Document:

Exhibit
10.1

 

TRANSITION
SERVICES AGREEMENT

 

THIS TRANSITION SERVICES AGREEMENT (this
“Agreement”) is dated as of this 30th day of April, 2004, by and between PHARMACOPEIA, INC., a Delaware corporation
(“Pharmacopeia”), and ACCELRYS INC.,
a Delaware corporation and a wholly owned subsidiary of Pharmacopeia
(Pharmacopeia and Accelrys Inc. are referred to herein collectively as
“Accelrys”), on the one hand, and PHARMACOPEIA
DRUG DISCOVERY, INC., a Delaware corporation (“PDD”), on the other
hand.  Each of Accelrys and PDD is
sometimes hereinafter referred to as a “Party” and together as the “Parties.”

 

WHEREAS,
the Parties have entered into a Master Separation and Distribution Agreement
(the “Distribution Agreement”) pursuant to which Pharmacopeia has agreed to
distribute to its stockholders all of the outstanding shares of common stock of
PDD (the “Distribution”);

 

WHEREAS,
Pharmacopeia and Accelrys Inc., on the one hand, and PDD, on the other hand,
have historically provided or shared, and currently provide or share, certain
services to or with each other;

 

WHEREAS,
in recognition of the historic and current relationship between the businesses,
PDD is interested in receiving certain services from Accelrys, and Accelrys is
interested in providing such services to PDD, during a transition period
commencing on the date of the Distribution (the “Distribution Date”); and

 

WHEREAS,
in recognition of the historic and current relationship between the businesses,
Accelrys also is interested in receiving certain limited services from PDD, and
PDD is interested in providing such services to Accelrys, during such
transition period;

 

NOW,
THEREFORE, in consideration of the mutual covenants and
agreements, and upon the terms, and subject to the conditions, hereinafter set
forth, the Parties hereby agree as follows:

 

Article 1                                               SERVICES

 

1.1.                              Provision
of Services.  During the Transition
Period (as defined below), subject to the terms and conditions of this
Agreement, (a) Accelrys agrees to provide to PDD and PDD agrees to receive from
Accelrys the services described in Exhibit A hereto (each, an “Accelrys
Service” and together, the “Accelrys Services”), and (b) PDD agrees to provide
to Accelrys and Accelrys agrees to receive from PDD the services described in
Exhibit B hereto (each, a “PDD Service and together, the “PDD Services”).  Each Accelrys Service and PDD Service (as
applicable, a “Service”) shall be provided in good faith and at a level and
quality comparable to that performed by Accelrys or PDD, as applicable, prior
to the date of this Agreement, unless the Parties otherwise agree in
writing.  Each of Exhibit A and Exhibit
B hereto is incorporated into and constitutes a part of this Agreement.

 

1.2.                              Consideration
for Services.

 

a.               In consideration of the mutual covenants, agreements,
undertakings, representations and warranties of the Parties set forth in the
various agreements entered into in connection with the Distribution, including,
without limitation, the Distribution Agreement and the agreements referenced
therein, Accelrys and PDD expressly agree that, except to the extent
specifically set forth in Exhibit A hereto, no fee shall be payable by PDD to
Accelrys in exchange for or in consideration of the provision by Accelrys of
any Accelrys Service and no fee shall be payable by Accelrys to PDD in exchange
for or in consideration of the provision by PDD of any PDD Service.

 

 

b.              The Parties also agree to the Service acquisition and
funding arrangements set forth on Exhibit C hereto, which is incorporated into
and constitutes a part of this Agreement.

 

1.3.                              Access.  Each of PDD and Accelrys will make available
to the other Party all information and materials reasonably requested by such
other Party to enable it to provide the Accelrys Services and the PDD Services,
respectively.  Each of PDD and Accelrys
will provide the other Party with reasonable access, upon reasonable prior
notice, to its premises to the extent necessary for the purpose of providing
the relevant Services.

 

1.4.                              Independent
Contractors.  In performing any
service on behalf of the other Party, each of PDD and Accelrys will act under
this Agreement solely as an independent contractor, and not as an agent of the
Party for which the applicable Services are performed.

 

1.5.                              Additional
Resources Resulting From Changes in Business.  If it is necessary for either Accelrys or PDD to increase
staffing or acquire equipment or make any investments or capital expenditures
to accommodate an increase in the use of any Service beyond the level of use of
such Service prior to the Distribution Date, as a result of an increase in
volume of the business or a change in the manner in which the business is being
conducted, such Party will inform the other Party in writing of such increase
in staffing level, equipment acquisitions, investments or capital expenditures
before any such cost or expense is incurred. 
Upon mutual agreement of the Parties acting in good faith as to the
necessity of any such increase, the Party to receive such Service will advance
to the Party to provide the Service an amount equal to the actual costs and
expenses to be incurred in connection therewith.  If such mutual agreement is not reached, the obligation of the
Party required hereunder to furnish or cause to be furnished such Service will
be limited to the level of use of such Service in effect prior to the proposed
increase.

 

1.6.                              Cooperation.  The Parties will use good faith efforts to
reasonably cooperate with each other in all matters relating to the provision
and receipt of Services.  Such cooperation
will include seeking or applying for all consents, licenses or approvals
necessary to permit each Party to perform its obligations hereunder.  The Parties will, for a period of five years
after the Distribution Date, maintain documentation supporting the information
contained in the Exhibits hereto and cooperate with each other in making such
information available as needed, subject to appropriate confidentiality
requirements.

 

1.7.                              Disclaimer
of Warranty.  EXCEPT AS EXPRESSLY
SET FORTH IN THIS AGREEMENT, THE SERVICES TO BE PROVIDED UNDER THIS AGREEMENT
ARE FURNISHED AS IS, WHERE IS, WITH ALL FAULTS AND WITHOUT WARRANTY OF ANY
KIND, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE.

 

Article 2                                               TERM
OF SERVICES

 

2.1.                              Transition
Period; Early Termination.  The
provision of Services will commence on the Distribution Date and will terminate
no later than the first anniversary of the Distribution Date (such period being
referred to herein as the “Transition Period”), unless earlier terminated by
the Party receiving the Service(s) or extended by mutual written agreement of
the Parties.  In this connection, any
Service may be cancelled or reduced in amount or scope by the recipient of the
Service upon its provision of advance written notice thereof to the Service
provider.

 

Article 3                                               LIABILITIES

 

3.1.                              Consequential
and Other Damages.  No provider of
any Service hereunder will be liable to any person, whether in contract, tort
(including negligence and strict liability) or otherwise, but excluding gross
negligence, willful misconduct or bad faith, in connection with the provision
of any

 

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Service pursuant to this
Agreement, for any special, indirect, incidental or consequential damages
whatsoever which in any way arise out of, relate to or are a consequence of the
performance or nonperformance by such Service provider hereunder or the
provision of, or failure to provide, any Service hereunder, including with respect
to loss of profits, business interruptions or claims of customers (other than,
with respect to customers, the Service recipient in its capacity as a customer
of the Service provider).

 

3.2.                              Limitation
of Liability.  Except as set forth
in this Agreement (including, without limitation, Exhibits A and C hereto), the
liability of any provider of Services with respect to this Agreement or any act
or failure to act in connection herewith (including, but not limited to, the
performance or breach hereof, but excluding gross negligence, willful
misconduct or bad faith in connection with the provision of or failure to
provide any Service pursuant to this Agreement), or from the sale, delivery,
provision or use of any Service provided under or covered by this Agreement,
whether in contract, tort (including negligence and strict liability) or
otherwise, will be limited to the obligation to re-perform the Service as
contemplated by Section 3.3 below.

