Document:

Exhibit 10.1

 

RESTATED EXECUTIVE EMPLOYMENT AGREEMENT

 

THIS EXECUTIVE
EMPLOYMENT AGREEMENT (“Agreement”) effective May 30, 2006, by and between MedicalCV, Inc., a corporation duly
organized and existing under the laws of the State of Minnesota, with a place
of business at 9725 South Robert Trail, Inver Grove Heights, Minnesota 55077
(hereinafter referred to as the “Company”), and Eapen Chacko, a resident of the state of Minnesota
(hereinafter referred to as “Executive”).

 

BACKGROUND OF AGREEMENT

 

•                                          The Company
desires to hire Executive as its Vice President, Finance and Chief Financial
Officer and Executive desires to be employed by the Company.

 

•                                          The Company
and Executive desire to memorialize the terms and conditions of Executive’s
employment, including additional terms and conditions which have been approved
by the Company’s Board of Directors.

 

In
consideration of the foregoing, the Company and Executive agree as follows:

 

ARTICLE 1

EMPLOYMENT

 

1.01  Subject to the terms of Articles 3 and 6, the
Company hereby agrees to employ Executive in the capacity of Executive Vice
President Finance and Chief Financial Officer, pursuant to the terms of this
Agreement, and Executive agrees to such employment. Upon the termination of the
employment or responsibilities of the Company’s current chief financial
officer, presently anticipated to be on or after July 31, 2006, Executive will
also have the responsibilities and office of principal financial officer and
principal accounting officer. It is also the Company’s intention to elect
Executive its corporate secretary. Your offices/titles will not be effective
until your employment commences on June 21, 2006.

 

1.02  Executive shall generally have the authority,
responsibilities, and such duties as are customarily performed by the chief
financial officer, principal financial officer and principal accounting officer
of a public company of similar size and industry, specifically including,
without limitation, the following responsibilities:

 

(i)                                     working
with senior management of the Company and its Board of Directors (the “Board”)
in formulating short and long term goals and developing, implementing, and
executing strategies to attain Company objectives;

 

(ii)                                  endeavoring
to establish and maintain a relationship of trust and credibility with members
of the senior management team, the Board, its committees, outside auditors and
legal counsel;

 

(iii)                               supervising the
implementation of the Company’s policies and business processes in order to
meet the corporate governance and internal control

 

 

requirements
established by the senior management team, the Board and relevant laws,
including, but not limited to:  (A)
designing and implementing effective disclosure controls and procedures that
are necessary to insure accurate financial reporting; (B) conducting periodic
reviews and evaluations of the effectiveness of the Company’s disclosure
controls and procedures, including, without limitation, interfacing with the
senior management team and other Company personnel, the Board, Audit Committee,
outside auditors and legal counsel to insure the effectiveness of the Company’s
disclosure controls and procedures and related matters; (C) accurately
reporting the results of Company operations and related matters to the
Securities and Exchange Commission, Nasdaq and other regulatory agencies; and
(D) acting as a certifying officer of the Company’s financial reporting under
the Exchange Act and other regulatory agencies;

 

(iv)                              managing
and protecting the Company’s capital and liquid assets and monitoring and
advising management regarding the availability of adequate capital at all
times;

 

(v)                                 regularly
and systematically appraising and evaluating the Company’s performance results
against the Company’s established objectives; and

 

(vi)                              consistent
with the foregoing, such other finance functions as the Chief Executive Officer
may assign to Executive from time to time during his employment period.

 

Executive shall also render such additional services and duties within
the scope of Executive’s experience and expertise as may be reasonably
requested of him from time to time by the Board.

 

1.03  Executive shall report to the Chief Executive
Officer and shall direct, and shall generally be subject to direction, orders
and advice of the Board.

 

1.04  In his capacity as Vice President, Finance
and Chief Financial Officer, Executive shall use his best energies and
abilities in the performance of his duties, services and responsibilities for
the Company.

 

1.05  During the term of his employment, Executive
shall devote substantially all of his business time and attention to the
business of the Company and its subsidiaries and affiliates and shall not
engage in any substantial activity inconsistent with the foregoing, whether or
not such activity shall be engaged in for pecuniary gain, unless approved by
the Board; provided, however, that, to the extent such activities do not
violate, or substantially interfere with his performance of his duties,
services and responsibilities under this Agreement, Executive shall be
permitted to serve on civic or charitable boards or committees thereof.

 

ARTICLE 2

COMMENCEMENT OF TERM

 

2.01  Executive’s employment shall commence on June
21, 2006.

 

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ARTICLE 3

NATURE OF EMPLOYMENT

 

3.01  Executive’s employment pursuant to this
Agreement shall be on an at-will basis, with either Executive or the Company
having the right to terminate Executive’s employment with or without cause on
not less than sixty (60) days’ prior written notice, subject to the Company’s
obligations to Executive pursuant to Sections 6 and 7. The terms and conditions
of this Agreement may be amended from time to time with the consent of the
Company and Executive. All such amendments shall be effective when memorialized
by a written agreement between the Company and Executive or by resolutions of
the Board or the Company’s Compensation Committee (the “Committee”).

 

ARTICLE 4

COMPENSATION AND BENEFITS

 

4.01  During the term of employment hereunder,
Executive shall be paid a base salary at the rate of Two Hundred Thousand ($200,000)
per year (“Base Salary”), payable in installments in accordance with the
Company’s established pay periods, reduced by all deductions and withholdings
required by law and as otherwise specified by Executive. The Company shall
cause the Committee to review Executive’s performance and Base Salary level
each calendar year during the Term, commencing, 2007. Executive’s Base Salary
may be increased (but not decreased), in the sole discretion of the Board. In
the event Executive’s employment shall, for any reason, terminate during the
Term, Executive’s final monthly Base Salary payment shall be made on a
pro-rated basis as of the last day of the month in which such employment
terminated.

 

4.02  During the term of employment, in addition to
payments of Base Salary set forth above, Executive shall be eligible to
participate in any performance-based cash bonus plan for senior executives
based upon achievement of goals established with respect to each fiscal year by
the Board or Committee after reasonable consultation with Executive, but
Executive’s participation and performance goals therein shall remain within the
discretion of the Board or Committee.

 

4.03  Executive will be awarded a stock option for
912,296 shares of common stock as provided in his employment offer letter dated
May 30, 2006.

 

4.04  During the term of employment, Executive
shall be entitled to participate in employee benefit plans, policies, programs,
perquisites and arrangements, as the same may be provided and amended from time
to time, that are provided generally to similarly situated executive employees
of the Company, to the extent Executive meets the eligibility requirements for
any such plan, policy, program, perquisite or arrangement.

 

4.05  The Company shall reimburse Executive for all
reasonable business expenses incurred by Executive in carrying out Executive’s
duties, services, and responsibilities under this Agreement. Executive shall
comply with generally applicable policies, practices and procedures of the
Company with respect to reimbursement for, and submission of expense reports,
receipts

 

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or similar documentation of, such expenses.

 

4.06  If the Company, based upon an opinion of
legal counsel or a judicial determination, determines that Section 304 of the
Sarbanes-Oxley Act of 2002 is applicable to Executive, to the extent that the
Company is required to prepare an accounting restatement due to the material
noncompliance of the Company, as a result of misconduct, with any financial
reporting requirement under the securities laws, Executive shall reimburse the
Company for any bonus or other incentive or equity-based compensation received
from the Company during the 12-month period following the first public issuance
or filing with the Securities and Exchange Commission (whichever first occurs)
of the financial document embodying such financial reporting requirement and
any profits received from the sale of the Company’s securities during that
12-month period. In the event Executive fails to make prompt reimbursement of
any such amount, the Company may, to the extent permitted by applicable law,
deduct the amount required to be reimbursed from Executive’s compensation
otherwise due under this Agreement.

 

ARTICLE 5

VACATION AND LEAVE OF ABSENCE

 

5.01  Executive shall be entitled to three (3)
weeks of paid vacation per year, in addition to the Company’s normal holidays. Vacation
time will be scheduled taking into account the Executive’s duties and
obligations at the Company. Unused paid vacation time shall not accumulate from
year to year, unless otherwise approved in writing by the Board or Committee. Sick
leave and all other leaves of absence will be in accordance with the Company’s
stated personnel policies.

 

ARTICLE 6

TERMINATION

 

6.01  The Company may terminate Executive’s
employment without Cause by giving Executive at least sixty (60) days written
notice thereof. In the event of such termination, Executive shall receive only
the severance compensation set forth in Article 7.01 and Executive shall also
be entitled to all or a portion of any bonus due Executive pursuant to any
bonus plan or arrangement established or mutually agreed-upon prior to
termination, to the extent earned or performed through the date of termination,
based upon the requirements or criteria of such bonus plan or arrangement, as
the Board shall in good faith determine. Such pro-rated bonus, shall be payable
at the time and in the manner payable to other executives of the Company who
participate in such plan or arrangement.

 

6.02  Executive’s employment will be deemed
terminated as of the date of the death of the Executive. In the event of such
termination, there shall be payable to Executive’s estate compensation earned
through the date of death together with a pro-rata portion of any bonus due
Executive pursuant to any bonus plan or arrangement established or mutually
agreed-upon prior to termination, to the extent earned or performed based upon
the requirements or criteria of such plan or arrangement, as the Board shall in
good faith determine. Such pro-rated bonus, shall be

 

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payable at the time and in the
manner payable to other executives of the Company who participate in such plan
or arrangement.

 

6.03  Any other provision of this Agreement
notwithstanding, the Company may terminate Executive’s employment upon written
notice specifying a termination date based on any of the following events that
constitute Cause:

 

(a)                                  Any
commission or nolo contendere plea by Executive to a felony, gross misdemeanor
or misdemeanor involving moral turpitude, or any public conduct by Executive
that has or can reasonably be expected to have a detrimental effect on the Company;

 

(b)                                 Any
act of material misconduct, willful and gross negligence, or breach of duty to
the Company, including, but not limited to, embezzlement, fraud, dishonesty,
nonpayment of an obligation owed to the Company, or willful breach of fiduciary
duty to the Company which results in a material loss, damage, or injury to the
Company;

 

(c)                                  Any
material breach of any material provision of this Agreement or of the Company’s
announced rules, codes or polices, which remains uncured or uncorrected for a
period of thirty (30) days following written notice thereof to Executive
specifying such breach;

 

(d)                                 Any
act of insubordination by Executive; however, an act of insubordination by
Executive shall not constitute Cause if Executive cures or remedies such
insubordination within thirty (30) days after written notice to Executive,
without material harm or loss to the Company, unless such insubordination is a
part of a pattern of chronic insubordination, which may be evidenced by reports
or warning letters given by the Company to Executive, in which case such
insubordination is deemed not curable.

 

(e)                                  Any
unauthorized disclosure of any Company trade secret or confidential
information, or conduct constituting unfair competition with respect to the
Company, including inducing a party to breach a contract with the Company; or

 

(f)                                    A
willful violation of federal or state securities laws or regulations.

 

In making such determination, the Board shall act in good faith and
give Executive a reasonably detailed written notice and a reasonable
opportunity to be heard on the issues at a Board or Committee meeting. For
purposes of this Agreement, no act or failure by the Executive shall be
considered “willful” if such act is done by Executive in good faith in the
belief that such act is or was lawful and in the best interest of the Company
or one or more of its businesses. Nothing in this paragraph 6.03 shall be
construed to prevent Executive from contesting the Board or Committee’s
determination that Cause exists. In the event of such termination, and not
withstanding any contrary provision otherwise stated, Executive shall receive
only his Base Salary earned through the date of termination.

 

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6.04  The employment of the Executive shall in no
event be considered to have been terminated for Cause if the termination of his
employment took place:

 

(a)                                  as
a result of an act or omission which occurred more than 360 days prior to the
Executive’s having been given notice of the termination of his employment for
such act or omission, unless the commission of such act or such omission could
not at the time of such commission or omission have been known to a member of
the Board (other than the Executive, if he is then a member of the Board), in which
case there shall not be termination for Cause if notice of termination took
place more than 360 days from the date that the commission of such act or such
omission was or could reasonably have been so known; or

 

(b)                                 as
a result of a continuing course of action which commenced and was or reasonably
could have been known to a member of the Board (other than the Executive) more
than 360 days prior to notice having been given to the Executive of the
termination of his employment.

 

6.05  Executive may terminate his employment upon
sixty (60) days prior written notice to the Company for “Good Reason.”  For purposes of this Agreement, “Good Reason”
means any of the following actions taken by the Company without Cause:

 

(a)                                  the
Company or any of its subsidiaries reduces Executive’s Base Salary or current
equity compensation plan opportunities (participation in any such plans or
programs remaining in the discretion of the Board or Committee), or benefit
plans (other than company-wide changes to benefit plans covering all full-time
eligible employees);

 

(b)                                 without
Executive’s express written consent, the Company or any of its subsidiaries
significantly reduces Executive’s job authority and responsibility over quality
assurance at the Company as contemplated by Article 1;

 

(c)                                  without
Executive’s express written consent, the Company or any of its subsidiaries
requires Executive to change the location of Executive’s job or office, so that
Executive will be based at a location more than fifty (50) miles from the location
of Executive’s job or office immediately preceding notice of such requirement.

 

(d)                                 a
successor company fails or refuses to assume the Company’s obligations under
this Agreement; or

 

(e)                                  the
Company or any successor company breaches any of the material provisions of
this Agreement; provided, however, that Executive shall provide detailed
information to the Company in such written notice and such grounds for Good
Reason are not remedied or continue for a period of thirty (30) days or more
following receipt of such notice.

 

6.06  During the term of his employment and for 24
months after the date of Executive’s termination of employment, (i) Executive
shall not, directly or indirectly, make or publish any

 

6

 

disparaging statements (whether
written or oral) regarding the Company or any of its affiliated companies or
businesses, or the affiliates, directors, officers, agents, principal
shareholders or customers of any of them and (ii) neither the Company or any of
its affiliated companies or businesses or their affiliates, directors, or
officers shall directly or indirectly, make or publish any disparaging
statements (whether written or oral) regarding Executive. Information  which the Company or Executive is required to
make or disclose regarding the other to comply with laws or regulations, or
makes in a pleading on the advice of litigation counsel, shall not constitute a
disparaging statement.

 

6.07  Upon any termination of Executive’s
employment with the Company, Executive shall be deemed to have resigned from
all other positions he then holds as an officer, employee or director or other
independent contactor of the Company or any of its subsidiaries or affiliates,
unless otherwise agreed by the Company and Executive.

 

ARTICLE 7

SEVERANCE PAYMENTS

 

7.01  The Company, its successors or assigns, will
pay Executive as severance pay a lump sum amount equal to six (6) months of the
Executive’s monthly Base Salary for full-time employment at the time of
Executive’s termination (the “Severance Payment”) if the employment of
Executive is terminated by the Company without cause or by Executive for Good
Reason.

 

(a)                                  If
Executive becomes entitled to a Severance Payment under this Agreement, and
Executive is eligible to and elects to continue medical coverage as provided by
law (commonly referred to as the COBRA continuation period), then the Company
will pay the cost of premiums for COBRA coverage for Executive and his eligible
dependents for a period of six months following termination, or if sooner,
until Executive is no longer eligible for COBRA coverage. Executive must be
eligible for COBRA coverage, elect COBRA during the COBRA election period, and
comply with all requirements to obtain such coverage, to be eligible for
coverage and for this benefit.

 

(b)                                 If,
on the six (6) month anniversary of the Severance Payment pursuant to Section
7.01, Executive is unemployed and is not rendering services as an independent
contractor, Executive shall be entitled to continue to receive monthly payments
of Base Salary and COBRA coverage for the period ending on the earlier of (a)
the date Executive is reemployed; (b) commences rendering services as an
independent contractor; or (c) is covered by another medical plan provided by
Executive’s new employer; provided, however, that such payments shall in no
event continue for more than an additional six (6) months. Executive shall
report to the Company in writing his reemployment or engagement as a
consultant.

