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT
NOT LIMITED TO, LOST PROFITS, LOSS OF USE, DAMAGE TO GOODWILL, OR LOSS OF
BUSINESS) AND, IN ANY CASE, BMS SHALL NOT BE LIABLE IN AN AMOUNT GREATER THAN
[*]; PROVIDED, THAT THE FOREGOING SHALL NOT APPLY TO ANY BREACH BY VANDA OF THE
RIGHTS LICENSED TO IT UNDER ARTICLE 2 HEREOF OR TO ANY BREACH BY A PARTY OF
ARTICLE 11 HEREOF.

                                   ARTICLE 10
                PATENT MAINTENANCE; INFRINGEMENT; CONFIDENTIALITY

     10.1 INVENTIONS. Each Party shall own the entire right, title and interest
in and to any and all inventions conceived solely by its employees and agents
after the Effective Date ("Sole Inventions"), and any patents covering such Sole
Inventions. BMS and Vanda shall each own an undivided one-half interest in and
to any and all inventions conceived jointly after the Effective Date by (a)
employees and agents of BMS and (b) employees and agents of Vanda, and in and to
any patents and other intellectual property

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rights claiming or covering such joint Inventions ("Joint Inventions") BMS and
Vanda as joint owners each shall have the right to exploit and to grant licenses
under such Joint Inventions (without an accounting or obligation to, or consent
required from, the other Party), unless otherwise specified in this Agreement.

     10.2 PATENT MAINTENANCE; ABANDONMENT.

          10.2.1 BMS PATENT RIGHTS. [*] shall be responsible for, and shall
control, the prosecution (including any interferences, reissue proceedings and
reexaminations) and maintenance of all BMS Patent Rights. [*] shall provide [*]
with copies of all correspondence from any and all patent offices concerning the
BMS Patent Rights and an opportunity to comment on any proposed responses,
voluntary amendments and submissions of any kind to be made to any and all such
patent offices (other than routine filings and correspondence to maintain the
patents). [*] shall have the right to select the in-house or outside counsel who
will perform the aforementioned prosecution and maintenance-associated
activities, and [*] shall reimburse [*] (including any fees payable to the
applicable patent office) incurred in connection therewith. In the event that
BMS exercises the BMS Option and the Parties are co-Developing or co-promoting
the Product, [*] will only reimburse [*] for [*] incurred [*], as applicable. If
[*] elects not to pay any expenses with respect to a BMS Patent Right in a given
country, [*] shall inform [*] in writing not less than [*] before any relevant
deadline (or, in the event of a shorter period in which to respond to a patent
office, as soon as reasonable practicable). In the event [*] makes such
election, or if [*] fails to reimburse [*] for [*] incurred [*] a BMS Patent
Right in a given country, [*]. Except as provided in the previous sentence, [*]
may not abandon a BMS Patent Right without the prior written consent of [*].

          10.2.2 SOLE INVENTIONS. Each Party shall direct and control at its
expense the filing, prosecution (including any interferences, reissue
proceedings and reexaminations) and maintenance of all patents covering its Sole
Inventions.

          10.2.3 JOINT INVENTIONS. The Parties shall supervise, and shall
assign, on a Joint Invention-by-Joint Invention basis, one Party to be
responsible for, the filing, prosecution (including any interferences, reissue
proceedings and reexaminations) and maintenance of all patents covering such
Joint Invention consistent with such strategy. The designated controlling Party
shall provide the other Party with (a) drafts of any new patent application that
covers a Joint Invention prior to filing that application, allowing adequate
time for review and comment by the Party if possible; provided, however, the
designated controlling Party shall not be obligated to delay the filing of any
patent application; and (b) copies of all correspondence from any and all patent
offices concerning patent applications covering Joint Inventions and an
opportunity to comment on any proposed responses, voluntary amendments and
submissions of any kind to be

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made to any and all such patent offices. The Parties shall mutually agree on the
in-house or outside counsel who will perform the filing, prosecution and
maintenance of Joint Inventions and the allocation of out-of-pocket costs
incurred in connection therewith.

     10.3 ENFORCEMENT OF BMS PATENT RIGHTS AGAINST INFRINGERS.

          10.3.1 Enforcement [*]. In the event that BMS or in-house counsel
of Vanda becomes aware of a suspected infringement of any BMS Patent Right, such
Party shall notify the other Party promptly, and following such notification,
the Parties shall confer. [*] shall have the right, but shall not be obligated,
to bring an infringement action at its own expense, in its own name and entirely
under its own direction and control. [*] will reasonably assist [*] in any
action or proceeding being prosecuted if so requested, and will lend its name to
such actions or proceedings if requested by [*] or required by law, and [*] will
indemnify and hold [*] harmless from any liability incurred by [*] arising out
of any such actions or proceedings. [*] shall have the right to participate and
be represented in any such suit by its own counsel [*]. No settlement of any
such action or defense which restricts the scope, or adversely affects the
enforceability, of a BMS Patent Right may be entered into by [*] without the
prior written consent of [*], which consent shall not be unreasonably withheld.

          10.3.2 Enforcement [*]. If [*] elects not to bring any action for
infringement described in Section 10.3.1 and so notifies [*], then [*] may bring
such action at its own expense, in its own name and entirely under its own
direction and control. [*] will reasonably assist [*] in any action or
proceeding being prosecuted if so requested, and will lend its name to such
actions or proceedings if requested by [*] or required by law, and [*] will
indemnify and hold [*] harmless from any liability incurred by [*] arising out
of any such actions or proceedings. [*] shall have the right to participate and
be represented in any such suit by its own counsel [*]. No settlement of any
such action or defense which restricts the scope, or adversely affects the
enforceability, of a BMS Patent Right may be entered into by [*] without the
prior written consent of [*], which consent shall not be unreasonably withheld.

          10.3.3 Withdrawal. If either Party brings such an action or defends
such a proceeding under this Section 10.3 and subsequently ceases to pursue or
withdraws from such action or proceeding, it shall promptly notify the other
Party and the other Party may substitute itself for the withdrawing Party under
the terms of this Section 10.3.

          10.3.4 Damages. In the event either Party exercises the rights
conferred in this Section 10.3 and recovers any damages or other sums in such
action, suit or proceeding or in settlement thereof, such damages
or other sums recovered shall [*].

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     10.4 DEFENSE OF THIRD PARTY CLAIMS. If a claim is brought by a Third Party
against either Party that any activity related to the Development, manufacture,
Commercialization, use, sale, import or export of a Compound or Product
infringes the intellectual property rights of such Third Party, each Party will
give prompt written notice to the other Party of such claim. The Royalty Paying
Party shall control [*], and shall be solely responsible for, and shall defend,
indemnify and hold harmless the Royalty Receiving Party and its Affiliates from
and against, any such claims, damages, losses, liabilities, costs (including
without limitation reasonable legal expenses, costs of litigation, and
reasonable attorney's fees) or judgments, whether for money or equitable relief.

                                   ARTICLE 11
                   NONDISCLOSURE OF CONFIDENTIAL INFORMATION.

     11.1 NONDISCLOSURE. Each Party agrees that for a period of [*] after
receipt of Confidential Information from the other Party, a Party receiving
Confidential Information of the other Party will (a) use commercially reasonable
efforts to maintain in confidence such Confidential Information (but not less
than those efforts as such Party uses to maintain in confidence its own
proprietary industrial information of similar kind and value) and not to
disclose such Confidential Information to any Third Party without prior written
consent of the other Party, except for disclosures made in confidence to any
Third Party under terms consistent with this Agreement and made in furtherance
of this Agreement or of rights granted to a Party hereunder, and (b) not use
such other Party's Confidential Information for any purpose except those
permitted by this Agreement (it being understood that this subsection (b) shall
not create or imply any rights or licenses not expressly granted under Article 2
hereof).

          11.1.1 EXCEPTIONS. The obligations in Section 11.1 shall not apply
with respect to any portion of the Confidential Information that the receiving
Party can show by competent proof:

               (a) Is publicly disclosed by the disclosing Party, either before
or after it is disclosed to the receiving Party hereunder; or

               (b) Was known to the receiving Party or any of its Affiliates,
without obligation to keep it confidential, prior to disclosure by the
disclosing Party; or

               (c) Is subsequently disclosed to the receiving Party or any of
its Affiliates by a Third Party lawfully in possession thereof and without
obligation to keep it confidential; or

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               (d) Is published by a Third Party or otherwise becomes publicly
available or enters the public domain, either before or after it is disclosed to
the receiving Party; or

               (e) Has been independently developed by employees or contractors
of the receiving Party or any of its Affiliates without the aid, application or
use of Confidential Information.

     11.2 AUTHORIZED DISCLOSURE. A Party may disclose the Confidential
Information belonging to the other Party to the extent such disclosure is
reasonably necessary in the following instances:

          11.2.1 Filing or prosecuting patents;

          11.2.2 Regulatory filings;

          11.2.3 Prosecuting or defending litigation;

          11.2.4 Complying with applicable governmental laws and regulations and
with judicial process;

          11.2.5 Disclosure, in connection with the performance of this
Agreement, to Affiliates, potential collaborators, partners, and counterparties
(including potential co-marketing and co-promotion contractors), research
collaborators, potential investment bankers, investors, lenders, and investors,
employees, consultants, or agents, each of whom prior to disclosure must be
bound by similar obligations of confidentiality and non-use at least equivalent
in scope to those set forth in this Section 11.2; and

          11.2.6 For purposes of raising capital, provided that prior to
disclosure, each Third Party to whom Confidential Information is disclosed must
be bound by similar obligations of confidentiality and non-use at least
equivalent in scope to those set forth in this Section 11.2.

     11.3 TERMS OF THIS AGREEMENT. The Parties acknowledge that the terms of
this Agreement shall be treated as Confidential Information of both Parties.
Such terms may be disclosed by a Party to individuals or entities covered by
Sections 11.2.5 and 11.2.6 above, each of whom prior to disclosure must be bound
by similar obligations of confidentiality and non-use at least equivalent in
scope to those set forth in this Section 11.3. In addition, a copy of this
Agreement may be filed by either Party with the Securities and Exchange
Commission in connection with any public offering of such Party's securities. In
connection with any such filing, such Party shall endeavor to obtain
confidential treatment of economic and trade secret information. In any event,
the Parties agree to take all reasonable action to avoid disclosure of
Confidential Information except as permitted hereunder.

     11.4 EXCEPTION FOR DISCLOSURE [*]. Notwithstanding anything else in this
Agreement to the contrary, each Party hereto (and each employee, representative,
or other agent of any Party) may disclose to any and all persons, without

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limitation of any kind, [*] and all materials of any kind [*] that are or have
been provided to any Party (or to any employee, representative, or other agent
of any Party) relating to [*], provided, however, that this authorization of
disclosure shall not apply to restrictions reasonably necessary to comply with
securities laws. This authorization of disclosure is [*] and the Parties [*]
authorization has been given on [*].

                                   ARTICLE 12
                                    INDEMNITY

     12.1 VANDA INDEMNITY. Vanda shall indemnify, defend and hold harmless BMS
and its Affiliates and the officers, directors, employees, agents, licensors
(including without limitation MGH and its officers, medical and professional
staff, employees, trustees, and agents and their respective successors, heirs
and assigns) and representatives of BMS and its Affiliates from and against
any and all claims, threatened claims, damages, losses, suits, proceedings,
liabilities, costs (including without limitation reasonable legal expenses,
costs of litigation, and reasonable attorney's fees) or judgments, whether for
money or equitable relief, of any kind ("Losses and Claims") arising out of or
relating to, directly or indirectly, [*] except for Losses and Claims to the
extent reasonably attributable to (i) breach by BMS of Article 11, or (ii) BMS
having committed an act or acts of gross negligence, recklessness, or willful
misconduct. A claim to which indemnification applies under this Section 12.1 or
Section 12.2 shall be referred to herein as an "Indemnification Claim".

     12.2 BMS INDEMNITY. Only in the event that BMS exercises the BMS Option
with respect to a Product shall BMS indemnify, defend and hold harmless Vanda
and its Affiliates and the officers, directors, employees, agents, licensors and
representatives of Vanda and its Affiliates from Losses and Claims arising out
of or relating to, directly or

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indirectly, [*] except for Losses and Claims to the extent reasonably
attributable to (i) breach by Vanda of Article 11, or (ii) Vanda having
committed an act or acts of gross negligence, recklessness, or willful
misconduct.

     12.3 INDEMNIFICATION PROCEDURES. If a party or any its Affiliates or their
respective officers, directors, employees, agents, licensors and representatives
(collectively, the "Indemnitee") intends to claim indemnification under this
Article 12, the Indemnitee shall notify the other party (the "Indemnitor") in
writing promptly upon becoming aware of any Claim that may be an Indemnification
Claim. The Indemnitor shall have the right to assume and control the defense of
the Indemnification Claim at its own expense. If the right to assume and have
sole control of the defense is exercised by the Indemnitor, the Indemnitee shall
have the right to participate in, but not control, such defense at its own
expense and the Indemnitor's indemnity obligations shall not include any
attorneys' fees and litigation expenses incurred by the Indemnitee after the
assumption of the defense by the Indemnitor. If the Indemnitor does not assume
the defense of the Indemnification Claim, the Indemnitee may defend the
Indemnification Claim but shall have no obligation to do so. The Indemnitee will
not settle or compromise the Indemnification Claim without the prior written
consent of the Indemnitor, and the Indemnitor will not settle or compromise the
Indemnification Claim in any manner which would have an adverse effect on the
Indemnitee's rights under this Agreement or the scope or enforceability of the
BMS Patents Rights or BMS Know-How, without the prior written consent of the
Indemnitee, which consent, in each case, will not be unreasonably withheld. The
Indemnitee shall reasonably cooperate with the Indemnitor at the Indemnitor's
expense and will make available to the Indemnitor all pertinent information
under the control of the Indemnitee.

     12.4 INSURANCE. Vanda will, beginning with the initiation of the first
clinical trial for the Product, maintain at all times thereafter during the term
of this Agreement, and until the later of (a) [*] after termination or
expiration of this Agreement or (b) the date that all statutes of limitation
covering claims or suits that may be brought for personal injury based on the
sale or use of a Product have expired in all states in the U.S.A., [*] insurance
from a [*], and with coverage limits of not less than [*] per occurence and [*]
in the aggregate. The minimum level of insurance set forth herein shall not be
construed to create a limit on Vanda's liability hereunder. Within [*] following
written request

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from BMS, Vanda shall furnish to BMS a certificate of insurance evidencing such
coverage as of the date. Each such certificate of insurance, as well as any
certificates evidencing new or modified coverages of Vanda, shall include a
provision whereby [*] written notice must be received by BMS prior to coverage
modification or cancellation by either Vanda or the insurer and of any new or
modified coverage. In the case of a modification or cancellation of such
coverage, Vanda shall promptly provide BMS with a new certificate of insurance
evidencing that Vanda's coverage meets the requirements in the first sentence of
this Section.