 

3.3.                              Obligation
To Re-perform.  In the event of any
breach of this Agreement by any provider of Services with respect to the
provider’s obligation hereunder to provide any Service (which breach such
Service provider can reasonably be expected to remedy through the
re-performance of the Service in a commercially reasonable and timely manner),
the Service provider will promptly correct in all material respects such breach
or re-perform in all material respects such Service, subject to
Section 3.2, at the request of the recipient of the Service and at the
expense of the Service provider.  To be
effective, any such request by a recipient of Services must be in a written
notice that specifies in reasonable detail the particular error, defect or
breach and be delivered to the Service provider no more than sixty (60) days
from the date such Service was provided. 
Notwithstanding anything to the contrary contained in this Agreement
(including, without limitation, this Section 3.3 and Section 3.2
above), nothing contained in this Agreement shall be construed to limit PDD’s
ability to utilize the Services Fund to secure Services or acquire assets under
the circumstances set forth in Exhibit C hereto

 

3.4.                              Release
and Indemnity.  Except as
specifically set forth in this Agreement, PDD hereby releases Accelrys and each
of Accelrys’ employees, agents, officers and directors (collectively, the
“Accelrys Indemnitees”), and PDD hereby agrees to jointly and severally
indemnify, defend and hold harmless the Accelrys Indemnitees, from and against
any and all claims, demands, complaints, liabilities, losses, damages, costs
and expenses arising from or relating to the use of any Service provided by
Accelrys which is incurred or suffered by PDD or any other person using such
Service on PDD’s behalf.  Except as
specifically set forth in this Agreement, Accelrys hereby releases PDD and each
of PDD’s employees, agents, officers and directors (collectively, the “PDD
Indemnitees” and together with the Accelrys Indemnitees, the “Indemnitees”),
and Accelrys hereby agrees to jointly and severally indemnify, defend and hold
harmless the PDD Indemnitees, from and against any and all claims, demands,
complaints, liabilities, losses, damages, costs and expenses arising from or
relating to the use of any Service provided by PDD which is incurred or
suffered by Accelrys or any other person using such Service on Accelrys’
behalf.

 

3.5.                              Indemnification
Procedures.  The provisions of
Section 4.6 of the Distribution Agreement shall apply to Third Party
Claims (as defined in the Distribution Agreement) arising inconnection with
this Agreement; and all other disputes shall be resolved in accordance with
Section 5.7 hereof.

 

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Article 4                                               TERMINATION

 

4.1.                              Termination.

 

a.               The obligation of a
provider of a Service, with respect to any Service to be provided under this
Agreement, shall terminate on the earlier to occur of (a) the last date of the
Transition Period or (b) the date on which the provision of such Service has
terminated or been canceled pursuant to Article 2 or Section 4.2 hereof.

 

b.              The Parties may
extend the Transition Period by mutual written agreement.

 

c.               This Agreement
shall terminate when both Parties have no further obligation to provide any
Services hereunder.

 

4.2.                              Breach
of Agreement.  Subject to Article 3,
if a Party causes or suffers to exist any material breach of any of its
material obligations under this Agreement, and that Party does not cure such
default in all material respects within thirty (30) days after receiving
written notice thereof from the non-breaching Party, the non-breaching Party
may terminate this Agreement, including the provision of Services pursuant
hereto, immediately by providing written notice of termination to the breaching
Party.

 

4.3.                              Effect
of Termination.  Sections 4.1 and 4.2,
this Section 4.3 and Article 3 and 5 will survive any termination of this
Agreement.

 

Article 5                                               MISCELLANEOUS

 

5.1.                              Definitions.  All capitalized terms used but not otherwise
defined herein will have the meanings ascribed to them in the Distribution Agreement.

 

5.2.                              Force
Majeure.  In the event that the
performance of this Agreement or of an obligation under this Agreement is
prevented, restricted or interfered with by reason of any cause not within the
control of the prevented Party, and which could not by reasonable diligence
have been avoided by the prevented Party, the prevented Party, upon the giving
of prompt notice to the other Party as to the nature and probable duration of
the event, will be excused from its performance to the extent and for the
duration of the prevention, restriction or interference, provided that the
prevented Party uses reasonable commercial efforts to avoid or remove the cause
of non-performance and continues performance under this Agreement whenever and
to the extent the cause or causes are removed. 
For the purpose of this Section 5.2, but without limiting its
generality, the following are not within the control of a Party: acts of God;
acts or omissions of a governmental agency or body; mechanical failures or
breakdowns; power failures or fluctuations; compliance with requests,
recommendations, rules, regulations or orders of any governmental authority or
any officer, department, agency, or instrument thereof; explosion; civil
disorder; flood; storm; earthquake; fire; war; insurrection; riot; accidents;
quarantine restrictions; work stoppages (including strikes or lockouts);
shortages of labor; differences with workmen; embargoes; delays or failures in
transportation; and acts of a similar nature. 
In the event such a curtailment by either Party continues in whole or in
part, then a recipient of a Service may arrange for temporary provision of the
Services until the provider of the Service can resume provision of the
applicable Services.

 

5.3.                              Conflicting
Documents.  To the extent that any
documents issued in connection with the provision of the Services contains
terms or conditions that are in conflict with, or derogate from, this
Agreement, they will be null and void and the terms of this Agreement will
control.

 

5.4.                              Notices.  All notices or other communications
hereunder will be deemed to have been duly given and made if in writing and if
served by personal delivery upon the Party for whom it is intended, if
delivered by registered or certified mail, return receipt requested, by Federal
Express or by other “overnight” courier service, or if sent by fax, provided
that the fax is promptly confirmed by telephone confirmation thereof, to the
person at the address set forth below, or such other address as may be
designated in writing hereafter, in the same manner, by such person:

 

4

 

	
  If to Pharmacopeia or
  Accelrys Inc., to:

  	
  If to PDD, to:

  
	
   

  	
   

  
	
   

  	
  Accelrys, Inc.

  	
   

  	
  Pharmacopeia Drug
  Discovery, Inc.

  
	
   

  	
  9685 Scranton Road

  	
   

  	
  P.O. Box 5350

  
	
   

  	
  San Diego, CA 92121

  	
   

  	
  Princeton, NJ  08543

  
	
   

  	
  Attention:  Chief Operating Officer

  	
   

  	
  Attention:  Chief Operating Officer

  
	
   

  	
  Phone:

  	
  (858) 799-5000

  	
   

  	
  Phone:

  	
  (609) 452-3651

  
	
   

  	
  Fax No.:

  	
  (858) 799-5475

  	
   

  	
  Fax No.: 

  	
  (609) 452-3672

  

 

5.5.                              Entire
Agreement.  The agreement of the
Parties, which is comprised of this Agreement and the Exhibits hereto, sets
forth the entire agreement and understanding among the Parties and supersedes
any prior agreement or understanding, written or oral, relating to the subject
matter of this Agreement.

 

5.6.                              Assignment;
Binding Effect; Severability. 
Neither Party may assign its rights or obligations under this Agreement
absent the express, written consent of the other Party.  Notwithstanding the above, either Party may,
without such consent, assign this Agreement and its rights and obligations
hereunder in connection with the transfer or sale of all or substantially all
of its business or the business unit to which this Agreement pertains, or in
the event of its merger, consolidation, change in control or similar
transaction.  The provisions of this
Agreement are severable and, in the event that any one or more provisions are
deemed illegal or unenforceable, the remaining provisions will remain in full
force and effect unless the deletion of such provision will cause this
Agreement to become materially adverse to any Party, in which event the Parties
will use reasonable efforts to arrive at an accommodation which best preserves
for the Parties the benefits and obligations of the offending provision.

 

5.7.                              Governing
Law.  THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE,
ITS RULES OF CONFLICT OF LAWS NOTWITHSTANDING.

 

5.8.                              Dispute
Resolution and Arbitration.

 

a.              Negotiation.  In the event of a controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance, nonperformance, validity or breach of this Agreement or otherwise arising out of, or in any way related to, this Agreement or the transactions contemplated hereby, including, without limitation, any claim based on contract, tort, statute or constitution (but excluding any controversy, dispute or claim arising out of any agreement relating to the use or lease of real property if any third party is a party to such controversy, dispute or claim) (collectively, “Agreement Disputes”), the Agreement Dispute shall be negotiated in good faith for a reasonable period of time by the Chief Operating Officer of each party (or the equivalent thereof), provided that such reasonable period of time shall not exceed 15 days from the time the Parties began such negotiations.  Should there be no resolution of an Agreement Dispute within a reasonable period of time by such officers of the Parties, the Agreement Dispute shall be negotiated in good faith for a reasonable period of time by the Chief Executive Officers of the Parties, or their respective designees, provided that such reasonable period of time shall not, unless otherwise agreed by the Parties in writing, exceed 10 days from the time the Chief Executive Officers of the Parties, or their respective designees, began such negotiations; provided further that in the event of any arbitration in accordance with Section 5.8(b) hereof, the Parties shall not assert the defenses of statute of limitations and laches arising for the period beginning after the date the Parties began negotiations hereunder, and any

 

5

 

contractual time period or deadline under this Agreement shall not be deemed to have passed until such Agreement Dispute has been resolved.
 