 

(c)                                  Nothing
in this Subsection 7.01 shall limit the authority of the Committee or Board to
terminate Executive’s employment in accordance with Section 6.03. Payment of
severance payments pursuant to Section 7.01, less customary

 

7

 

withholdings,
shall be made in one lump sum within thirty (30) days of the Executive’s
termination or resignation.

 

7.02  In addition to the Severance Payment pursuant
to Section 7.01, the Company will pay Executive a pro-rata portion of any bonus
earned by Executive as of the date of termination, as provided by Sections 6.01
and 6.02. The payments to Executive pursuant to Sections 6.01, 6.02 or 7.01 are
not intended to be cumulative or duplicative and an amount payable as a payment
of Base Salary or pro-rata bonus under any one of such sections shall be
reduced to the extent of similar payments made under another of such sections. In
addition, the severance payment of Base Salary shall be reduced by the amount
of cash severance-type benefits to which Executive may be entitled pursuant to
any other cash severance plan, agreement, policy or program of the Company or
any of its subsidiaries; including any payment for post-employment
restrictions, provided that if the amount of cash severance benefits
payable under such other severance plan, agreement, policy or program is
greater than the amount payable pursuant to this Agreement, Executive will be
entitled to receive the amounts payable under such other plan, agreement,
policy or program which exceeds the Base Salary severance payment. Without
limiting other payments which would not constitute “cash severance-type
benefits” hereunder, any cash settlement of stock options, accelerated vesting
of stock options and retirement, pension and other similar benefits shall not
constitute “cash severance-type benefits” for purposes of this Section 7.02.

 

7.03  Notwithstanding any other provision of this
Agreement, the Company and Executive intend that any payments, benefits or
other provisions applicable to this Agreement comply with the payout and other
limitations and restrictions imposed under Section 409A of the Code (“Section
409A”), as clarified or modified by guidance from the U.S. Department of
Treasury or the Internal Revenue Service – in each case if and to the extent
Section 409A is otherwise applicable to this Agreement and such compliance is
necessary to avoid the penalties otherwise imposed under Section 409A. In this
connection, the Company and Executive agree that the payments, benefits and
other provisions applicable to this Agreement, and the terms of any deferral
and other rights regarding this Agreement, shall be deemed modified if and to
the extent necessary to comply with the payout and other limitations and
restrictions imposed under Section 409A, as clarified or supplemented by
guidance from the U.S. Department of Treasury or the Internal Revenue Service –
in each case if and to the extent Section 409A is otherwise applicable to this
Agreement and such compliance is necessary to avoid the penalties otherwise
imposed under Section 409A.

 

7.04  The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes required
by applicable law to be withheld by the Company.

 

7.05  The provisions of this Article 7 will be deemed
to survive the termination of this Agreement for the purposes of satisfying the
obligations of the Company and Executive thereunder.

 

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ARTICLE 8

NONDISCLOSURE AND INVENTIONS

 

8.01  Except as permitted or directed by the
Company or as may be required in the proper discharge of Executive’s employment
hereunder, Executive shall not, during his employment or at any time
thereafter, divulge, furnish or make accessible to anyone or use in any way any
Confidential Information of the Company. “Confidential Information” means any
information or compilation of information that the Executive learns or develops
during the course of his employment that is not generally known, that is
proprietary to or within the unique knowledge of the Company, from which it
derives economic value (whether or not conceived, originated, discovered, or
developed in whole or in part by Executive). Confidential Information includes
but is not limited to, the following types of information and other information
of a similar nature (whether or not reduced to writing), all of which Executive
agrees constitutes the valuable trade secrets of the Company: research,
designs, development, know how, computer programs and processes, marketing plans
and techniques, existing and contemplated products and services, customer and
product names and related information, prices sales, inventory, personnel,
computer programs and related documentation, technical and strategic plans, and
finances. Confidential Information also includes any information of the
foregoing nature that the Company treats as proprietary or designates as
Confidential Information, whether or not owned or developed by the Company. “Confidential
Information” does not include information that (a) is or becomes generally
available to the public through no fault of Executive, (b) was known to
Executive prior to its disclosure by the Company, as demonstrated by files in
existence at the time of the disclosure, (c) becomes known to Executive, without
restriction, from a source other than the Company, without breach of this
Agreement by Executive and otherwise not in violation of the Company’s rights,
or (d) is explicitly approved for release by written authorization of the
Company.

 

8.02  Executive acknowledges that new and valuable
proprietary concepts, methods, processes, discoveries, trade secrets (as
defined in the Minnesota Uniform Trade Secrets Act), improvements, adaptations,
or ideas (herein individually and collectively referred to as “Inventions”) may
be developed, originated, authorized, conceived, invented, or made by
Executive, either alone or jointly with others, in the course of Executive’s
employment by the Company. All such Inventions shall be the exclusive property
of the Company, whether or not be patentable or copyrightable, and they may or
may not be shown or described in writing or reduced to practice. With respect
to all such Inventions developed, originated, authored, conceived, or invented,
or made by Executive (whether in whole or in part) during Executive’s
employment by the Company, Executive shall:

 

(i)                                     keep
accurate, complete and timely records all such Inventions, which records shall
be the Company’s property and be retained on the Company’s premises;

 

(ii)                                  promptly
and fully disclose and describe all such Inventions to the Company;

 

9

 

(iii)                               assign (and Executive
hereby does assign) to the Company all of Executive’s rights to such Inventions
and to applications for letters patent or copyrights in all countries and to
letters patent or copyrights granted with respect to such Inventions in all
countries; and

 

(iv)                              acknowledge
and deliver promptly to the Company (without charge to the Company but at the
expense of the Company) such written instruments and cooperate and do such
other acts as may be necessary in the opinion of the Company to preserve
property rights to such Inventions against forfeiture, abandonment, or loss and
to obtain and maintain letters patent or copyrights and to vest the entire
right and title thereto exclusively in the Company.

 

(a)                                  If
Executive is needed, at any time, to give testimony, evidence, or opinions in
any litigation or proceeding involving any patents or copyrights or
applications for patents or copyrights, both domestic and foreign, relating to
inventions, improvements discoveries, software, writings or other works of
authorship conceived, developed or reduced to practice by Executive, Executive
agrees to do so. With respect to any obligations performed by the Executive
under this Section following termination of Executive’s employment, the Company
will pay or reimburse all reasonable out-of-pocket expenses.

 

(b)                                 The
obligations of this paragraph shall continue beyond the termination of employment
with respect to Inventions conceived or made by Executive during the period of
his employment and shall be binding upon assigns, executors, administrators and
other legal representatives. For purposes of this Agreement, any Invention
relating to the business of the Company on which Executive files or claims a
copyright, or files a patent application, within one (1) year after termination
of employment with the Company, shall be presumed to cover Inventions conceived
by Executive during the term of his employment with the Company, subject to
proof to the contrary by good faith, written and duly corroborated records
establishing that such Invention was conceived and made following termination
of employment.

 

NOTICE: 
The Company hereby notifies Executive that the foregoing does not apply
to inventions or ideas for which no equipment, supplies, facility, or trade
secret information of the Company was used and that was developed entirely on
Executive’s own time, and (1) which does not relate (a) directly to the
business of the Company and (b) to the Company’s actual or demonstrably
anticipated research or development, or (2) which does not result from any work
performed by Executive for the Company.

 

8.03  In the event of a breach or threatened breach
by Executive of the provisions of this Article 8, the Company shall be entitled
to an injunction restraining Executive from directly or indirectly disclosing,
disseminating, lecturing upon, publishing or using such confidential, trade
secret or proprietary information (whether in whole or in part) and restraining
Executive from rendering any services or participating with any person, firm,
corporation, association or other entity to whom such knowledge or information
(whether in whole or in part) has been disclosed,

 

10

 

without the posting of a bond
or other security. Nothing herein shall be construed as prohibiting the Company
from pursuing any other equitable or legal remedies available to it for such
breach or threatened breach, including the recovery of damages from Executive.

 

8.04  Executive agrees not to directly or
indirectly use or disclose Confidential Information for the benefit of anyone
other than the Company, either during or after employment with the Company and
during the term of his employment and at all times thereafter, agrees:

 

(a)                                  to
receive, maintain, and use Confidential Information in the strictest confidence
and, except with the consent of the Company, not to directly or indirectly
reveal, report, publish, disclose, or transfer, any Confidential Information to
any person, firm, corporation, or other entity or utilize any Confidential
Information for Executive’s own benefit or intended benefit or for the benefit
or intended benefit of any other person, firm, corporation or other entity; and

 

(b)                                 not
to put into issue the confidentiality of any of the Confidential Information,
Company’s ownership thereof, or its status as valuable trade secrets of
Company.

 

Executive acknowledges that all notes, data, reference materials,
documents, business plans, the Company business and financial records, computer
programs, and other materials that in any way incorporate, embody, or reflect
any of the Confidential Information, whether prepared by Executive or others,
are the exclusive property of the Company, and Executive agrees to forthwith
deliver to the Company all such materials, including all copies or
memorializations thereof, in Executive’s possession or control, whenever
requested to do so by the Company, and in any event, upon termination of
Executive’s employment with the Company.

 

8.05  The Executive understands and agrees that any
violation of this Article 8 while employed by the Company may result in
immediate disciplinary action by the Company, including termination of
employment for Cause.

 

8.06  The provisions of this Article 8 shall
survive termination of this Agreement indefinitely.

 

ARTICLE 9

NONCOMPETITION AND NON-RECRUITMENT

 

9.01  Executive agrees that during the term of his
employment and for a period of one (1) year after termination of employment
(the “Restricted Period”) he will not directly or indirectly render service
(including services in research) to any person or entity in connection with the
design, development, manufacture, marketing, or sale of a Competitive Product
that is sold or intended for use or sale in any geographic area in which the
Company actively markets a Company Product or has planned to actively market a
Company Product of the same general type or function. This territory currently
includes North America, Europe and Japan.

 

(a)                                  Without
limiting the generality of the above, Executive expressly agrees that during
the Restriction Period discussed above, he will not directly or indirectly (on
his own behalf or on behalf of another person or entity) sell competitive

 

11

 

Products
to, attempt to sell such products to, or otherwise solicit purchases of such
services or products from, the following:

 

(i)                                     any
customer with whom Executive (or any other Executive or representative under
Executive’s supervision) has had direct or indirect contact or to whom
Executive (or any other Executive or representative under Executive’s
supervision) has directly or indirectly sold such services or products during
the period of Executive’s employment; or

 

(ii)                                  any
prospective customer who has been directly or indirectly solicited by Company,
or who has approached Company, and with whom Executive (or any other Executive
or representative under the Executive’s supervision) has had direct or indirect
contact or to whom Executive (or any other Executive or representative under
Executive’s supervision) has directly or indirectly attempted to sell such
services or products during the term of Executive’s employment.

 

(b)                                 Executive
further agrees that during the Restriction Period he will not directly or
indirectly (i) in any way interfere or attempt to interfere with the Company’s
relationships with any of its current or potential customers, or (ii) employ or
attempt to employ any of the Company’s then Executives on behalf of any other
entity, whether or not such entity competes with the Company.

 

(c)                                  For
the purposes of this Section 9.01,

 

(i)                                     “Competitive
Product” means any surgical product or research to develop information useful
in connection with a product or service that is being designed, developed,
manufactured, marketed or sold by anyone other than the Company and is of the
same general type, performs similar functions, or is used for the same purposes
as a Company Product on which the Employee worked, dealt with, or marketed
during the preceding two years of employment or about which he received or had
knowledge of Confidential Information; provided, however, that the term “surgical
product” shall not include non-invasive or percutaneous products; and

 

(ii)                                  “Company
Product” means any product, product line or service (including any component
thereof or research to develop information useful in connection with a product
or service) that is being designed, developed, manufactured, marketed or sold
by the Company or with respect to which the Company has acquired Confidential
Information which it intends to use in the design, development, manufacture,
marketing or sale of a product or service.

 

9.02  At its sole option, the Company may, by
express written notice to Executive, waive or limit the time and/or geographic
area in which Executive cannot engage in competitive activity or the scope of
such competitive activity.

 

9.03  Executive agrees that breach by him of the
provisions of this Article 9 will cause the Company irreparable harm that is
not fully remedied by monetary damages. In the event of a

 

12

 

breach or threatened breach by
Executive of the provisions of this Article 9, the Company shall be entitled to
an injunction restraining Executive from directly or indirectly competing or
recruiting as prohibited herein, without posting a bond or other security. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
equitable or legal remedies available to it for such breach or threatened
breach, including the recovery of damages from Executive.

 

9.04  The Executive understands and agrees that any
violation of this Article 9 while employed by the Company may result in
immediate disciplinary action by the Company, including termination of
employment for Cause.

 

9.05  The obligations contained in this Article 9
shall survive the termination of this Agreement indefinitely.

 

ARTICLE 10

MISCELLANEOUS

 

10.01  Governing Law. This Agreement shall be
governed and construed according to the laws of the State of Minnesota without
regard to conflicts of law provisions. The Company and Executive agree that if
any action is brought pursuant to this Agreement that is not otherwise resolved
by arbitration pursuant to Section 10.06, such dispute shall be resolved only
in the District Court of Hennepin County, Minnesota, or the United States
District Court for Minnesota, and each party hereto unconditionally (a) submits
for itself in any proceeding relating to this Agreement, or for recognition and
enforcement of any judgment in respect thereof, to the exclusive jurisdiction
of the Hennepin County, Minnesota District Courts or the United States Federal
District Court for Minnesota, and agrees that all claims in respect to any such
proceeding shall be heard and determined in Hennepin County, Minnesota,
Minnesota District Court or, to the extent permitted by law, in such federal
court, (b) consents that any such proceeding may and shall be brought in such
courts and waives any objection that it may now or thereafter have to the venue
or jurisdiction of any such proceeding in any such court or that such
proceeding was brought in an inconvenient court and agrees not to plead or
claim the same; waives all right to trial by jury in any proceeding (whether
based on contract, tort or otherwise) arising out of or relating to this
Agreement, or its performance under or the enforcement of this Agreement; (d)
agrees that service of process in any such proceeding may be effected by
mailing a copy of such process by registered or certified mail (or any
substantially similar form of mail), postage prepaid, to such party at its
address as provided in Section 10.06; and (e) agrees that nothing in this
Agreement shall affect the right to effect service of process in any other
manner permitted by the laws of the State of Minnesota.

 

10.02  Successors. This Agreement is personal
to Executive and Executive may not assign or transfer any part of his rights or
duties hereunder, or any compensation due to him hereunder, to any other person
or entity. This Agreement may be assigned by the Company and the Company. The
Company shall require any successor or assignee, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all the
business or assets of the Company, expressly and unconditionally to assume and
agree to perform the Company’s obligations under this Agreement, in the same
manner and to the same extent that the Company

 

13

 

would be required to perform if
no such succession or assignment had taken place. In such event, the term “Company,”
as used in this Agreement, shall mean the Company as defined above and any
successor or assignee to the business or assets which by reason hereof becomes
bound by the terms and provisions of this Agreement.

 

10.03  Waiver. The waiver by the Company of
the breach or nonperformance of any provision of this Agreement by Executive
will not operate or be construed as a waiver of any future breach or
nonperformance under any such provision of this Agreement or any similar
agreement with any other Executive.

 

10.04  Entire Agreement; Modification. This
Agreement supersedes, revokes and replaces any and all prior oral or written
understandings, if any, between the parties relating to the subject matter of
this Agreement. The parties agree that this Agreement: (a) is the entire
understanding and agreement between the parties; and (b) is the complete and
exclusive statement of the terms and conditions thereof, and there are no other
written or oral agreements in regard to the subject matter of this Agreement. Except
for modifications described in Article 3, this Agreement shall not be changed
or modified except by a written document signed by the parties hereto.

 

10.05  Severability and Blue Penciling. To
the extent that any provision of this Agreement shall be determined to be
invalid or unenforceable as written, the validity and enforceability of the
remainder of such provision and of this Agreement shall be unaffected. If any
particular provision of this Agreement shall be adjudicated to be invalid or
unenforceable, the Company and Executive specifically authorize the tribunal
making such determination to edit the invalid or unenforceable provision to
allow this Agreement, and the provisions thereof, to be valid and enforceable
to the fullest extent allowed by law or public policy.

