AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
                                                      REGISTRATION NO. 333-
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
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                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
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                            CELL THERAPEUTICS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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       WASHINGTON                    2384                    91-1533912
    (STATE OR OTHER           (PRIMARY STANDARD           (I.R.S. EMPLOYER
    JURISDICTION OF               INDUSTRIAL             IDENTIFICATION NO.)
    INCORPORATION OR         CLASSIFICATION CODE
     ORGANIZATION)                 NUMBER)
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                      201 ELLIOTT AVENUE WEST, SUITE 400
                           SEATTLE, WASHINGTON 98119
                                (206) 282-7100
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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                                JAMES A. BIANCO
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                            CELL THERAPEUTICS, INC.
                      201 ELLIOTT AVENUE WEST, SUITE 400
                           SEATTLE, WASHINGTON 98119
                                (206) 282-7100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                       OF AGENT FOR SERVICE OF PROCESS)
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                                  COPIES TO:
 
          MICHAEL J. KENNEDY                       SCOTT T. SMITH
            MICHAEL S. DORF                       KAREN A. DEMPSEY
          SHEARMAN & STERLING               PILLSBURY MADISON & SUTRO LLP
   555 CALIFORNIA STREET, SUITE 2000             2700 SAND HILL ROAD
    SAN FRANCISCO, CALIFORNIA 94104         MENLO PARK, CALIFORNIA 94025
            (415) 616-1100                         (415) 233-4500
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  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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                        CALCULATION OF REGISTRATION FEE

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PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE FEE - ------------------------------------------------------------------------------------- Common Stock, no par value (including associated Preferred Stock Purchase Rights)............... 3,450,000 shares $16.00 $55,200,000 $16,728 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
(1) Includes 450,000 shares which the Underwriters have the option to purchase to cover any over-allotments. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act. ----------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CELL THERAPEUTICS, INC. CROSS REFERENCE SHEET ------------ PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S- 1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS ---------------------------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Forepart of the Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors 4. Use of Proceeds............... Prospectus Summary; Use of Proceeds 5. Determination of Offering Outside Front Cover Page of Prospectus; Price........................ Underwriting 6. Dilution...................... Risk Factors; Dilution 7. Selling Security Holders...... Not Applicable 8. Plan of Distribution.......... Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered................ Outside Front Cover Page of Prospectus; Prospectus Summary; Description of Capital Stock 10. Interests of Named Experts and Counsel...................... Legal Matters 11. Information with Respect to the Registrant............... Outside and Inside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Capital Stock; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................. Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, Dated February , 1997 PROSPECTUS 3,000,000 Shares [LOGO OF CELL THERAPEUTICS, INC.] Cell Therapeutics, Inc. Common Stock -------- All of the 3,000,000 shares of Common Stock offered hereby (the "Offering") are being sold by Cell Therapeutics, Inc. ("cti" or the "Company"). Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "CTIC." Johnson & Johnson Development Corporation, an existing shareholder and an affiliate of one of the Company's collaborative partners, has agreed to purchase a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering directly from the Company (the "Johnson & Johnson Stock Purchase") in a private placement at a per share price equal to the initial public offering price. The Johnson & Johnson Stock Purchase will not be registered in this Offering, and such shares will be purchased concurrent with the closing of this Offering. See "Johnson & Johnson Stock Purchase," "Business--Collaborations" and "Underwriting." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Discounts Proceeds to Public and Commissions(1) Company(2) - ----------------------------------------------------------------------------------------------- Per Share............................. $ $ $ - ----------------------------------------------------------------------------------------------- Total(3).............................. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. For information regarding indemnification of the Underwriters, see "Underwriting." 2. Before deducting expenses of the Offering payable by the Company, estimated at $850,000. 