                                   ARTICLE 13
                              TERM AND TERMINATION

     13.1 TERM. This Agreement shall commence upon the Effective Date and,
unless sooner terminated in accordance with the terms hereof or by mutual
written consent, shall continue until neither Party has any obligation to the
other remaining hereunder.

     13.2 TERMINATION BY BMS. BMS shall have the right to terminate this
Agreement, at BMS' sole discretion, upon delivery of written notice to Vanda,
upon the occurrence of any of the following:

          13.2.1 INSOLVENCY. Upon the filing by Vanda in any court or agency
pursuant to any statute or regulation of the United States or any other
jurisdiction a petition in bankruptcy or insolvency or for reorganization or
similar arrangement for the benefit of creditors or for the appointment of a
receiver or trustee of Vanda or its assets, upon the proposal by Vanda of a
written agreement of composition or extension of its debts, or if Vanda is
served with an involuntary petition against it in any insolvency proceeding,
upon the [*] after such service if such involuntary petition has not previously
been stayed or dismissed, or upon the making by Vanda of an assignment for the
benefit of its creditors; or

          13.2.2 BREACH. In the event of any material breach by Vanda of any
terms and conditions of this Agreement, including failure to use Commercially
Reasonable Efforts to Develop or Commercialize a Product or Compound, provided
that such breach has not been cured within [*] after written notice thereof is
given by BMS to Vanda; provided, that if such breach relates to the failure to
make a payment when due, such breach must be cured within [*] after written
notice thereof is given by BMS.

          13.2.3 TERMINATION FOR FAILURE TO EFFECT COMMERCIAL LAUNCH. If Vanda
is obligated to Commercialize a Product and fails to effect a commercial launch
in a Major Market Country within [*] of achieving an Approval for such Product
in such country; provided however, (i) that if the failure to launch in such
Major Market Country is a consequence of [*] and provided, further, (ii) that
subpart (i) of this Section

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13.2.3 may not be used to excuse launch, with respect to the [*]. Termination
under this Section 13.2.3 shall apply only to the [*] affected by such failure
to launch; provided, that (iii) if such failure relates to a [*] and (iv) [*]
Nothing in the foregoing shall relieve Vanda of its obligation to use
Commercially Reasonable Efforts to Commercialize a Product once launched in a
country.

          13.2.4 SCOPE OF TERMINATION. Termination under Sections 13.2.1 and
13.2.2 shall be as to all countries and all Products.

     13.3 TERMINATION BY VANDA. Subject to Section 13.3.4, Vanda shall have the
right to terminate this Agreement, at Vanda's sole discretion, upon delivery of
written notice to BMS, upon occurrence of any of the following:

          13.3.1 TERMINATION FOR ANY REASON. At Vanda's discretion, on a
country-by-country and Product-by-Product basis, it may terminate this Agreement
for any reason; provided however, such termination shall be effective not sooner
than [*] after written notice thereof; and further provided, however, that no
such termination right may be exercised as-to-any Major Market Country unless
all Major Market Countries are so terminated unless such termination in a Major
Market Country is a consequence of lack of commercial feasibility in such Major
Market Country due to the pricing/reimbursement received for the Product in such
Country, in which event Vanda may terminate its license in such Major Market
Country only.

          13.3.2 TERMINATION FOR BMS' FAILURE TO EFFECT COMMERCIAL LAUNCH. If
BMS is obligated to Commercialize a Product and fails to effect a commercial
launch within [*] of achieving the first Approval for such Product in a given
Major Market Country; provided however, if the failure to launch in such Major
Market Country is a consequence of lack of commercial feasibility due to the
pricing/reimbursement received for the Product in such Country or safety issues,
then this Section 13.3 shall not apply to such failure to launch.

          13.3.3 TERMINATION FOR BMS' CESSATION OF DEVELOPMENT. If BMS elects to
cease development of a Product in its discretion with respect to a given Major
Market Country for a period exceeding [*] (other than for safety reasons or
regulatory reasons).

          13.3.4 SCOPE OF TERMINATION. Termination under Sections 13.3.2 and
13.3.3 shall only be as to the countries affected by the BMS action in question
and not to the entire agreement (unless such BMS action affects all Major Market
Countries).

     13.4 EFFECT OF TERMINATION.

          13.4.1 Upon termination of this Agreement under Section 13.2.1 or
13.2.2 hereof or, with respect to each applicable country as to which
termination occurs pursuant to Section 13.2.3 or 13.3.1 hereof (the rights of
Vanda in the remaining countries of the

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Territory in which termination under Section 13.2.3 or 13.3.1 has not occurred
being unaffected by such termination):

               (a) All rights and licenses granted to Vanda in Article 2 shall
terminate with respect to each terminated country, all rights, title and
interests to the BMS Patent Rights and BMS Know-How in each terminated country
shall revert to BMS, and Vanda shall cease all use of the BMS Patent Rights and
BMS Know-How with respect to each terminated country; and

               (b) All regulatory filings (including all INDs and NDAs) and
Approvals relating to the Compounds and any Product (and all of Vanda's rights,
title and interests therein) in each terminated country shall be assigned to
BMS, and Vanda shall provide to BMS one copy of all documents and filings
contained in or referenced in any such filings, together with the raw and
summarized data for any preclinical and clinical studies of the Compounds and
Products. BMS shall have the right to obtain specific performance of Vanda's
obligations referenced in this Section 13.4.1(b) and/or in the event of failure
to obtain assignment, Vanda hereby consents and grants to BMS the right to
access and reference (without any further action required on the part of Vanda,
whose authorization to file this consent with any Regulatory Authority is hereby
granted) any and all such regulatory filings for any regulatory or other use or
purpose in each terminated country; and

               (c) All amounts due or payable to BMS that were accrued, or that
arise out of acts or events occurring, prior to the effective date of
termination shall remain due and payable; but no additional amounts will be
payable based on events occurring after the effective date of termination; and

               (d) BMS shall have the right to retain all amounts previously
paid to BMS by Vanda; and

               (e) Should Vanda have any inventory of Compound suitable for use
in clinical trials in each terminated country, Vanda shall offer to sell such
Compound to BMS [*] (but BMS shall be under no obligation to purchase same
unless it agrees to do so in writing at such time); and

               (f) Should Vanda have any inventory of Product approved and
allocated prior to termination for sale in a terminated country, Vanda shall
have [*] thereafter in which to dispose of such inventory (subject to the
payment to BMS of any royalties due hereunder thereon);

               (g) Vanda will disclose to BMS its manufacturing patents,
processes, techniques and trade secrets for making the Product and BMS will
automatically have an exclusive, perpetual, worldwide, sublicensable right and
license under know-how and patents Controlled by Vanda and its Affiliates
relating to any composition, formulation, method of use or manufacture of the
Compounds and Products solely for (i) using, importing, selling and offering for
sale the Compounds and Products in the terminated countries and (ii) making and
having made the Compounds and

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Products anywhere in the world for use, importation, sale and offer for sale in
the terminated countries;

               (h) Vanda shall assign to BMS any trademark or trade dress that
is specific to a Product (it being understood that the foregoing shall not
include any trademarks or tradenames that contain the name "Vanda") in each
terminated country;

               (i) Vanda shall assign to BMS its right, title and interest in
any Sole Inventions and Joint Inventions (and any patent applications filed
thereon and patents issued thereon) pertaining to the composition of matter or
method of use or utility of the Compounds or Products in each terminated
country; and

               (j) Neither Party shall be relieved of any obligation that
accrued prior to the effective date of such termination.

It is understood and agreed that BMS shall be entitled to specific performance
as a remedy to enforce the provisions of this Section 13.4.1, in addition to any
other remedy to which it may be entitled by applicable law.

          13.4.2 In the event Vanda terminates the Agreement, in whole or in
part (in accordance with Section 13.3.4), pursuant to Section 13.3.2 or 13.3.3:

               (a) BMS shall grant Vanda all necessary rights and licenses on
the same terms and conditions set forth in Article 2, to the BMS Patent Rights
and BMS Know-How solely for use in a terminated country; and

               (b) All regulatory filings (including all INDs and NDAs) and
Approvals relating to the Compounds and any Product (and all of BMS' rights,
title and interests therein) in a terminated country shall be assigned to Vanda,
and BMS shall provide to Vanda one copy of all documents and filings contained
in or referenced in any such filings, together with the raw and summarized data
for any preclinical and clinical studies of the Compounds and Products. In the
event of failure to obtain assignment, BMS hereby consents and grants to Vanda
the right to access and reference (without any further action required on the
part of BMS, whose authorization to file this consent with any Regulatory
Authority is hereby granted) any and all such regulatory filings for any
regulatory or other use or purpose with respect to each terminated country; and

               (c) All amounts due or payable to Vanda that were accrued, or
that arise out of acts or events occurring, prior to the effective date of
termination shall remain due and payable, but no additional amounts will be
payable based on events occurring after the effective date of termination; and

               (d) Vanda shall have the right to retain all amounts
previously paid to Vanda by BMS; and

               (e) BMS shall assign to Vanda any trademark or trade dress that
is specific to a Product in such terminated country (it being understood that
the

                                      -35-

<PAGE>

foregoing shall not include any trademarks or tradenames that contain the name
"BMS"); and

               (f) Vanda shall thereafter pay milestones and royalties to BMS
in accordance with Sections 8.2.1 and 8.5.1.

The remedies set forth in this Section 13.4.2 shall be Vanda's sole and
exclusive remedy for breach by BMS of its Development and/or Commercialization
obligations under this Agreement.

     13.5 SURVIVAL. Except as expressly provided herein, the following
provisions shall survive early termination of this Agreement, as well as any
other provisions which by their nature are intended to survive termination:
Sections 4.2, 8.9.2, 9.4, 9.5, 10.1, 10.2, 10.4, 12.1, 12.2, 12.3, 12.4,
13.4.1(b), 13.4.1(f), 13.4.1(g), 13.4.2(b), 13.4.2(f), 13.5 and 13.6 and
Articles 11 and 14.

     13.6 BANKRUPTCY.

          13.6.1 All rights and licenses granted under or pursuant to this
Agreement, including amendments hereto, by each Party to the other Party are,
for all purposes of Section 365(n) of Title 11 of the U.S. Code ("TITLE 11"),
licenses of rights to intellectual property as defined in Title 11. Each Party
agrees during the term of this Agreement to create and maintain current copies
or, if not amenable to copying, detailed descriptions or other appropriate
embodiments, to the extent feasible, of all such intellectual property. If a
case is commenced by or against either Party (the "BANKRUPT PARTY") under Title
11, then, unless and until this Agreement is rejected as provided in Title 11,
the Bankrupt Party (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 Trustee)
shall, at the election of the Bankrupt Party made within 60 days after the
commencement of the case (or, if no such election is made, immediately upon the
request of the non-Bankrupt Party) either (i) perform all of the obligations
provided in this Agreement to be performed by the Bankrupt Party including,
where applicable and without limitation, providing to the non-Bankrupt Party
portions of such intellectual property (including embodiments thereof) held by
the Bankrupt Party and such successors and assigns or otherwise available to
them or (ii) provide access or a license to the non-Bankrupt Party to all such
intellectual property (including all embodiments thereof) held by the Bankrupt
Party and such successors and assigns or otherwise available to them.

          13.6.2 If a Title 11 case is commenced by or against the Bankrupt
Party and this Agreement is rejected as provided in Title 11 and the
non-Bankrupt Party elects to retain its rights hereunder as provided in Title
11, then the Bankrupt Party (in any capacity, including debtor-in-possession)
and its successors and assigns (including, without limitation, a Title 11
Trustee) shall provide access or a license to the non-Bankrupt Party to all such
intellectual property (including all embodiments thereof) held by the Bankrupt
Party and such successors and assigns or otherwise available to them immediately
upon the non-Bankrupt Party's written request therefor. Whenever the Bankrupt
Party or any of its successors or assigns provides access or a license to the
non-

                                      -36-

<PAGE>

Bankrupt Party to any of the intellectual property licensed hereunder (or any
embodiment thereof) pursuant to this Section 13.7, the non-Bankrupt Party shall
have the right to perform the obligations of the Bankrupt Party hereunder with
respect to such intellectual property, but neither such provision nor such
performance by the non-Bankrupt Party shall release the Bankrupt Party from any
such obligation or liability for failing to perform it.

          13.6.3 All rights, powers and remedies of the non-Bankrupt Party
provided herein are in addition to and not in substitution for any and all other
rights, powers and remedies now or hereafter existing at law or in equity
(including, without limitation, Title 11) in the event of the commencement of a
Title 11 case by or against the Bankrupt Party. The non-Bankrupt Party, in
addition to the rights, power and remedies expressly provided herein, shall be
entitled to exercise all other such rights and powers and resort to all other
such remedies as may now or hereafter exist at law or in equity (including,
without limitation, under Title 11) in such event. The Parties agree that they
intend the foregoing non-Bankrupt Party rights to extend to the maximum extent
permitted by law and any provisions of applicable contracts with Third Parties,
including without limitation for purposes of Title 11, (i) the right of access
or a license to any intellectual property (including all embodiments thereof) of
the Bankrupt Party or any Third Party with whom the Bankrupt Party contracts to
perform an obligation of the Bankrupt Party under this Agreement, and, in the
case of the Third Party, which is necessary for the development, registration
and manufacture of licensed products and (ii) the right to contract directly
with any Third Party described in (i) in this sentence to complete the
contracted work. Any intellectual property provided pursuant to the provisions
of this Section 13.6 shall be subject to the licenses set forth elsewhere in
this Agreement and the payment obligations of this Agreement, which shall be
deemed to be royalties for purposes of Title 11.

                                   ARTICLE 14
                                  MISCELLANEOUS

     14.1 PROVISIONS CONTRARY TO LAW. In performing this Agreement, the Parties
shall comply with all applicable laws. Wherever there is any conflict between
any provision of this Agreement and any law, the law shall prevail, but in such
event the affected provision of this Agreement shall be limited or eliminated
only to the extent necessary, and the remainder of this Agreement shall remain
in full force and effect. In the event the terms of this Agreement are
materially altered as a result of the foregoing, the Parties shall renegotiate
in good faith the terms of this Agreement to resolve any inequities.