 

10.06  Arbitration. Any dispute, claim or
controversy arising under this Agreement shall, at the request of any party
hereto be resolved by binding arbitration by a single arbitrator selected by
employer and Executive, with arbitration governed by The United States
Arbitration Act (Title 9, U.S. Code); provided, however, that a dispute, claim
or controversy shall be subject to adjudication by a court in any proceeding
against the Company or Executive involving third parties (in addition to the
Company or Executive). Such arbitrator shall be a disinterested person who is
either an attorney, retired judge or labor relations arbitrator. In the event
employer and Executive are unable to agree upon such arbitrator, the arbitrator
shall, upon petition by either the Company or Executive, be designated by a
judge of the Hennepin County District Court. The arbitrator shall have the
authority to make awards of damages as would any court in Minnesota having
jurisdiction over a dispute between employer and Executive, except that the
arbitrator may not make an award of exemplary damages or consequential damages.
In addition, the Company and Executive agree that all other matters arising out
of Executive’s employment relationship with the Company shall be arbitrable,
unless otherwise restricted by law.

 

(a)                                  In
any arbitration proceeding, each party shall pay the fees and expenses of its
or his own legal counsel.

 

(b)                                 The
arbitrator, in his or her discretion, shall award legal fees and expenses and
costs of the arbitration, including the arbitrator’s fee, to a party who
substantially

 

14

 

prevails
in its claims in such proceeding.

 

(c)                                  Notwithstanding
this Section 10.06, in the event of noncompliance or violation, as the case may
be, of Sections 8 or 9 of this Agreement, the Company may alternatively apply
to a court of competent jurisdiction for a temporary restraining order,
injunctive and/or such other legal and equitable remedies as may be
appropriate, if it and such court reasonably determines that the Company would
have no adequate remedy at law for such violation or noncompliance.

 

10.07  Legal Fees. If any contest or dispute
shall arise between the Company and Executive regarding any provision of this
Agreement, and such dispute results in court proceedings or arbitration, a
party that prevails to a substantial extent with respect to a claim brought and
pursued in connection with such dispute, shall be entitled to recover its legal
fees and expenses reasonably incurred in connection with such dispute. Such
reimbursement shall be made as soon as practicable following the resolution of
the dispute (whether or not appealed) to the extent a party receives documented
evidence of such fees and expenses.

 

10.08  Notices. For purposes of this
Agreement, notices and all other communications provided for herein shall be in
writing and shall be deemed to have been duly given when personally delivered
or may send by certified mail, return receipt requested, postage prepaid,
addressed to Executive at his residence address appearing on the records of the
Company and to the Company at its then current executive offices to the
attention of the Board. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the third business day
after the mailing thereof, except that notice of change of address shall be
effective only upon actual receipt. No objection to the method of delivery may
be made if the written notice or other communication is actually received.

 

10.09  Survival. The provisions of this
Article 10 shall survive the termination of this Agreement, indefinitely.

 

IN WITNESS
WHEREOF the following parties have executed the above instrument the day and
year first above written.

 

	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Marc P.
  Flores

  
	
   

  	
   

  	
  Marc P. Flores

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Eapen
  Chacko

  
	
   

  	
   

  	
  Eapen Chacko

  

 

15CERTAIN
CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS([*]),
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 24B-2 OF THE EXCHANGE ACT OF 1934, AS AMENDED

 

RESEARCH,
DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

BETWEEN

CYSTIC
FIBROSIS FOUNDATION THERAPEUTICS INCORPORATED

AND

COMBINATORX,
INCORPORATED

 

DATED MAY 31,
2006

 

 

TABLE OF
CONTENTS

	
  RESEARCH, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE I — DEFINITIONS

  	
   

  	
  2

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II — RESEARCH PROGRAM

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.1

  	
   

  	
  Commencement; Objective

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.2

  	
   

  	
  Research Diligence

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.3

  	
   

  	
  Research Plan

  	
   

  	
  12

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.4

  	
   

  	
  Joint Research Committee

  	
   

  	
  12

  
	
  2.4.1

  	
   

  	
  Composition and Purposes

  	
   

  	
  12

  
	
  2.4.2

  	
   

  	
  Decision-Making

  	
   

  	
  14

  
	
  2.4.3

  	
   

  	
  Additional Clinical Development Candidate Criteria

  	
   

  	
  15

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.5

  	
   

  	
  Joint Steering Committee

  	
   

  	
  16

  
	
  2.5.1

  	
   

  	
  Composition and Purposes

  	
   

  	
  16

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.6

  	
   

  	
  Exchange of Information

  	
   

  	
  17

  
	
  2.6.1

  	
   

  	
  Sharing of Information

  	
   

  	
  17

  
	
  2.6.2

  	
   

  	
  Restrictions on CFFT Use

  	
   

  	
  17

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.7

  	
   

  	
  Third Party Testing

  	
   

  	
  17

  
	
  2.7.1

  	
   

  	
  CFFT Testing Request

  	
   

  	
  17

  
	
  2.7.2

  	
   

  	
  Agreed Lab

  	
   

  	
  18

  
	
  2.7.3

  	
   

  	
  Testing Request

  	
   

  	
  18

  
	
  2.7.4

  	
   

  	
  Lead Compounds

  	
   

  	
  18

  
	
  2.7.5

  	
   

  	
  CombinatoRx Cooperation

  	
   

  	
  19

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III — DEVELOPMENT

  	
   

  	
  20

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.1

  	
   

  	
  Commencement of Clinical Development Program

  	
   

  	
  20

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.2

  	
   

  	
  Joint Development Committee

  	
   

  	
  20

  
	
  3.2.1

  	
   

  	
  Formation and Responsibilities

  	
   

  	
  20

  
	
  3.2.2

  	
   

  	
  Clinical Development Plan

  	
   

  	
  21

  
	
  3.2.3

  	
   

  	
  Meeting Materials

  	
   

  	
  22

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.3

  	
   

  	
  Clinical Development Responsibility

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.4

  	
   

  	
  Regulatory Approvals

  	
   

  	
  23

  
	
  3.4.1

  	
   

  	
  CombinatoRx Ownership

  	
   

  	
  23

  
						

 

 

 

	
  3.4.2

  	
   

  	
  Principal Interface

  	
   

  	
  23

  
	
  3.4.3

  	
   

  	
  Regulatory Meetings

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.5

  	
   

  	
  Data and Material Transfer

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV — PAYMENTS

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.1

  	
   

  	
  Staffing and Research Support Payments

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.2

  	
   

  	
  Clinical Trial Commencement Milestone

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.3

  	
   

  	
  Records

  	
   

  	
  27

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V — COMMERCIALIZATION; ROYALTIES

  	
   

  	
  28

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.1

  	
   

  	
  Marketing and Promotion

  	
   

  	
  28

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.2

  	
   

  	
  Trademarks

  	
   

  	
  28

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.3

  	
   

  	
  Due Diligence

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.4

  	
   

  	
  Royalties on Net Sales in the Field

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.5

  	
   

  	
  Reduction of Royalty

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.6

  	
   

  	
  Royalties on Net Sales Outside the Field

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.7

  	
   

  	
  Royalties to CFFT in the Event of a 10.4 Termination

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.8

  	
   

  	
  Royalties to CombinatoRx in the Event of an
  Interruption License

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.9

  	
   

  	
  Royalty Stacking

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.10

  	
   

  	
  Sales Reports

  	
   

  	
  32

  
	
  5.10.1

  	
   

  	
  Contents

  	
   

  	
  32

  
	
  5.10.2

  	
   

  	
  Payments

  	
   

  	
  33

  
	
  5.10.3

  	
   

  	
  Currency

  	
   

  	
  33

  
	
  5.10.4

  	
   

  	
  CFFT Audit of Sales Reports

  	
   

  	
  33

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.11

  	
   

  	
  Royalty Stream Purchase

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI — CONFIDENTIALITY

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.1

  	
   

  	
  Undertaking

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.2

  	
   

  	
  Exceptions

  	
   

  	
  38

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.3

  	
   

  	
  Publicity

  	
   

  	
  39

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VII — PUBLICATION

  	
   

  	
  40

  

 

 

 

	
  

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VIII — INDEMNIFICATION

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.1

  	
   

  	
  Indemnification by CombinatoRx

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.2

  	
   

  	
  Indemnification by CFFT

  	
   

  	
  43

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.3

  	
   

  	
  Claims Procedures

  	
   

  	
  43

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IX — OWNERSHIP OF INTELLECTUAL PROPERTY

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.1

  	
   

  	
  Ownership

  	
   

  	
  45

  
	
  9.1.1

  	
   

  	
  CombinatoRx Background Intellectual Property

  	
   

  	
  45

  
	
  9.1.2

  	
   

  	
  CFFT Background Intellectual Property

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.2

  	
   

  	
  License to CFFT Background Intellectual Property

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.3

  	
   

  	
  Ownership of New Intellectual Property

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.4

  	
   

  	
  Ownership and Licensing of New Assays

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.5

  	
   

  	
  CFFT’s Right to Interruption License

  	
   

  	
  47

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE X — TERM AND TERMINATION

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.1

  	
   

  	
  Term

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.2

  	
   

  	
  Termination of the Research Program by CFFT for
  Cause

  	
   

  	
  50

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.3

  	
   

  	
  Termination of the Research Program by CombinatoRx
  for Cause

  	
   

  	
  50

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.4

  	
   

  	
  Termination Without Cause

  	
   

  	
  51

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.5

  	
   

  	
  General Effect of Termination

  	
   

  	
  51

  
	
  10.5.1

  	
   

  	
  Survival

  	
   

  	
  51

  
	
  10.5.2

  	
   

  	
  Retention of License

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XI — RESTRICTIONS ON OTHER CFTR
  MODULATORS

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XII — REPRESENTATIONS AND WARRANTIES

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.1

  	
   

  	
  Representations and Warranties of CombinatoRx

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.2

  	
   

  	
  Representations and Warranties of CFFT

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XIII — DISPUTE RESOLUTION

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13.1

  	
   

  	
  Governing Law, and Jurisdiction

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13.2

  	
   

  	
  Dispute Resolution

  	
   

  	
  54

  

 

 

 

	
  

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE XIV — MISCELLANEOUS PROVISIONS

  	
   

  	
  57

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.1

  	
   

  	
  Waiver

  	
   

  	
  57

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.2

  	
   

  	
  Force Majeure

  	
   

  	
  57

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.3

  	
   

  	
  Severability

  	
   

  	
  57

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.4

  	
   

  	
  Assignment and Successors

  	
   

  	
  58

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.5

  	
   

  	
  Counterparts

  	
   

  	
  58

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.6

  	
   

  	
  Insurance

  	
   

  	
  59

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.7

  	
   

  	
  No Agency

  	
   

  	
  59

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.8

  	
   

  	
  Notice

  	
   

  	
  59

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.9

  	
   

  	
  Headings

  	
   

  	
  60

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.10

  	
   

  	
  Entire Agreement

  	
   

  	
  61

  

 

 

RESEARCH,
DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

THIS RESEARCH, DEVELOPMENT AND COMMERCIALIZATION
AGREEMENT is made this      day of May, 2006, (the “Effective
Date”) (the “Agreement”), by and between CombinatoRx, Incorporated (“CombinatoRx”),
a Delaware corporation with principal offices at 245 First Street, Cambridge,
MA, 02142 (“CombinatoRx”), and Cystic Fibrosis Foundation Therapeutics
Incorporated, a Maryland corporation with principal offices at 6931 Arlington
Road, Bethesda, Maryland 20814 (“CFFT”). CombinatoRx and CFFT may each
be referred to as a “party” and collectively, as the “Parties.”

WHEREAS, CombinatoRx is a biopharmaceutical company
focused on developing new medicines built from synergistic combinations of
approved drugs and has created a systematic combination high throughput
screening platform for the discovery of such combinations; and

WHEREAS, CFFT is a Section 501(c)(3) organization
the principal charitable mission of which is to foster the discovery and
development of methods of treatment for cystic fibrosis; and

WHEREAS, CFFT wishes
to enter into this Agreement with CombinatoRx to accelerate the discovery,
development and commercialization of cystic fibrosis drug products.

NOW, THEREFORE, in
consideration of the mutual covenants set forth in this Agreement, and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, accepted and agreed to, the Parties hereby agree as
follows:

[*]
Portions of this exhibit have been omitted pursuant to a confidential treatment
request. An unredacted version of this exhibit has been filed with the
Commission.

 1
 

 

ARTICLE
I - DEFINITIONS

For purposes of this Agreement, the terms defined in
this Article 1 shall have the following meanings whether used in their singular
or plural forms. Use of the singular shall include the plural and vice versa,
unless the context requires otherwise:

1.1      “Active Ingredient”
means any component of a drug intended to furnish pharmacological
activity or other direct effect in the treatment of disease, or to affect the
structure or any function of the body of humans or other animals. Active
Ingredients include those components of the product that may undergo chemical
change during the manufacture of the Drug Product and be present in the Drug
Product in a modified form intended to furnish the specified activity or
effect.

1.2      “Affiliate” shall mean, with
respect to any Person, any other Person who directly or indirectly, by itself
or through one or more intermediaries, controls, or is controlled by, or is
under direct or indirect common control with, such Person. The term “control”
means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Control will be
presumed if one Person owns, either of record or beneficially, more than 50% of
the voting stock of any other Person. For the avoidance of any doubt, the
Cystic Fibrosis Foundation and CFFT are considered to be Affiliates.

1.3      “Agreed
Lab” shall have the meaning ascribed to it in Section 2.7.2.

1.4      “Agreed Upon Purchase Price” shall
have the meaning ascribed to it in Section 5.11.

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1.5      “Budget” shall mean the budget set
forth in Exhibit A, as it may be revised from time to time in accordance
with this Agreement.

1.6      “CF” means the disease known as
Cystic Fibrosis.

1.7      “CF Field” means the treatment of
humans diagnosed with CF.

1.8      “CFFT Background Intellectual Property”
shall mean Intellectual Property owned or licensed by CFFT on or prior to the
Effective Date together with any modifications or enhancements to such
Intellectual Property.

1.9      “CFTR” shall mean a CF
transmembrane conductance regulator protein which has the biological effect of transporting
molecules across human cellular membranes.

1.10   “Clinical Development Candidate” shall
mean a Compound that meets the Clinical Development Candidate Criteria for the
initiation of a Clinical Development Program in the Field, and which is the subject
of a written notice from CombinatoRx to CFFT that CombinatoRx intends to
commence development of the Compound in the Field pursuant to the provisions of
Section 3.1 hereof.

1.11   “Clinical Development Candidate Criteria”
shall mean the criteria determined by the JRC, as defined in Section 1.32
hereof, which shall be applicable to any Compound selected by CombinatoRx as a
Clinical Development Candidate hereunder.

1.12   “Clinical Development Candidate
Information” shall mean a summary of all material information known to
CombinatoRx about a Clinical Development Candidate, which CFFT, the JRC and the
JSC, reasonably needs in order to assess the potential of that Clinical 

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Development
Candidate as a treatment for CF.

1.13   “Clinical Development Plan” shall have
the meaning ascribed to it in Section 3.2.2 hereof.

1.14   “Clinical Development Program” shall
mean activities associated with the clinical development of a Drug Product
Candidate which are conducted by or at the direction of CombinatoRx, its
Affiliates, licensees or sublicensees, including but not limited to:  (a) manufacture and formulation of Drug
Product Candidates for use in clinical trials; (b) planning,
implementation, evaluation and administration of human clinical trials; (c) manufacturing
process development, scale-up and manufacture/analysis/ quality control/quality
assurance of Drug Product Candidate for clinical trials; (d) preparation
and submission of applications for Regulatory Approval; and (e) post-market
monitoring of approved drug indications, as required or agreed as part of a
marketing approval by any governmental regulatory authority.