3. The Company has granted the Underwriters an option, exercisable within 30 days from the date hereof, to purchase up to 450,000 additional shares of Common Stock on the same terms as set forth above, solely to cover over- allotments, if any. If such option is exercised in full, the total Price to Public will be $ , the Underwriting Discounts and Commissions will be $ and the Proceeds to the Company will be $ . Including the Johnson & Johnson Stock Purchase, the total Proceeds to Company will be $ , or $ if the Underwriters over-allotment option is exercised in full. See "Underwriting." -------- The shares of Common Stock offered by the Underwriters are subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and to certain other conditions. It is expected that delivery of such shares will be made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about March , 1997. -------- UBS Securities Montgomery Securities Raymond James & Associates, Inc. March , 1997 [GRAPHIC TO COME] ------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward- looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." As used in this Prospectus, unless otherwise indicated or the context otherwise requires, all references to "cti" or the "Company" include Cell Therapeutics, Inc. and its wholly-owned subsidiary, CTI Technologies, Inc. and all references to "Johnson & Johnson" include Johnson & Johnson and its wholly-owned subsidiaries Ortho Biotech, Inc., The R.W. Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical Corporation) and Johnson & Johnson Development Corporation, or any of such entities, but does not include any other subsidiary of Johnson & Johnson. THE COMPANY Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery, development and commercialization of small molecule drugs for the treatment of cancer and inflammatory and immune diseases. The Company is conducting Phase III clinical trials for its lead product candidate, Lisofylline, which is being developed to prevent or reduce treatment-related toxicities, specifically infection, mucositis and treatment-related mortality, among cancer patients receiving high dose radiation and/or chemotherapy. In November 1996 cti entered into a Collaboration and License Agreement with Johnson & Johnson for the joint development and commercialization of Lisofylline. Since its inception, the Company has invested more than $60 million developing its products and building a unique drug discovery platform based on its proprietary technology in phospholipid chemistry. Oncology Cancer is the second leading cause of death in the United States with approximately 1.4 million new cases diagnosed each year. At some point in their disease treatment, 70 percent of all cancer patients will receive radiation therapy and 50 percent of all newly diagnosed cancer patients will receive chemotherapy. Despite their benefits for treating cancer, there are significant limitations of, and complications associated with, radiation and chemotherapy which result in a high rate of treatment failure. The principal causes of treatment failure include treatment-related toxicities, multidrug resistance and tumor resistance to radiation. The Company is focusing its oncology development efforts on a portfolio of drugs that it believes will address the three principal causes of cancer treatment failure: (i) Lisofylline--a supportive care agent being investigated to prevent or reduce the incidence of serious and fatal infections, mucositis (damage to the epithelial cells lining the mouth, stomach and intestinal tract) and treatment-related mortality among patients receiving high dose radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer drug under investigation for the treatment of patients with multidrug resistant tumors and (iii) tumor sensitizing agents being investigated to enhance sensitivity to radiation among tumors that have deleted or mutated tumor suppression genes. Lisofylline. Lisofylline is a synthetic small molecule drug in Phase III clinical trials among cancer patients receiving high dose radiation and/or chemotherapy. Unlike blood cell growth factors or chemotherapy protecting agents, Lisofylline is being developed to prevent or reduce the incidence of serious and fatal infections, mucositis and treatment-related mortality. More than 400 people have participated in over 15 clinical trials of Lisofylline to date. The Company has completed a Phase II trial in which Lisofylline resulted in a statistically significant reduction in mortality and the incidence of serious and fatal infections in cancer patients undergoing high dose radiation and/or chemotherapy followed by bone marrow transplantation ("BMT"). Based on the results of this trial, in the third quarter of 1996 the Company initiated a pivotal Phase III trial to more fully assess the safety and effectiveness of Lisofylline. The Company is also conducting Phase II and Phase III trials to investigate 3 the effects of Lisofylline on the incidence of infection and mortality among patients with newly diagnosed acute myelogenous leukemia ("AML") undergoing high dose induction chemotherapy. Lisofylline is also being developed to prevent or reduce severe mucositis, for which cti is planning to commence a Phase II/III trial in the second half of 1997. CT-2584. CT-2584 is cti's novel small molecule drug under investigation for the treatment of patients with multidrug resistant cancers, including sarcomas, prostate, colon, lung and breast cancer. The Company initiated parallel Phase I trials at the Christie Hospital in the United Kingdom in November 1995 and at the Memorial Sloan Kettering Cancer Research Center in the United States in May 1996 for patients with advanced cancers. More than 20 patients have been treated with CT-2584 as of January 1, 1997 at four different dose levels without exhibiting bone marrow or gastrointestinal toxicity. Based on preliminary results from these trials, the Company currently anticipates starting disease-specific Phase II trials in the United States in the second half of 1997. Inflammatory Disease The Company believes that, in addition to its oncology applications, Lisofylline may be effective as an agent to prevent or reduce the incidence and severity of acute lung injury ("ALI") and mortality among patients requiring mechanical ventilation for respiratory failure following pneumonia, multiple traumatic injuries or sepsis. The Company has completed a Phase II feasibility study in patients suffering from septic shock. In