b.              Arbitration.  If after such reasonable period such representatives are unable to settle such Agreement Dispute (and in any event, unless otherwise agreed in writing by the Parties, after 60 days have elapsed from the time the Parties began such negotiations), such Agreement Dispute shall be determined, at the request of either Party, by arbitration conducted in New York City, before and in accordance with the then-existing International Arbitration Rules of the American Arbitration Association (the “Rules”).  In any dispute between the Parties, the number of arbitrators shall be one.  Any judgment or award rendered by the arbitrator shall be final, binding and nonappealable (except upon grounds specified in 9 U.S.C. Section 10(a) as in effect on the date hereof).  If the Parties are unable to agree on an arbitrator, the arbitrator shall be selected in accordance with the Rules.  Any controversy concerning whether an Agreement Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived, whether an assignee of this Agreement is bound to arbitrate or as to the interpretation of enforceability of this Section 5.8(b) shall be determined by the arbitrator.  In resolving any dispute, the Parties intend that the arbitrator apply the substantive laws of the State of Delaware, without regard to the choice of law principles thereof.  The Parties intend that the provisions to arbitrate set forth herein be valid, enforceable and irrevocable.  The Parties agree to comply with any award made in any such arbitration proceedings that has become final in accordance with the Rules and agree to enforcement of or entry of judgment upon such award, by any court of competent jurisdiction, including the Supreme Court of the State of New York, New York County, or the United States District Court for the Southern District of New York.  The arbitrator shall be entitled, if appropriate, to award any remedy in such proceedings, including, without limitation, monetary damages, specific performance and all other forms of legal and equitable relief; provided, however, that the arbitrator shall not be entitled to award punitive damages.  Without limiting the provisions of the Rules, unless otherwise agreed in writing by or among the relevant Parties or permitted by this Agreement, the Parties shall keep confidential all matters relating to the arbitration or the award, provided, such matters may be disclosed (A) to the extent reasonably necessary in any proceeding brought to enforce the award or for entry of a judgment upon the award and (B) to the extent otherwise required by law.  Notwithstanding Article 32 of the Rules, the Party other than the prevailing Party in the arbitration shall be responsible for all of the costs of the arbitration, including legal fees and other costs specified by such Article 32.  Nothing contained herein is intended to or shall be construed to prevent any Party, in accordance with Article 22(3) of the Rules or otherwise, from applying to any court of competent jurisdiction for interim measures or other provisional relief in connection with the subject matter of any Agreement Disputes.
 
c.               Continuity of Service and Performance.  Unless otherwise agreed in writing, the Parties will continue to provide services and honor all other commitments under this Agreement during the course of dispute resolution pursuant to the provisions of this Agreement with respect to all matters not subject to such dispute, controversy or claim.
 

5.9.                              Execution
in Counterparts.  This Agreement may
be executed in two or more counterparts, each of which will be deemed an
original, and all of which will constitute one and the same agreement.

 

6

 

5.10.                        No
Third Party Beneficiaries.  Nothing
in this Agreement, express or implied, is intended to or will (a) confer on any
person other than the Parties hereto and their respective successors or
permitted assigns any rights (including third party beneficiary rights),
remedies, obligations or liabilities under or by reason of this Agreement, or
(b) constitute the Parties hereto as partners or as participants in a joint
venture.  This Agreement will not
provide third parties with any remedy, claim, liability, reimbursement, cause
of action or other right in excess of those existing without reference to the
terms of this Agreement.

 

5.11.                        Headings.  The headings preceding the text of the
sections and subsections hereof are inserted solely for convenience of reference,
and will not constitute a part of this Agreement, nor will they affect its
meaning, construction or effect.

 

5.12.                        Amendment
and Waiver.  The Parties may by
mutual agreement amend this Agreement in any respect, and any Party, as to such
Party, may (a) extend the time for the performance of any of the obligations of
any other Party, (b) waive any inaccuracies in representations by any other
Party, (c) waive compliance by any other Party with any of the agreements
contained herein and performance of any obligations by such other Party, and
(d) waive the fulfillment of any condition that is precedent to the performance
by such Party of any of its obligations under this Agreement.  To be effective, any such amendment or
waiver must be in writing and be signed by the Party against whom enforcement
of the same is sought.

 

7

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed the day and year first above written.

 

 

	
  PHARMACOPEIA,
  INC.

  	
   

  	
  PHARMACOPEIA
  DRUG DISCOVERY, INC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ John J. Hanlon

  	
   

  	
  /s/ Joseph A. Mollica,
  Ph.D.

  	
   

  
	
  Signature

  	
   

  	
  Signature

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John J. Hanlon

  	
   

  	
  Joseph A. Mollica,
  Ph.D.

  	
   

  
	
  Printed Name

  	
   

  	
  Printed Name

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Chief Financial Officer

  	
   

  	
  President and Chief
  Executive Officer

  	
   

  
	
  Title

  	
   

  	
  Title

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ACCELRYS
  INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Mark J. Emkjer

  	
   

  	
   

  
	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Mark J. Emkjer

  	
   

  	
   

  
	
  Printed Name

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  President and Chief
  Executive Officer

  	
   

  	
   

  
	
  TitleExhibit
10.2

 

TAX
SHARING AND INDEMNIFICATION AGREEMENT

 

This Tax Sharing and
Indemnification Agreement (this “Agreement”) is entered into as of the
Distribution Date by and between Pharmacopeia, Inc., a Delaware corporation
(“Pharmacopeia”), on behalf of itself and each Pharmacopeia Affiliate, and
Pharmacopeia Drug Discovery, Inc., a Delaware corporation (“PDD”), and their
respective successors.

 

RECITALS

 

WHEREAS, Pharmacopeia is
the common parent of an affiliated group of corporations within the meaning of
Section 1504(a) of the Code, which currently files consolidated income Tax
Returns;

 

WHEREAS, PDD is a
first-tier subsidiary of Pharmacopeia;

 

WHEREAS, PDD conducts the
drug discovery business which integrates proprietary small molecule
combinatorial and medicinal chemistry, high-throughput screening, in-vitro
pharmacology, computational methods and informatics to discover and optimize
lead compounds, as more fully described in its Form 10 filed with the
Securities and Exchange Commission on December 22, 2003, and the amendment
thereto filed on February 17, 2004 (the “Drug Discovery Business”);

 

WHEREAS, Pharmacopeia
holds certain assets used in the Drug Discovery Business;

 

WHEREAS, Pharmacopeia has
agreed to transfer and assign, or cause to be transferred and assigned, to PDD
substantially all the remaining assets and properties of the Drug Discovery
Business not already held by PDD (the “Contribution”);

 

WHEREAS, Pharmacopeia,
its subsidiary Accelrys, Inc., and other Pharmacopeia Affiliates are engaged in
the development and commercialization of molecular modeling and simulation
software for the life sciences and materials research markets, cheminformatics
and decision support systems, and bioinformatics tools including gene sequence
analysis (the “Software Business”);

 

WHEREAS, the Board of
Directors of Pharmacopeia has determined that it would be advisable and in the
best interests of Pharmacopeia and its shareholders for Pharmacopeia to
distribute on a pro-rata basis to the holders of record of Pharmacopeia common
stock, par value $0.0001 per share (the “Pharmacopeia Common Stock”), without
any consideration being paid by such holders, all of the outstanding shares of
PDD common stock, par value $0.01 per share (the “PDD Common Stock”) owned
directly by Pharmacopeia (the “Distribution”);

 

WHEREAS, Pharmacopeia and
PDD intend that the Contribution and the Distribution qualify as free of
Federal Tax to Pharmacopeia and its stockholders under Sections 355 and
368(a)(1)(D) of the Code;

 

 

WHEREAS, the parties
hereto are entering into this agreement: to ensure the tax-free status of the
Contribution and Distribution; to provide certain indemnities; and to provide
for various administrative matters relating to Taxes, including (1) the
preparation and filing of Tax Returns along with the payment of Taxes shown as
due and payable thereon, (2) the retention and maintenance of relevant records
necessary to prepare and file appropriate Tax Returns, as well as the provision
for appropriate access to those records by the parties to this Agreement, (3)
the conduct of audits, examinations, and proceedings by appropriate
governmental entities which could result in a redetermination of Taxes, and (4)
the cooperation of all parties with one another in order to fulfil their duties
and responsibilities under this Agreement and under the Code and other
applicable law; and

 

WHEREAS, the parties
desire to set forth their respective responsibilities for Taxes, including any
Taxes that could be incurred in connection with the Distribution.