1.15   “CombinatoRx Background Intellectual
Property” shall mean Intellectual Property owned or licensed by CombinatoRx
on or prior to the Effective Date together with any modifications or
enhancements to such Intellectual Property.

1.16   “CombinatoRx
Share” shall have the meaning ascribed to it in Section 4.1.

1.17   “Commercially
Reasonable Efforts” shall mean efforts and resources commensurate with the
efforts and resources in research and development used by a reasonable party
for projects of commensurate economic value taking into account the then state
of scientific knowledge and available resources.

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1.18   “Compound” shall mean a single Active
Ingredient or a combination of two or more Active Ingredients together with
pro-drugs, metabolites, racimers, isomers, enantiomers, salts, esters,
free-base, free-acid and optically active forms of any of the foregoing with
respect to which screening has been conducted in connection with the Research
Program.

1.19   “Confidential Information” shall have
the meaning ascribed to it in Section 6.1 hereof.

1.20   “Discussion Period” shall have the
meaning ascribed to it in Section 5.11 hereof.

1.21   “Drug Product” resulting from a Drug
Product Candidate shall mean a finished dosage form which is approved by a
regulatory authority for administration to patients as a pharmaceutical.

1.22   “Drug Product Candidate” shall mean
any Clinical Development Candidate for which a Clinical Development Program has
commenced under Section 3.1 hereunder.

1.23   “Early Termination Decision” shall
have the meaning ascribed to it in Section 10.4.

1.24   “Effective Date” shall be the date on
which this Agreement is fully executed and delivered.

1.26   “Field” shall mean the treatment of
conditions or diseases in the CF Field, asthma, chronic bronchitis and chronic
obstructive pulmonary disease.

1.26   “First Sale” shall mean the first sale
of a Drug Product by CombinatoRx or an Affiliate, licensee or sublicensee of
CombinatoRx in the Territory following Regulatory 

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Approval of the Drug Product, or if no such Regulatory Approval or
similar marketing approval is required, then the date on which the Drug Product
is first commercially launched. For the avoidance of doubt, sales prior to
receipt of all Regulatory Approvals, such as so-called “treatment IND sales,” “named
patient sales” and “compassionate use sales,” shall not be construed as a First
Sale.

1.27   “Go Decision” shall have the meaning
ascribed to it in Section 10.4.

1.28   “Intellectual
Property” means any discovery, invention, formulation, know-how, method,
technological development, enhancement, modification, improvement, work of
authorship, computer software (including, but not limited to, source code and
executable code), patent, patent applications, trade secrets and documentation
thereof, data or collection of data, whether patentable or not, or susceptible
to copyright or any other form of legal protection.

1.29   “Interruption” means the cessation of
Commercially Reasonable Efforts directed toward development and
commercialization of activities prior to commercial launch of a Drug Product in
the Field for more than [*].

1.30   “Interruption License Data Package”
shall mean all information known by CombinatoRx about a Clinical Development
Candidate or a Drug Product Candidate, as the case may be, which CFFT
reasonably needs to pursue the Interruption License and which was generated or
developed pursuant to this Agreement. Without limitation, such information
shall include screening and assay data; results from animal model studies;
copies of relevant sections from laboratory notebooks; reports, results and
data related to PK, ADME and toxicology studies; protocols and clinical study
reports.

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1.31   “Joint
Development Committee” or “JDC” shall have the meaning ascribed to
it in Section 3.2  hereof

1.32   “Joint Research Committee” or “JRC”
shall have the meaning ascribed to it in Section 2.4 hereof.

1.33   “Joint Steering Committee”“ or “JSC”
shall have the meaning ascribed to it in Section 2.5 hereof.

1.34   “Lead Compounds” shall have the
meaning ascribed to it in Section 2.7.4.

1.35   “NDA” means a New Drug Application or
the equivalent, and all supplements pursuant to the requirements of the FDA,
including all documents, data and other information concerning Drug Products
which are necessary for FDA approval to market a Drug Product, or the
equivalent governmental approval in any other country.

1.36   “Negative Difference” shall have the
meaning ascribed to it in Section 4.3.

1.37   “Negative Go Decision” shall have the
meaning ascribed to it in Section 10.4.

1.38   “Net Sales” with respect to any Drug
Product shall mean the gross amount invoiced by CombinatoRx and any CombinatoRx
Affiliate, licensee or sublicensee for that Drug Product sold in bona fide,
arms-length transactions to Third Parties for use in the Field, less: (i) quantity
and/or cash discounts from the gross invoice price which are actually allowed
or taken; (ii) freight, postage and insurance included in the invoice
price; (iii) amounts repaid or credited by reasons of rejections or return of goods or because
of retroactive price reductions specifically identifiable to the Drug Product; (iv) amounts
payable resulting from government (or 

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agency thereof) mandated rebate programs; (v) third-party
rebates to the extent actually allowed; (vi) invoiced customs duties and
sales taxes (excluding income, value-added and similar taxes), if any, actually
paid and directly related to the sale that are not reimbursed by the buyer; and
(vii) any other specifically identifiable amounts included in the Drug
Product’s gross invoice price that should be credited for reasons substantially
equivalent to those listed above; all as determined in accordance with
CombinatoRx’s usual and customary accounting methods, which are in accordance
with generally accepted accounting principles. Net Sales shall also include
licensing fees, upfront payments, milestone payments and the like received from
Third Parties in exchange for an interest in any Drug Product or Clinical
Research Candidate or Drug Product Candidate. Payments received in other than
cash shall be included in Net Sales at their fair market value.

1.39   “Non Offering Party” shall have the
meaning ascribed to it in Section 5.11 hereof.

1.40   “Offered
Royalty Stream” shall have the meaning ascribed to it in Section 5.11
hereof.

1.41   “Offering Party” shall have the
meaning ascribed to it in Section 5.11 hereof.

1.42   “Patents” means all existing patents
and patent applications and all patent applications hereafter filed, including
any continuation, continuation-in-part, divisional, provisional or any
substitute applications, any patent issued with respect to any such patent
applications, any reissue, reexamination, renewal or extension (including any
supplementary protection certificate) of any such patent, and any confirmation
patent or registration patent or patent of addition based on any such patent,
and all foreign counterparts of any of the foregoing.

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1.43   “Person” means any individual,
corporation, partnership, association, limited liability company, joint-stock
company, trust, unincorporated organization or government or political
subdivision thereof.

1.44   “Prime Rate” shall mean the average
prime rate published in the Wall
Street Journal during the relevant period.

1.45   “Purchase Amount” shall have the
meaning ascribed to it in Section 5.11 hereof.

1.46   “Purchase Documentation” shall have
the meaning ascribed to it in Section 5.11 hereof.

1.47   “Regulatory
Approval” shall mean, with respect to any country, all authorizations by
the appropriate governmental entity or entities necessary for commercial sale
of a Drug Product
in that country including, without limitation and where applicable, approval of
labeling, price, reimbursement and manufacturing. “Regulatory Approval” in the
United States shall mean final approval of a new drug application pursuant to
21 CFR § 314, permitting marketing of the applicable Drug Product in interstate
commerce in the United States. “Regulatory Approval” in the European Union
shall mean final approval of a marketing authorization application, or
equivalent.

1.48   “Research Initiation Date” shall mean
the date on which the Research Plan is approved the Parties

1.49   “Research Plan” shall have the meaning
set forth in Section 2.3 hereof.

1.50   “Research Program” shall mean all
research activities undertaken under this 

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Agreement associated with the identification and design of Compounds
and Clinical Development Candidates as provided herein; including but not
limited to the identification and initial testing of Compounds; the conduct of
those activities referenced in the Clinical Development Candidate Criteria with
respect to Compounds; selection of Clinical Development Candidates and the
presentation of those Clinical Development Candidates and related Clinical
Development Candidate Information to CFFT.

1.51   “Review Period” shall have the meaning
ascribed to it in Section 5.11 hereof.

1.52   “TDN” shall mean the Therapeutics Development
Network established by Cystic Fibrosis Foundation Therapeutics.

1.53   “Term”
shall mean that period specified in Section 10.1.

1.54   “Territory” shall mean worldwide.

1.55   “Testing Request” shall have the
meaning ascribed to it in Section 2.7.3.

1.56   “Third Party” shall mean any person or
entity which is not a party or an Affiliate of any party to this Agreement.

1.57   “Transfer Notice” shall have the
meaning ascribed to it in Section 5.11.

1.58   “Valid Claim” means a claim in a pending Patent
application or an issued and unexpired patent that (a) has not been
finally cancelled, withdrawn, abandoned or rejected by any administrative
agency or other body of competent jurisdiction not subject to further appeal, (b) has
not been revoked, held invalid, or declared unpatentable or unenforceable in a
decision of a court or other body of competent jurisdiction that is
unappealable or unappealed within the 

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time allowed for appeal, (c) has not been rendered unenforceable
through disclaimer, abandonment, withdrawal or otherwise, and (d) with
respect to a claim in a pending patent application, such claim is being
actively prosecuted in good faith and is believed in good faith to meet the
requirements of patentability in the relevant jurisdiction.

ARTICLE II— RESEARCH PROGRAM

2.1      Commencement;
Objective.

CombinatoRx will be responsible for the conduct of the
Research Program and CFFT will provide financial support, consultation and
advice as provided herein and through its participation on the JRC, the JSC and
the JDC, as provided below. The Research Program will be directed toward the
identification of Clinical Development Candidates which may be suitable for
development and commercialization in the CF Field.

2.2      Research
Diligence.

The common objective of the Parties is to identify
Clinical Development Candidates for CFTR modulation for development and
marketing under the terms of this Agreement. CombinatoRx will use Commercially
Reasonable Efforts, consistent with prudent business judgment, to perform in vitro studies, in vivo studies, pharmacological studies and formulation studies to
potentially identify Clinical Development Candidates and to potentially
commence the development of those Clinical Development Candidates as Drug
Product Candidates. Subject to funding by CFFT and the timely performance by
CFFT of its obligations under this Agreement, CombinatoRx will dedicate to the
Research Program that level of staffing referenced in the Research Plan. CFFT
will dedicate to the Research Program that level of funding referenced in 

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the Budget attached
hereto as Exhibit A, as it may be modified from time to time in accordance
with this Agreement.

2.3      Research
Plan.

CombinatoRx and CFFT agree that they will finalize the
Research Plan as the basis for the Research Program and complete the
preparation of the Research Plan within sixty (60) days following the Effective
Date. The date on which the Research Plan is finalized shall be designated as
the  “Research Initiation Date”. Once
completed and agreed upon by the Parties, the Research Plan shall be attached
hereto as Exhibit B. At each meeting of the JRC, the members will review
and evaluate the Research Plan, taking into consideration ongoing research
outcomes and other scientific and commercial developments, and any resulting
modifications recommended by the JRC will be incorporated into the Research
Plan (the original plan, and any such modifications are referred to herein as
the “Research Plan”). Modifications to the Research Plan may be proposed by
either CombinatoRx or CFFT and will be reviewed by the JRC before being adopted.
No modifications to the Research Plan shall change the scope of the Research
Plan in a manner that would require CombinatoRx, without its written approval,
to devote more resources from the allocation specified in the Research Plan in
the performance of all of its obligations under this Agreement or  increases the materials and capital equipment
required for CombinatoRx to perform its activities under the Research Plan. No
modification to the Research Plan shall increase the financial support CFFT has
agreed to provide without its written approval.

2.4      Joint
Research Committee.

2.4.1.             Composition
and Purposes. CombinatoRx and CFFT will establish a
Joint Research Committee (“JRC”) consisting initially of six (6) members
(as may be increased 

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or decreased by the JRC) with the requisite experience and seniority to enable them to make
recommendations on behalf of the Parties with respect to the initiation,
planning and performance of the activities of the Research Program, half
of whom shall be designated from time to time by each party. If the JRC chooses
to designate a Committee Chair, the Chair will be appointed from among the
members of the JRC designated by CombinatoRx. The JRC shall terminate upon the
formation of the JDC. The JRC shall meet, in person or by conference telephone,
formally no less frequently than once in each three (3) month period
during the Research Program, and at such time and location or by such
means,  as may be established by the JRC,
for the following purposes:

(i)     To review reports
prepared by CombinatoRx, which shall be submitted to the JRC at least fifteen
(15) days prior to each meeting, and shall include a summary in written text of
the progress made during the preceding three (3) month period under the
Research Plan;

(ii)   To review and discuss the Research Plan and
to evaluate, consider and make recommendations to the JSC regarding any
proposed revisions to the Research Plan; and

(iii)  To
recommend to the JSC amendments to the Clinical Development Candidate Criteria
as required.

(iv)   To review the criterion for the selection of Clinical
Development Candidates proposed by
CombinatoRx and to assess whether a Clinical Development Candidate proposed by CombinatoRx meets the Clinical Development Candidate Criteria.

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CombinatoRx shall prepare and deliver minutes of the
meetings to the members of the JRC, within thirty (30) days after the
adjournment date of each meeting, setting forth, inter alia, all recommendations of the JRC, and including as
an attachment the report on the progress of work performed required by Section 2.4.1(i).

2.4.2              Decision-Making.

(i)     The objective of the JRC
shall be to reach consensus on all matters within the scope of the Research
Plan. However, in the event consensus cannot be reached with respect to any
matter either party shall request in writing referral to the JSC for
resolution.

(ii)   Regarding
the following matters referred to the JSC:

(x) as to whether or not a given Compound
proposed by CombinatoRx as a Clinical Development Candidate meets the Clinical
Development Candidate Criteria, any disagreement between the Parties that
cannot be resolved by the JRC within ten (10) days shall be referred to
the JSC for resolution and if not resolved by the JSC within seven (7) business
days after referral, shall be referred for resolution by the Chief Executive
Officer of CombinatoRx and the Chief Executive Officer of CFFT, and failing
resolution at that level, the matter shall be referred for final decision under
the provisions of Section 13.2(b) of this Agreement; and

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(y) as to the nature and extent of any additional
Clinical Development Candidate Criteria referenced in Section 2.4.3
hereof, if any disagreement cannot be resolved by the JRC and the JSC as
provided in (x) above, then there will be no change in the Clinical
Development Candidate Criteria.

(iii)    Each
party shall retain the rights, powers, and discretion granted to it under this
Agreement, and the JRC shall not be delegated or vested with any such rights,
powers or discretion except as expressly provided in this Agreement. The JRC
shall not have the power to amend or modify this Agreement, which may only be
amended or modified in a writing executed by the Parties.

2.4.3              Additional
Clinical Development Candidate Criteria. The Parties acknowledge that it may be
necessary or appropriate after the Effective Date to adopt additional Clinical
Development Candidate Criteria which
more specifically define the pre-development characteristics of Compounds which
the Parties believe may be suitable for development and commercialization based
upon the particular features of that Compound. The Parties will use good faith
efforts through their respective representatives on the JRC to agree on any
such additional Clinical Development
Candidate Criteria as soon as practicable after a change is proposed to the JRC
by either party. Any disagreements with respect to the selection of additional Clinical
Development Candidate Criteria
hereunder will be addressed as provided in Section 2.4.2(ii).

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                2.5          Joint Steering Committee.

2.5.1       Composition
and Purposes.  CombinatoRx and CFFT will establish a Joint
Steering Committee (“JSC”) which shall consist of an equal number of senior
management personnel from
each party with the requisite experience and seniority to enable them to make
decisions on behalf of the Parties with respect to the initiation, planning and
performance of the activities of the Research Program, as may be agreed by the Parties from time to
time. The JSC shall initially have a total of four (4) members. If the JSC
chooses to designate a Committee Chair, the Chair will be appointed from among
the members of the JSC designated by CombinatoRx. The JSC shall terminate upon
the completion of the Research Program. The JSC shall meet, in person or
by conference telephone, annually, or
with such other frequency, and at such time and location or by such
means, as may be established by the
Committee, for the following purposes:

(i)          To provide general oversight of the Research Program;

(ii)        To
periodically review the overall goals and strategy of the Research Program;

(iii)       To
discuss and attempt to resolve any deadlocked issues submitted to it by the
JRC, although the vote of CombinatoRx’s representatives shall prevail if the
JSC is unable to reach a consensus on any matter other than matters referred to
it under Section 2.4.2(ii)(x) and 2.4.2(ii)(y), which shall be
resolved as provided therein.