     14.2 THIRD PARTY RIGHTS. Notwithstanding anything to the contrary in this
Agreement, the grant of rights by BMS under this Agreement shall be subject to
and limited in all respects by the terms of the applicable BMS in-license(s)
pursuant to which BMS acquired any licensed rights, and all rights or
sublicenses granted under this Agreement shall be limited to the extent that BMS
may grant such rights and sublicenses under such BMS in-license(s).

                                      -37-

<PAGE>

     14.3 NOTICES. Any notice required or permitted to be given by this
Agreement shall be in writing and shall be delivered by hand or overnight
courier with tracking capabilities or mailed postage prepaid by first class,
registered or certified mail addressed as set forth below unless changed by
notice so given:

     If to Vanda:

        Vanda Pharmaceuticals, Inc.
        47 Hulfish Street, Suite 310
        Princeton, New Jersey 08452
        Attention: President

     If to BMS:

        Bristol-Myers Squibb Company
        Route 206 and Province Line Road
        Princeton, New Jersey 08450
        Attention: Senior Vice President for Business Development

     With a copy to the Vice President and Senior Counsel, Corporate and
     Business Development, at the same address.

     Any such notice shall be deemed delivered on the date received. A Party may
add, delete, or change the person or address to whom notices should be sent at
any time upon written notice delivered to the Party's notices in accordance with
this Section 14.3.

     14.4 FORCE MAJEURE. Neither Party shall be liable for delay or failure in
the performance of any of its obligations hereunder if such delay or failure is
due to causes beyond its reasonable control, including, without limitation, acts
of God, fires, earthquakes, strikes and labor disputes, acts of war, civil
unrest or intervention of any governmental authority; provided, that the
affected Party promptly notifies the other Party and further provided that the
affected Party shall use its commercially reasonable efforts to avoid or remove
such causes of non-performance and shall continue performance with the utmost
dispatch whenever such causes are removed. When such circumstances arise, the
Parties shall negotiate in good faith any modifications of the terms of this
Agreement that may be necessary or appropriate in order to arrive at an
equitable solution.

     14.5 USE OF NAMES. Vanda, at its sole cost and expense, shall be
responsible for the selection, registration and maintenance of all trademarks
which it employs in connection with its activities conducted pursuant to this
Agreement, if any, and shall own and control such trademarks. Nothing in this
Agreement shall be construed as a grant to Vanda of rights, by license or
otherwise, to the use of any trademarks, service marks, logos or the name of BMS
for any purpose. Neither Party shall use the name or marks or logos of the other
Party for any purpose without the prior written consent of such other Party.

                                      -38-

<PAGE>

     14.6 ASSIGNMENT. Neither Party shall assign its rights or obligations under
this Agreement without the prior written consent of the Party, except that:

          14.6.1 BMS may, without Vanda's consent, assign all of its rights and
obligations hereunder in connection with any transfer of all of the BMS Patent
Rights and BMS Compound Know-How, to any Affiliate of BMS or another Third
Party, (including, without limitation, a successor in interest); provided, that
such Affiliate or assignee or successor in interest agrees in a writing provided
to Vanda to be bound by the terms of this Agreement; and

          14.6.2 Upon [*] advance written notice to BMS and subject to BMS
approval, not to be unreasonably withheld, conditioned, or delayed, Vanda may
assign all of its rights and obligations hereunder to an entity of equal or
superior financial condition as Vanda or to an Affiliate (and so long as such
assignment includes, without limitation, the Approvals, all manufacturing assets
relating to this Agreement, and all rights and obligations under this
Agreement), provided, that such entity or Affiliate shall have agreed prior to
such assignment to be bound by the terms of this Agreement in a writing provided
to BMS and provided that Vanda remains jointly and severally liable with such
entity or Affiliate for the performance of this Agreement where assigned to a
Third Party or an Affiliate;

          14.6.3 Vanda may assign all of its rights and obligations hereunder
without such consent to a successor in interest by reason of merger,
consolidation or sale of substantially all of the assets of Vanda (and so long
as such assignment or sale includes, without limitation, the Approvals, all
manufacturing assets relating to this Agreement, and all rights and obligations
under this Agreement), provided, that such successor in interest shall have
agreed prior to such assignment or sale to be bound by the terms of this
Agreement in a writing provided to BMS; and

          14.6.4 Subject to the foregoing, this Agreement shall inure to the
benefit of and be binding on the Parties' successors and assigns. Any assignment
in violation of the foregoing shall be null and void and wholly invalid, the
assignee in any such assignment shall acquire no rights whatsoever, and the
non-assigning Party shall not recognize, nor shall it be required to recognize,
such assignment

     14.7 FURTHER ASSURANCES. Each Party agrees to do and perform all such
further acts and things and shall execute and deliver such other agreements,
certificates, instruments and documents necessary or that the other Party may
deem advisable in order to carry out the intent and accomplish the purposes of
this Agreement and to evidence, perfect or otherwise confirm its rights
hereunder.

     14.8 WAIVERS AND MODIFICATIONS. The failure of any Party to insist on the
performance of any obligation hereunder shall not be deemed to be a waiver of
such obligation. Waiver of any breach of any provision hereof shall not be
deemed to be a waiver of any other breach of such provision or any other
provision on such occasion or any succeeding occasion. No waiver, modification,
release or amendment of any

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obligation under or provision of this Agreement shall be valid or effective
unless in writing and signed by all Parties hereto.

     14.9 CHOICE OF LAW AND JURISDICTION.

          14.9.1 This Agreement shall be governed by, enforced, and shall be
construed in accordance with the laws of the State of New York without regard
to its conflicts of law provisions (other than section 5.1401 of the New York
General Obligations Law).

          14.9.2 Each Party irrevocably submits to the exclusive jurisdiction of
(a) the Supreme Court of the State of New York, New York County, and (b) the
United States District Court for the Southern District of New York, for the
purposes of any suit, action or other proceeding arising out of this Agreement
or out of any transaction contemplated hereby. Each Party agrees to commence any
such action, suit or proceeding either in the United States District Court for
the Southern District of New York or if such suit, action or other proceeding
may not be brought in such court for jurisdictional reasons, in the Supreme
Court of the State of New York, New York County. Each Party further agrees that
service of any process, summons, notice or document by personal delivery, by
registered mail, or by a recognized international express delivery service to
such Party's respective address set forth above shall be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction in this Section 14.9. Each
Party irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Supreme Court of the State of New
York, New York County or (ii) the United States District Court for the Southern
District of New York, and hereby and thereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.

          14.9.3 Each Party hereto hereby waives to the fullest extent permitted
by applicable law, any right it may have to a trial by jury in respect to any
litigation directly or indirectly arising out of, under or in connection with
this Agreement. Each Party hereto (a) certifies that no representative, agent or
attorney of the other Party has represented, expressly or otherwise, that such
other Party would not, in the event of litigation, seek to enforce that
foregoing waiver and (b) acknowledges that it and the other Party hereto have
been induced to enter into this Agreement, as applicable, by, among other
things, the mutual waivers and certifications in this Section 14.9.

     14.10 PUBLICITY.

          14.10.1 Subject to Article 11, except as required by law, regulation
or order, including, without limitation, laws, regulations and orders of the
U.S. Securities and Exchange Commission, the National Association of Securities
Dealers or any national stock exchange, and except as expressly provided herein,
neither Vanda nor BMS shall make any public announcement concerning this
Agreement, including but not

                                      -40-

<PAGE>

limited to the execution of this Agreement and the economic terms of this
Agreement, without the prior written consent of the other Party. In the event of
a public disclosure required by law or regulation, including without limitation,
any required disclosure in any securities offering document, the Party making
such announcement shall at least five business days prior to such disclosure
provide the other Party with a copy of the proposed text of the disclosure, and
such other Party shall be entitled to have its reasonable comments incorporated
prior to such announcement, provided that provision of proposed text and
incorporation of comments referenced above is consistent with the disclosing
Party's legal or regulatory obligations.

          14.10.2 Notwithstanding the foregoing, in the event that Vanda decides
that it would like to issue a public announcement regarding the execution of
this Agreement following such execution, Vanda shall submit the proposed form of
such public announcement to BMS for its review and written approval. Absent such
approval of BMS, Vanda may not make such a public announcement.

     14.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Parties as to the subject matter of this Agreement, and supersedes
and merges all prior negotiations, representations, agreements and
understandings regarding the same.

     14.12 COUNTERPARTS. This Agreement may be executed in counter-parts with
the same effect as if both Parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.

     14.13 RELATIONSHIP OF THE PARTIES. Each Party is an independent contractor
under this Agreement. Nothing contained herein is intended or is to be construed
so as to constitute BMS and Vanda as partners, agents or joint venturers.
Neither Party shall have any express or implied right or authority to assume or
create any obligations on behalf of or in the name of the other Party or to bind
the other Party to any contract, agreement or undertaking with any Third Party.

     14.14 HEADINGS. Headings and captions are for convenience only and are not
be used in the interpretation of this Agreement. Neither this Agreement nor any
provision of this Agreement shall be construed for or against any Party because
the Agreement as a whole, or any portion of it, was requested or drafted by such
Party.

     14.15 DISPUTE RESOLUTION. In the event of any dispute relating to this
Agreement, prior to instituting any lawsuit, arbitration or other dispute
resolution process on account of such dispute, the Parties shall attempt in good
faith to settle such dispute first by negotiation and consultation between
themselves, including referral of such dispute to the Chief Executive Officer of
Vanda and the (a) President of the Pharmaceutical Research Institute of BMS for
any dispute involving Development, or (b) the President of U.S. Primary Care of
BMS for any dispute involving Commercialization. In the event said executives
are unable to resolve such dispute or agree upon a mechanism to resolve such
dispute within thirty (30) days of the first written request for dispute
resolution under this

                                      -41-

<PAGE>

Section 14.15, then the Parties shall be free to pursue any remedy or rights
available to either of them at law or in equity.

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

                                        VANDA PHARMACEUTICALS, INC.

                                        By:
                                            ------------------------------------
                                            (Signature)
                                        Name: Mihael Polymeropoulos
                                        Title: Chief Executive Officer
                                        Date:
                                              ----------------------------------

                                        BRISTOL-MYERS SQUIBB COMPANY

                                        By:
                                            ------------------------------------
                                            (Signature)
                                        Name: James Palmer
                                        Title: President, Pharmaceutical
                                               Research Institute
                                        Date:
                                              ----------------------------------

                                      -42-

<PAGE>

                                  SCHEDULE 1.3

          BMS COMPOUND PATENT RIGHTS AND DESCRIPTION OF THE COMPOUNDS

BMS-214778 is a [*].

BMS-330446 is a [*].

BMS Compound Patent Rights for BMS-214778

                                      [*]

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BMS Compound Patent Rights for BMS-330446

                                      [*]

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                                  SCHEDULE 1.7

                         BMS MANUFACTURING PATENT RIGHTS

     None

                                      -45-

<PAGE>
\
                                  SCHEDULE 1.19

                                DEVELOPMENT PLAN

            DEVELOPMENT TIMELINES FOR A PRODUCT CONTAINING BMS-214778

                                       [*]

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<PAGE>

                   BUDGET FOR A PRODUCT CONTAINING BMS-214778

                                       [*]

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                                  SCHEDULE 1.25

                                    FTE RATE

                                       [*]

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                                      -48-<PAGE>
                                                                    Exhibit 10.4

                                     NDD-094
                               LICENSE AGREEMENT

                                     between

                               Novartis Pharma AG,

                                   Novartis AG

                                       and

                          Vanda Pharmaceuticals, Inc.

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<PAGE>
                            NDD-094 LICENSE AGREEMENT

      This LICENSE AGREEMENT (the "Agreement") dated the 4th day of June, 2004
(the "Effective Date") by and between Novartis Pharma AG, a corporation
organized and existing under the laws of Switzerland and having its principal
office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis"), Novartis AG, a
corporation organized and existing under the laws of Switzerland and having its
principal office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis AG") and
Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws
of the State of Delaware and having its principal office at 47 Hulfish Street,
Suite 310, Princeton, NJ 08542, The United States ("Vanda"). Novartis, Novartis
AG and Vanda may be referred to herein individually as a "Party" and
collectively as the "Parties".

                                  INTRODUCTION

      WHEREAS, Novartis AG owns or has rights to certain Novartis Patents (as
defined below) and Novartis AG and Novartis each have rights to Novartis
Know-How (as defined below) related to the Product (as defined below) and the
Compound (as defined below), and each has the right to grant certain rights and
licenses thereunder as set forth herein, and

      WHEREAS, Vanda has certain expertise in the development and
commercialization of pharmaceutical products, and Vanda wishes to obtain certain
licenses to the Compound for the purpose of developing and commercializing the
Product, and

      WHEREAS, Novartis AG and Novartis each wish to grant a license to Vanda in
respect of such development and commercialisation.

      NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the sufficiency of which is hereby
acknowledged, the Parties to this Agreement mutually agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

      For purposes of this Agreement, the following initially capitalized terms
in this Agreement, whether used in the singular or plural, shall have the
following meanings:

            1.1 "Affiliate" shall mean any corporation, company, partnership,
      joint venture and/or firm which controls, is controlled by, or is under
      common control with a specified person or entity. For purposes of this
      Section 1.1, "control" shall be presumed to exist if one of the following
      conditions is met: (a) in the case of corporate entities, control of at
      least fifty per cent (50%) of the voting rights at a meeting of the board
      of directors or 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, and (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 policies of such non-corporate
      entities. The Parties acknowledge that in the case of certain entities
      organized under the laws of certain countries outside of the United
      States, the

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      maximum percentage ownership permitted by law for a foreign investor may
      be less than fifty percent (50%), and that in such cases such lower
      percentage shall be substituted in the preceding sentence, provided that
      such foreign investor has the power to direct the management and policies
      of such entity. Notwithstanding the foregoing venture capital investors
      in Vanda shall not be considered Affiliates of Vanda.

            1.2 "Annex" or "Schedule" shall mean the annexes attached to the
      back of this Agreement. In the event of conflict between the drafting of
      the operative terms of the Agreement and the Annex, the operative terms of
      the Agreement shall prevail.

            1.3 "Back-up Compound" shall mean a compound [*].