 

AGREEMENT

 

NOW, THEREFORE, in
consideration of the foregoing and the mutual covenants and agreements set
forth below, the parties agree as follows:

 

ARTICLE I

DEFINITIONS

 

Unless otherwise defined
in this Agreement, capitalized terms shall have the meanings ascribed thereto
in the Distribution Agreement.  As used
in this Agreement, the following terms shall have the following meanings:

 

1.1.                              “Adjustment”
means any proposed or final change in the taxable income or Tax Liability of a
taxpayer.

 

1.2.                              “Affiliate”
means, when used with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such Person.

 

1.3.                              “Associates”
has the meaning ascribed to such term in the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.

 

1.4.                              “Code”
means the Internal Revenue Code of 1986, as amended.

 

1.5.                              “Combined
State Tax” means, with respect to each United States state or local taxing
jurisdiction, any income, franchise or similar tax payable to such state or
local taxing jurisdiction in which any PDD Affiliate files Returns with a
Pharmacopeia Affiliate, on a consolidated, combined or unitary basis for purposes
of such Tax.

 

1.6.                              “Combined
State Tax Return” means any Return with respect to any Combined State Taxes
that includes any Pre-Distribution Tax Period.

 

2

 

1.7.                              “Distribution”
has the meaning set forth in the recitals.

 

1.8.                              “Distribution
Agreement” means the Master Separation and Distribution Agreement between
Pharmacopeia, Accelrys Inc. and PDD dated April 30, 2004.

 

1.9.                              “Distribution
Date” has the meaning set forth in the Distribution Agreement.

 

1.10.                        “Federal
Tax” means any Tax imposed under the Code, including any interest, penalty
or other additions to Tax imposed under Subtitle F of the Code.

 

1.11.                        “Federal
Tax Return” means any Return with respect to any Federal Taxes that
includes any Pre-Distribution Tax Period.

 

1.12.                        “Final
Determination” means the final resolution of any Tax matter.  A final Determination shall result from the
first to occur of:

 

(a)                                  the
expiration of 30 days after the IRS’s acceptance of a Waiver of Restrictions on
Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
on Form 870 or 870-AD (or any successor comparable form) (the “Waiver”),
except as to reserved matters specified therein, or the expiration of 30 days
after acceptance by any other Taxing Authority of a comparable agreement or
form under the laws of any other jurisdiction, including state, local, and
foreign jurisdictions; unless, within such period, the taxpayer gives notice to
the other party to this Agreement of the taxpayer’s intention to attempt to
recover all or part of any amount paid pursuant to the Waiver by the filing of
a timely claim for refund;

 

(b)                                 a
decision, judgment, decree, or other order by a court of competent jurisdiction
that is not subject to further judicial review (by appeal or otherwise) and has
become final;

 

(c)                                  the
execution of a closing agreement under Code section 7121, or the
acceptance by the IRS of an offer in compromise under Code section 7122,
or comparable agreements under the laws of any other jurisdiction, including
state, local, and foreign jurisdictions; except as to reserved matters
specified therein;

 

(d)                                 the
expiration of the time for filing a claim for refund or for instituting suit in
respect of a claim for refund that was disallowed in whole or part by the IRS
or any other Taxing Authority;

 

(e)                                  the
expiration of the applicable statute of limitations; or

 

(f)                                    an
agreement by the parties hereto that a Final Determination has been made.

 

1.13.                        “Indemnified
Liability” is defined at Section 7.2.

 

3

 

1.14.                        “Indemnified
Parties” is defined at Section 7.2.

 

1.15.                        “Indemnifying
Parties” is defined at Section 7.2.

 

1.16.                        “IRS”
means the U.S. Internal Revenue Service.

 

1.17.                        “IRS
Interest Rate” means the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621(a)(2).

 

1.18.                        “Opinion
Documents” means (i) the Spin-Off Opinion, (ii) the representation letters
issued by Pharmacopeia and PDD to Dechert LLP in connection with the Spin-Off
Opinion and (iii) all other documents provided by Pharmacopeia and PDD to
Dechert LLP and on which Dechert LLP relied in issuing the Spin-Off Opinion

 

1.19.                        “PDD
Affiliate” means PDD and any Affiliate of PDD after the Distribution Date.

 

1.20.                        “PDD
Change in Control Tax” means any Tax imposed by reason of
section 355(e) of the Code or any comparable provision of state or local
law as a result of one or more persons acquiring, directly or indirectly, stock
representing a 50% or greater interest in PDD.

 

1.21.                        “PDD
Separate Return” means any state or local Tax Return of PDD, other than any
Combined State Tax Return, that includes any Pre-Distribution Tax Period.

 

1.22.                        “Pharmacopeia
Affiliate” means Pharmacopeia and any Affiliate of Pharmacopeia (other than
PDD) before, on or after the Distribution Date, as applicable.

 

1.23.                        “Pharmacopeia
Consolidated Group” means the group of companies filing a consolidated
Federal Tax Return or Combined State Tax Return, as the case may be, that includes
Pharmacopeia.

 

1.24.                        “Pharmacopeia
Consolidated Return” means any consolidated Federal Tax Return or Combined
State Tax Return of the Pharmacopeia Consolidated Group that includes any
Pre-Distribution Tax Period.

 

1.25.                        “Person”
means any natural person, corporation, business trust, joint venture,
association, company, partnership, or government, or any agency or political
subdivision thereof.

 

1.26.                        “Post-Distribution
Tax Period” means (i) any tax period ending after the Distribution Date,
and (ii) with respect to a tax period that begins on or before the Distribution
Date and ends after the Distribution Date, such portion of the tax period that
begins on the day after the Distribution Date.

 

1.27.                        “Pre-Distribution
Tax Period” means (i) any tax period beginning and ending before or on the
Distribution Date, and (ii) with respect to a tax period that begins on or
before and ends after the Distribution Date, such portion of the tax period
that begins before the Distribution Date and ends at the close of the
Distribution Date.

 

4

 

1.28.                        “Proceeding”
is defined at section 8.2(a).

 

1.29.                        “Return”
means any return, declaration, report, claim for refund, or information or
return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.

 

1.30.                        “Separation
Tax” means any Tax (other than any PDD Change in Control Tax) imposed on
any Pharmacopeia Affiliate or PDD Affiliate in connection with the Contribution
and Distribution that would not have occurred had the Contribution and
Distribution not occurred.

 

1.31.                        “Spin-Off
Opinion” means the opinion received from Dechert LLP to the effect that the
Distribution will qualify as free of Federal Tax to Pharmacopeia and its
stockholders under sections 355 and 368(a)(1)(D) of the Code.

 

1.32.                        “Spin-Off
Period” means the period commencing on the Distribution Date and ending on
the seventh anniversary of the close of the taxable year of Pharmacopeia in
which the Distribution occurs.

 

1.33.                        “Subsidiary”
means with respect to Pharmacopeia or PDD, any Person of which Pharmacopeia or
PDD, respectively, controls or owns, directly or indirectly, more than 50% of
the stock or other equity interest entitled to vote on the election of members
to the board of directors or similar governing body.

 

1.34.                        “Tax
Asset” means any Tax Item that may have the effect of producing a Tax
Benefit.

 

1.35.                        “Tax
Benefit” means a reduction in the Tax Liability of a taxpayer (whether a
Pharmacopeia Affiliate or a PDD Affiliate) for any taxable period.  Except as otherwise provided in this
Agreement, a Tax Benefit shall be deemed to have been realized or received from
a Tax Item in a taxable period only if and to the extent that the Tax Liability
of the taxpayer for such period, after taking into account the effect of the
Tax Item on the Tax Liability of such taxpayer in all prior periods, is less
than it would have been if such Tax Liability were determined without regard to
such Tax Item.

 

1.36.                        “Taxes”
means all federal, state, local and foreign gross or net income, gross
receipts, withholding, payroll, franchise, transfer, sales, use, value added,
estimated or other taxes of any kind whatsoever or similar charges and
assessments, including all interest, penalties and additions imposed with
respect to such amounts which any Pharmacopeia Affiliate or any PDD Affiliate
is required to pay, collect or withhold, together with any interest and any
penalties, additions or additional amounts imposed with respect thereto, and “Tax”
means any of the Taxes.

 

1.37.                        “Taxing
Authority” means the IRS or any other governmental authority or any
subdivision, agency, commission or authority thereof or any quasi-governmental
or private body

 

5

 

having jurisdiction pursuant to applicable law over
the assessment, determination, collection or imposition of any Tax.

 

1.38.                        “Tax
Item” means any item of income, gain, loss, deduction, credit, recapture of
credit, or any other item (including basis) which may have the effect of
increasing or decreasing Taxes paid or payable.