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                2.6          Exchange of Information.

                       2.6.1       Sharing of Information. CombinatoRx will share information with the
JRC and JSC on a confidential basis as soon as practicable following its
availability; as is necessary to facilitate mutual understanding of the status
of the Research Program and decision-making in connection therewith.

                       2.6.2       Restrictions on CFFT Use. CFFT shall not use CombinatoRx Background
Intellectual Property, now or at any time in the future, for any purpose,
including, without limitation, the filing of patent applications containing
such information.

                2.7          Third Party Testing.

                       2.7.1       CFFT Testing Request. At
CFFT’s written request (a “Testing Request”) delivered as provided below,
CombinatoRx will, in accordance with the provisions of this Agreement, supply
to an Agreed Lab reasonably adequate quantities of its Lead Compounds as
necessary to enable the Agreed Lab to conduct in
vitro testing of the efficacy and potency of the Lead Compounds in
agreed CF assay models. All such testing will be undertaken at the expense of
CFFT in addition to any funding otherwise provided hereunder. Notwithstanding
anything to the contrary herein contained, CFFT agrees, that as a condition to
CombinatoRx complying with the provisions of this Article 2.7, CFFT agrees
that all test results, data, reports and the like relating to testing by an
Agreed Lab (the “Reports”) shall be CombinatoRx’s Confidential Information and
shall be made available to CombinatoRx and CFFT simultaneously. CombinatoRx
shall be considered the owner of the Reports and any Intellectual Property
derived therefrom or from the testing activities of the Agreed Lab and may use
the Reports and any Intellectual Property therefrom as it deems appropriate.

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                       2.7.2       Agreed Lab. An Agreed
Lab is a testing laboratory unaffiliated with either CFFT or CombinatoRx and
reasonably acceptable to both Parties, which (a) agrees to render services
to CFFT; (b) would be free of any real or apparent conflict of interest in
performing the services which are the subject of this Section 2.7; and (c) is
bound by the terms of a confidentiality 
and invention assignment agreement with CombinatoRx which is customary
in form and content, which covers the testing contemplated by this Section 2.7,
and which permits the Agreed Lab to report to CFFT, directly, the results which
it obtains with respect to efficacy and potency of the Lead Compounds, but only
those results.

                       2.7.3       Testing Request. A
Testing Request is a written request relating to the testing of Lead Compounds
which is delivered by CFFT to CombinatoRx during any of the following
periods:  (i) the ninety (90) day
period prior to the due date for potential delivery to CombinatoRx of any Early
Termination Notice under Section 10.4 hereof; (ii) the sixty (60) day
period following the delivery by either party to the other of a Research
Extension Proposal as provided in Section 10.1 hereof, and (iii) the
ninety (90) day period prior to the date CFFT will be asked to make a Go
Decision. CombinatoRx shall respond to a Testing Request in a commercially
reasonable  manner with the goal of  allowing CFFT adequate time to perform testing
prior to the dates specified above.

                       2.7.4       Lead Compounds. Lead
Compounds shall mean not more than two Compounds for which a Testing Request is
delivered, which meet the following criteria, as evidenced in writing signed by
the Parties:  (i) the Compound(s) have
been selected by CFFT, as relevant to the Testing Request; (ii) each
Compound will be representative of those Compounds in which CombinatoRx
believes to be the most promising as a Clinical Development Candidate; 

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and (iii) each
Compound shall have been previously tested by CombinatoRx, in vitro, as to potential efficacy and
potency in CF, and the results of that testing shall have been provided to
CFFT.

                       2.7.5       CombinatoRx Cooperation. CombinatoRx
will provide the Agreed Lab with reasonably required amounts of each Lead
Compound, in connection with written Testing Requests from CFFT as provided
above, and up to three additional Compounds out of any supplies which
CombinatoRx may have on hand, the chemical structures of which have been published
by CombinatoRx in peer-reviewed journals or through posters or presentations at
scientific conferences, which the Agreed Lab may use for control purposes;
CombinatoRx also will provide telephone consulting to appropriate
representatives of the Agreed Lab concerning applicable assay methodology. If
the Parties indicate in writing that conventional testing will not yield
adequate results, and upon the written request of CFFT rendered with due regard
to the lead time which may be required to establish an assay based on
proprietary protocols from CombinatoRx, CombinatoRx will provide its
proprietary assay protocol to the Agreed Lab sufficiently in advance of any
testing provided for in this Section 2.7 to accommodate such testing,
under provisions of confidentiality, restricted access and non-use (for other
than testing hereunder), and will ensure that appropriate CombinatoRx
representatives are available by telephone from time to time to answer
questions and otherwise assist the Agreed Lab representatives in its efforts to
establish CombinatoRx’s proprietary assay. CombinatoRx shall in no event be
responsible for any failure by the Agreed Lab to establish an effective assay
using CombinatoRx’s protocols, nor shall any time periods provided herein for
action by CFFT be extended by reason of any such failure.

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ARTICLE
III- CLINICAL DEVELOPMENT

                3.1          Commencement of Clinical Development
Program.

                As soon as practicable
following CombinatoRx’s identification of a Clinical Development Candidate
which it believes meets the Clinical Development Candidate Criteria, it will so
notify CFFT and the JRC in writing, and will include with that notice the
Clinical Development Candidate Information with respect to that Clinical
Development Candidate. Once the JRC agrees in writing that a Clinical
Development Candidate meets the Clinical Development Candidate Criteria this
shall signify the designation of said Clinical Development Candidate as a Drug
Product Candidate. For each designated Clinical Development Candidate,
CombinatoRx shall propose, and CFFT shall approve, a Clinical Development
Program and budget. Once approved by CFFT in writing, CombinatoRx will promptly
commence and pursue a Clinical Development Program with respect to that Drug
Product Candidate in accordance with Section 3.2 hereof, with the payment
by CFFT made to CombinatoRx as set forth in Section 4.2 hereof, applying
diligent, Commercially Reasonable Efforts to develop selected Drug Product
Candidates into Drug Products. CombinatoRx shall use CFFT’s Data Safety
Monitoring Board and the Therapeutics Development Network (“TDN”), as feasible,
in connection with its clinical trials involving CF patients.

                3.2          Joint Development Committee.

3.2.1       Formation and Responsibilities. As soon as practicable after the commencement
by CombinatoRx of a Clinical Development
Program with respect to a Drug Product Candidate, CombinatoRx will establish a
Joint Development Committee (“JDC”). Additional JDC’s may be established from
time to time in connection with the development of 

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additional
Drug Product Candidates. CFFT shall appoint one-half of the members of the JDC
for the period beginning with the formation of the JDC and ending on the second
anniversary following the last date on which CFFT provides Phase1 and Phase 2a
funding to CombinatoRx. Thereafter, the JDC shall include one representative to
be designated by CFFT. The JDC (or its successor organization, as designated by
CombinatoRx) will be the principal body through which the development of a Drug
Product Candidate is planned, evaluated and managed, subject to appropriate
review and approval as required by CombinatoRx from time to time. In addition
to the CFFT members, the JDC will typically have members from the various
functional groups (e.g., research, preclinical safety, clinical, regulatory,
and marketing) which are or will be expected to be involved in development and
launch of the Drug Product Candidate. CombinatoRx will appoint the JDC Chair. The
JDC will typically meet at least quarterly, depending on the level of current
development activity, and will be responsible for preparation and
implementation of the Clinical Development
Plan described in Section 3.2.2 with respect to each Drug Product
Candidate. The JDC shall terminate upon the earlier of either the grant of an
NDA for the Drug Product Candidate or the termination of the Clinical
Development Program for the Drug Product Candidate. CombinatoRx’s
representatives shall have the ultimate decision-making authority if the JDC is
unable to reach a consensus and/or agreement on any matter. For avoidance of
doubt, it is agreed and understood that Section 13.2 shall not apply to
any matters or issues arising under Sections 3.2.1 through 3.2.3.

3.2.2       Clinical
Development Plan. The
JDC shall be responsible for reviewing the goals and strategy for development
of each Drug Product Candidate and shall oversee the implementation of an
overall Clinical Development
Plan for each Drug Product Candidate. The Clinical Development Plan and budget shall, among
other things, detail, schedule and describe 

 21
 

 

the proposed toxicology and
pharmacokinetic studies, clinical trials, regulatory plans, clinical trial and
commercial material requirements, and process development and manufacturing
plans for each Drug Product Candidate, along with relevant budget information
for the described items, and will outline the key elements involved in
obtaining Regulatory Approval in each country where the Drug Product is to be
marketed.

3.2.3       Meeting
Materials. The JDC
will consider all information that is material to an assessment of the status,
direction and progress of each Clinical Development Program, including all clinical trial protocols, data and
reports. The JDC Chair will have minutes prepared and distributed to each
member of the JDC promptly after each meeting. Those minutes shall contain a
report on the activities of the JDC during its meeting. CFFT’s representatives
on the JDC will receive all documents and information distributed or
communicated to members of the JDC, and may review copies of all other
information material to the development of a Drug Product Candidate. CFFT shall
treat all such documents and information as Confidential Information.

 22
 

 

                3.3          Clinical Development Responsibility.

                CombinatoRx
will have sole responsibility for administering the Clinical Development
Program with respect to each Drug Product Candidate.

                3.4          Regulatory Approvals.

                CombinatoRx shall be solely
responsible for preparing and submitting submissions for Regulatory Approval of
Drug Product Candidates in the Territory.

3.4.1       CombinatoRx
Ownership. All
Regulatory Approvals shall be held by and in the name of CombinatoRx and all
submissions in connection with Regulatory Authorities shall be in the name of
and owned by CombinatoRx.

3.4.2       Principal
Interface. All
formulary or marketing approvals shall also be submitted by and obtained  in the name of CombinatoRx, and CombinatoRx
will exclusively handle all interactions with regulatory agencies concerning
any Drug Product Candidate or Drug Product.

3.4.3       Regulatory
Meetings. Upon
written request of CombinatoRx, CFFT will arrange for one or more
representatives of CFFT to participate in meetings between representatives of
CombinatoRx and any of the FDA, the EMEA and Koseisho (MHW Japan).

                3.5          Data and Material Transfer. After the completion of clinical studies of a
Drug Product Candidate, CombinatoRx shall transfer data from all study visits
and patients to the TDN Data Bank. CFFT will remove from such data all patient
identifiers, will ensure the integrity and confidentiality of such information
and shall indemnify CombinatoRx and its affiliates pursuant to Section 8.2
for any losses incurred by CRXX for the disclosure of patient data or breach of

 23
 

 

confidentiality. The TDN
Data Bank (as further described in Exhibit C) is a central repository for
data from completed TDN studies to serve as a resource of data from CF clinical
trials. In addition, CombinatoRx shall collect two (2) milliliters of
plasma from each patient enrolled in clinical trials during each blood draw and
transfer it to the CFFT specimen bank. CFFT will reimburse CombinatoRx for any
incremental costs CombinatoRx incurs in collecting the data and materials. CFFT
will delay the release of such data and materials as is appropriate to protect
the Intellectual Property generated by the Research Program.

ARTICLE IV — PAYMENTS

                4.1          Staffing and Research Support
Payments.

                       (a)           CFFT will make payments to
CombinatoRx in support of the Budget. The initial Budget shall cover estimated
costs for the Research Program during each annual period encompassed by the
Research Program prior to the Go Decision. If a Go Decision is made, CFFT will
pay seventy-five percent (75%) and CombinatoRx will pay twenty-five percent
(25%) (the “CombinatoRx Share”) of the Phase I and Phase IIa costs of the first
Drug Product  Candidate and the Budget
shall be modified as part of the Go Decision process to project such costs. The
Parties will negotiate in good faith with respect to any level of financial
support CFFT will provide for any subsequent Drug Product Candidate. Any
material revisions to the Budget which would result in an increase in total
funding for the Research Program by CFFT will require the prior approval of
CFFT.

(b)           In addition to the foregoing, all
licensing costs required to obtain a license necessary for the performance of
the Research Program will be borne by CFFT after CFFT’s 

 24
 

 

prior review
and approval. Any royalties required by such license shall be subject to Section 5.9.

(c)           Payments due under the Budget on account of internal FTEs
shall be made by CFFT quarterly in advance, except the payment for the quarter
following the Research Initiation Date shall be made pursuant to this
subparagraph following receipt of an invoice submitted to CFFT by CombinatoRx
after the Research Initiation Date. FTE’s shall be identified on invoices or in
the budget by the individual constituting the FTEs. During the quarter
following its invoicing, internal FTE shall be trued up to actual with
appropriate adjustment to such quarter’s payment. Internal FTE costs will be
calculated at an annual rate of $[*] per FTE. Payments due under the Budget on
account of external costs shall be made by CFFT quarterly in arrears. Payment
pursuant to this Section 4.1 shall be made within thirty (30) days following
receipt of an invoice from CombinatoRx for such costs accompanied by reasonable
documentation of such costs and, during Phase I and IIa of clinical
development, reasonable evidence that CombinatoRx has paid the CombinatoRx
Share. All payments shall be made without deduction for withholding or other
similar taxes, in United States dollars to the credit of such bank account as
may be designated by CombinatoRx in writing to CFFT. Any payments which are due
on a date which is a legal holiday in the Commonwealth of Massachusetts may be
made on the next following day which is not a legal holiday in the Commonwealth.
On or before each January 31 during the Term, CombinatoRx will provide
CFFT with an accounting of all internal FTE costs and outsourcing costs
incurred under the Research Program during the most recently concluded calendar
year. Costs incurred will be compared with funds provided by CFFT on account of
that year, and any excess of funds provided over costs incurred will be
refunded to CFFT within thirty (30) days or, as to amounts due while the
Research Program is ongoing, applied as a credit against amounts due with
respect to the following quarter[s].

 25
 

 

(d)           If CombinatoRx continues the
development of a Drug Product Candidate beyond Phase IIa clinical trials, all
development, clinical and regulatory costs and expenses will be borne by
CombinatoRx.

                4.2          Clinical Trial Commencement Milestone.

CFFT will pay to
CombinatoRx within thirty (30) days of receipt of invoice from CombinatoRx,
accompanied by appropriate documentation, such as a copy of the NDA, of the
milestone event specified below, a non-refundable and non-creditable milestone
payment in accordance with respect to the each Drug Product Candidate under the
Clinical Development Program. Such milestone payment shall be made whether or
not a Go Decision has been made or the Research Program has previously
terminated if it occurs during the original Term of the Research Program as it
may be extended by the Parties in accordance with this Agreement, but it shall
not be made if the milestone event occurs after an Interruption. 

 26
 

 

 

	
  Milestone Event

  	
   

  	
  Amount

  
	
   

  	
   

  	
   

  
	
  1. Opening of an
  IND

  	
   

  	
  $[*]

  
	
   

  	
   

  	
   

  
	
  2. At the
  initiation of a Phase III of a Drug Product Candidate after CFFT has received
  and approved a commercialization plan for the Drug Product Candidate prepared
  by CombinatoRx

  	
   

  	
  $[*]

  
	
   

  	
   

  	
   

  
	
  3. Approval of
  NDA

  	
   

  	
  $[*]

  

                4.3          Records.

                CombinatoRx shall provide a
quarterly report summarizing the FTEs, the activities that the FTEs were
engaged in, and external costs incurred by CombinatoRx in the Research Program.
CFFT’s internal auditors shall have the right at its expense to audit
CombinatoRx’s relevant records to verify compliance with FTE and other research
funding allocation requirements hereunder. CFFT and CombinatoRx will agree on a
time for the audit.

                At CFFT’s request,
CombinatoRx shall make those records available no more than once a year during
reasonable working hours for review by CFFT internal auditors for the sole
purpose of verifying the accuracy of those records in the calculation of
Research Program FTEs and external costs. CombinatoRx shall not, however, be
required to retain or make available to CFFT or its accountants, any such
records or books of account beyond thirty-six (36) months after the termination
of the Research Program. CFFT shall retain all such information as Confidential
Information.