            1.4 "Business Day" shall mean any day on which banking institutions
      in New York, New York and Basel are open for business.

            1.5 "Commercialization" or "Commercialize" shall mean activities
      conducted by a Party either by itself or through a Third Party and
      directed to marketing, promoting, distributing, importing, exporting,
      offering for sale and selling a Product. When used as a verb,
      "Commercialize" means to engage in Commercialization.

            1.6 "Commercializing Party" shall mean Vanda, except that
      "Commercializing Party" shall mean Novartis as soon as Novartis has
      exercised either the Scenario II Option or the Scenario III Option and
      thereby has elected to Commercialize the Product.

            1.7 "Compound" shall mean the compound currently identified by
      Novartis and Novartis AG as NDD-094 or isomers or epimers thereof and any
      metabolites and salts thereof and more particularly described on Schedule
      1.7.

            1.8 "Confidential Information" has the meaning set forth in Section
      8.1.

            1.9 "Controlled" or "Controls", when used in reference to
      intellectual property, shall mean the legal authority or right of a Party
      hereto (or any of its Affiliates) to grant a license or sublicense of
      intellectual property rights to another party, or to otherwise disclose
      proprietary or trade secret information to such other Party, without
      breaching the terms of any agreement with a Third Party, infringing upon
      the intellectual property rights of a Third Party, or misappropriating the
      proprietary or trade secret information of a Third Party.

            1.10 "Co-Promotion Agreement" has the meaning set forth in Section
      2.1(b).

            1.11 "Development Costs" shall mean all reasonable costs incurred by
      Vanda after the Effective Date in developing the Product in accordance
      with this Agreement, as set out in the Development Plan, which costs shall
      [*] and including:

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         (a) all reasonable Out-of-Pocket Costs and expenses incurred;

         (b) the reasonable direct and indirect costs of internal scientific,
medical or technical personnel (including personnel expenses, travel expenses
and infrastructure costs but for the avoidance of doubt, not including the costs
of managerial, financial, legal or business development personnel) engaged in
such efforts, which costs shall be determined based on the FTE Rate, unless
another basis is otherwise agreed by the Parties in writing;

         (c) the reasonable costs and expenses of clinical supplies for such
efforts, including without limitation (i) supply cost of clinical supplies of
the Product; (ii) costs and expenses incurred to purchase and/or package
comparator or combination drugs or devices; and (iii) costs and expenses of
disposal of clinical samples;

         (d) the reasonable costs and expenses incurred in connection with
manufacturing process development and validation, manufacturing scale-up and
improvements, stability testing and quality assurance/quality control
development; qualification and validation of Third Party contract manufacturers;

         (e) the reasonable direct and indirect costs of senior management of
Vanda to the extent reasonably related to the Product and

         (f) all regulatory filing fees.

      1.12 "Development Plan" shall mean the detailed plan drafted by Vanda and
showing its intentions and estimated costs with respect to the development of
the Compound.

      1.13 "Effective Date" shall mean the date specified in the first paragraph
of this Agreement.

      1.14 "EMEA" shall mean the European Agency for the Evaluation of Medicinal
Products.

      1.15 "FDA" shall mean the U.S. Food and Drug Administration or its
successor agency.

      1.16 "Field of Use" shall mean application to all conditions, disorders
and diseases in humans.

      1.17 "First Commercial Sale" shall mean the first sale of a Product to a
Third Party by a Party or an Affiliate or sublicensee of such Party in a country
in the Territory following the obtaining of the applicable Regulatory Approval
of such Product in such country.

      1.18 "FTE Rate" shall mean a rate of $[*] per annum for the time of an
employee for a full-time equivalent person year (consisting of a total of [*]
hours per annum) of work, to be pro-rated on a daily basis (per annum amount to
be divided by [*] to produce the rate per whole day consisting of [*] hours) if
necessary, such rate to include all travel expenses.

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      1.19 "Good Clinical Practice" shall mean the current Good Clinical
Practice regulations promulgated by the FDA, published at 21 C.F.R Part 50 and
56 as such regulations may be amended, and such comparable regulations or
standards as may be applicable with respect to the design, conduct, performance,
monitoring, auditing, recording, analyses and reporting of clinical trials
outside the United States.

      1.20 "GMP" shall mean the current Good Manufacturing Practice regulations
promulgated by the FDA, published at 21 C.F.R. Part 210 et seq. as such
regulations may be amended, and such comparable regulations or standards as may
be applicable with respect to Compound or Product(s) manufactured or sold
outside the United States.

      1.21 "Investigational New Drug Application" or "IND" has the meaning set
forth in Section 2.2(a).

      1.22 "Indemnified Party" has the meaning set forth in Section 10.3.

      1.23 "Indemnifying Party" has the meaning set forth in Section 10.3.

      1.24 "Infringement Claim" has the meaning set forth in Section 6.2(a).

      1.25 "Joint Development Committee" or "JDC" shall mean the joint global
development committee to be set up by Vanda and Novartis to coordinate the
development and registration efforts described in this Agreement.

      1.26 "Loss" has the meaning set forth in Section 10.1

      1.27 "Major Market Country" means each and any of [*].

      1.28 "NDA" or "New Drug Application" shall mean a new drug application and
all amendments and supplements thereto filed with the FDA pursuant to 21 C.F.R.
Section 314, the EMEA or an equivalent Regulatory Authority in a Major Market
Country, requiring such filing, and including all documents, data and other
information concerning a pharmaceutical product which are necessary for the
gaining of Regulatory Approval seeking permission to market and sell the Product
in a Major Market Country.

      1.29 "NDA Acceptance" means the written notification by the FDA or its
equivalent outside the United States, that the NDA has met all the criteria for
filing acceptance pursuant to 21 C.F.R. Section 314.101 or such equivalent.

      1.30 "NDA Filing" means the first submission of the NDA to the FDA, EMEA
or its equivalent in a Major Market Country.

      1.31 "Net Sales" shall mean [*], less the following deductions in respect
of the Product (each as determined in accordance with International Accounting
Standards ("IAS")) if not previously deducted or reimbursed or paid by a Third
Party in the amount invoiced or received: (a) [*]

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[*]; (b) [*] to the extent included in the invoice price; (c) [*] to the extent
included in the invoice price to the customer; (d) [*], in each case
specifically identifiable as relating to Product; (e) [*]; (f) [*] to the extent
actually allowed as agreed by the parties in writing, [*]. [*] shall be
disregarded for purposes of calculating Net Sales.

        In the event that the Product is sold as part of a combination product,
the Net Sales of the Product, for the purposes of determining royalty payments,
shall be determined by [*]. In the event that [*], Net Sales for purposes of
determining royalty payments shall be mutually agreed by the Parties within a
reasonable period of time prior to the first Regulatory Approval of such
combination product based on [*], and such agreement shall not be unreasonably
withheld.

      1.32 "Novartis Know-How" shall mean any proprietary or nonproprietary
information specific to the Compound or Product within the Field of Use and of a
confidential nature necessary or useful for the manufacture, preparation or
development of the Compound or Product Controlled by Novartis and/or Novartis AG
during the term of this Agreement and shall include, without limitation, data,
knowledge and information., including chemical, stability, pharmacological,
toxicological, pre-clinical, clinical and manufacturing data, samples,
documentation, analytical standards, and gene expression data, provided that
Novartis Know-How shall not include [*].

      1.33 "Novartis Monthly Average Exchange Rate" shall mean for a currency,
the mathematical average of Reuters Daily Rates between 9:00 a.m. and 10 a.m.
Basel time and the official European Central Bank daily rate fixed at 2 p.m. for
each Business Day of a month, where applicable.

      1.34 "Novartis Patents" shall mean those Patents Controlled by Novartis AG
claiming Compound, Product, or their metabolites or any formulation of Compound,
processes, uses and intermediates of the foregoing, including those listed on
Annex 3 attached hereto. For the avoidance of doubt, such Novartis Patents shall
not include patents for [*].

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      1.35 "Out of Pocket Costs" shall mean, in accordance with International
Accounting Standards, expenses incurred by a Party and for the avoidance of
doubt, not including pre-paid amounts and capital expenditure.

      1.36 "Patents" shall mean all rights under any patents or patent
applications and any continuations, continuations-in-part, divisions,
provisionals, substitutions, patents of addition, reissues, reexamination,
renewals or extensions thereof (including any supplemental patent certificates)
and any confirmation patent or registration patent and all foreign counterparts
of any of the foregoing.

      1.37 "Payee" has the meaning set forth in Section 5.6.

      1.38 "Payor" has the meaning set forth in Section 5.6

      1.39 "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization or
government or political subdivision thereof.

      1.40 "Phase I Clinical Trial" shall mean the first phase of human clinical
trials of a drug required by the FDA to gain evidence of safety for Product(s),
as described in 21 C.F.R. 312(a), as may be amended and deemed to commence on
the date that the first patient is first dosed by or on behalf of Vanda.

      1.41 "Phase II Clinical Trials" shall mean that portion of the FDA
submission and approval process which provides for the initial trials of a
Product on a limited number of patients for the purposes of determining dose
and, evaluating safety and efficacy in the proposed therapeutic indication, as
more fully defined in 21 C.F.R. 312.21(b) as may be amended and deemed to
commence on the date that the first patient is first dosed by or on behalf of
Vanda.

      1.42 "Phase III Clinical Trials" shall mean that portion of the FDA
submission and approval process which provides for the continued trials of a
Product on sufficient numbers of patients to generate safety, efficacy and
pharmacoeconomic data to support regulatory approval in the proposed therapeutic
indication, as more fully defined in 21 C.F.R. 312.21(c) as may be amended and
deemed to commence on the date that the first patient is first dosed by or on
behalf of Vanda (and Novartis, if applicable).

      1.43 "Primary Market Research Development" shall mean all market research
activity undertaken by the Commercialising Party prior to the First Commercial
Sale.

      1.44 "Product" shall mean a formulated pharmaceutical product containing
the Compound or Back-up Compound as an active ingredient and packaged for the
use by the ultimate consumer.

      1.45 "Reasonable Commercial Efforts" shall mean the efforts and resources
[*].

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      1.46 "Regulatory Approval" shall mean, with respect to a country or group
of countries in the Territory, all authorizations by the appropriate Regulatory
Authority, governmental entity or entities necessary for commercial sale of a
Product in that country or group of countries including, without limitation and
where applicable, approval of labeling, price, reimbursement and manufacturing.

      1.47 "Regulatory Authority" shall mean the FDA, EMEA or any other
counterpart or additional governmental or regulatory agencies responsible for
applicable Regulatory Approvals.

      1.48 "Scenario I Option" has the meaning set forth in Section 2.2(c).

      1.49 "Scenario II Option" has the meaning set forth in Section 2.2(a).

      1.50 "Scenario III Option" has the meaning set forth in Section 2.2(b).

      1.51 "Sublicensee" shall mean a Person, other than a Vanda Affiliate, to
whom Vanda grants any right or license to use Novartis Patents or Novartis
Know-How or to make, use or sell any Product under all or part of Novartis'
Patents or Novartis' Know-How in the Territory.

      1.52 "Supply Agreement" has the meaning set forth in Section 3.2.

      1.53 "Support" or "Supporting" shall mean the preparation, filing,
prosecution, maintenance, renewal and defense of a Patent.

      1.54 "Term" has the meaning set forth in Section 9.l(a).

      1.55 "Territory" shall mean all the countries and territories of the
world.

      1.56 "Third Party" shall mean any Person or other entity other than
Vanda, Novartis, Novartis AG or their respective Affiliates of rights conveyed
under this Agreement.

      1.57 "Valid Claim" shall mean (i) an unexpired or issued claim of a
Novartis Patent which claim has not been held invalid or unenforceable by final
decision of a court or other governmental agency of competent jurisdiction,
unappealable or unappealed within the time allowed for appeal, and which is not
admitted to be invalid or unenforceable through reissue, disclaimer or otherwise
or (ii) pending patent application that is a Novartis Patent Right, which claim
was filed in good faith and has not been abandoned or finally disallowed without
the possibility of appeal or refiling of said application.

      1.58 "Vanda Technology" means all Patents and know-how that are (i)
generated, identified, discovered, created or made by Vanda, its employees or a
Third Party on behalf of Vanda, (ii) controlled by Vanda, and (iii) necessary to
manufacture, use, research, develop, sell or seek regulatory approval,
including, without limitation, manufacturing processes, formulations, modes of
delivery and methods of use for the Compound, Back-up Compound, or Products
developed by Vanda pursuant to its development work with the Compound or the
Back-up Compound.

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                                    ARTICLE 2
                                     LICENSE

      2.1 Grant to Vanda.

         (a) Subject to the terms and conditions of this Agreement, on the
Effective Date, Novartis and Novartis AG hereby grant to Vanda an exclusive
license, with the right to sublicense with the prior written consent of Novartis
and Novartis AG, such consent not to be unreasonably withheld, under the
Novartis Patents and Novartis Know-How, to develop, use, make and have made
Compound and Product in the Field of Use and in the Territory.

         (b) Subject to the Scenario II Option pursuant to Section 2.2(a) and
Scenario III Option pursuant to Section 2.2(b) and the Co-Promotion Option
pursuant to Section 2.3(a) and (b), Vanda shall have an exclusive license to
Commercialize the Compound and Product, with right to sublicense without
consent.

         (c) Novartis AG and Novartis retain all rights to Novartis Patents and
Novartis Know-How except to the extent explicitly granted to Vanda hereunder.

      2.2 Option

         (a) Scenario II Option. Upon the execution of this Agreement, Vanda
agrees and undertakes that it shall commence Phase II Clinical Trials for the
Product on [*]. [*] shall be responsible for the conduct [*] of each of the
Phase I Clinical Trials and Phase II Clinical Trials which it elects to conduct.
Within [*] of the completion of the Phase II Clinical Trials, Vanda shall
provide Novartis with a full written report of the results of the Phase II
Clinical Trials, including the conclusions thereof. Upon request by Novartis,
Vanda shall [*]. Novartis shall have [*] immediately following the delivery to
Novartis of the final Phase II Clinical Trial report to provide notice of
exercise to Vanda stating, that Novartis wishes to co-develop and Commercialize
the Product (the "Scenario II Option").

         Upon exercise of the Scenario II Option, Novartis shall [*] and
Novartis shall [*]. After the exercise of the Scenario II Option, Vanda shall
[*]. As per Section 4.2 below Novartis shall [*]. Subject only to the option to
co-promote in Section 2.3(c) below, under Scenario II Novartis and its
Affiliates shall have the exclusive rights for the Commercialisation of the
Compound or Product and Vanda shall grant Novartis an exclusive license under
the Vanda Technology.