January 1997 the National Heart, Lung and Blood Institute notified the Company that it had selected Lisofylline for investigation in a Phase II/III trial among patients experiencing ALI. This trial is expected to begin in the second half of 1997. Corporate Collaboration In November 1996 the Company entered into a Collaboration and License Agreement with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical Corporation), each of which are wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson & Johnson"), for the joint development and commercialization of Lisofylline. Johnson & Johnson has committed to fund 60 percent of cti's budgeted development expenses. The Company and Johnson & Johnson will co-promote Lisofylline in the United States, and each will share equally in any resulting operating profits and losses. Johnson & Johnson will make additional payments to, and equity investments in, cti if certain milestones are achieved in the development and commercialization of Lisofylline. Johnson & Johnson has the exclusive right to develop and market Lisofylline, at its own expense, for markets other than the United States and Canada, subject to specified royalty payments to cti. At signing, Johnson & Johnson paid a $5.0 million license fee to and made a $5.0 million equity investment in cti, and has agreed to purchase, concurrent with the closing of this Offering, a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering. Cell Therapeutics, Inc. was incorporated in Washington in September 1991. The Company has not received any revenue from the sale of products to date and does not expect to receive revenues from the sale of products for at least the next several years. The Company's executive offices are located at 201 Elliott Avenue West, Seattle, Washington 98119, and its telephone number is (206) 282- 7100. ------------ Except as otherwise specified, all information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option, (ii) a 1-for-3 1/2 reverse stock split of the Common Stock which will be effected prior to the effective date of this Offering, (iii) the sale of 300,000 shares of Common Stock to Johnson & Johnson concurrent with the closing of this Offering at an assumed price of $15.00 per share, and (iv) the automatic conversion of all of the outstanding shares of the Company's Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (collectively, the "Convertible Preferred Stock") upon the closing of this Offering. See "Underwriting," "Johnson & Johnson Stock Purchase" and "Description of Capital Stock." cti(R) is a registered trademark of the Company. This Prospectus contains trademarks and service marks of companies other than cti. 4 THE OFFERING Common Stock Offered by the Company................. 3,000,000 shares Johnson & Johnson Stock Purchase.................... 300,000 shares (1) Common Stock Outstanding after this Offering........ 12,846,824 shares (2) Use of Proceeds..................................... For clinical trials and other research and development activities, general corporate purposes and working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............. CTIC
SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
PERIOD FROM SEPTEMBER 4, 1991 (DATE OF YEARS ENDED DECEMBER 31, INCORPORATION) ---------------------------- TO DECEMBER 31, 1994 1995 1996 1996 -------- -------- -------- --------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................... $ -- $ 100 $ 9,121 $ 9,221 Research and development ex- pense...................... 14,368 14,606 16,109 60,871 General and administrative expense.................... 5,283 6,144 7,602 24,743 -------- -------- -------- -------- Total operating expenses.. 19,651 20,750 23,711 85,614 Loss from operations........ (19,651) (20,650) (14,590) (76,393) Other income (expense)...... 152 658 662 2,321 -------- -------- -------- -------- Net loss.................... $(19,499) $(19,992) $(13,928) $(74,072) ======== ======== ======== ======== Pro forma net loss per share(3)................... $ (1.63) ======== Shares used in computation of pro forma net loss per share...................... 8,527
DECEMBER 31, 1996 ----------------------- ACTUAL AS ADJUSTED(4) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and securities available-for- sale................................................. $30,987 $ 76,487 Working capital....................................... 26,300 71,800 Total assets.......................................... 37,002 82,502 Long-term obligations, less current portion........... 2,005 2,005 Deficit accumulated during development stage.......... (74,083) (74,083) Total shareholders' equity............................ 30,053 75,553
- -------- (1) Johnson & Johnson has agreed to purchase a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering directly from the Company in a private placement that will occur concurrent with the closing of this Offering (the "Johnson & Johnson Stock Purchase") at a per share price equal to the initial per share price to public set forth on the cover of this Prospectus. See "Johnson & Johnson Stock Purchase." (2) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of stock options outstanding as of December 31, 1996 at a weighted average exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock issuable upon exercise of warrants outstanding as of December 31, 1996 at a weighted average exercise price of $19.12 per share. See "Management--Stock Option Plans" and "Description of Capital Stock." (3) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements. (4) As adjusted to reflect the net proceeds from the sale of the 3,000,000 shares of Common Stock offered hereby and receipt by the Company of the estimated net proceeds therefrom, based upon an assumed initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. Also adjusted to reflect the Johnson & Johnson Stock Purchase. See "Use of Proceeds" and "Johnson & Johnson Stock Purchase." 