                In the event that the aggregate costs actually
chargeable to the Research Program during any year are different than the
amount previously paid to CombinatoRx by CFFT for any year (a 

 27
 

 

“Difference”),
CombinatoRx will offset the Difference against requests for payments due from
CFFT pursuant to the Budget, or if the Difference occurs in the final year of
the Research Program, CombinatoRx will refund the Difference to CFFT.

ARTICLE
V — COMMERCIALIZATION; ROYALTIES

                5.1          Marketing and Promotion.

                CombinatoRx
and/or its licensees and sublicensees shall have exclusive rights to
manufacture, market, sell and distribute all Drug Products in the Territory.

                5.2          Trademarks.

                CombinatoRx shall have the right to choose, at its
sole discretion, the trademarks under which the Drug Products may be marketed
in the Territory. CombinatoRx shall be the sole owner of such trademarks.

 28
 

 

                5.3          Due Diligence.

                CombinatoRx shall use
Commercially Reasonable Efforts consistent with the requirements of the
Clinical Development Program and reasonable and ethical business practices and
judgment to introduce Drug Products into the Territory after Regulatory
Approval.

                5.4          Royalties on Net Sales in the Field.

(a)           In consideration of CFFT’s payments
and grant of license to CombinatoRx pursuant to this Agreement, CombinatoRx
shall pay to CFFT the following royalties on the Net Sales of Drug Products for
use in the Field:

                                       (i)            [*];

                                       (ii)           [*];

                                       (iii)         [*].

(b)           After any [*] in which [*] since the [*]
shall be substituted for [*].

(c)           For purposes of
subparagraph (a), annual sales shall be calculated on the basis of a calendar
year, and royalties shall be paid [*] pursuant to this Agreement shall be
applied on [*]; and for purposes of subparagraph (b) [*] also shall
be determined on [*].

 29

 

5.5      Reduction
of Royalty.

Notwithstanding Section 5.4, in any country after
any date there is no Valid Claim in such country, the royalty rate payable to
CFFT shall be reduced to [*] of the applicable rate specified in Section 5.4.

5.6      Royalties
on Net Sales Outside the Field.

CombinatoRx shall pay CFFT a royalty of [*] of Net
Sales of Drug Products for use outside the Field.

5.7      Royalties
to CFFT in the Event of a 10.4 Termination.

In lieu of the royalties CFFT will receive pursuant to
Sections 5.4, 5.5 and 5.6:  (a) if
CFFT terminates this Agreement pursuant to Section 10.4 on or before the
second anniversary of the Research Initiation Date: [*]%; or (b) if CFFT
terminates this Agreement pursuant to Section 10.4 after the second
anniversary of the Research Initiation Date: 
[*]%.

5.8      Royalties
to CombinatoRx in the Event of an Interruption License

If CFFT exercises its rights under Section 9.5(c) 
to an Interruption License and a Drug Product is marketed, CombinatoRx shall
receive the following royalties:  if (a) there
has been a Go Decision pursuant to Section 10.4; or (b) CFFT
terminates this Agreement after the second anniversary of the Research
Initiation Date, each party shall share [*] in any royalty or other payment
received with respect to a Clinical Development Candidate, Drug Product
Candidate and Drug Product, provided that, a CFFT’s share shall increase and
CombinatoRx’s share shall decrease by [*] percentage points (or fraction
thereof) for each $[*] (or fraction thereof) 

 30
 

 

additional investment
CFFT makes in the Clinical Development Candidate, Drug Product Candidate and
Drug Product after the effective date of the Interruption License, except that
notwithstanding the foregoing, CombinatoRx’s share shall not decrease below [*]
percent ([*]%). For purposes of determining a party’s “investment” pursuant to
the preceding sentence, such investment shall include only direct expenditures
(i.e., without allocation of overhead)
and (x) only CombinatoRx investment after any CFFT termination pursuant to
Section 10.4 shall be taken into account; and (y) only CFFT’s
investment after an Interruption shall be taken into account; and (z) investments
by both Parties during such times shall be offset against one another prior to
making the determination in the preceding sentence. CombinatoRx shall have the
right at its expense to have a third party auditor review and audit at an
agreed upon time CFFT’s investment in a Drug Product Candidate or Drug Product
after there effective date of the Interruption License. If such auditor’s
report shows less investment by CFFT than reported, and the findings are agreed
upon by CFFT, then the royalty rate shall be adjusted accordingly.

5.9      Royalty
Stacking.

In the event that after the Effective Date (a) CombinatoRx,
its Affiliates or sublicensees determine that it is necessary to pay royalties
or other fees to any Third Party to obtain a license to practice any Third
Party’s rights in order to market or develop a Drug Product Candidate or a Drug
Product in any given country with respect to rights that relate to the
composition, its formulation, or method of use, then in such event, CombinatoRx
and its Affiliates shall pay such royalties or other fees and may deduct [*] of
such royalties due to such Third Parties (or such amounts expended in
settlement of such claim, or for securing such rights) from the 

 31
 

 

royalties otherwise due
to CFFT under this Agreement, provided that such reduction shall not exceed [*]
of the royalties otherwise due to CFFT in such year with respect to such
country.

5.10   Sales
Reports.

5.10.1         Contents. After the First Sale of a
Drug Product, CombinatoRx shall furnish or cause to be furnished to CFFT on a
quarterly basis, a written report or reports covering each calendar quarter
(each such calendar quarter being sometimes referred to herein as a “reporting
period”) within sixty days after the close of each quarter showing:  (i) the Net Sales of each Drug Product
in each country in the world during the reporting period by CombinatoRx and each
Affiliate, licensee and sublicensee; (ii) the royalties, payable in U.S.
dollars (“Dollars”), which shall have accrued under Sections 5.4, 5.6 and 5.7
hereof in respect of such sales and the basis of calculating those royalties; (iii) withholding
taxes, if any, required by law to be deducted from any royalties payable in
respect of any such sales; (iv) the exchange rates used in converting into
Dollars, from the currencies in which sales were made, any payments due which
are based on Net Sales; and (v) dispositions of Drug Products other than
pursuant to sale for cash. With respect to sales of Drug Products invoiced in
Dollars, the Net Sales amounts and the amounts due to CFFT hereunder shall be
expressed in Dollars. With respect to sales of Drug Products invoiced in a
currency other than Dollars, the Net Sales and amounts due to CFFT hereunder
shall be expressed in the domestic currency of the party making the sale,
together with the Dollar equivalent of the amount payable to CFFT, calculated
by translating foreign currency sales into U.S. dollars based on the average of
the exchange rates reported in the Wall Street Journal or comparable
publication over the period covered by the royalty report.

 32
 

 

5.10.2         Payments. Amounts shown to have
accrued by each such sales report provided for under Section 5.10.1,
above, shall be due and payable on the date that such sales report is due.

5.10.3         Currency. All payments shall be made
in United States Dollars. If at any time legal restrictions prevent the prompt
remittance of any payments with respect to any country in the Territory where
Drug Products are sold, CombinatoRx or its sublicensees shall have the right
and option to make such payments by depositing the amount thereof in local
currency to CFFT’s account in a bank or depository in such country.

5.10.4         CFFT Audit of Sales Reports. Upon
the written request of CFFT, at CFFT’s expense and not more than once in or in
respect of any calendar year, CombinatoRx shall permit an independent
accountant of national prominence selected by CFFT to have access during normal
business hours to those records of CombinatoRx as may be reasonably necessary
to verify the accuracy of the sales reports furnished by CombinatoRx pursuant
to this Section 5.10, with respect to any calendar year ending not more
than thirty-six (36) months prior to the date of such notice. The report
prepared by such independent accountant, a copy of which shall be sent or
otherwise provided to CombinatoRx by such independent accountant at the same
time it is sent or otherwise provided to CFFT, shall contain the conclusions of
such independent accountant regarding the audit and will specify that the
amounts paid to CFFT pursuant thereto were correct or, if incorrect, the amount
of any underpayment or overpayment. If such independent accountant’s report
shows any underpayment, CombinatoRx shall remit to CFFT within thirty (30) days
after CombinatoRx’s receipt of such report, (i) the amount of such
underpayment plus interest at the Prime Rate plus two (2) percentage
points calculated from the date the original payment was due, and (ii) if
the amount of the underpayment exceeds 3% of the 

 33
 

 

amount due, the reasonable and necessary fees and
expenses of such independent accountant performing the audit. Any overpayments
shall be fully creditable against amounts payable in subsequent payment periods.
CFFT agrees that all information subject to review under this Section 5.10
or under any sublicense agreement is Confidential Information and that CFFT
shall retain and cause its accountant to retain all such information in
confidence. If CFFT has not requested an audit with respect to any Sales Report
on or before thirty-six (36) months following the end of any calendar year
during which sales reports were rendered, the calculation of amounts payable
with respect to such fiscal year shall be binding and conclusive upon CFFT, and
CombinatoRx shall be released from any liability or accountability with respect
to payments for such year on or before such period.

5.11   Royalty Stream Purchase.

At any time after completion of a Phase III clinical
trial  of a Drug Product Candidate (as
indicated by the final Phase III study report), either party (the “Offering
Party”) shall have the right to propose the purchase or sale (as the case may be)
of all or any portion of the royalties payable to CFFT (the “Offered Royalty
Stream”) under Section 5.4 and 5.6 of this Agreement in accordance with
the procedures set forth hereinafter in this Section 5.11. If CFFT wishes
to sell any interest in such royalties, engaging in the process set forth below
shall be a prerequisite to any sale to a Third Party.

The Offering Party shall propose, in writing, to sell
or purchase (as the case may be) all the royalty stream (or a portion
constituting the royalty stream in a separate territory) for an amount equal to
the net present value of the royalty obligation based on the then customary and

 34
 

 

reasonable standards and
assumptions (including an appropriate discount rate and projected revenue
assumptions) (the “Purchase Amount”).

The Offering Party shall notify the other party (the “Non
Offering Party”) of its offer, such notice to specify the Purchase Amount and
the details, information and assumptions employed by the Offering Party in
determining the Purchase Amount (the “Purchase Documentation”). It is the
intention of the Parties that the Purchase Amount be revenue neutral, meaning
that the Purchase Amount should fairly represent the present value of what CFFT
would have received during the anticipated life of the underlying Drug Product
had CombinatoRx not purchased such royalties.

The Non Offering Party shall have a period of [*] (the
“Review Period”) to consider the Purchase Amount and evaluate the Purchase
Documentation. If it agrees during the Review Period that the Purchase Amount
is revenue neutral, then it shall accept the Purchase Amount in writing and the
Offering Party shall pay the Purchase Amount within [*] following such written
acceptance; and thereafter, CombinatoRx shall have no further royalty
obligations to CFFT or any other party for the Offered Royalty Stream and the
same shall be deemed extinguished. If the Non Offering Party is CombinatoRx, it
may also decide that it does not wish to purchase the Offered Royalty Stream. In
such event, CombinatoRx shall notify CFFT within the Review Period of such
fact, and CFFT shall have the right to sell the Offered Royalty Stream to a
Third Party during the [*] period following such notice. If no such sale is
completed on or before such date, this Section 5.11 shall again be
applicable to any such sale.

 35
 

 

In the event that the Non Offering Party wishes to
sell or purchase (as the case may be) the Offered Royalty Stream but determines
in good faith and after reasonable due diligence and analysis of the Purchase
Documentation that the Purchase Amount is not revenue neutral then, prior to
the expiration of the Review Period, it shall provide the Offering Party with
an amount that would be in the Non Offering Party’s reasonable opinion revenue
neutral together with written documentation supporting such analysis. The
Parties shall thereafter negotiate in good faith for a period not to exceed [*]
(the “Discussion Period”), using their good faith efforts to reach agreement on
the amount to be paid by CombinatoRx to CFFT that would be revenue neutral (the
“Agreed Upon Purchase Amount”), and if the Agreed Upon Purchase Amount is
determined, CombinatoRx shall pay the Agreed Upon Purchase Amount within [*]
days following such written determination; and thereafter, CombinatoRx shall
have no further royalty obligations to CFFT or any other party for the Offered
Royalty Stream and the same shall be deemed extinguished.

If the Parties, notwithstanding their good faith
efforts, are unable to agree upon an Agreed Upon Purchase Amount, then all
offers for the Offered Realty Stream shall be deemed withdrawn and CFFT shall
have the right to sell the Offered Royalty Stream to a Third Party during the [*]
period after the date of the withdrawal. If no such sale is completed on or
before such date, this Section 5.11 shall again be applicable to any such
sale.

ARTICLE VI - CONFIDENTIALITY

6.1      Undertaking.

Each party shall keep confidential, and other than as
provided herein, shall not use or disclose, directly or indirectly, any trade
secrets, confidential or proprietary information, or any 

 36
 

 

other knowledge,
information, documents or materials, owned, developed or possessed by the other
party, whether in tangible or intangible form (“Confidential Information”). All
Confidential Information shall be identified as such by the party disclosing
such information. Neither CFFT nor CombinatoRx will use the other party’s
Confidential Information except as expressly permitted in this Agreement. In
addition:

(a)       Each party shall use the level of care to prevent the unauthorized use
and disclosure of the other party’s Confidential Information that is the same
as  the level of care used for its own
Confidential Information, but not less that a reasonable level of care, and to
prevent unauthorized persons or entities from obtaining or using that
Confidential Information.

(b)       Each party will refrain from directly or indirectly taking any action
which would constitute or facilitate the unauthorized use or disclosure of the
other party’s Confidential Information. Each party may disclose that
Confidential Information to its officers, employees, advisors, consultants and
agents, to Affiliates, to authorized licensees and sublicensees, and to
subcontractors in connection with the development or manufacture of Clinical
Development Candidates, Drug Product Candidates or Drug Products to the extent
necessary to enable such persons to perform their obligations hereunder or
under the applicable license, sublicense or subcontract, as the case may be;
provided, that such officers, employees, agents, licensees, sublicensees and
subcontractors have entered into appropriate confidentiality agreements or obligations
for secrecy and non-use of such Confidential Information.

 37
 

 

(c)       Each party shall be liable for any unauthorized use and disclosure of the
other party’s Confidential Information by its officers, employees, advisors,
consultants, Affiliates and agents and any such sublicensees and
subcontractors.

6.2      Exceptions.

Notwithstanding the foregoing, the provisions of Section 6.1
hereof shall not apply to Confidential Information which the receiving party
can conclusively establish:

(a)       has entered the public domain without such party’s breach of any
obligation owed to the disclosing party;

(b)       is permitted to be disclosed by the prior written consent of the
disclosing party;

(c)       has become known to the receiving party from a source other than the
disclosing party, other than by breach of an obligation of confidentiality owed
to the disclosing party;

(d)       is disclosed by the disclosing party to a Third Party without
restrictions on its disclosure;

(e)       is independently developed by the receiving party without breach of this
Agreement as demonstrated by the receiving parties contemporaneously made
written records; or

 38
 

 

(f)        is required to be disclosed by the receiving
party to comply with applicable laws or regulations, to defend or prosecute
litigation or to comply with governmental regulations, provided that the
receiving party provides prior written notice of such disclosure to the
disclosing party and takes reasonable and lawful actions to avoid or minimize
the degree of such disclosure.

Further, CombinatoRx shall be permitted to disclose
any Confidential Information as may be legally required by stock exchange or
quotation system rule without first obtaining the approval of CFFT. In the
event of such disclosure, CombinatoRx shall provide CFFT a copy of the proposed
disclosure with such advanced notice as is practicable under the circumstances
for the purpose of allowing CFFT to review and comment upon such disclosure.