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         Upon the exercise of the Scenario II Option by Novartis the Scenario I
Option, pursuant to Section 2.2(c) below and Scenario III Option pursuant to
Section 2.2(b) below as well the Co-Promotion Option pursuant to Section 2.3 (a)
and (b) shall be deemed expired.

         (b) Scenario III Option. In the event that Novartis does not exercise
its Scenario II Option, Vanda will consider the results of the Phase II Clinical
Trial and may elect to commence Phase III Clinical Trials for the Product within
[*] of the delivery of the final Phase II Clinical Trial report to Novartis.
Vanda shall provide written notice of such election to Novartis. Upon such
election, Vanda shall [*]. If Novartis does not receive such election notice
within the [*] period, Novartis may terminate this Agreement according to
Section 9.3. Within [*] of the completion of the Phase III Clinical Trials,
Vanda shall provide Novartis with a full written report of the results of the
Phase III Clinical Trials, including the conclusions thereof. The Phase III
Clinical Trials shall be performed in accordance with a plan reviewed with the
relevant Regulatory Authority in a post Phase IIB meeting and be approved by the
JDC. Upon request by Novartis Vanda shall [*]. Novartis shall have [*]
immediately following the delivery to Novartis of the final Phase III Clinical
Trials report to provide written notice to Vanda of exercise stating, Novartis
wishes to Commercialize the Product (the "Scenario III Option").

         Upon exercise of the Scenario III Option, Novartis shall [*] and
Novartis shall [*]. As per Section 4.2 below Novartis shall [*] immediately
after the exercise of the Scenario III Option. Subject only to the option to
co-promote in Section 2.3(c) below, under Scenario III Novartis and its
Affiliates shall have the exclusive rights for the Commercialisation of the
Compound or Product and Vanda shall grant Novartis and exclusive license under
the Vanda Technology.

         Upon the exercise of the Scenario III Option by Novartis the Scenario I
Option pursuant to Section 2.2(c) below and the Co-Promotion Option pursuant to
Section 2.3(a) and (b) shall be deemed expired.

         (c) Scenario I Option. In the event that Novartis does not exercise the
Scenario II Option or the Scenario III Option, Novartis shall be deemed to have
exercised the Scenario I Option. Under Scenario I Vanda shall be fully
responsible for the entire development, manufacturing and Commercialisation of
the Compound and the Product. Subject to the option to co-promote in Section 2.3
(a) and (b) below, under Scenario I Novartis shall have no right or obligation
to the Commercialisation of the Compound or Product. Within [*] of the last date
for Novartis to exercise the Scenario III Option, but did not exercise such
option, Vanda shall [*].

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          (d) Good Clinical Practices. All Phase I Clinical Trials, Phase II
Clinical Trials or Phase III Clinical Trials conducted by Vanda pursuant to this
Agreement shall be conducted in accordance to Good Clinical Practice.

      2.3 Co-Promotion Option.

          (a) Novartis First Right of Refusal - If pursuant to section 2.2(c)
above Novartis is deemed to have exercised its Scenario I Option, and Vanda
decides to co-promote the product with a Third Party, Vanda shall notify
Novartis in writing of its intention to co-promote the Products with such a
co-promotion partner. Novartis will have [*] from the date Vanda notifies
Novartis of its intention to co-promote the Product with a Third Party to
provide written notice of its intent to exercise its option to co-promote the
Product with Vanda and to negotiate in good faith a Co-Promotion Agreement on
commercially reasonable terms and conditions.

          (b) If after such [*] period, the Parties have not entered into a
Co-Promotion Agreement, Vanda would be free to enter into an arrangement with
[*]; provided, that Vanda will provide Novartis a last opportunity to submit a
Matching counteroffer on terms no less favorable to Vanda than those terms last
offered [*]. Vanda shall [*]; provided, however, that Vanda shall not be
required to disclose the identity of such Third Party. Within [*] of Novartis'
receipt of the written notice, Novartis will respond to Vanda in writing
regarding Novartis' interest in Matching the counter-offer. During the same [*]
period following receipt of such notice from Vanda, Novartis may submit to Vanda
the counter-offer. Vanda shall consider such counteroffer from Novartis in good
faith and agree to negotiate with Novartis in the event that the terms of such
Novartis counteroffer are more favourable to Vanda than those of a bona fide
definitive agreement negotiated by Vanda with a Third Party. As used herein,
"Matching" shall mean [*] or (ii) [*].

          (c) If Novartis exercises its Scenario II Option or Scenario III
Option, and intends to co-promote the product in a Major Market Country with a
Third Party, Novartis shall notify Vanda in writing of its intention to
co-promote the Products with a co-promotion partner. Vanda will have [*] from
the date Novartis notifies Vanda of its intention to co-promote the Product to
provide written notice of its intent to exercise its option to co-promote the
Product with Novartis on commercially reasonable terms and conditions to be
negotiated in good faith and set forth in the Co-Promotion Agreement. If after
[*] of such good faith negotiations there is no agreement on the

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terms of the Co-Promotion Agreement between the Parties, Novartis shall be free
to co-promote the Product with a Third Party.

                                    ARTICLE 3
                             MANUFACTURE AND SUPPLY

      3.1 Provision of Compound. Within [*] of the Effective Date, Novartis will
provide to Vanda, [*], 20 kg of Compound substance [*] as well as adequate data
in connection with the development of the Compound and Product. Further Novartis
shall sell to Vanda and Vanda shall buy [*] from Novartis the remaining Compound
available at Novartis in addition to the 20 kg specified in this Section 3.1 at
the terms and conditions specified in Schedule 3.1. For the avoidance of doubt,
Novartis makes no representation or warranty that any quantities of Compound
provided to Vanda under this Agreement will meet the GMP standards,

      3.2 Right to Manufacture Clinical Supply. Within [*] of the Effective
Date, the Parties shall determine whether Novartis will manufacture and supply
to Vanda the clinical supplies of Compound and/or Product, and the parties shall
negotiate the terms and conditions of a clinical supply agreement pursuant to
which the Compound shall be supplied. To the extent that the Parties do not
enter into an agreement for the supply of Compound for clinical purposes within
[*], then Novartis shall co-operate in all reasonable respects to transfer such
Novartis Know-How to Vanda and provide such other assistance reasonably
necessary in order to enable Vanda or a Third Party to supply clinical supplies
of Compound and/or Product.. Novartis shall have exclusive rights to manufacture
the Compound and Product in the event that Novartis exercises either the
Scenario II Option or the Scenario III Option.

      3.3 Transfer of Novartis Know-How and Novartis Patent Files. In
furtherance of the activities contemplated by this Agreement, Novartis and
Novartis AG each shall, or shall cause its Affiliates to, transfer as promptly
as possible to Vanda the Novartis Know-How and the files of the Novartis
Patents, including copies of all relevant laboratory notebook information,
screening data and synthesis schemes clinical trial information and clinical
trial raw and derived datasets, which includes description in any forms, data
and other information disclosed or transferred to Vanda before the Effective
Date. Banked DNA samples and or animal tissues treated with the compound will
only be made available to Vanda for further studies in accordance with the
protocols and informed consents set forth at the time of sample acquisition
provided however that no human tissue samples with identifiable patient data
will be transferred to Vanda. All raw data and individual clinical and genetic
data will be transferred to Vanda under a mutually agreed coding schema, in
order to protect patient confidentiality. All original identifiable patient data
will, however be provided to the FDA as part of the submission package. If Vanda
requires additional genotyping on existing samples, Novartis will contract this
work out, in accordance with the informed consents, on Vanda's

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behalf [*]. If further DNA samples from past study patients are desired, Vanda
will revisit the sites and try to consent or reconsent these patients for
additional DNA sampling. Novartis and Vanda shall [*]. In addition, Novartis and
Novartis AG shall make a Novartis representative familiar with the Novartis
Know-How and the files of the Novartis Patents reasonably available within
reasonable office hours of the relevant employee to assist Vanda with the
transfer as well as to answer any questions Vanda may have concerning such
transferred information. In the event a translator is necessary or any of the
materials need to be translated into English, the Parties shall [*]. Upon
Novartis' exercise of the Scenario II option Vanda shall [*].

      3.4 Transfer of Pharmacovigilance obligations and IND. In furtherance of
the activities contemplated by this Agreement, Novartis and Novartis AG each
shall, or shall cause its Affiliates to, transfer to Vanda the IND, including
copies of all relevant registration dossiers. Such transfer shall however be
subject to the transfer of all Pharmacovigilance obligations, with respect to
clinical trials of Products performed prior to the Effective Date by Novartis to
Vanda or Vanda's Affiliates.

                                    ARTICLE 4
                       DEVELOPMENT AND COMMERCIALIZATION

      4.1 Development. Subject to the exercise by Novartis of either the
Scenario II Option or the Scenario III Option, Vanda shall be responsible for
overall development and regulatory filings for the Product in the Territory.
Vanda shall use its Reasonable Commercial Efforts to perform its obligations
under this Agreement and cause or cause to be done, all things necessary to
perform the obligations contemplated hereby. Vanda shall use Reasonable
Commercial Efforts to make all registrations, filings and applications, to give
all notices to the relevant Regulatory Authority and obtain any governmental
transfers, approvals, orders, qualifications and waivers necessary or desirable
for the commercialisation of the Product hereby.

      4.2 The JDC shall be set up within four (4) weeks of the Scenario II
Option and shall be comprised of at least one member from Vanda and Novartis
respectively (or further equal numbers from both Parties on an ad hoc basis as
is agreed), plus the chairman [*] to assist in a consistent and harmonized
development of the Product under this Agreement, it being understood that each
member shall be entitled and expected to consult with their organization. The
JDC shall discuss development and registration issues and shall co-ordinate the
development and registration efforts described in this Agreement. Meetings of
the JDC shall be at such times and places and in such form (e.g., in person,
telephonic or video conference) as the members of the JDC shall determine but
shall meet at least once every [*]. Representatives of both Novartis and Vanda
shall be present at any meeting of the JDC. Decisions of the JDC shall be made
by a majority vote at a telephone or video conference or by a written consent
signed by

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<PAGE>
[*]. The JDC shall keep minutes of its deliberations (or appoint a secretary to
do so) setting forth, amongst other matters, all proposed actions and all votes
thereon.

      4.3 All records of the JDC shall at all times be available to the Parties.
The JDC may delegate to one Party or to a specific representative the authority
to make certain decisions. The costs incurred by each Party through its
participation in the JDC shall [*].

      4.4 [*] Reports. While the Compound is under development and until the
completion of Phase II and Phase III Clinical Trials, Novartis will receive
reports every [*] within [*] after the end of [*]. Such reports shall set forth
in summary form the results of development work performed and costs incurred
during the preceding [*] period and the planned development work, time-lines,
launch plans, estimated costs to be incurred and commercialisation to be
performed [*] and explain to Novartis in detail the reasons for [*].

      4.5 [*] in Development. If either (1) Vanda should decide to discontinue
the development of the Compound into Product or (2) if a time period of more
than [*] elapses [*] prior to [*] or (3) more than [*] elapses between [*], it
shall promptly notify Novartis in person and in writing and all licenses granted
hereunder will thereupon automatically terminate. Vanda will make available to
Novartis all results of development work carried out up to the point of
discontinuance and Novartis shall have a non-exclusive license to use all such
results of the Vanda Technology solely for use in any future development or
commercialisation work to be carried out in respect of the Compound, Product or
Back-up Compound. Should the Compound ultimately become a commercialized
Product, a [*] % royalty on Net Sales will be payable to Vanda by Novartis where
such Net Sales are [*]. For [*], Novartis shall pay to Vanda a royalty of [*]
per cent on Net Sales for a period of five (5) years after the First Commercial
sale of a Product.

      4.6 Regulatory and Marketing Efforts

         (a) Market Launch. The Commercializing Party shall use Reasonable
Commercial Efforts to seek marketing authorizations in Major Market Countries
and effect the introduction of Product into Major Market Countries within [*] of
such Product completing the Regulatory Approval process..

         (b) [*]. Subject to the terms and conditions of the Co-Promotion
Agreement, if entered into by the Parties, [*] shall be responsible for [*] all
Commercialization of Product in the

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<PAGE>
Territory. [*] shall have sole responsibility for all Primary Market Research
Development

      4.7 Commercialisation. [*] shall have full responsibility for the costs of
the Commercialisation unless otherwise agreed in writing by the parties.

                                    ARTICLE 5
                                    PAYMENTS

      5.1 Upfront Payment. Within [*] of the Effective Date, Vanda shall pay to
Novartis an upfront payment of [*].

      5.2 [*]. Vanda shall pay to Novartis [*] a milestone payment upon [*]
should Vanda's aggregate expenditure on [*] not reach [*]. If upon the [*],
Vanda's cost of [*] exceeds, and is less than [*], Vanda will pay to Novartis a
milestone payment equal to [*] minus the cost of [*].

      5.3 Outside Funding from a Third Party. If Novartis has not exercised its
Scenario II Option and Vanda needs outside funding to support further
development, Vanda will provide written notice to Novartis of Vanda's intention
to seek a Third Party partner to assist Vanda with the continued development of
the Compound. Novartis will have [*] from its receipt of such notice to inform
Vanda if Novartis is willing to provide a secured interest-bearing loan facility
to Vanda on terms to be negotiated, to be used to fund all subsequent
development costs that Vanda may need to complete its obligations as set out in
the Development Plan (or the Development plan amendments as approved by the
JDC). In the event that Vanda receives debt funding from a Third Party it shall
not grant any interest to that Third Party which conflict with its obligations
to Novartis. If Vanda requests that Novartis relinquish Novartis' Scenario III
Option rights (primarily for the purposes of securing Third Party outside
funding), financial consideration for these rights shall be negotiated between
Vanda and Novartis.

      5.4 Milestone Payments by Vanda

      (a) Scenario I Milestone Payments. In the event that Novartis does not
exercise its Scenario II Option or Scenario III Option, and Vanda continues with
the development, manufacture and Commercialization of the Product, then Vanda
will pay to Novartis or Novartis AG (as specified) upon achieving the following
milestones in addition and not instead of any payments received prior to such
milestones:

<Table>
<Caption>
MILESTONE                                                     UNITED STATES DOLLARS
<S>                                                           <C>
[*]                                                           [*] to Novartis AG
</Table>

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                                  Page 15 of 44
<PAGE>
<Table>
<Caption>

<S>                                                           <C>
[*]                                                           [*] to Novartis AG
[*]                                                           [*] to Novartis
</Table>

Each such milestone shall be payable [*] upon the [*].