 

1.39.                        “Tax
Liability” means the net amount of Taxes due and paid or payable for any
taxable period, determined after applying all tax credits and all applicable carrybacks
or carryovers for net operating losses, net capital losses, unused general
business tax credits, or any other Tax Items arising from a prior or subsequent
taxable period, and all other relevant adjustments.

 

1.40.                        “Tax
Returns” means all reports, estimates, declarations of estimated tax,
information statements and returns relating to, or required to be filed in
connection with any Taxes, including information returns or reports with
respect to backup withholding and other payments to third parties.

 

1.41.                        “Unqualified
Tax Opinion” means an unqualified “will” opinion of tax counsel to the
effect that a transaction does not disqualify the Distribution from qualifying
for tax-free treatment for Pharmacopeia or its shareholders under Code
section 355 (including Code section 355(e))and any other applicable
sections of the Code, assuming that the Distribution would have qualified for
tax treatment if such transaction did not occur, which opinion is in form and
substance reasonably satisfactory to Pharmacopeia.  An Unqualified Tax Opinion may rely upon, and may assume the
accuracy of, any representations given in any Opinion Document, and any
customary representations contained in an officer’s certificate delivered by an
officer of Pharmacopeia or PDD to such counsel.

 

ARTICLE II

PREPARATION AND FILING OF TAX RETURNS.

 

2.1.                              Designation
of Agent.  With regard to each
Pharmacopeia Consolidated Return, each PDD Affiliate hereby irrevocably
authorizes and designates Pharmacopeia as its agent, coordinator, and administrator,
for the purpose of taking any and all actions (including the execution of
waivers of applicable statutes of limitation) necessary or incidental to the
filing of any such Tax Return or other Tax proceedings, and for the purpose of
making payments to, or collecting refunds from, any Taxing Authority, provided
that PDD may continue to participate in any such Tax proceedings as provided
herein.

 

2.2.                              Pharmacopeia
Consolidated Returns.  Pharmacopeia
will prepare all Pharmacopeia Consolidated Returns.  Pharmacopeia shall have the exclusive right to (a) file,
prosecute, compromise, or settle any claim for refund, and (b) determine
whether any refunds to which the Pharmacopeia Consolidated Group may be
entitled shall be received by way of refund or credit against the Tax liability
of the Pharmacopeia Consolidated Group.

 

6

 

2.3.                              Taxable
Period Ends on Distribution Date. 
Unless prohibited by applicable law, any taxable period of PDD that is
included in a Pharmacopeia Consolidated Return that includes the Distribution
Date shall end on the Distribution Date.

 

2.4.                              Allocation.  Unless Pharmacopeia and PDD agree otherwise,
the taxable year of PDD shall be treated for all Tax purposes as ending on the
Distribution Date, and no alternative method of allocating Tax Items of PDD to
the period including the Distribution shall be used.

 

2.5.                              PDD
Separate Returns.  PDD shall be
solely responsible for the preparation and filing of all PDD Separate
Returns.  PDD shall be responsible for
paying to the applicable Tax Authorities all Taxes shown as due from any PDD
Affiliate on the PDD Separate Returns.

 

2.6.                              Post-Distribution
Conduct of PDD.  On or after the
Distribution Date, PDD will not, nor will it permit any PDD Affiliate to, make
or change any accounting method, change its taxable year, amend any Return or
take any Tax position on any Return, take any other action, omit to take any
action, or enter into any transaction that may reasonably be expected to result
in or does result in any increased Tax liability or reduction of any Tax Asset
of the Pharmacopeia Consolidated Group or any Pharmacopeia Affiliate.

 

ARTICLE III

TAX SHARING

 

3.1.                              Taxes
Generally.  Except as provided in
Section 3.2 and Section 3.3 of this Agreement, Pharmacopeia shall pay
or cause to be paid and shall indemnify and hold each PDD Affiliate harmless
against all Tax Liabilities that arise under each Pharmacopeia Consolidated
Return.  PDD shall pay or cause to be
paid and shall indemnify and hold each Pharmacopeia Affiliate harmless against
all Tax Liabilities that arise under each PDD Separate Return.

 

3.2.                              Adjustments.  If any Tax Return is examined by a Taxing
Authority and an Adjustment results from such examination, liability for Taxes
arising from such Adjustment shall be borne by the responsible party as
determined under Section 3.1, provided, however, that if the Adjustment
which results in additional Tax Liability to one party also results in a Tax
Benefit to the other party, the party receiving such Tax Benefit, to the extent
it is equal to or less than the other party’s additional Tax Liability, shall
pay such Tax Benefit to the other party within 30 days after such Tax Benefit
is realized.  Promptly after receiving
notice from the party having the Adjustment which results in additional Tax
Liability, the other party shall make a claim for any Tax Benefit resulting
from such Adjustment, on an amended Tax Return or in a formal or informal claim
filed with the IRS, unless the amount of such Tax Benefit is immaterial or
unless otherwise agreed by the parties. 
If an Adjustment could be governed by both this Section 3.2 and
Articles VII or VIII, those Articles will take precedence over this
Section 3.2.

 

3.3.                              Separation
Taxes.  Notwithstanding anything in
this Agreement to the contrary, PDD shall indemnify and hold harmless each
Pharmacopeia Affiliate against liability for (i) any PDD Change in Control Tax
and (ii) any Separation Tax for which PDD or its Affiliates has an obligation
to indemnify Pharmacopeia under any other provision of this Agreement.

 

7

 

Pharmacopeia shall indemnify and hold harmless each
PDD Affiliate against liability for all other Separation Taxes.

 

ARTICLE IV

COOPERATION AND EXCHANGE OF INFORMATION; AUDITS AND ADJUSTMENTS

 

4.1.                              Tax
Return Information.

 

(a)                                  PDD
shall, and shall cause each appropriate PDD Affiliate to, provide Pharmacopeia
with all information and other assistance reasonably requested by Pharmacopeia
to enable the Pharmacopeia Affiliates to prepare and file Pharmacopeia
Consolidated Returns required to be filed by them pursuant to this Agreement.

 

(b)                                 Pharmacopeia
shall, and shall cause each appropriate Pharmacopeia Affiliate to, provide PDD
with all information and other assistance reasonably requested by PDD to enable
the PDD Affiliates to prepare and file PDD Separate Returns required to be
filed by them pursuant to this Agreement.

 

4.2.                              Audits
and Adjustments.

 

(a)                                  Whenever
a Pharmacopeia Affiliate or PDD Affiliate receives in writing from the IRS or
any other Taxing Authority notice of an Adjustment that may give rise to a
payment from the other party under this Agreement or otherwise affect the other
party’s Taxes, Pharmacopeia or PDD, as the case may be, shall give written
notice of the Adjustment to the other party in accordance with the terms of
Article VIII.  The audit shall be
controlled and settled pursuant to the terms of that article.

 

(b)                                 PDD
agrees reasonably to cooperate with Pharmacopeia in the negotiation,
settlement, or litigation of any liability for Taxes of any Pharmacopeia
Affiliate.

 

(c)                                  Pharmacopeia
agrees reasonably to cooperate, and to cause each Pharmacopeia Affiliate to
cooperate, with PDD in the negotiation, settlement, or litigation of any liability
for Taxes of any PDD Affiliate.

 

(d)                                 Pharmacopeia
will reasonably promptly notify PDD in writing of any Adjustment involving a
change in the tax basis of any asset of any PDD Affiliate, specifying the
nature of the change so that such PDD Affiliate will be able to reflect the
revised basis of its tax books and records for periods beginning on or after
the Distribution Date.

 

4.3.                              PDD
Carrybacks.  Whenever permitted to
do so by applicable law, and unless agreed otherwise by Pharmacopeia, PDD shall
elect to relinquish any carryback period which would include any
Pre-Distribution Tax Period.

 

For purposes of this
Article IV, the term “party” shall refer to any Pharmacopeia Affiliate and
any PDD Affiliate, as the case may be.

 

8

 

ARTICLE V

RETENTION OF RECORDS

 

5.1.                              Retention
of Records.  Pharmacopeia and PDD
agree to retain the appropriate records which may affect the determination of
the liability for Taxes of any PDD Affiliate or Pharmacopeia Affiliate,
respectively, until such time as there has been a Final Determination with
respect to such liability for Taxes.  A
party may satisfy its obligations under the preceding sentence by allowing the
other party to duplicate records at such second party’s request and expense.