6.3      Publicity.

The Parties will agree upon the timing and content of
any initial press release or other public communications relating to this
Agreement and the research contemplated herein as follows:

(a)       Except to the extent already disclosed in the initial press release or
other public communication, no public announcement concerning the terms of this
Agreement or concerning the transactions described herein shall be made, either
directly or indirectly, by CombinatoRx or CFFT, except:  (i) as may be required by applicable
laws, regulations, securities and exchange listing requirements, or judicial order,
or (ii) if limited to the fact that the Research Program exists, that
research is in progress, and its duration, without first 

 39
 

 

obtaining the approval of
the other party. Approval of the nature, text, and timing of such announcement
shall not be unreasonably withheld.

(b)       The party desiring to
make any such press release shall provide the other party with a written copy
of the proposed announcement in sufficienttime prior to public release to
allow such other party to comment upon such announcement prior to public
release.

ARTICLE
VII - PUBLICATION

Each of CombinatoRx and CFFT reserves the right to
publish or publicly present the results (the “Results”) of the Research
Program, subject to the following terms and conditions. The party proposing to
publish or publicly present the Results (the “publishing party”) will submit a
draft of any proposed manuscript or speech to the other party (the “non-publishing
party”) for comments at least forty (45) days prior to submission for
publication or oral presentation. The non-publishing party shall notify the
publishing party in writing within thirty (30) days of receipt of such draft
whether such draft contains (i) information of the non-publishing party
which it considers to be confidential under the provisions of Article VI
or hereof, (ii) information that if published would have an adverse effect
on a patent application covering the subject matter of this Agreement which the
non-publishing party intends to file, or (iii) information which the
non-publishing party reasonably believes would be likely to have a material
adverse impact on the development or commercialization of a Drug Product
Candidate. In any such notification, the non-publishing party shall indicate
with specificity its suggestions regarding the manner and degree to which the
publishing party may disclose such information. 

 40
 

 

In the case of item (ii) above,
the non-publishing party may request a delay, and the publishing party shall
delay such publication, for a period not exceeding ninety (90) days, to permit
the timely preparation and filing of a patent application or an application for
a certificate of invention on the information involved. In the case of item (i) above,
no party may publish Confidential Information of the other party without its
consent in violation of Article VI of this Agreement. In the case of item (iii) above,
if the publishing party shall disagree with the non-publishing party’s
assessment of the impact of the publication, then the issue shall be referred
to the JSC for resolution. If the JSC is unable to reach agreement on the
matter within thirty (30) days after such referral, the matter shall be
referred by the JSC to the Chief Executive Officer of CFFT and the Chief
Executive Officer of CombinatoRx who shall attempt in good faith to reach a
fair and equitable resolution of this disagreement. If the disagreement is not
resolved in this manner within two (2) weeks of referral by the JSC as
aforesaid, then the proposed information will not be published. The Parties
agree that authorship of any publication will be determined based on the
customary standards then being applied in the relevant scientific journal, and
that appropriate credit will be acknowledged when the subject matter of a
publication is derived in whole or in significant part from CombinatoRx or CFFT.
The Parties will use Commercially Reasonable Efforts to gain the right to
review proposed publications relating to the subject matter of the Research
Program by consultants or contractors.

It is CombinatoRx’s objective, in part, to
advance  the body of general scientific
knowledge of CF and its potential therapies, and to contribute to the
identification of chemical tools as optimal scientific benchmarks, all in a
manner consistent with its general scientific and commercial objectives in
entering into the collaboration with CFFT to which this Agreement relates. In
furtherance of that objective, CombinatoRx would expect, after giving due 

 41
 

 

consideration to the
appropriate protection of intellectual property, to publish information in
peer-reviewed scientific journals concerning its efforts under the Research
Program, including chemical structural information about at least two Compounds.
CombinatoRx will include as co-authors of any such publication contributing
CFFT personnel and consultants and other persons who would customarily be
considered in that regard, including members of the JRC as appropriate. CFFT’s
financial contribution to the Research Program also will be acknowledged.

ARTICLE VIII - INDEMNIFICATION

8.1      Indemnification by CombinatoRx.

CombinatoRx will indemnify and hold CFFT and its
Affiliates and their employees, officers and directors harmless, from and
against any loss, damages, action, suit, claim, demand, liability, expense,
bodily injury, death or property damage (a “Loss”), that may be brought or
instituted by a Third Party to the extent such Loss is based on or arises out
of:

(a)       the development, manufacture, use, sale, storage or handling of a
Compound, a Clinical Development
Candidate, a Drug Product Candidate or a Drug Product by CombinatoRx or its
Affiliates or their representatives, agents, authorized licensees, sublicensees
or subcontractors under this Agreement;

(b)       the breach by
CombinatoRx of any of its covenants, representations or warranties set forth in
this Agreement; and

(c)       provided however, that the foregoing indemnification shall not apply to
any Loss to the extent such Loss is caused by the negligence or willful
misconduct of CFFT or its Affiliates.

 42
 

 

8.2      Indemnification by CFFT.

CFFT will indemnify and hold CombinatoRx, and its
Affiliates and their employees, officers and directors harmless from and
against any Loss that may be brought or instituted by a Third Party to the
extent such Loss is based on or arises out of:

(a)       the development, manufacture, use, sale, storage or handling of a
Compound, a Clinical Development
Candidate, a Drug Product Candidate or a Drug Product by CFFT or its Affiliates
or their representatives, agents, authorized licensees, sublicensees or
subcontractors under this Agreement;

(b)       the breach by CFFT of
any of its covenants, representations or warranties set forth in this
Agreement; and

(c)       provided
that the foregoing indemnification shall not apply to any Loss to the extent
such Loss is caused by the negligence or willful misconduct of CombinatoRx or
its Affiliates.

8.3      Claims Procedures.

Each party entitled to be indemnified by the other
party (an “Indemnified Party”) pursuant to Section 8.1 or 8.2 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 be approved by 

 43
 

 

the Indemnified Party (whose
approval shall not unreasonably be withheld) and the Indemnified Party may
participate in such defense at such Indemnified Party expense unless: (i) the
employment of counsel by such Indemnified Party has been authorized by the
Indemnifying Party; or (ii) the
Indemnified Party shall have reasonably concluded that there may be a conflict
of interest between the Indemnifying Party and the Indemnified Party in the
defense of such action, in each of which cases the Indemnifying Party shall pay
the reasonable fees and expenses of one law firm serving as counsel for the Indemnified
Party, which law firm shall be subject to approval, not to be unreasonably
withheld, by the Indemnifying Party;

(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 (i) would result in injunctive or other relief being
imposed against the Indemnified Party; or (ii) does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.

 44
 

 

(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.

ARTICLE IX— OWNERSHIP OF INTELLECTUAL PROPERTY

9.1      Ownership.

The ownership of all Intellectual Property owned by
the Parties as of the Effective Date or developed by or on behalf of a party,
or the Parties, hereunder shall be as set forth in this Section 9.

9.1.1           CombinatoRx Background Intellectual Property. All
rights, title and interest in, to and under the CombinatoRx Background
Intellectual Property and any additions, enhancements or improvements thereto
however created or discovered, shall be owned by, and remain, with CombinatoRx.
Except as expressly set forth in this Agreement and as necessary to pursue its
Interruption License, CFFT shall have no interest in any CombinatoRx Background
Intellectual Property.

9.1.2           CFFT Background Intellectual Property. All
rights, title and interest in, to and under the CFFT Background Intellectual
Property and any additions, enhancements or improvements thereto however
created or discovered, shall be owned by, and remain, with CFFT. Except as
expressly set forth in this Agreement, CombinatoRx shall have no interest in
any CFFT Background Intellectual Property.

 45

 

9.2 License to CFFT Background Intellectual Property.

CFFT hereby grants to CombinatoRx, a worldwide,
non-exclusive, non-royalty bearing license for the Term, without the right to
sublicense, to the CFFT Background
Intellectual Property, and such Intellectual Property as may be conceived,
developed or acquired by CFFT, for all uses and purposes by CombinatoRx related
to the Research Program and Research Plan and that may be necessary or useful
for the development or exploitation of a Drug Product.

9.3 Ownership of New Intellectual Property.

The Parties agree that any new Intellectual Property
whether or not in the Field, made by either party, in the course of the
conduct, or resulting from the performance of, or arising out of the Research
Program shall be owned exclusively by CombinatoRx. If either party believes
that any new Intellectual Property has been made in the course of the conduct,
or resulting from or arising out of the performance of, the Research Program,
such party will, within a reasonable period of time thereafter, give notice
(the “Invention Notice”) of such new Intellectual Property to the other party;
and thereafter CombinatoRx shall determine if the new Intellectual Property is
patentable. If CombinatoRx determines that the same is patentable, then
CombinatoRx shall prepare, file, prosecute and maintain now and in the future
in its sole discretion, the appropriate patent filings in the United States and
in such other jurisdictions as CombinatoRx determines after consultation with
CFFT.

9.4 Ownership and Licensing of New Assays.

The Parties agree that any
new assay(s) developed under, as a result of, or in connection with
the performance of this Agreement, will be owned by CombinatoRx. Upon 

 46
 

 

written request from CFFT, CombinatoRx shall grant non-exclusive,
fully paid up licenses for use of any new assays in the Field to nonprofit
organizations with which CFFT or its Affiliates has some pre-existing
relationship for internal, research and development purposes only. At
CombinatoRx’s request, CFFT will administer any such license program.

9.5 CFFT’s Right to Interruption License.

(a)           If at any time after CFFT terminates funding of the
Research Program because (i) CombinatoRx notifies CFFT that CombinatoRx
has ceased Commercially Reasonable Efforts on the research or development of a
Drug Product Candidate or Drug Product, of the Research Program, or (ii) CFFT
reasonably believes that an Interruption has occurred, CFFT may provide
CombinatoRx with written notice (the “Interruption Notice”) that it intends to
exercise its rights pursuant to subparagraph (c) of this Section 9.5,
and (iii) in the case of a Interruption Notice occasioned by (ii) above,
CFFT shall include in its Interruption Notice the specifics and details stating
the basis on which CombinatoRx is not using Commercially Reasonable Efforts to
develop a Drug Product Candidate  in the
Field.

(b)           From the date of receipt of the
Interruption Notice, CombinatoRx shall have a period of ninety (90) days to
provide a written response (the “Response Letter”) either:  (i) rejecting the Interruption Notice
and stating, in reasonable detail why CombinatoRx believes that it is using
Commercially Reasonable Efforts to develop a candidate either itself or through
a Licensee in the Field, or (ii) accepting the Interruption Notice and
setting forth the steps to be taken by CombinatoRx, within a period of one
hundred and twenty (120) days from the date of the Response Letter, to
reinitiate development activities. Within ninety (90) days after receipt of the
Response Letter, CFFT shall respond, in writing, either accepting the Response
Letter or 

 47
 

 

rejecting the same and requesting dispute mediation in
accordance with Section 13.2 hereof. If CFFT fails to timely respond for
whatever reason, then CFFT shall be deemed to have accepted the Response
Letter.

(c)           If CombinatoRx provides notice in accordance with Section 9.5(a)(i),
or if CombinatoRx accepts the Interruption Notice pursuant to Section 9.5(b)(ii),
or it is finally determined pursuant to Section 13.2 to not to be
exercising Commercially Reasonable Efforts to develop a Drug Product Candidate
or a Drug Product in the Field, then CFFT shall have the right and CombinatoRx
hereby grants CFFT in the event of an Interruption, an exclusive,
sublicenseable license to the Clinical Development Candidate, Drug Product
Candidate, and the Drug Product, as they may exist at such time, to continue to
develop the same and to make, have made, use, sell, and import the Clinical
Development Candidate, the Drug Product Candidate and the Drug Product for use
in the Field (the “Interruption License”). If CFFT exercises its right to the
Interruption License, CombinatoRx shall promptly provide the Interruption
License Data Package to CFFT and shall thereafter cooperate with CFFT to furnish
such additional information to CFFT with respect to the Interruption License as
is in CombinatoRx’s possession.

(d)           In the event that CombinatoRx transfers all of or certain
of its rights and obligations to develop and commercialize a Drug Product Candidate
or a Drug Product at any time, the third party to which CombinatoRx transfers
all or certain rights and obligations to develop and commercialize the Drug
Product shall be subject to the obligations of the Interruption License. The
Interruption License shall be deemed to constitute intellectual property as
defined in Section 365(n) of the U.S. Bankruptcy Code. CombinatoRx
agrees that CFFT, as a licensee of such rights, shall retain and may exercise
all of its rights and elections 

 48
 

 

under the U.S. Bankruptcy Code; provided however, that
nothing in this Agreement shall be deemed to constitute a present exercise of
such rights and elections.

ARTICLE X — TERM AND TERMINATION

10.1               Term.

The Research Program will be deemed to have commenced
on the Research Initiation Date, and will conclude on the earlier of the
completion of one Phase IIa clinical trial of its first Drug Product Candidate
or the seventh (7th)
anniversary of the Research Initiation Date (the “Term”) unless extended by
agreement of the Parties, or unless earlier terminated in accordance with the
provisions of this Article X hereof. CombinatoRx and CFFT may extend the
Term by mutual agreement. Any party desiring an extension of the Term shall
notify the other party in writing of that fact not less than ninety (90) days
prior to the anticipated initial termination of the Research Program. That
notice shall include a summary of the material terms upon which the extension
is proposed. Neither the fact that the Term hereunder is longer than the period
covered by the Budget or is extended from time to time by Agreement of the
Parties shall imply any increase in CFFT’s financial obligations pursuant to
this Agreement without CFFT’s separate agreement executed in writing to
increase such obligations.

 49
 

 

10.2               Termination of the Research
Program by CFFT for Cause.

Upon written notice to CombinatoRx, CFFT may at its
sole discretion unilaterally terminate the Research Program and this Agreement
upon the occurrence of any of the following events:

(a)      CombinatoRx shall materially breach any of its material obligations under
this Agreement, and such material breach shall not have been remedied or
material steps initiated to remedy the same to CFFT’s reasonable satisfaction,
within sixty (60) days after CFFT sends written notice of breach to
CombinatoRx; or

(b)       CombinatoRx, or its successors, shall cease to function as a going
concern by suspending or discontinuing its business for any reason except for
interruptions in its normal business activities caused by events of force
majeure, as defined in Section 14.2.

10.3               Termination of the Research
Program by CombinatoRx for Cause.

CombinatoRx may at its sole discretion terminate this
Agreement upon written notice to CFFT upon the occurrence of the following
events:

(a)  CFFT shall materially
breach any of its material obligations under this Agreement and such material
breach shall not have been remedied or material steps initiated to remedy the
same to CombinatoRx’s reasonable satisfaction, within sixty (60) days after CombinatoRx
sends written notice of breach to CFFT, or

 50
 

 

(b)       CFFT shall cease to function as a going concern by suspending or
discontinuing its business for any reason except for interruptions in its
normal business activities caused by events of force majeure, as defined in Section 14.2.

10.4               Termination Without Cause.

CFFT shall have
the right upon at least ninety (90) days notice to CombinatoRx to terminate its
participation in the Research Program and the funding thereof effective (i) on
each anniversary of the Research Initiation Date (an “Early Termination Notice”)
and (ii) prior to the filing of an IND for the first Drug Product
Candidate (the latter a “Negative Go Decision”). In either such event, CFFT
shall pay, within thirty (30) days of being invoiced, all reasonable costs
relating to the Research Program for which CombinatoRx is legally obligated
prior to the effective date of such termination. A decision by CFFT to approve
the filing of an IND for the first Drug Product Candidate shall be referred to
as herein a “Go Decision”). At least ninety (90) days prior to the intended
filing of an IND for a Clinical Development Candidate, CombinatoRx shall inform
CFFT and furnish it with such information as will allow CFFT to make an
informed Go or Negative Go Decision.

10.5               General Effect of Termination.

10.5.1     Survival. Except where explicitly provided elsewhere
herein, termination of this Agreement for any reason, or expiration of this Agreement, will not affect:  (i) obligations
which have accrued as of the date of termination or expiration, and (ii) obligations
and rights which, expressly or from the context thereof, are intended to
survive termination or expiration of this Agreement. Without limitation, the
following shall survive termination either indefinitely or 

 51
 

 

for the period so
stated:  Articles V, VI, VII, VIII, IX,
XI and XIII and Sections 3.1, 3.2.1, 3.2.3, 3.5, 4.2, 4.3 and 10.5.