5 RISK FACTORS Prospective investors in the shares of Common Stock offered hereby should carefully consider the following risk factors, in addition to the other information contained in this Prospectus. This Prospectus contains forward- looking statements which involve risks and uncertainties. When used in this Prospectus, the words "believes," "anticipates," "expects" and similar expressions are intended to identify such forward-looking statements. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward- looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Dependence on Single Drug Candidate. The Company's lead drug candidate is Lisofylline. A Phase II clinical trial of Lisofylline in cancer patients undergoing high dose radiation and/or chemotherapy followed by bone marrow transplantation ("BMT") was completed in the first quarter of 1996, and the Company initiated a pivotal Phase III trial of Lisofylline for BMT in the third quarter of 1996. The Company is also conducting ongoing Phase II and Phase III trials of Lisofylline among patients with newly diagnosed acute myelogenous leukemia ("AML") undergoing high dose chemotherapy. There can be no assurance that such Phase III trials will be successfully completed, that further clinical studies will not be needed, or that any such clinical trials will lead to FDA approval. Furthermore, there can be no assurance that the Company will be successful in its efforts to develop Lisofylline for other indications, including mucositis and inflammatory disease. The remainder of the Company's drug candidates are still in research and development, preclinical trials or early stage clinical trials. Any additional product candidates will require significant research, development, preclinical and clinical testing, regulatory approval and commitments of resources prior to commercialization. The Company is, therefore, dependent on the successful completion of its Phase III trials and filing for and obtaining regulatory approvals of Lisofylline to generate revenues while it continues the research, development and regulatory approval processes for its other drug candidates. Although the Company is currently seeking to develop other drug candidates and to expand the number of drug candidates it has under development, there can be no assurance that it will be successful in such development or expansion. If Lisofylline does not successfully complete clinical testing and meet applicable regulatory requirements or is not successfully manufactured or marketed, the Company may not have the financial resources to continue research and development of other product candidates. See "Risk Factors--No Assurance of FDA Approval; Comprehensive Government Regulation", "Business-- Products under Development" and "--Collaborations." Technological Changes and Uncertainty. The Company currently relies exclusively upon its lipid-based small molecule technology for the discovery, development and commercialization of drugs for the treatment of cancer and inflammatory and immune diseases. To date, the Company's resources have been dedicated primarily to the research and development of potential pharmaceutical products that the Company believes regulate the production and/or degradation of phospholipids such as phosphatidic acids ("PAs") or oxidized lipids such as hydroperoxyoctadeceadieneoic acids ("HPODEs"). The physiology of cancer, inflammatory and immune disease is complex, and the role of PAs and HPODEs, and the stress-activated pathways ("SAPs") which they appear to activate, is not fully known. Although preclinical and clinical data to date suggest that the species of PAs and HPODEs targeted by the Company's products under development play an important role in the cellular inflammatory and injurious response to cell-damaging stimuli such as radiation, chemotherapy and oxidative injury, there can be no assurance that the Company's therapeutic approaches are correct or that its drug candidates will be proven safe or effective. The Company believes that the elevation and production of PAs and HPODEs and the activation of SAPs do not appear to be primarily utilized for normal cellular processes, and that the Company's drug candidates will not substantially interfere with normal cellular processes at therapeutically-relevant levels. There can be no assurance that the PAs or HPODEs or the SAPs believed to be targeted by the Company's drug candidates do not serve a currently unidentified beneficial purpose which might be adversely affected by the mechanism of action of the Company's drug candidates. No assurance can be given that unforeseen problems will not develop with the Company's technologies or applications, or that commercially feasible products will ultimately be developed by cti. There can be no assurance that research and discoveries 6 by others will not render some or all of cti's programs or products noncompetitive or obsolete or that the Company will be able to keep pace with technological developments or other market factors. Technological changes or medical advancements could diminish or eliminate the commercial viability of the Company's focus on cell membrane lipids in regulating cellular processes. The failure to commercialize such products would have a material adverse effect on the Company. No Assurance of Successful Product Development; Uncertainties Related to Clinical Trials. The Company has no products commercially available for sale and does not expect to have any products commercially available for sale for at least the next several years, if ever. The time frame for achievement of market success for any potential product is long and uncertain. Lisofylline and CT-2584, are currently in clinical trials for certain indications. However, the results obtained to date in preclinical and clinical studies of Lisofylline and in preclinical studies and preliminary clinical trial results of CT-2584 are not necessarily indicative of results that will be obtained during future clinical testing. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. In addition, clinical trial results may be subject to different interpretations. For example, in February 1996 the Company entered into an agreement with Schering AG ("Schering") for the development and commercialization of Lisofylline and CT-2584. This agreement was contingent upon Schering finding the clinical trial results and related data from the Company's Phase II BMT trial acceptable. In April 1996 Schering informed the Company that it did not wish to activate the agreement based on, among other factors, (i) its view that one of the endpoints of the Phase II BMT trial, white blood cell recovery, was not met and (ii) its view that the trial data regarding mortality rate and incidence of serious and fatal infection were difficult to interpret and that, as a result, Schering could not determine that the data was meaningful. See "Business--Products under Development-- Oncology" and Note 11 of Notes to Consolidated Financial Statements. There can be no assurance that the Company and its collaborators will agree on the interpretation of the Company's future clinical trial results or that the Company's clinical trials will demonstrate sufficient safety and efficacy necessary to obtain the requisite regulatory clearance or will result in marketable products. The Company's research and development programs for products other than Lisofylline and CT-2584 are at an early stage of development. Preclinical in vitro and animal studies are not necessarily indicative of results that may be obtained during human clinical testing. Many potential therapeutic products indicate positive in vitro results which are not subsequently reproduced in humans. Any additional product candidates will require significant research, development, preclinical and clinical testing, regulatory approval and commitments of resources prior to commercialization. There can be no assurance that the Company's research will lead to the discovery of additional product candidates or that Lisofylline, CT-2584 or any other products will be successfully developed, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully or profitably marketed. There can be no assurance as to the extent to which any products developed by cti will be able to penetrate the potential market for a particular therapy or indication or gain market acceptance among health care providers, third-party payors or patients. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to submit a new drug application as scheduled if clinical trials are completed, or that any such application will be reviewed and cleared by the FDA in a timely manner, or at all. There can be no assurance that unacceptable toxicities or side effects will not occur at any dose level at any time in the course of toxicological studies or of clinical trials of the Company's potential products. The appearance of any such unacceptable toxicities or side effects in toxicology studies or in clinical trials could cause the Company or regulatory authorities to interrupt, limit, delay or abort the development of any of the Company's potential products and could ultimately prevent their clearance by the FDA or foreign regulatory authorities for any or all targeted indications. Even after being cleared by the FDA or foreign regulatory authorities, a product may later be shown to be unsafe or to not have its purported effect, thereby preventing 7 widespread use or requiring withdrawal from the market. There can be no assurance that any potential products under development by the Company will be safe or effective when administered to patients. History and Continuation of Losses; Early Stage of Development. The Company commenced operations on February 1, 1992, and has not received any revenue from the sale of products to date, nor does it expect to receive revenues from the sale of products for at least the next several years. The Company has incurred net losses since inception and had an accumulated deficit of approximately $74.1 million as of December 31, 1996. These losses are primarily attributable to research and development efforts, including preclinical studies and clinical trials. To date, the Company's operations have been funded primarily through the sale of equity securities, which has raised aggregate net proceeds of approximately $103.0 million. The Company expects that its revenue sources for at least the next several years will consist primarily of future expense reimbursements and milestone payments under its collaboration agreements with Johnson & Johnson and with an affiliate of BioChem Pharma, Inc. ("BioChem Pharma"), and of interest income. The Company expects to continue to incur significant additional operating losses over the next several years as its research, development and clinical trial efforts expand. The Company is in the development stage and its operations are subject to all of the risks inherent in the establishment of a new business enterprise. The likelihood of the success of cti must be considered in light of the problems, expenses and delays frequently encountered in connection with the development of pharmaceutical products, the utilization of unproven technology and the competitive environment in which cti operates. The Company is working on a number of costly long-term development projects, which involve experimental and unproven technology, and may ultimately prove unsuccessful. There can be no assurance that cti will have sufficient funds or be able to complete successfully its research and development, obtain regulatory approval for, or manufacture or market any products in the future. In addition, since cti does not currently have any marketable products, it expects to incur substantial operating losses for a number of years. The amount of net losses and the time required by the Company to reach profitability are highly uncertain. There can be no assurance that it will be able to develop additional revenue sources or that its operations will become profitable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Need for Substantial Additional Funds. The Company will require substantial funds to conduct its existing and planned preclinical and clinical trials, to establish