 

5.2.                              Statute
of Limitations.  Pharmacopeia and
PDD will notify each other in writing of any waivers or extensions of the
applicable statute of limitations that may affect the period for which any
materials, records, or documents must be retained.

 

ARTICLE VI

COVENANTS

 

6.1.                              Pharmacopeia
Covenants.  Pharmacopeia covenants
to PDD that:

 

(a)                                  No
Pharmacopeia Affiliate will take any action or fail to take any action, which
action or failure to act would cause the Contribution and the Distribution to
fail to qualify under Sections 351(a), 355(a), and 368(a)(1)(D) of the Code or
any corresponding provision of state or local law.  Without limiting the foregoing, Pharmacopeia covenants to PDD
that:

 

(i)                                     During
the six-month period following the Distribution Date, no Pharmacopeia Affiliate
will liquidate, merge, or consolidate with any person or enter into any
substantial negotiations, agreements, or arrangements with respect to any such
transaction.

 

(ii)                                  During
the six-month period following the Distribution Date, no Pharmacopeia Affiliate
will sell, exchange, distribute, or otherwise dispose of assets to any person
or enter into any substantial negotiations, agreements, or arrangements with
respect to any such transaction, except in the ordinary course of business.

 

(iii)                               Following
the Distribution, Accelrys and its subsidiaries will, for a minimum of two
years, continue the active conduct of the Software Business.

 

(iv)                              No
Pharmacopeia Affiliate will take any action inconsistent with the information
and representations in the Opinion Documents.

 

(v)                                 No
Pharmacopeia Affiliate will repurchase stock of Pharmacopeia in a manner
contrary to the requirements of Revenue Procedure 96-30 or in a manner contrary
to the representations made in the Opinion Documents.

 

(vi)                              No
Pharmacopeia Affiliate will permit its agents to take any of the actions
described in items (i) through (v) above on its behalf.

 

9

 

(b)                                 No
Pharmacopeia Affiliate will take or omit to take (or permit its agents to take
or omit to take) any action that results in any Separation Tax being imposed on
any PDD Affiliate in excess of the amount that would be imposed on such PDD
Affiliate, based upon:

 

(i)                                     any
specific agreements between a Pharmacopeia Affiliate and a PDD Affiliate as to
the manner in which the Contribution and Distribution and any other relevant
transactions are to be treated for tax purposes, and

 

(ii)                                  to
the extent not contrary to the agreements described in Section 6.1(b)(i),
the form of the Contribution and Distribution and any other relevant
transactions as set forth in agreements between the relevant Pharmacopeia
Affiliates and PDD Affiliates.

 

(c)                                  Within
the two-year period following the distribution, no Pharmacopeia Affiliate will
take any action (including stock issuances, whether pursuant to the exercise of
options or similar interests or otherwise, option grants, capital
contributions, or redemptions) or omit to take any action (or permit its agents
to take or omit to take any action) which is reasonably likely to, either alone
or in combination with actions or omissions by any Pharmacopeia Affiliate or
any other party, result in the imposition of any Separation Tax.

 

6.2.                              PDD
Covenants.  PDD covenants to
Pharmacopeia that:

 

(a)                                  No
PDD Affiliate will take any action or fail to take any action, which action or
failure to act would cause the Contribution and the Distribution to fail to
qualify under Sections 351(a), 355(a), and 368(a)(1)(D) of the Code or any
corresponding provision of state or local law. 
Without limiting the foregoing, PDD covenants to Pharmacopeia that:

 

(i)                                     During
the six-month period following the Distribution Date, PDD will not liquidate,
merge, or consolidate with any person, or enter into any substantial negotiations,
agreements, or arrangements with respect to any such transaction.

 

(ii)                                  During
the six-month period following the Distribution Date, no PDD Affiliate will
sell, exchange, distribute, or otherwise dispose of assets to any person, or
enter into any substantial negotiations, agreements, or arrangements with
respect to any such transaction, except in the ordinary course of business.

 

(iii)                               Following
the Distribution, PDD will, for a minimum of two years, continue the active
conduct of the Drug Discovery Business.

 

(iv)                              No
PDD Affiliate will take any action inconsistent with the information and
representations in the Opinion Documents.

 

(v)                                 No
PDD Affiliate will repurchase stock of PDD in a manner contrary to the
requirements of Revenue Procedure 96-30 or in a manner contrary to the
representations made in the Opinion Documents.

 

10

 

(vi)                              No
PDD Affiliate will permit its agents to take any of the actions described in
items (i) through (v) above on its behalf.

 

(b)                                 No
PDD Affiliate will take or omit to take (or permit its agents to take or omit
to take) any action that results in any Separation Tax being imposed on any
Pharmacopeia Affiliate in excess of the amount that would be imposed on such
Pharmacopeia Affiliate, based upon:

 

(i)                                     any
specific agreements between a Pharmacopeia Affiliate and a PDD Affiliate as to
the manner in which the Contribution and Distribution and any other relevant
transactions are to be treated for tax purposes, and

 

(ii)                                  to
the extent not contrary to the agreements described in Section 6.1(b)(i),
the form of the Contribution and Distribution and any other relevant
transactions as set forth in agreements between the relevant Pharmacopeia
Affiliates and PDD Affiliates.

 

(c)                                  Within
the two-year period following the distribution, no PDD Affiliate will take any
action (including stock issuances, whether pursuant to the exercise of options
or similar interests or otherwise, option grants, capital contributions, or
redemptions) or omit to take any action (or permit its agents to take or omit
to take any action) which is reasonably likely to, either alone or in
combination with actions or omissions by any PDD Affiliate or any other party,
result in the imposition of any Separation Tax.

 

6.3.                              Exceptions.  Any Pharmacopeia Affiliate or PDD Affiliate
may take actions inconsistent with the covenants contained in Section 6.1,
if Pharmacopeia or PDD, as the case may be obtains an Unqualified Tax Opinion,
it being understood that each party hereto agrees to cooperate with the party
seeking such opinion and use its reasonable best efforts to assist the party
seeking such opinion in its attempting to obtain, as expeditiously as possible,
any opinion described in this Section 6.3.

 

ARTICLE VII

INDEMNITY OBLIGATIONS

 

7.1.                              PDD
Indemnity.  Each PDD Affiliate
(collectively, jointly and severally, the “PDD Indemnifying Parties”)
will jointly and severally indemnify each Pharmacopeia Affiliate (each a “Pharmacopeia
Indemnified Party”) against and hold them harmless from:

 

(a)                                  Any
state and local Tax of any PDD Affiliate, excluding any Combined State Tax and
excluding (for purposes of this Section 7.1(a)) any Separation Tax;

 

(b)                                 any
Separation Taxes resulting from a breach by a PDD Indemnifying Party of (i) any
representation or covenant in an Opinion Document (as such representation is
modified, qualified or elaborated in any subsequent Opinion Document), (ii) any
representation,

 

11

 

covenant or other agreement set forth in this
Agreement, or (iii) any agreements or covenants between a Pharmacopeia
Affiliate and a PDD Affiliate pertaining to Tax matters;

 

(c)                                  any
PDD Change in Control Tax;

 

(d)                                 any
Tax liability arising from an Adjustment for which PDD is responsible under
Section 3.2;

 

(e)                                  any
Tax imposed on a Pharmacopeia Affiliate as a result of PDD’s failure to
cooperate with Pharmacopeia under Article VIII; and

 

(f)                                    any
Tax increase to Pharmacopeia resulting from PDD’s adoption of a position
inconsistent with the allocation set out in Section 2.4.

 

7.2.                              Pharmacopeia
Indemnity.  Each Pharmacopeia
Affiliate (collectively, jointly and severally, the “Pharmacopeia
Indemnifying Parties” and, together with PDD Indemnifying Parties, the “Indemnifying
Parties”) will jointly and severally indemnify each PDD Affiliate (each a “PDD
Indemnified Party” and, together with the Pharmacopeia Indemnified Parties,
the “Indemnified Parties”) against and hold them harmless from:

 

(a)                                  Any
Pharmacopeia Consolidated Group Taxes, excluding (for purposes of this
Section 7.2) any Separation Taxes;

 

(b)                                 Any
separate state or local Tax and any foreign Tax of any Pharmacopeia Affiliate;

 

(c)                                  Any
liability or damage arising from the breach by any Pharmacopeia Affiliate of
(i) any representation or covenant in an Opinion Document (as such
representation is modified, qualified or elaborated in any subsequent Opinion
Document), (ii) any representation, covenant or other agreement set forth in
this Agreement, or (iii) any agreements or covenants between a Pharmacopeia
Affiliate and a PDD Affiliate pertaining to Tax matters;

 

(d)                                 any
Separation Taxes (other than such Taxes for which PDD is required to indemnify
Pharmacopeia under Section 7.1);

 

(e)                                  Any
Tax liability arising from an Adjustment for which Pharmacopeia is responsible
under Section 3.2; and

 

(f)                                    Any
Tax imposed on a PDD Affiliate (other than a Separation Tax) as a result of
Pharmacopeia’s failure to cooperate with PDD under Article VIII (each of
the items described in Section 7.1 or 7.2, an “Indemnified Liability”).