      5.5 Milestone Payments by Novartis

         (a) Scenario II Milestone Payments. In the event that Novartis
exercises its Scenario II Option, then, Novartis shall pay to Vanda the
following milestones:

<Table>
<Caption>

MILESTONE                                                     UNITED STATES DOLLARS
<S>                                                           <C>
[*]                                                           [*]
[*]                                                           [*]
[*]                                                           [*]
[*]                                                           [*]
</Table>

Each such milestone shall be payable [*] upon [*].

         (b) Scenario III Milestone Payments. In the event that Novartis
exercises its Scenario III Option, Novartis shall pay to Vanda the following
milestones:

<Table>
<Caption>

MILESTONE                                                     UNITED STATES DOLLARS
<S>                                                           <C>
[*]                                                           [*]
[*]                                                           [*]
[*]                                                           [*]
</Table>

Each such milestone shall be payable [*] upon [*].

      5.6 Timing.

         Payment to be made by one Party (the "Payor") to the other ("Payee")
shall be made within [*] after its receipt of notification by the Payee of the
occurrence of a milestone event giving rise to a payment obligation hereunder,
with an accompanying invoice from the Payee. All payments shall be made by wire
transfer in United States Dollars to the credit of such bank account as may be
designated, from time to time, by the Payor in writing. Vanda may receive a
milestone amount stated in this clause (if payable) [*] from the applicable
paying Party.

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                                  Page 16 of 44

<PAGE>
      5.7   Development Costs.

            (a) Scenario I or Scenario III Development Costs. In the event that
either the Scenario I Option or Scenario III Option applies, [*] will be
responsible for all Development Costs for Product.

            (b) Scenario II Development Costs. In the event that Novartis
exercises its Scenario II Option, Novartis will [*]. Thereafter, Novartis shall
pay [*] and Vanda will provide Novartis with [*] invoices for [*] and Novartis
will pay such invoices within [*] of the date of such invoice. Vanda shall [*].

      5.8   Royalties.

            (a) Payment.

                  (i) Scenario I Royalty. In the event that Novartis does not
exercise its Scenario II Option or Scenario III Option, Vanda will pay to
Novartis a [*] percent ([*]%) royalty on annual Net Sales of Product by Vanda,
its Affiliates and Sublicensees in the Territory in consideration of the license
granted under the Novartis Know-How and Novartis Patents.

                  (ii) Scenario II Royalty. In the event that Novartis exercises
its Scenario II Option, Novartis will pay to Vanda a [*] percent ([*]%) royalty
on annual Net Sales of Product by Novartis, its Affiliates and Sublicensees in
the Territory in consideration of the license granted under the Vanda
Technology.

                  (iii) Scenario III Royalty. In the event that Novartis
exercises its Scenario III Option, Novartis will pay to Vanda a [*] percent
([*]%) royalty on annual Net Sales of Product by Novartis, its Affiliates and
Sublicensees in the Territory in consideration of the license granted under the
Vanda Technology.

                  (iv) Each of the foregoing shall be collectively and
individually referred to as "Royalties".

            (b) Royalty Offset for Third Party Royalty Payments. The
Commercialising Party may require additional patented technologies to which no
Party has rights, from a Third Party, in order to develop, manufacture and
Commercialize the Compound or Products. As between Novartis and Vanda, the
Commercialising Party shall have the right to deduct [*] ([*]%)of such third
person royalty or consideration from the royalty owed to the other Party on Net
Sales of the Product in such country, provided that any deduction under this
Section shall not exceed [*] ([*]%) of the royalty percentage (e.g. [*])
otherwise due to the other Party for Net Sales from that country.

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<PAGE>
            (c) Royalty Offset for Third Party Intellectual Property
Infringement. As between Novartis and Vanda and in the event that the
manufacture, use or sale of Compound or Product in any country infringes a Third
Party patent and the Commercialising Party must pay to a Third Party a royalty
or consideration accordingly, the Commercialising Party shall have the right to
deduct such third person royalty or consideration from the royalty owed to the
other Party on Net Sales of the Product in such country, provided that any
deduction under this Section shall not exceed [*] ([*]%) of the royalty
percentage [*] otherwise due to the other Party for Net Sales from that country,
and provided further that such deduction shall be in addition to any
indemnification for breach of representation that such Party may be entitled to
receive under this Agreement.

            (d) Countries With No Valid Claim Covering Product. As between
Novartis and Vanda and for countries where there is no Valid Claim of an
applicable Patent related to the Compound or Product or a method of use thereof,
Royalty amounts payable by the Commercialising Party with respect to the Net
Sales of Product in such country shall be reduced by [*] percent ([*]%).

            (e) As between Novartis and Vanda and the maximum Royalty relief
which may be claimed by the Commercialising Party in respect of this Section 5.8
in any one country is [*] percent ([*]%) of the royalty otherwise due to the
other Party.

            (f) Term for Royalty Payments. Royalties shall be payable on a
country by country basis from the First Commercial Sale until the later of
either the last applicable Patent to expire (including extensions thereof) with
a Valid Claim which in absence of the license would be infringed by the
Compound, the Product or a method of use thereof, or five (5) years from the
date of First Commercial Sale of a Product.

      5.9   Sales Reports.

            (a) Substance of Reports. After the First Commercial Sale of Product
and during the term of this Agreement, the Commercializing Party shall furnish
or cause to be furnished to the other Party on a [*] basis no later than [*]
after the end of the preceding [*] a written report showing the Net Sales of
Product in each country in the Territory.

            (b) Timing. Final yearly reports shall be due on [*] following the
close of the calendar year.

            (c) Records. The Commercializing Party shall keep accurate records
in sufficient detail to enable the amounts due hereunder to be determined and to
be verified by an independent certified public accountant mutually agreed upon
by the Parties pursuant to Section 5.4(e).

            (d) Vanda Currency Exchange. With respect to payments to be made by
Vanda to Novartis in respect of Net Sales invoiced in United States Dollars, the
Net Sales and

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                                  Page 18 of 44

<PAGE>
the amounts due to Novartis hereunder shall be expressed in United States
Dollars. With respect to Net Sales invoiced in a currency other than United
States Dollars, the Net Sales shall be expressed in the domestic currency of the
entity making the sale, together with the Dollar equivalent, calculated using
the arithmetic average of the spot rates on the last Business Day of each month
of the calendar quarter in which the Net Sales were made. The "closing mid-point
rates" found in the "dollar spot forward against the dollar" table published by
The Financial Times or any other publication as agreed to by the Parties shall
be used as the source of spot rates to calculate the average as defined in the
preceding sentence. All payments shall be made in United States Dollars. If at
any time legal restrictions in any country in the Territory prevent the prompt
remittance of any payments with respect to sales in that country, Vanda shall
have the right and option to make such payments by depositing the amount thereof
in local currency to Novartis' account in a bank or depository in such country.

            (e) Novartis Currency Exchange. With respect to royalty payments to
be made by Novartis to Vanda in relation to Net Sales invoiced in United States
Dollars, payments to Vanda by Novartis shall be made in United States Dollars.
With respect to the calculation of royalty payments to be made by Novartis to
Vanda in relation to Net Sales invoiced in a currency other than United States
Dollars, for the conversion of the Net Sales amount into United States Dollars,
the Novartis Monthly Average Exchange Rate or such other standard methodology
for currency conversion as employed by Novartis at that time, shall be used.

            (f) In the event of a co-commercialization between Vanda and
Novartis, local payments to be made between Vanda and Novartis shall be made in
the applicable local currency.

            (g) Royalty Payment Due Date; Accrual. Royalties which have accrued
during any calendar year and are required to be shown on a sales report provided
for under this Section 5.4 (a) of this Agreement shall be due and payable on the
date such sales report is due.

                  (i) The Commercializing Party, its Affiliates and Sublicensees
            shall keep for [*] from the date of each payment of royalties
            complete and accurate records of sales by the Commercializing Party
            and its Affiliates and Sublicensees of Product in sufficient detail
            to allow the accruing royalties to be determined accurately.

                  (ii) The non-Commercializing Party shall have the right for a
            period of [*] after receiving any report or statement with respect
            to royalties due and payable to appoint an independent certified
            public accountant reasonably acceptable to the Commercializing Party
            to inspect the relevant records of the Commercializing Party and its
            Affiliates and Sublicensees to verify such report or statement not
            more than [*].

                  (iii) The Commercializing Party and its Affiliates and
            Sublicensees shall each make its records available for inspection by
            such independent certified public accountant during regular business
            hours at such place or

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                                  Page 19 of 44

<PAGE>

            places where such records are customarily kept, upon reasonable
            notice from the non-Commercializing Party, solely to verify the
            accuracy of the reports and payments. Such inspection right shall
            not be exercised [*].

                  (iv) The non-Commercializing Party agrees to hold in strict
            confidence all information concerning royalty payments and reports,
            and all information learned in the course of any audit or inspection
            (and not to make copies of such reports and information), except to
            the extent necessary for the non-Commercializing Party to reveal
            such information in order to enforce its rights under this Agreement
            or if disclosure is required by law, regulation or judicial order.
            The results of each inspection, if any, shall be binding on both
            Parties.

                  (v) The non-Commercializing Party shall pay for such
            inspections, except that in the event there is any upward adjustment
            in aggregate royalties payable for any year shown by such inspection
            of [*] ([*]%) of the amount paid, the Commercializing Party shall
            pay for such inspection. Any overpayments shall be fully creditable
            against amounts payable in subsequent payment periods.

                  (vi) The Commercializing Party shall include in each
            sublicense or marketing agreement entered into by it pursuant to
            this Agreement a provision requiring the Sublicensee or marketing
            partner to keep and maintain adequate records of sales made pursuant
            to such sublicense or marketing agreement and to grant access to
            such records by the aforementioned independent public accountant for
            the reasons specified in this Section.

      5.10 Tax Withholding. The withholding tax, duties, and other levies (if
any) applied by a government of any country of the Territory on payments made by
one Party (the "Payor") to the other ("Payee") hereunder shall be borne by [*].
[*] shall cooperate with [*] to enable [*] to claim exemption therefrom under
any double taxation or similar agreement in force and shall provide to Payee
proper evidence of payments of withholding tax and assist [*] by obtaining or
providing in as far as possible the required documentation for the purpose of
[*] tax returns.

      5.l1. Interest Due. In case of any delay in payment by Vanda to Novartis
not occasioned by Force Majeure, interest on the overdue payment shall accrue at
an annual interest rate, compounded monthly, equal to the three month London
Interbank Offer Rate (LIBOR) as determined for each month on the last Business
Day of that month, assessed from the day payment was initially due. The
foregoing interest shall be due from Vanda without any special notice.

      5.12 Payments to Novartis. A11 payments to be made by Vanda shall be made
to the following bank account of Novartis and Novartis AG:

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<PAGE>

Bank: [*]
Swift: [*]
Correspondent Bank for USD: [*]
USD Account Novartis AG, Basel / Switzerland: [*]
USD Account Novartis Pharma AG, Base1 / Switzerland:[*]

      5.13 Pavements to Vanda. All payments to be made by Novartis shall be made
to the following bank account of Vanda:

[*]
ABA: [*]
Account #: [*]
Account Name: [*]

                                    ARTICLE 6
                              INTELLECTUAL PROPERTY

      6.1 Novartis Patentable Inventions and Know-How.

      Any invention made by Novartis shall be owned by Novartis and any
invention made by Vanda shall be owned by Vanda.

            (a) Novartis Patent Prosecution.

                  (i) During the term of the Agreement, [*] shall, diligently
            and in the reasonable exercise of its commercial discretion, Support
            the Novartis Patents in the countries where such Novartis Patents
            are filed as of the Effective Date. Except as provided in Paragraph
            6.l(a)(ii) for discontinued Novartis Patents, the Parties will [*].

                  (ii) If [*] does not intend to file for patent protection or
            does not wish to continue Supporting a Novartis Patent, (a
            "discontinued Novartis Patent") then it shall give at least [*]
            advance notice, and in no event less than a reasonable period of
            time for the other Party to act in its stead.

                        {A) In such case, the other Party may elect at its sole
                  discretion to continue Supporting the discontinued Novartis
                  Patent [*].

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<PAGE>
                        (B) Discontinuance may be elected on a
                  country-by-country basis or for a patent application or patent
                  series in total.

            (b) Co-operation. [*] will consult with the other Party and will
keep the other Party continuously informed of all matters relating to Support of
the Novartis Patents.

                  (i) [*] shall provide the other Party with a copy of any
            Novartis Patents relating to the Compound or Product, prior to
            filing the first of such Patents in any jurisdiction and copies of
            all material correspondence with the relevant patent office
            pertaining to the Novartis Patents and relating to the Compound or
            Product.

                  (ii) In no event shall a Party relinquish control of the
            prosecution of Novartis Patents to a Third Party.

      6.2   Infringement Claims by Third Parties.

            (a) Notice. If the manufacture, use or sale of Product under the
Novartis Patents results in a claim or a threatened claim by a Third Party
against a Party hereto for patent infringement or for inducing or contributing
to patent infringement ("Infringement Claim"), the Party first having notice of
an Infringement Claim shall promptly notify the other in writing. The notice
shall set forth the facts of the Infringement Claim in reasonable detail.

            (b) Third Party Licenses. In the event that exploitation under the
Novartis Patents in connection with manufacture, use or sale of Compound or
Product in a country would infringe a Third Party Patent and a license to such
Third Party Patent is available and [*] seeks such a license, the Parties agree
that [*].

            (c) Litigation. In the event of the institution of any suit by a
Third Party against Vanda as a result of Vanda's manufacture, use or sale of
Compound or Product, Vanda shall have the right but not the obligation to defend
such suit [*]. Novartis shall cooperate and assist Vanda in any such litigation
[*].

      6.3   Infringement Claims Against Third Parties.

            (a) Cooperation. Novartis and Vanda each agree to take reasonable
actions to protect Novartis Patents from infringement, subject to the terms of
this Section 6.3. If one Party brings any such action or proceeding, the second
Party may be joined as a Party plaintiff if necessary for the action or
proceeding to proceed and, in case of joining, the second Party agrees to give
the first Party reasonable assistance and authority to file and to prosecute
such suit.