manufacturing and marketing capabilities for any products it may develop, and to continue research and development activities. The Company expects that its existing capital resources, together with the net proceeds of this Offering and the Johnson & Johnson Stock Purchase and the interest earned thereon, combined with anticipated funding from Johnson & Johnson under the Collaboration Agreement, will enable the Company to maintain its current and planned operations at least through the end of 1998. Furthermore, the Company will need to raise substantial additional capital to fund its operations beyond such time. See "--Reliance on Relationship with Johnson & Johnson," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Collaborations." The Company's future capital requirements will depend on, and could increase as a result of, many factors, including the continuation of the collaboration with Johnson & Johnson, continued scientific progress in its research and development programs, the magnitude of such programs, the progress of preclinical and clinical testing, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims, competing technological and market developments, changes in collaborative relationships, the terms of any additional collaborative arrangements that the Company may enter into, the ability of the Company to establish research, development and commercialization arrangements pertaining to products other than those covered by existing collaborative arrangements, the cost of establishing manufacturing facilities, the cost of commercialization activities, and the demand for the Company's products if and when approved. The Company intends to raise additional funds through additional equity or debt financings, research and development financings, collaborative relationships, or otherwise. Because of these long-term capital 8 requirements, cti may seek to access the public or private equity markets whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that any such additional funding will be available to cti, or, if available, that it will be on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to shareholders may result. If adequate funds are not available, cti may be required to delay, reduce the scope of, or eliminate one or more of its research, development and clinical activities or to seek to obtain funds through arrangements with collaborative partners or others that may require cti to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Reliance on Relationship with Johnson & Johnson. The Company is dependent on the future payments from Johnson & Johnson to continue the development and commercialization of Lisofylline as presently planned. Under the terms of the Collaboration and License Agreement (the "Collaboration Agreement") between Johnson & Johnson and the Company, Johnson & Johnson has committed to fund 60 percent of cti's budgeted development expenses incurred in connection with obtaining regulatory approval for Lisofylline in the United States. Johnson & Johnson will be responsible for obtaining regulatory approval for Lisofylline outside of the United States and Canada at its own expense. Although cti and Johnson & Johnson will co-promote Lisofylline in the United States, Johnson & Johnson will have primary responsibility for commercializing Lisofylline. There can be no assurance that Johnson & Johnson will be able to establish effective sales and distribution capabilities or will be successful in gaining market acceptance for Lisofylline or that Johnson & Johnson will devote sufficient resources to the commercialization of products under the Collaboration Agreement. Although Johnson & Johnson has committed to fund up to $12.0 million of cti's budgeted development expenses for each of the calendar years 1997 and 1998, Johnson & Johnson may terminate the Collaboration Agreement at any time based upon material safety or tolerability issues related to Lisofylline upon 30 days' notice, and for any reason after November 8, 1997, subject to a six month notice period. Johnson & Johnson would have no further obligation to fund cti's development expenses related to Lisofylline following such termination, however, the financial and other obligations of Johnson & Johnson (other than Johnson & Johnson's obligation to make additional payments to, and equity investments in, cti if certain development milestones are achieved) would continue during such six month notice period. If Johnson & Johnson were to terminate its participation in the Collaboration Agreement, the Company would not be able to continue the development of Lisofylline as presently planned, and the Company's financial condition would be materially and adversely affected. If adequate funds were not then available from other sources, the Company would be required to delay, reduce the scope of, or eliminate one or more of its research, development and clinical activities or seek to obtain funds through arrangements with collaborative partners or others on terms which may be less favorable to cti than the Collaboration Agreement. See "--Need for Substantial Additional Funds" and "Business-- Collaborations." No Assurance of FDA Approval; Comprehensive Government Regulation. Regulatory approval to market human therapeutics must be obtained from the FDA and comparable health authorities in foreign countries. This process requires lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures, which must establish that such therapeutics are safe and efficacious. Obtaining regulatory approval to market drugs typically takes one or more years after the completion of clinical trials and the filing of a New Drug Application ("NDA") (with no assurance that such approval will ever be obtained). The time involved for regulatory review varies substantially based upon the type, complexity and novelty of the drug. In addition, delays or rejections may be encountered based upon existing and changing policies of regulatory authorities for drug approval during the period of drug development and regulatory review of each submitted new