 

7.3.                              Amount
of Indemnity.  The amount of Tax
included in an Indemnified Liability that is incurred by any Indemnified Party
shall in the case of a Tax based or determined with reference to income shall
for any year be the difference between (x) the actual Tax incurred by

 

12

 

the Indemnified Party for such year and (y) the amount
of Tax that the Indemnified Party would have paid in such year absent the Tax
Items (or adjustments thereto) in that year or any prior year giving rise to
the Indemnified Liability.  For the
avoidance of doubt, if an adjustment to any Tax Item would have resulted in
additional Tax paid but for the availability of net operating losses or tax
credits, the Indemnifying Party shall indemnify the Indemnified Party when, as,
and to the extent that such loss or credit carryforward would otherwise have
been available to reduce any Tax.  All
amounts payable under this Agreement shall be treated as adjustments to the
amount of the Contribution, provided that if any taxing jurisdiction determines
that the amounts received by an Indemnified Party nevertheless are taxable,
then the Indemnifying Party shall make additional payments to the Indemnified
Party so that the Indemnified Party is made whole on an after-tax basis.  For this purpose, the amount of Taxes
imposed on the payments shall be determined based on the taxing jurisdiction’s
highest marginal Tax rate applicable to taxable income of corporations such as
the Indemnified Party on income of the character subject to tax and indemnified
against under this Article VII for the taxable period in which the
Distribution occurs (net of any federal Tax Benefit from state and local
Taxes).

 

ARTICLE VIII

PROCEDURAL ASPECTS OF INDEMNITY

 

8.1.                              General.

 

(a)                                  If
either any Indemnified Party or any Indemnifying Party receives any written
notice of deficiency, claim or adjustment or any other written communication
from any Taxing Authority that may result in an Indemnified Liability, the
party receiving such notice or communication shall promptly give written notice
thereof to the other party, provided that any delay by an Indemnified Party in
so notifying an Indemnifying Party shall not relieve the Indemnifying Party of
any liability hereunder, except to the extent (i) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified
Liability administratively or in the courts in accordance with section 8.2
and (ii) the Indemnifying Party is materially and adversely prejudiced by the
delay.

 

(b)                                 The
parties hereto undertake and agree that from and after such time as they obtain
knowledge that any representative of a Taxing Authority has begun to
investigate or inquire into the Distribution (whether or not such investigation
or inquiry is a formal or informal investigation or inquiry), the party
obtaining such knowledge shall (i) notify the other party thereof, provided
that any delay by an Indemnified Party in so notifying an Indemnifying Party
shall not relieve the Indemnifying Party of any liability hereunder (except to
the extent (A) such delay restricts the ability of the Indemnifying Party to
contest the resulting Indemnified Liability administratively or in the courts
in accordance with section 8.2 and (B) the Indemnifying Party is
materially and adversely prejudiced by such delay), (ii) consult with the other
party from time to time as to the conduct of such investigation or inquiry,
(iii) provide the other party with copies of all correspondence with such
Taxing Authority or any representative thereof pertaining to such investigation
or inquiry, and (iv) arrange for a representative of the other party to be
present at all

 

13

 

meetings with such Taxing Authority or any
representative thereof pertaining to such investigation or inquiry.

 

8.2.                              Contests.

 

(a)                                  Provided
that (i) an Indemnifying Party shall furnish the Indemnified Party with
evidence reasonably satisfactory to the Indemnified Party of its ability to pay
the full amount of the Indemnified Liability and (ii) such Indemnifying Party
acknowledges in writing that the asserted liability is an Indemnified
Liability, such Indemnifying Party shall assume and direct the defense or
settlement of any tax examination, administrative appeal, hearing, arbitration,
suit or other proceeding (each a “Proceeding”) commenced, filed or
otherwise initiated or convened to investigate or resolve the existence and
extent of such liability.

 

(b)                                 If
the Indemnified Liability is grouped with other unrelated asserted liabilities
or issues in the Proceeding, the parties shall use their respective best
efforts to cause the Indemnified Liability to be the subject of a separate
proceeding.  If such severance is not
possible, the Indemnifying Party shall assume and direct and be responsible
only for the matters relating to the Indemnified Liability.  The Indemnified Party may settle, partially
settle, or otherwise resolve any controversy involving the Indemnified Party’s
return to which the particular Adjustment relates, so long as the Indemnified
Party does not settle, partially settle, or otherwise resolve the controversy
in a manner inconsistent with the Indemnifying Party’s position, without prior
written consent, which may not be unreasonably withheld, from the Indemnifying
Party.

 

(c)                                  Notwithstanding
the foregoing, if at any time during a Proceeding controlled by an Indemnifying
Party pursuant to Section 8.2(a) such Indemnifying Party fails to provide
evidence reasonably satisfactory to the Indemnified Party of its ability to pay
the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that such Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the
Indemnified Party may assume control of the Proceedings upon 7 days written
notice.

 

(d)                                 In
addition to amounts referred to in Section 7.1 or Section 7.2, an
Indemnifying Party shall pay all out-of-pocket expenses and other costs related
to the Indemnified Liability, including but not limited to fees for attorneys,
accountants, expert witnesses or other consultants retained by such
Indemnifying Party and/or the Indemnified Party.  To the extent that any such expenses and other costs have been or
are paid by an Indemnified Party, the Indemnifying Party shall promptly
reimburse the Indemnified Party therefor.

 

(e)                                  An
Indemnifying Party shall not pay (unless otherwise required by a proper notice
of levy and after prompt notification to the Indemnified Party of receipt of
notice and demand for payment), settle, compromise or concede any portion of
the Indemnified Liability without the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld.  An Indemnifying Party shall, on a timely basis, keep the
Indemnified

 

14

 

Party informed of all developments in the Proceeding
and provide the Indemnified Party with copies of all pleadings, briefs, orders,
and other written papers.

 

(f)                                    Any
Proceeding which is not controlled or which is no longer controlled by an
Indemnifying Party pursuant to this Section 8.2 shall be controlled and
directed exclusively by the Indemnified Party, and any related out-of-pocket
expenses and other costs incurred by the Indemnified Party, including but not
limited to fees for attorneys, accountants, expert witness or other
consultants, shall be reimbursed by such Indemnifying Party.  An Indemnified Party will not be required to
pursue the claim in federal district court, the Court of Federal Claims or any
state or foreign court if as a prerequisite to such court’s jurisdiction, the
Indemnified Party is required to pay the asserted liability unless the funds
necessary to invoke such jurisdiction are provided by such Indemnifying Party.

 

8.3.                              Time
and Manner of Payment.  An
Indemnifying Party shall pay to the Indemnified Party the amount of the
Indemnified Liability and any expenses or other costs indemnified against (less
any amount paid directly by an Indemnifying Party to the Taxing Authority) no
less than seven (7) days prior to the date payment of the Indemnified Liability
is to be made to the Taxing Authority. 
Such payment shall be paid by wire transfer of immediately available
funds to an account designated by the Indemnified Party by written notice to an
Indemnifying Party prior to the due date of such payment.  If an Indemnifying Party delays making
payment beyond the due date hereunder, such party shall pay interest on the
amount unpaid at the IRS Interest Rate for each day and the actual number of
days for which any amount due hereunder is unpaid.

 

8.4.                              Refunds.  In connection with this Agreement, if an
Indemnified Party receives a refund in respect of amounts paid by an
Indemnifying Party to any Taxing Authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the Taxing Authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to such Indemnifying Party.

 

8.5.                              Cooperation.  The parties shall cooperate with one another
in a timely manner in any administrative or judicial proceeding involving any
matter that may result in an Indemnified Liability.

 

8.6.                              Affiliates.  Pharmacopeia agrees and acknowledges that
Pharmacopeia shall be responsible for the performance of the obligations of
each Pharmacopeia Affiliate under this Agreement.  PDD agrees and acknowledges that PDD shall be responsible for the
performance of the obligations of each PDD Affiliate under this Agreement.