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            (b) Notice. If any Novartis Patents are infringed by a Third Party,
the Party to this Agreement first having knowledge of such infringement, or
knowledge of a reasonable probability of such infringement, shall promptly
notify the other in writing. The notice shall set forth the facts of such
infringement in reasonable detail.

            (c) Institution of Proceedings. [*] shall have the primary right,
but not the obligation, to institute, prosecute, and control with its own
counsel [*] any action or proceeding with respect to infringement of the claims
of such Novartis Patents and the other Party shall have the right, but not the
obligation at its own expense, to be represented in such action by its own
counsel.

            (d) Failure to Institute Proceedings. If [*] fails to institute,
prosecute, and control such action or prosecution and fails to do so within a
period of [*] after receiving notice of the infringement, [*] shall have the
right but not the obligation to bring and control any such action by counsel of
its own choice, and [*] shall have the right [*], to be represented in any such
action by counsel of its own choice.

            (e) Division of Damages Award. Each Party shall[*]. Any excess
amount awarded in damages shall [*].

            (f) Settlement. The Parties shall keep each other informed of the
status of and of their respective activities regarding any litigation or
settlement thereof concerning Product; provided, however, that no settlement or
consent judgment or other voluntary final disposition of a suit under this
Section [*].

      6.4 Notice of Certification. Novartis and Vanda each shall immediately
give notice to the other of any certification filed under the "U.S. Drug Price
Competition and Patent Term Restoration Act of 1984" (or its foreign equivalent)
claiming that a Novartis Patent is invalid or that infringement will not arise
from the manufacture, use or sale of any Product by a Third Party ("Hatch-Waxman
Suit Notice").

            (a) Within [*] after receipt of notice of such certification [*]
shall give written notice to [*] of its decision as to whether to bring a suit
[*] within a [*] period from the date of such certification. Should [*] inform
[*] that it is not to bring a suit, then [*] shall be free to immediately bring
such a suit in its name. If [*] brings suit, at [*] written request [*] agrees
to be named as a party to such suit. If [*] brings such a suit, at [*] written
request [*] agrees to be named as a party to such suit.

            (b) [*] may then, but is not required to, bring suit against
the party that filed the certification.

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<PAGE>
            (c) Any suit by [*] or [*] shall either be in the name of [*] or in
the name of [*], or jointly in the name of [*] and [*], as may be required by
law.

            (d) For this purpose, the Party not bringing suit shall execute such
legal papers necessary for the prosecution of such suit as may be reasonably
requested by the Party bringing suit.

      6.5 Patent Term Extensions. The Parties shall cooperate in good faith with
each other in gaining patent term extensions wherever applicable to Novartis
Patents covering Compound or Product.

            (a) Vanda and Novartis shall jointly determine which Novartis
Patents shall be extended.

            (b) All filings for such extension shall be made by the Party
responsible for prosecution and maintenance of the Novartis Patent, provided,
however, that in the event that the Party who is responsible for prosecution and
maintenance of the Novartis Patent elects not to file for an extension, such
Party shall (i) inform the other Party of its intention not to file and (ii)
grant the other Party the right to file for such extension.

      6.6 Trademarks. No trade mark shall be included in the licences granted to
Vanda under this Agreement. The parties agree to negotiate the terms of a
further agreement governing trade marks related to the Compound or Product.

                                    ARTICLE 7
                         REPRESENTATIONS AND WARRANTIES

      7.1 Novartis AG and Novartis Representations and Warranties. Each of
Novartis and Novartis AG hereby represents and warrants to Vanda as of the
Effective Date that:

            (a) This Agreement has been duly executed and delivered by it and
constitutes the valid and binding obligation of it, enforceable against it in
accordance with its terms except as enforceability may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors' rights generally and by general equitable
principles. The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action on the part of it, its officers and
directors;

            (b) to the best of Novartis' and Novartis AG's knowledge, the
Novartis Patents and Novartis Know-How exist and neither Novartis nor Novartis
AG have information that would render any Patent invalid or unenforceable,
except as disclosed to Vanda or available to Vanda in public information;
notwithstanding anything to the contrary in this Agreement, in no event shall
Novartis or Novartis AG be deemed to have guaranteed the validity of the
Patents.

            (c) it has not previously assigned, transferred, conveyed or
otherwise encumbered its right, title and interest in Novartis Patents;

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THE OMITTED PORTIONS.

                                  Page 24 of 44

<PAGE>

            (d) to the best of Novartis AG's knowledge, (i) it is the sole and
exclusive owner of the Novartis Patents, (ii) all of which are free and clear of
any liens, charges and encumbrances, and (iii) no other person, corporate or
other party entity, or governmental entity or subdivision thereof, has or shall
have any claim of ownership with respect to the Novartis Patents, whatsoever;

            (e) So far as it is aware, the execution, delivery and performance
of this Agreement does not conflict with any agreement, instrument or
understanding, oral or written, to which it is a Party or by which it may be
bound, and, to the best of its knowledge, does not violate any material law or
regulation of any court, governmental body or administrative or other agency
having authority over it that would be inconsistent with the obligations under
this Agreement;

            (f) It is not subject to any order, decree or injunction by a court
of competent jurisdiction which prevents or materially delays the consummation
of the transactions contemplated by this Agreement.

            NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY AND
SPECIFICALLY DISCLAIMS ANY GUARANTEE THAT THE DEVELOPMENT OF COMPOUND OR
PRODUCTS WILL BE SUCCESSFUL, IN WHOLE OR IN PART, OR THAT NOVARTIS PATENTS AND
NOVARTIS KNOW- HOW WILL BE SUITABLE FOR COMMERCIALIZATION OR THAT THE COMPOUND
AND/OR PRODUCTS WILL BE SUITABLE FOR USE WITH ANY ADDITIONAL PATENTED
TECHNOLOGIES LICENSED FROM A THIRD PARTY. NOVARTIS AND NOVARTIS AG EXPRESSLY
DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE
WITH RESPECT TO NOVARTIS PATENTS AND NOVARTIS KNOW-HOW, INCLUDING WITHOUT
LIMITATION, ANY WARRANTY OR MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE
OR NON-INFRINGEMENT.

      7.2 Vanda Representation And Warranty. Vanda hereby represents and
warrants to each of Novartis and Novartis AG as of the Effective Date that:

            (a) The execution, delivery and performance of this Agreement by
Vanda does not conflict with any agreement, instrument or understanding, oral or
written, to which it is a Party or by which it may be bound, and, to the best of
its Knowledge, does not violate my material law or regulation of any court,
governmental body or administrative or other agency having authority over it;

            (b) Vanda is not currently a party to, and during the term of this
Agreement will not enter into, any agreements, oral or written, that are
inconsistent with its obligations under this Agreement;

            (c) Vanda is duly organized and validly existing under the laws of
the country of its incorporation and has full legal power and authority to
enter into this Agreement; and

                                  Page 25 of 44

<PAGE>

            (d) Vanda is not subject to any order, decree or injunction by a
court of competent jurisdiction which prevents or materially delays the
consummation of the transactions contemplated by this Agreement.

      7.3 Disclaimer of Warranties. THE LIMITED WARRANTIES CONTAINED IN THIS
ARTICLE ARE THE SOLE WARRANTIES GIVEN BY THE PARTIES AND ARE MADE EXPRESSLY IN
LIEU OF AND EXCLUDE ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, TITLE, INFRINGEMENT OR OTHERWISE, AND ALL OTHER EXPRESS OR
IMPLIED REPRESENTATIONS AND WARRANTIES PROVIDED BY COMMON LAW, STATUTE OR
OTHERWISE ARE HEREBY DISCLAIMED BY EACH PARTY.

                                    ARTICLE 8
                                 CONFIDENTIALITY

      8.1 Confidentiality. During the term of this Agreement, and for a period
of [*] thereafter, Novartis and Novartis AG will maintain in confidence all
information disclosed by Vanda and Vanda will maintain in confidence all
information disclosed by Novartis and Novartis AG, including for the avoidance
of doubt, Novartis Know-how ("Confidential Information"). With respect to
Novartis and Novartis AG, Vanda shall not use, disclose or grant use of such
Confidential Information except as required under this Agreement. With respect
to Vanda, Novartis and Novartis AG shall not use, disclose or grant use of such
Confidential Information except as required under this Agreement, each Party
shall use at least the same standard of care as it uses to protect its own
Confidential Information to ensure that its and its Affiliates' employees,
agents, consultants, and clinical investigators only make use of Confidential
Information for the purpose of this Agreement and do not disclose any
Confidential Information without the express prior Written consent of the other
Party, which consent shall not be unreasonably withheld, or make any
unauthorized use of such Confidential Information. Each Party shall promptly
notify the other upon discovery of any unauthorized use or disclosure of
Confidential Information. Confidential Information shall not include any
information which and to the extent:

            (a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure by the other Party;

            (b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the other Party;

            (c) becomes generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the receiving Party in breach of this Agreement;

            (d) was disclosed to the receiving Party, other than under an
obligation of confidentiality, by a Third Party who had no obligation to the
other Party not to disclose such information; or

            (e) was independently developed by the receiving Party without
reference to the disclosure by the other Party.

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<PAGE>
      8.2 Terms of Agreement. The Parties agree that the material financial
terms of the Agreement shall be considered the Confidential Information of each
Party.

      8.3 Permitted Disclosure. Each Party may disclose the Confidential
Information to the extent such disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation, or
complying with any applicable statute or governmental regulation provided such
Party has given the disclosing Party prompt written notice allowing it to limit
such disclosure. In addition, each Party may disclose Confidential Information
to its Affiliates and to its Sublicensees; provided, however, in connection with
any such disclosure the disclosing Party shall secure confidential treatment of
such Confidential Information.

      8.4 Employee Obligations. The Parties shall undertake to ensure that all
their employees who have access to Confidential Information of the other Party
are under obligations of confidentiality fully consistent with those provided in
this Article.

      8.5 Publication. As between Novartis and Novartis AG on the one hand, and
Vanda on the other, no Party may publish confidential or proprietary information
of the other Party, without the consent of the other Party. The reviewing Party
shall have [*] from receipt of the proposed oral disclosure or written
publication to provide comments and/or proposed changes to the disclosing Party.
The review period may be extended for [*] to permit the reviewing Party to file
one or more patent applications as it deems appropriate. This Section 8.5 shall
be inapplicable to the publication of information presented in substantially the
same form in which was previously published or disclosed to the public, and at
any other disclosures which, on the advice of counsel, are required by law to be
disclosed.

                                    ARTICLE 9
                              TERM AND TERMINATION

      9.1 TERM.

            (a) Term. Unless earlier terminated as provided herein, the term of
this Agreement shall commence as of the Effective Date and shall remain in full
force and effect until the end of the last to expire milestone or royalty
payment obligation of a Party under this Agreement (the "Term").

            (b) Accrued Obligations. Except where explicitly provided elsewhere
herein, termination of this Agreement for any reason, or expiration of this
Agreement, will not affect: (i) obligations, including the payment of any
royalties or other sums which have accrued as of the date of termination or
expiration, and (ii) rights and obligations which, from the context thereof, are
intended to survive termination or expiration of this Agreement.

      9.2 Termination for Insolvency, Either Party may terminate this Agreement
immediately upon delivery of written notice to the other Party (a) upon the
institution by or against the other Party of insolvency, receivership or
bankruptcy proceedings or any other proceedings for the settlement of the other
Party's debts; provided, however with respect to involuntary proceedings, that
such proceedings are not dismissed within one hundred and twenty (120) days; (b)
upon the other Party's making an assignment for the benefit of

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<PAGE>

creditors; or (c) upon the other Party's dissolution or ceasing to do business.
In the event that such insolvency, receivership or bankruptcy proceedings or any
other proceedings for the settlement of a Party's debts are instituted, that
Party shall immediately notify the other Party of such proceedings.

      9.3 Termination for Lack of Diligence. If Vanda [*], as determined by
Vanda with the agreement of Novartis or materially breaches the terms of this
Agreement, then Novartis may terminate this Agreement upon [*] prior written
notice to Vanda. Such prior written notice shall specify that it is a notice of
termination under this Section 9.3. Within [*] following Vanda's receipt of such
prior written notice (the "Response Period"), Vanda shall [*]. At the request of
either Vanda or Novartis, representatives of Novartis and Vanda shall meet to
[*]. For avoidance of doubt, Vanda may remedy any remediable breach of its
obligation under this Section 9.3 during the Response Period. Should Vanda,
during the Response Period, fail to (i) remedy such remediable breach, (ii)
respond to Novartis' written notice of termination under this Section, or (iii)
provide to Novartis any written response regarding compliance or remedy of
breach under this Section, then Novartis may terminate this Agreement pursuant
to the termination provisions set forth in Section 9.4.

      9.4 Material Breach. Either Party may terminate this Agreement upon [*]
prior written notice to the other Party upon the material breach by the other
Party of any of its obligations under this Agreement; provided, however, that
such termination shall become effective only if the other Party shall fail to
remedy or cure the breach within [*] period. If either Party is in breach
of any material obligation hereunder and, in the case of a breach incapable of
remedy, the Party not in breach of the material obligation may forthwith
terminate this Agreement by notice without prejudice to the accrued rights of
either Party.

      9.5 Termination by Vanda. Vanda's obligations to develop and commercialise
under this Agreement may be terminated by it at any time upon [*] prior written
notice to Novartis in the event that [*], and Vanda agrees to give Novartis
prompt notice in writing and in person thereof of such issue.

      9.6 Effect Of Termination.

            (a) Effect On License. Upon the expiration or earlier termination of
this Agreement, the rights licensed under this Agreement shall be treated as
follows:

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                                  Page 28 of 44
<PAGE>

                  (i) Upon the expiration of the Term, Vanda shall have a fully
paid-up, perpetual, irrevocable, royalty-fee, transferable, worldwide,
non-exclusive right and license under the Novartis Patents and Novartis Know-How
existing as of the date of such expiration to make, have made, use, offer to
sell, and sell Product in the Territory.

                  (ii) Upon termination by Novartis pursuant to Section 9.2,
9.3, 9.4 or by Vanda pursuant to Section 9.5 all rights to Product granted by
Novartis to Vanda shall revert to Novartis. Upon such termination, Vanda shall
grant to Novartis a non-exclusive, world-wide, transferable, irrevocable,
perpetual license, with the right to sublicense, under the Vanda Technology to
make, use, offer to sell, sell and import Products solely in the country or
countries in which Vanda's licenses under this Agreement were so terminated. If
the termination was not due to Section 9.4 and if the Product is ultimately
commercialized, Novartis would pay Vanda [*]% of Net Sales until the later of
either the last Novartis Patent to expire (including extensions thereof) with a
Valid Claim related to the Compound or Product or a method of use thereof, or
five (5) years from the date of First Commercial Sale.