drug application. The results obtained in preclinical and early clinical studies are not necessarily indicative of results that will be obtained during future clinical testing. There can be no assurance that results obtained to date will continue as testing and trials progress or that such products will ever be approved by the FDA or other regulatory authorities for commercial sale. In addition to the substantial time commitment required, the regulatory process, which includes preclinical testing and clinical trials of each compound to establish its safety and efficacy, requires the expenditure of 9 substantial resources. Preclinical studies must be conducted in conformity with the FDA's good laboratory practices. Clinical trials must meet requirements for institutional review board oversight and informed consent, as well as FDA prior review and acceptance of Investigational New Drug applications ("IND"), continued FDA oversight, and good clinical practices. The Company's experience in conducting clinical trials is limited. Data obtained from preclinical studies and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Furthermore, studies conducted with alternative designs or alternative patient populations could produce results which vary from those obtained by the Company. There can be no assurance that the Company's data or its interpretation of its data will be accepted by governmental regulators or the medical community. Government regulation also affects the manufacture and marketing of pharmaceutical drug products. Any future FDA or other governmental approval of drug products developed by cti may entail significant limitations on the indicated uses for which such products may be marketed. Approved drug products will be subject to additional testing and surveillance programs required by the regulatory agencies. In addition, product approvals may be withdrawn or limited for noncompliance with regulatory standards or the occurrence of unforeseen problems following initial marketing. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, seizures or recalls of products, operating restrictions or criminal proceedings. In the event that cti were to manufacture therapeutic products, cti would be required to adhere to applicable standards for current Good Manufacturing Practices ("GMP") prescribed by the FDA, engage in extensive record keeping and reporting, and submit its manufacturing facilities to periodic inspections by state and federal agencies, including the FDA and comparable agencies in other countries. The effect of government regulation may be to considerably delay or prevent the marketing of any product that cti may develop and/or to impose costly procedures upon cti's activities, the result of which may be to furnish an advantage to its competitors. There can be no assurance that regulatory approval for any products developed by cti will be granted on a timely basis or at all. Any such delay in obtaining or failure to obtain such approvals would adversely affect cti's ability to market the proposed products and earn product revenue. The Company is unable to predict the extent and impact of regulation resulting from future federal, state or local legislation or administrative actions, or whether such government regulation may have a material adverse effect on cti. See "Business--Government Regulation." Outside the United States, the Company's ability to market a product is contingent upon receiving marketing authorizations from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Union ("EU") certain registration procedures are available to companies wishing to market a product in more than one EU member state. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. See "Business--Government Regulation." Ability to Protect Intellectual Property. The Company's success will depend in part on its ability to obtain patent protection for its products and technologies in the United States and other countries, effectively preserve its trade secrets, enforce its rights against third parties which may infringe on its technology and operate without infringing on the proprietary rights of third parties. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions. The Company intends to file applications as appropriate for patents covering both its products and processes. There can be no assurance that any patents will issue from any present or future applications or, if patents do issue, that such patents will be issued on a timely basis or that claims allowed on issued patents will be sufficient to protect the Company's technology. In addition, there can be no assurance that the patents issued to cti will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide proprietary protection or commercial advantage to the Company. With respect to such issued U.S. patents or any patents that may issue in the future, there can be no assurance that they will effectively protect the technology involved, foreclose the development of competitive products by others or otherwise be commercially valuable. 10 The commercial success of the Company will also depend in part on the Company's neither infringing the patents or proprietary rights of third parties nor breaching any technological licenses which relate to the Company's technologies and potential products. In general, the development of therapeutic products is intensely competitive and many pharmaceutical companies, biotechnology companies, universities and research institutions have filed and will continue to file patent applications and receive patents in this field. If patents are issued to other entities that contain competitive or conflicting claims with respect to technology pursued by cti and such claims are ultimately determined to be valid, no assurance can be given that cti will be able to obtain licenses to these patents at a reasonable cost or develop or obtain alternative technology or compounds. In such case, the Company could be precluded from using technology that is the subject matter of such patents, which could have a material