10.5.2     Retention of License. Upon termination or expiration of this Agreement
and subject to CFFT’s rights in the event of an Interruption, CombinatoRx will
retain exclusive rights to Intellectual Property, Confidential Information and
the inventions licensed to it by CFFT pursuant to Article IX of this
Agreement.

ARTICLE XI — RESTRICTIONS ON OTHER CFTR MODULATORS

If there is a Go Decision, during the period ending
after the earlier of (a) the fifth (5th) anniversary of an Interruption, or (b) the
third (3rd)
anniversary of FDA approval of a Drug Product, all of CombinatoRx’s research,
development and marketing efforts directed at the identification, development
and commercialization of pharmaceutical products that have as their principal
mode of action the modulation of CFTR shall be conducted under the Agreement;
provided that CombinatoRx may enter into an agreement with a Third Party (a “Third
Party Agreement”) or may engage in internal research directed toward the
eventual commercialization (including the acquisition and sale of a marketed
product) of a pharmaceutical product that has as its principal mode of action
the modulation of CFTR if CFFT will receive the same royalty rate from
CombinatoRx or the Third Party under the Third Party Agreement as is provided
under this Agreement on account of any Net Sales of the new product. This Article shall
be inapplicable if there is a Negative Go Decision. Further, this Article shall
be inapplicable to CombinatoRx Background Intellectual Property on which it has
conducted in vivo testing prior to the Research
Initiation Date.

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ARTICLE XII — REPRESENTATIONS AND
WARRANTIES

12.1               Representations and Warranties of
CombinatoRx.

CombinatoRx represents and warrants to CFFT that this
Agreement has been duly executed and delivered by CombinatoRx and constitutes
the valid and binding obligation of CombinatoRx, enforceable against CombinatoRx
in accordance with its terms except as enforceability may be limited by
bankruptcy, fraudulent conveyance, insolvency, bankruptcy, reorganization,
moratorium and other laws relating to or affecting creditors’ rights generally
and by general equitable principles.

12.2               Representations and Warranties of
CFFT.

CFFT represents and warrants to CombinatoRx that this
Agreement has been duly executed and delivered by CFFT and constitutes the
valid and binding obligation of CFFT, enforceable against CFFT in accordance
with its terms except as enforceability may be limited by bankruptcy,
fraudulent conveyance, insolvency, bankruptcy, reorganization, moratorium and
other laws relating to or affecting creditors’ rights generally and by general
equitable principles.

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ARTICLE XIII — DISPUTE RESOLUTION

13.1               Governing Law, and Jurisdiction.

This Agreement shall be governed and construed in
accordance with the internal laws of the State of Maryland. The Parties
acknowledge and agree that, in the event of a breach or a threatened breach by
either party of this Agreement for which it will have no adequate remedy at
law, the other party may suffer irreparable damage and, accordingly, shall be
entitled to seek injunctive and other equitable remedies to prevent or restrain
such breach or threatened breach, in addition to any other remedy they might
have at law or at equity.

13.2               Dispute Resolution.

(a)         In the event of any
dispute, claim or controversy arising out of, relating to or in any way
connected to the interpretation of any provision of this Agreement, the
performance of either party under this Agreement or any other matter under this
Agreement, including any action in tort, contract or otherwise, at equity or
law (a “Dispute”), either party may at any time provide the other party written
notice specifying the terms of such Dispute in reasonable detail. As soon as
practicable after receipt of such notice, the Chief Executive Officers of both
CFFT and CombinatoRx shall meet at a mutually agreed upon time and location for
the purpose of resolving such Dispute. The Chief Executive Officers shall
engage in good faith discussions and/or negotiations for a period of up to
thirty (30) days to resolve the Dispute or negotiate an interpretation or
revision of the applicable portion of this Agreement which is mutually
agreeable to both Parties without the necessity of formal dispute resolution
procedures relating thereto. During the course of such discussion and/or
negotiation, the Parties 

 54
 

 

shall reasonably
cooperate  in order so that each of the
Chief Executive Officers may be fully informed with respect to the issues in
the Dispute.

(b)         In the event that any
non-business type Dispute (including, but not limited to, those relating to
development, preclinical activities, regulatory matter, formulation, or
intellectual property) is not resolved by the Chief Executive Officers pursuant
to Section 13.2(a) then the Dispute shall be referred to an
independent expert appointed by agreement of the Parties. The independent
expert’s decision shall be final and binding and its costs shall be borne as
directed by the independent expert. Each party shall cooperate in good faith
with the expert. In the event that the Parties are unable to agree as to
whether a particular dispute is governed by this Section 13.2(b), then
this Section 13.2(b) shall be utilized to resolve such dispute.

(c)         In the event any
business-related Dispute is not resolved by the Chief Executive Officers
pursuant to Section 13.2(a), then the Parties shall resolve such Dispute
by final and binding arbitration. Whenever a party decides to institute
arbitration proceedings, it shall give written notice to that effect to the
other party. Arbitration shall be held in Washington, DC, according to the
then-current commercial arbitration rules of the American Arbitration
Association (“AAA”), except to the extent such rules are inconsistent with
this Section 13.2. The arbitration will be conducted by a panel of three (3) arbitrators
appointed in accordance with AAA rules; provided that each party shall within
thirty (30) days after the institution of the arbitration proceedings appoint
one arbitrator each, and such arbitrators shall select, if available, a third
arbitrator within thirty (30) days thereafter. If the two first arbitrators are
unable to 

 55
 

 

select a third arbitrator
within such period, the third arbitrator shall be appointed in accordance with
AAA rules. Any arbitrator chosen hereunder shall have educational training and
industry experience sufficient to demonstrate a reasonable level of relevant
scientific, financial, medical and industry knowledge. Within twenty (20) days
of the selection of all arbitrators, each party shall submit to the arbitrators
a proposed resolution of the Dispute that is the subject of the arbitration
(the “Proposals”). The arbitrators shall thereafter select one of the Proposals
so submitted as the resolution of the Dispute, but may not alter the terms of
either Proposal and may not resolve the Dispute in a manner other than by
selection of one of the submitted Proposals. If a party fails to submit a
Proposal in accordance with the terms of this Section 13.2, the
arbitrators shall select the Proposal of the other party as the resolution of
the Dispute. All arbitrators eligible to conduct the arbitration must agree to
render their opinion(s) within thirty (30) days of the final arbitration
hearing. No arbitrator (nor the panel of arbitrators) shall have the power to
award punitive damages under this Agreement regardless of whether any such
damages are contained in a Proposal, and such award is expressly prohibited.
The proceedings and decisions of the arbitrators shall be confidential, final
and binding on all of the Parties. Judgment on the award so rendered may be
entered in a court having jurisdiction thereof. The Parties shall share the
costs of arbitration according to the decision of the arbitrators. Nothing in
this Section 13.2(c) will preclude either party from seeking
equitable relief in accordance with Section 13.1 or interim or provisional
relief from a court of competent jurisdiction, including a temporary
restraining order, preliminary injunction or other interim equitable relief,
concerning a dispute either prior to or during any arbitration if necessary to
protect the 

 56
 

 

interests of such party
or to preserve the status quo pending the arbitration proceeding.
Notwithstanding the foregoing, the Parties are not required to resolve disputes
related to ownership, filing, prosecution, maintenance, defense or enforcement
of Patents pursuant to this Section 13.2(c).

ARTICLE XIV — MISCELLANEOUS
PROVISIONS

14.1               Waiver.

No provision of this Agreement may be waived or
amended except in writing by both Parties hereto. No failure or delay by either
party hereto in exercising any right or remedy hereunder or under applicable
law will operate as a waiver or amendment thereof, or a waiver of any right or
remedy on any subsequent occasion.

14.2               Force Majeure.

Neither party will be in breach hereof by reason of
its delay in the performance of or failure to perform any of its obligations
hereunder, if that delay or failure is caused by strikes, acts of God or the
public enemy, riots, incendiaries, interference by civil or military
authorities, compliance with governmental priorities for materials, or any
fault beyond its control or without its fault or negligence.

14.3               Severability.

Should one or more provisions of this Agreement be or
become invalid, then the Parties hereto shall attempt to agree upon valid
provisions in substitution for the invalid provisions, which in their economic
effect come so close to the invalid provisions that it can be reasonably
assumed that the Parties would have accepted this Agreement with those new
provisions. If the 

 57
 

 

Parties are unable to
agree on such valid provisions, the invalidity of such one or more provisions
of this Agreement shall nevertheless not affect the validity of the Agreement
as a whole, unless the invalid provisions are of such essential importance for
this Agreement that it may be reasonably presumed that the Parties would not
have entered into this Agreement without the invalid provisions.

14.4               Assignment and Successors.

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. Any purported assignment in contravention
of this Section 14.4 shall, at the option of the non-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. This Agreement shall be binding upon and enforceable against the
successor to or any permitted assignees from either of the Parties hereto.

14.5               Counterparts.

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

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14.6               Insurance.

Each party shall have and maintain such type and
amounts of liability insurance covering the Research Program and its activities
as is normal and customary for a party similarly situated and shall upon
request provide the other with a copy of certificates evidencing such
insurance, along with any amendments and revisions thereto.

14.7               No Agency.

Nothing herein contained shall be deemed to create an
agency, joint venture, amalgamation, partnership or similar relationship
between CFFT and CombinatoRx. Notwithstanding any of the provisions of this Agreement,
neither party to this Agreement 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 in connection with or relating to
the obligations of each party under this Agreement shall be made, paid, and
undertaken exclusively by such party on its own behalf and not as an agent or
representative of the other.

14.8               Notice.

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 such other addresses as may be designated by one party to the
other by notice pursuant hereto, by prepaid, certified air mail (which shall be
deemed received by the other party on the seventh business day following
deposit in the mails), overnight express mail or by facsimile transmission, or
other electronic means of communication (which shall be deemed received when
transmitted), with confirmation 

 59
 

 

by first class letter,
postage pre-paid, given by the close of business on or before the next
following business day:

if to CFFT, at:

Cystic Fibrosis Foundation Therapeutics Incorporated

6931 Arlington Road

Bethesda, Maryland  20814

Attention:  Dr. Robert J. Beall, President and CEO

with a copy to: Kenneth I. Schaner, Esq.

Bingham McCutchen LLP

3000 K Street, N.W., Suite 300

Washington, D.C. 20007

if to CombinatoRx, at:

CombinatoRx, Incorporated

Sixteenth Floor

245 First Street

Cambridge, MA  02142

Attention:  Daniel Grau, Senior Vice President Commercial Operations

with a copy to: Jason Cole, SVP and General Counsel

with a copy to: Peter B. Finn, Esq.

Rubin and Rudman LLP

50 Rowes Wharf

Third Floor

Boston, MA  02110

14.9               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.

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14.10             Entire Agreement.

This Agreement, together with all schedules, exhibits
and appendices contains the entire understanding of the Parties relating to the
matters referred to herein, and supersedes any prior agreements or
understandings, oral, written or otherwise.

	
  

  	
  COMBINATORX, INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:/s/ ALEXIS BORISY

  
	
   

  	
  Alexis Borisy, President and CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CYSTIC FIBROSIS FOUNDATION

  
	
   

  	
  THERAPEUTICS INCORORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:/s/ ROBERT J. BEALL

  
	
   

  	
  Dr. Robert J. Beall, President and CEO

  

 

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EXHIBIT A

BUDGET

To be adjusted by the Parties upon finalization of the
Research Plan

[*]

 62
 

 

EXHIBIT B

RESEARCH
PLAN

To
be inserted after agreement by the Parties

 63
 

 

EXHIBIT C

TDN DATA BANK

The
Therapeutics Development Network Data Bank

What is the TDN Data Bank?

The TDN Data Bank is a central repository for data
from completed TDN studies. For a particular TDN study, the bank contains
individual patient data collected in case report forms and/or from a central
laboratory.

The purpose of the TDN Data Bank is to serve as a
resource of precious data from CF clinical trials. Data in the bank can be used
to address several research questions not addressed in the original studies
from which the data was obtained. Examples include:

·                  What are the baseline laboratory abnormalities among
CF patients?  This research
question could be addressed combining baseline data from several studies in
order to look at the distribution of laboratory parameters among different
subgroups of CF patients, and can provide information on how abnormal CF
patients’ laboratory parameters are in the absence of study drug compared to
normal, healthy individuals.

·                  What is the variability in CF outcome measures such
as FEV1 over time? 
Spirometry is used in several TDN studies, and the more information we
collect on variables such as FEV1,
the better we can estimate sample sizes required for future CF clinical trials.

·                  Is there a more efficient way to analyze CF outcome
measures?  Data in the TDN
Data Bank can be instrumental for the development of new methodologic
approaches for analyzing data in CF clinical trials. Novel statistical methods
can be derived to make CF clinical trials more efficient, and hence reduce the
sample size needed for future CF clinical trials.

Using data from TDN studies to address questions such
as these fulfill the mission of the TDN, and more importantly, enhance our
knowledge of CF and help us to design the most efficient and appropriate CF
clinical trials.

What data is included in the TDN
Data Bank?

At the beginning of a study, the TDN negotiates with
the Sponsor to determine the extent of data that will be included in the data
bank. Sponsors are asked to donate data from all study visits and all patients
to the TDN Data Bank for maximum benefit supporting the TDN’s mission. Sponsors
should be encouraged to donate their entire study database to the TDN Data
Bank, since they will likely benefit from both their own donation and the
donation of other Sponsor’s data to aid in the design of future clinical
trials.

At the completion of the study, the data will be
extracted from the study database and stripped of patient identifiers (e.g.
initials, date of birth) and reposited in the bank. For patients who signed a
data bank informed consent, they will be assigned a unique TDN identification 

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number that will enable
them to be later linked with data from other studies. The link between the TDN
identification number and patient identifiers will be kept in a secure location
and is not part of the TDN bank. The data from patients who did not sign a data
bank informed consent will be maintained anonymously in the data bank.

Who uses the TDN Data Bank?

A primary use of the TDN Data Bank is for the design
of future CF clinical trials. In the design phase of a TDN clinical trial, the
TDN Statistical Analysis Unit (SAU) utilizes the data in the bank, in
particular for identifying the most appropriate endpoints, assessing the size
of eligible study populations, and generation of sample sizes. The TDN SAU also
uses this data to evaluate and develop different methodologic approaches for
analyzing key endpoints; the goal of this work is to find the most powerful
approach that could ultimately estimate the treatment effect most robustly and
with the least variability, resulting in a smaller sample size needed for
future trials.

A second purpose of the TDN Data Bank is to facilitate
ancillary studies, which are investigations that are not part of an approved
TDN protocol but uses existing data that has been collected in a previous TDN
study or studies. Ancillary studies are supported by funding mechanisms other
than the TDN. Examples include studies funded by investigator-initiated NIH
research awards (R01s), grants from academic institutions, CFF research grants,
private sources (e.g. industry sponsors), or those performed at no cost
(generally because of the special interest of a researcher).

A proposal for each ancillary study must be submitted
to the TDN. Proposals must be reviewed and approved by the TDN Data Use
Subcommittee of the National Resource Committee before data from the TDN Data
Bank can be released. A TDN investigator must be at least a Co-Investigator
and is usually expected to be the Principal Investigator on any ancillary study
using TDN data. Ancillary studies requesting data from industry sponsored
trials will receive full analysis support from the TDN Coordinating center. Thus,
data from industry sponsored studies will not be released outside of the TDN
Coordinating Center. In the scenario for which industry sponsored study data
has not yet been published and an ancillary study is referring by name to this
data in a manuscript to be submitted for publication, the sponsor will be given
30 days to review the manuscript prior to submission.

For ancillary studies requesting data from select
grant funded studies, data from the TDN data bank is released upon agreement that
the applicant will be a responsible user of the data and will only use the data
for the exact purpose for which it was requested. A TDN Data Use Agreement must
be signed and submitted by the investigator before TDN data is released and
implementation of the proposed study begins.

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