      (b) Ongoing Obligations.

            (i) Upon expiration or termination of this Agreement for any reason,
each Party shall immediately return to the other Party or destroy any
Confidential Information disclosed by the other Party, except for one copy which
may be retained in its confidential files for archive purposes only.

            (ii) Upon termination of this Agreement by Novartis pursuant to
Sections 9.2, 9.3, 9.4 or by Vanda pursuant to Section 9.5, Vanda shall assign
and deliver to Novartis all data and information (including registration
dossiers) obtained for or in pursuing Regulatory Approvals, and all Regulatory
Approvals (e.g., to Novartis; designee in the Territory as permitted under the
applicable law) for Product in the Territory received as of such termination
date.

      9.7 Inventory. Notwithstanding the foregoing, upon early termination of
this Agreement pursuant to Sections 9.2, 9.3, 9.4 or 9.5, Vanda shall have the
right to sell all remaining Product in its inventory [*] after the date of
termination, subject to the payment to Novartis of the amounts specified in
Article 5. Thereafter, Vanda agrees [*].

      9.8 Royalty and Payment Obligations. Termination of this Agreement by
either Party for any reason will not release the other Party from any obligation
to pay royalties or make any other payments to the Party which were accrued
prior to and including the effective date of termination or expiration
(including for Net Sales and milestones payable prior to the date of
termination). Termination of this Agreement by either Party for any reason will
not release Vanda from any obligation to pay royalties to Novartis on sales
arising from Section 9.7. All payments due to Novartis but not yet paid by Vanda
as of the date of termination shall become immediately due to Novartis.

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                                  Page 29 of 44
<PAGE>

                                   ARTICLE 10
                                 INDEMNIFICATION

      10.1 Indemnification by Novartis. Novartis will indemnify and hold Vanda
and its Affiliates, and their employees, officers and directors harmless against
any loss, damages, action, suit, claim, demand, liability, expense, bodily
injury, death or property damage (a "Loss"), that may be brought, instituted or
arise against or be incurred by such persons to the extent such Loss is based on
or arises out of [*]; provided however, that the foregoing indemnification shall
not apply to any Loss to the extent such Loss is caused by the grossly negligent
or willful misconduct of Vanda, its Affiliates or Sublicensees.

      10.2 Indemnification by Vanda. Vanda will indemnify and hold Novartis and
Novartis AG, and its Affiliates, and their employees, officers and directors
harmless against any Loss that may be brought, instituted or arise against or
be incurred by such persons to the extent such Loss is based on or arises out
of:

            (a) [*]; or

            (b) [*];

            (c) provided that the foregoing indemnification shall not apply to
any Loss to the extent such Loss is caused by the grossly negligent or willful
misconduct of Novartis, Novartis AG or its Affiliates.

      10.3 Claims Procedures. Each Party entitled to be indemnified by the other
Party (an "Indemnified Party") pursuant to Section 10.1 or 10.2 hereof shall
give notice to the other Party (an "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any threatened or asserted claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim or any litigation resulting therefrom; provided:

            (a) That counsel for the Indemnifying Party, who shall conduct the
defense of such claim or any litigation resulting therefrom, shall [*] by the
Indemnified Party [*] and the Indemnified Party may participate in such defense
[*].

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                                 Page 30 of 44
<PAGE>

            (b) The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Agreement to the extent that the failure to give notice did not result in harm
to the Indemnifying Party.

            (c) No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the approval of each Indemnified Party which
approval shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which [*].

            (d) Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.

      10.4 Indemnification Amounts. An Indemnifying Party shall not have
liability with respect to any breach of any of this Agreement: (a) for any
individual item where the Loss relating thereto is [*], and (b) in respect of
each individual item where the Loss relating thereto is equal to or greater [*],
unless and until [*] and then the Indemnifying Party will be liable for the
entire amount of the Losses described in this clause. Each Party shall take and
shall cause its Affiliates to take all reasonable steps to [*]

      10.5 Compliance. The Parties shall comply fully with all applicable laws
and regulations in connection with their respective activities under this
Agreement.

                                   ARTICLE 11
                            MISCELLANEOUS PROVISIONS

      11.1 Dispute Resolution. In the event of any controversy or claim arising
out of relating to or in connection with any provision of this Agreement, or the
rights or obligations hereunder, the Parties shall try to settle their
differences amicably between themselves. As between Novartis and Novartis AG on
the one hand, and Vanda on the other, each Party may initiate such informal
dispute resolution by sending written notice of the dispute to the other Party,
and within [*] after such notice appropriate representatives of the Parties
shall meet for attempted resolutions by good faith negotiations. If such
representatives are unable to resolve such disputed matters, it shall be
referred to [*], for discussion and resolution.

      11.2 Governing Law. This Agreement shall be construed and the respective
rights of the Parties determined according to the substantive laws of the State
of New York notwithstanding the provisions governing conflict of laws under such
New York law to the contrary, except matters of intellectual property law which
shall be determined in accordance with the intellectual property laws relevant
to the intellectual property in question.

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<PAGE>
      11.3 Jurisdiction. Any controversy or claim arising out of or in
connection with this Agreement, which cannot be settled within [*] of the notice
according to Section 11.1, shall be under the exclusive jurisdiction of the
courts in New York, NY, USA.

      11.4 Waiver. The failure on the part of Vanda or Novartis to exercise or
enforce any rights conferred upon it hereunder shall not be deemed to be a
waiver of my such rights nor operate to bar the exercise or enforcement thereof
at any time or times thereafter. The observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the Party entitled to enforce such term, but
any such waiver shall be effective only if in writing signed by the Party
against whom such waiver is to be asserted.

      11.5 Force Majeure. No Party shall be held liable or responsible to the
other Party nor be deemed to have defaulted under or breached this Agreement for
failure or delay in fulfilling or performing any term of this Agreement, other
than an obligation to make a payment, when such failure or delay is caused by or
results from fire, floods, embargoes, government regulations, prohibitions or
interventions, war, acts of war (whether war be declared or not), insurrections,
riots, civil commotions, strikes, lockouts, acts of God, or any other cause
beyond the reasonable control of the affected Party.

      11.6 Severability. It is the intention of the Parties to comply with all
applicable laws domestic or foreign in connection with the performance of its
obligations hereunder. In the event that any provision of this Agreement, or any
part hereof, is found invalid or unenforceable, the remainder of this Agreement
will be binding on the Parties hereto, and will be construed as if the invalid
or unenforceable provision or part thereof had been deleted, and the Agreement
shall be deemed modified to the extent necessary to render the surviving
provisions enforceable to the fullest extent permitted by law.

      11.7 Government Acts. In the event that any act, regulation, directive, or
law of a government, including its departments, agencies or courts, should make
impossible or prohibit, restrain, modify or limit any material act or obligation
of Vanda or Novartis or Novartis AG under this Agreement, the Party, if any, not
so affected shall have the right, at its option, to suspend or terminate this
Agreement as to such country, if good faith negotiations between the Parties to
make such modifications to this Agreement as may be necessary to fairly address
the impact thereof, after a reasonable period of time are not successful in
producing mutually acceptable modifications to this Agreement.

      11.8 Assignment. This Agreement may not be assigned or otherwise
transferred by either Party without the prior written consent of the other
Party; provided, however, that either Party may assign this Agreement, without
the consent of the other Party, (i) to any of its Affiliates, if the assigning
Party guarantees the full performance of its Affiliates' obligations hereunder,
or (ii) in connection with the transfer or sale of all or substantially all of
its assets or business or in the event of its merger or consolidation with
another company. In all cases the assigning Party shall provide the other Party
with prompt notice of any such assignment. Any purported assignment in
contravention of this Section shall, at the option of the non-

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assigning Party, be null and void and of no effect. No assignment shall release
either Party from responsibility for the performance of any accrued obligation
of such Party hereunder.

      11.9 Counterparts. This Agreement may be executed in duplicate, both of
which shall be deemed to be originals, and both of which shall constitute one
and the same Agreement.

      11.10 No Agency. Nothing herein contained shall be deemed to create an
agency, joint venture, amalgamation, partnership or similar relationship between
Novartis AG and Novartis on the one hand, and Vanda on the other.
Notwithstanding any of the provisions of this Agreement, as between Novartis
and Novartis AG on the one hand, and Vanda on the other, no Party shall at any
time enter into, incur, or hold itself out to third Parties as having authority
to enter into or incur, on behalf of the other Party, any commitment, expense,
or liability whatsoever, and all contracts, expenses and liabilities undertaken
or incurred by one Party in connection with or relating to the development,
manufacture or sale of Compounds or Products shall be undertaken, incurred or
paid exclusively by that Party, and not as an agent or representative of the
other Party.

      11.11 Notice. As between Novartis and Novartis AG on the one hand, and
Vanda on the other, all communications between the Parties with respect to any
of the provisions of this Agreement will be sent to the addresses set out below,
or to other addresses as designated by one Party to the other by notice pursuant
hereto, by internationally recognized courier or by prepaid certified, air mail
(which shall be deemed received by the other Party on the seventh Business Day
following deposit in the mails), or by facsimile transmission or other
electronic means of communication (which shall be deemed received when
transmitted), with confirmation by letter given by the close of business on or
before the next following Business Day:

           If to Novartis AG, at:
           Novartis AG
           [*]
           Basel, Switzerland
           Attn: [*]

           If to Novartis, at:
           Novartis Pharma AG
           [*]
           Basel, Switzerland
           Attn: [*]

           If to Vanda at:
           Vanda Pharmaceuticals Inc.
           [*]
           Princeton, NJ 08542
           Attn: [*]

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      11.12 Headings. The paragraph headings are for convenience only and will
not be deemed to affect in any way the language of the provisions to which they
refer.

      11.13 Entire Agreement. This Agreement contains the entire understanding
of the Parties relating to the matters referred to herein, and may only be
amended by a written document, duly executed on behalf of the respective
Parties.

   ***[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS]***

                                  Page 34 of 44
<PAGE>

      IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.

                                   VANDA PHARMACEUTICALS, INC.

                                   By: /s/ Mihael Polymeropoulos
                                       ------------------------------------
                                   Mihael Polymeropoulos
                                   Chief Executive Officer

                                   NOVARTIS PHARMA AG

                                   By: /s/ Herve Girsault
                                       ------------------------------------
                                   June 4, 2004
                                   Name: Herve Girsault
                                   Title: Head, Global Partnering
                                          Business Development & Licensing

                                   By: /s/ Tom Chakraborti
                                       ------------------------------------
                                   Name: Tom Chakraborti
                                   Title: Senior Legal Counsel
                                   22nd June, 2004

                                   NOVARTIS AG

                                   By: /s/ Jorg Walther
                                       ------------------------------------
                                   Name: Jorg Walther
                                   Title: Authorized Signatory

                                   By: /s/ Clive S. Morris
                                       ------------------------------------
                                   Name: Clive S. Morris
                                   Title: Authorised Signatory
                                   23-06-04

                                 Page 35 of 44
<PAGE>
                                  Schedule 1.7

NDD094 corresponds to [*]. It has the molecular formula [*] and the following
structure:

[*]

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                                                                    SCHEDULE 3.1

TERMS AND CONDITIONS FOR THE SALE OF COMPOUND FORM NOVARTIS TO VANDA

Available Compound Substance and Lot Number:
--------------------------------------------

[*]

----
      Total available Compound substance for technical use only
====

Price per kg of Compound substance:
-----------------------------------

[*]

Delivery Terms:

EX WORKS (as such term is defined in INCOTERMS 2000 of the International Chamber
of Commerce in Paris: delivery to Vanda shall occur when the Compound and
Product is placed at Vanda's disposal at Novartis' premises)

NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY THAT ANY QUANTITIES
OF COMPOUND PROVIDED TO VANDA UNDER THIS AGREEMENT WILL [*].

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                         ANNEX 1 - DEVELOPMENT PLAN AND BUDGET

A. DEVELOPMENT TIMELINES

[*]

B CLINICAL TRIALS TO BE PERFORMED UNDER DEVELOPMENT PLAN BY VANDA:

B1 [*]

Primary objectives:

(1) [*]
(2) [*]

B2 [*]

Primary objectives:

(1) [*]
(2) [*]

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B3 [*]

Primary objectives:

(1) [*]
(2) [*]
(3) [*]
(4) [*]

B4 [*]

Primary Objectives:

(1) [*]
(2) [*]
(3) [*]

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                                  Page 39 of 44
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C. DEVELOPMENT COST

[*]

VANDA PHARMACEUTICALS, INC.
NDD094
[*]
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                                 Page 40 of 44
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                                                                         ANNEX 2

                        ***[INTENTIONALLY LEFT BLANK]***

                                  Page 41 of 44
<PAGE>
                                                                         ANNEX 3

PATENT SCHEDULE                                                          [*]
[*]
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                                  Page 42 of 44
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[*]

                                  Page 43 of 44
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                                    ANNEX 4
                           Novartis POLICY STATEMENT

VANDA agrees to abide by the following policy statement, which is binding on all
parties under contract with Novartis, and is in support of the protection of
internationally proclaimed human rights, ethical and legal behaviour, fair,
courteous and respectful treatment of others, and professionalism and good
business practice.

Gifts, favours, kickbacks, entertainment or other offering of financial
advantage to an official of a government or a government-controlled entity for
the purpose of obtaining business or other services, as set out in the OECD
Convention on Combating Bribery of Foreign Public Officials are not allowed.
Gifts, favours or entertainment to non-governmental officials may be provided to
others only if they meet all of the following criteria:

      (a)   they are consistent with government regulations and customary
            business practices;

      (b)   they are not excessive in value, and cannot be construed as a bribe
            or a pay-off;

      (c)   they are not in contravention of applicable law or ethical
            standards; and

      (d)   they will not embarrass Novartis, VANDA, or the recipient if
            publicly disclosed.

VANDA shall respect the principles and rules of fair competition and shall not
violate applicable antitrust laws.

VANDA hereby agrees that in its dealings on behalf of Novartis, it will take no
action, directly or indirectly, that is inconsistent with the language or spirit
of this policy statement. VANDA further acknowledges and agrees that any such
action will serve as grounds for immediate termination of this Agreement by
Novartis.

                                  Page 44 of 44

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