 

8.7.                              Application
to Present and Future Subsidiaries. 
This Agreement is being entered into by Pharmacopeia and PDD on behalf
of themselves and each Pharmacopeia Affiliate and each PDD Affiliate,
respectively.  This Agreement shall
constitute a direct obligation of each such affiliate and shall be deemed to
have been readopted and affirmed on behalf of any

 

15

 

corporation or other entity which becomes a
Pharmacopeia Affiliate or a PDD Affiliate in the future.

 

ARTICLE IX

DISPUTE RESOLUTION

 

9.1.                              Disputes.

 

(a)                                  Resolution
of any and all disputes arising from or in connection with this Agreement,
whether based on contract, tort, statute, or otherwise, including, but not
limited to, disputes in connection with claims by third parties (collectively,
“Disputes”) shall be subject to the provisions of this Section 9.1;
provided, however, that nothing contained herein shall preclude either party
from seeking or obtaining (i) injunctive relief or (ii) equitable or other
judicial relief to enforce the provisions hereof or to preserve the status quo
pending resolution of Disputes hereunder.

 

(b)                                 Either
party may give the other party written notice of any Dispute not resolved in
the normal course of business.  The
parties shall attempt in good faith to resolve any Dispute promptly by
negotiation between executives of the parties who have authority to settle the
controversy and who are at a higher level of management than the persons with
direct responsibility for administration of this Agreement.  Within 30 days after delivery of the notice,
the foregoing executives of both parties shall meet at a mutually acceptable
time and place, and thereafter as often as they reasonably deem necessary for a
period not to exceed 15 days, to attempt to resolve the Dispute.  All reasonable requests for information made
by one party to the other will be honored. 
If the parties do not resolve the Dispute within such 45 day period (the
“Initial Mediation Period”), the parties shall attempt in good faith to
resolve the Dispute by negotiation between (a) in the case of Pharmacopeia, the
Chief Financial Officer, and (b) in the case of PDD, the Chief Financial
Officer (collectively, the “Designated Officers”).  Such officers shall meet at a mutually
acceptable time and place (but in any event no later than 15 days following the
expiration of the Initial Mediation Period) and thereafter as often as they
reasonably deem necessary for a period not to exceed 15 days, to attempt to
resolve the Dispute.

 

(c)                                  If
the Dispute has not been resolved by negotiation within 75 days of the first
party’s notice, or if the parties failed to meet within 30 days of the first
party’s notice, or if the Designated Officers failed to meet within 60 days of
the first party’s notice, either party may commence any litigation or other
procedure allowed by law.

 

ARTICLE X

GENERAL

 

10.1.                        Term of
the Agreement.  This Agreement shall
become effective as of the Distribution Date, and except as expressly provided
herein, shall continue in full force and effect indefinitely.

 

16

 

10.2.                        Elections
under Code section 1552. 
Nothing in this Agreement is intended to change or otherwise affect any
election made by or on behalf of the Pharmacopeia Consolidated Group with
respect to the calculation of earnings and profits under Code section 1552.

 

10.3.                        Injunctions.  The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached.  The parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of the provisions
of this Agreement and to enforce specifically the terms and provisions hereof
in any court having jurisdiction, such remedy being in addition to any other
remedy to which they may be entitled at law or in equity.

 

10.4.                        Assignment.  Neither of the parties may assign or
delegate any of its rights or duties under this Agreement without the prior
written consent of the other party, which consent will not be unreasonably
withheld.  This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns.

 

10.5.                        Further
Assurances.  Subject to the
provisions hereof, the parties hereto shall make, execute, acknowledge and
deliver such other instruments and documents, and take all such other actions,
as may be reasonably required in order to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby.  Subject to the provisions hereof, each of
the parties shall, in connection with entering into this Agreement, performing
its obligations hereunder and taking any and all actions relating hereto,
comply with all applicable laws, regulations, orders, and decrees, and promptly
provide the other parties with all such information as they may reasonably
request in order to be able to comply with the provisions of this sentence.

 

10.6.                        Waivers.  No failure or delay on the part of the
parties in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such right or power,
preclude any other or further exercise thereof or the exercise of any other right
or power.  No modification or waiver of
any provision of this Agreement nor consent to any departure by the parties
therefrom shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given.

 

10.7.                        Change
of Law.  If, due to any change in
applicable law or regulations or their interpretation by any court of law or
other governing body having jurisdiction subsequent to the date of this
Agreement, performance of any provision of this Agreement or any transaction
contemplated thereby shall become impracticable or impossible, the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
provision.

 

10.8.                        Confidentiality.  Subject to any contrary requirement of law
and the rights of each party to enforce its rights hereunder in any legal
action, each party agrees that it shall keep strictly confidential, and shall
cause its employees and agents to keep strictly confidential, any

 

17

 

information which it or any of its employees or agents
may require pursuant to, or in the course of performing its obligations under,
any provision of this Agreement.

 

10.9.                        Headings.  Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.

 

10.10.                  Counterparts.  For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.

 

10.11.                  Notices.  All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery by
hand, by reputable overnight courier service, by facsimile transmission, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this
Section 10.11) listed below:

 

Pharmacopeia
at:                                                      Pharmacopeia,
Inc.

9685 Scranton Road

San Diego, CA

Attn:  Chief Financial Officer

Phone:  (858) 799-5000

Fax no.:  (858) 799-5100

 

PDD
at:                                                                                                       Pharmacopeia
Drug Discovery, Inc.

3000 East Park Boulevard

Cranbury, NJ  08512

Attn:  Chief Financial Officer

Phone:  (609) 452-3600

Fax no.:  (609) 452-3672

 

or to such other address
as any party may, from time to time, designate in a written notice delivered in
a like manner.  Notice given by hand
shall be deemed delivered when received by the recipient.  Notice given by mail as set out above shall
be deemed delivered three (3) business days after the date the same is
mailed.  Notice given by reputable
overnight courier shall be deemed delivered on the next following business day
after the same is sent.  Notice given by
facsimile transmission shall be deemed delivered on the day of transmission
provided telephone confirmation of receipt is obtained promptly after
completion of transmission.

 

10.12.                  Pre-Distribution
Earnings and Profits.  Pharmacopeia
and PDD agree to allocate pre-Distribution earnings and profits in accordance
with Treasury Regulation section 1.312-10.

 

10.13.                  Costs and
Expenses.  Unless specifically
provided herein, each party agrees to pay its own costs and expenses resulting
from the fulfillment of its respective obligations hereunder.

 

18

 

10.14.                  Cancellation
of Prior Tax Allocation or Tax Sharing Agreements.  Except as otherwise expressly provided
herein, on or prior to the effective date, Pharmacopeia shall cause to be
canceled all agreements (other than this Agreement) providing for the
allocation or sharing of Taxes to which any PDD Affiliate would otherwise be
bound following the Distribution.

 

10.15.                  Interest on
Late Payments.  If a party delays
making any payment beyond the due date hereunder, such party shall pay interest
on the amount unpaid at the IRS Interest Rate for each day and the actual
number of days for which any amount due hereunder is unpaid.

 

10.16.                  General.  This Agreement, including the attachments,
shall constitute the entire agreement between the parties hereto with respect
to the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof.  This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 10.6.  This Agreement shall
be binding upon and inure solely to the benefit of the parties hereto and their
respective present and future Subsidiaries, and nothing herein, express or
implied, is intended to or shall confer upon any third parties any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.

 

10.17.                  Governing Law
and Severability.  This Agreement
shall be governed by, and construed in accordance with, the laws of the State
of Delaware, including the provisions of such laws relating to conflict of
laws.  If any term or other provision of
this agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party.  Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner in order that the transactions
contemplated hereby are consummated as originally contemplated to the greatest
extent possible.

 

19

 

IN WITNESS WHEREOF, the
undersigned have caused this Agreement to be duly executed by their respective
officers, each of whom is duly authorized, all as of the Distribution Date.

 

	
   

  	
  PHARMACOPEIA, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John J. Hanlon

  	
   

  
	
   

  	
   

  	
  Name: John J. Hanlon

  
	
   

  	
   

  	
  Title: Chief Financial
  Officer

  
	
   

  	
   

  
	
   

  	
  PHARMACOPEIA DRUG
  DISCOVERY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph A. Mollica,
  Ph.D.

  	
   

  
	
   

  	
   

  	
  Name: Joseph A.
  Mollica, Ph.D.

  
	
   

  	
   

  	
  Title: President and
  Chief Executive Officer

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