adverse effect on the Company. In order to enforce any patents issued to the Company or determine the scope and validity of other parties' proprietary rights, the Company may have to engage in litigation, which would result in substantial cost to, and diversion of efforts by, the Company. If the outcome of any such litigation is adverse to the Company, the Company's business could be adversely affected. In addition, if the Company elects or is required to participate in interference proceedings declared by the U.S. Patent and Trademark Office, substantial cost to the Company could result. The Company is aware of certain patents belonging to third parties that could be interpreted broadly to compromise the Company's freedom to sell Lisofylline in the United States for use in preventing lung injury following traumatic injury or sepsis. The Company believes, upon the advice of patent counsel, that the manufacture, use and sale of Lisofylline by cti does not infringe any valid claim of such third party patents. If such patents were to restrict the use of Lisofylline for such indications, the Company may be required to obtain a license from such parties. There can be no assurance that any such license would be available to the Company upon reasonably acceptable terms, if at all. If the Company were so required to obtain a license from such parties for such indications, and if the Company were unable to obtain such a license on reasonably acceptable terms, the Company would be materially and adversely affected. The Company could also face significant costs associated with any litigation relating to such patents. In order to protect its proprietary technology and processes, cti also relies on confidentiality and material transfer agreements with its corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for breach or that the Company's trade secrets will not otherwise become known or independently discovered by competitors. See "Business--Patents and Proprietary Rights." Substantial Competition. The Company faces substantial competition from a variety of sources, both direct and indirect. The Company faces direct competition from many companies focusing on areas such as cell signal transduction, surface receptor technology, transcription factors and gene therapies. There are many companies, both public and private, including well- known pharmaceutical companies, chemical companies and specialized genetic engineering companies, engaged more generally in developing synthetic pharmaceutical and biotechnological products for the same therapeutic applications as those which are the subject of the Company's research and development efforts. In some instances, such products have already entered clinical trials or received approval from the FDA. In addition, many of these competitors have significantly greater experience than cti in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. The Company also competes with companies that have substantially greater capital, research and development, manufacturing, marketing and sales capabilities. Moreover, certain academic institutions, governmental agencies and other public and private research organizations are conducting research in areas in which the Company is working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with the Company in recruiting highly qualified scientific personnel. Other companies may succeed in developing products that are more effective or less costly than any that may be developed by cti and may also prove to be more successful than cti at marketing such products. Competition may increase further as a result of the potential advances in 11 the commercial applicability of genetic engineering technologies and organic chemistry. There can be no assurance that the Company's competitors will not develop more effective or more affordable products or achieve earlier patent protection or product commercialization than cti. See "Business--Competition." Reliance on Third Party Manufacturers; Manufacture of Products in Commercial Quantities. The manufacturing of sufficient quantities of new drugs is a time consuming, complex and unpredictable process. The Company currently has no internal facilities for the manufacture of any of its products for clinical or commercial production. The Company currently relies on third parties to manufacture compounds for preclinical testing and clinical trials. The Company has recently entered into a manufacture and supply agreement with ChiRex, Ltd. ("ChiRex") for the manufacture and supply of Lisofylline bulk drug and corresponding intermediates for the Company's requirements for ongoing and future clinical trials and commercial requirements during launch and commercialization. Under the terms of the Collaboration Agreement with Johnson & Johnson, the Company will be responsible for the manufacture of Lisofylline for development and commercialization purposes until November 8, 1999. Thereafter, Johnson & Johnson will assume responsibility for the manufacture of Lisofylline. However, Johnson & Johnson may elect to assume responsibility for the manufacture of Lisofylline at any time prior to such date. Lisofylline has never been manufactured on a commercial scale, and no assurance can be given that the Company, together with Johnson & Johnson will be able to make the transition to commercial production. The Company may need to develop additional manufacturing resources, or may seek to enter into collaborative arrangements with other parties which have established manufacturing capabilities or may elect to have other third parties such as ChiRex manufacture its products on a contract basis. All manufacturing facilities must comply with applicable regulations of the FDA. The Company has established a quality control and quality assurance program, including a set of standard operating procedures and specifications, designed to ensure that the Company's products are manufactured in accordance with current Good Manufacturing Practices ("cGMP") and other applicable domestic and foreign regulations. However, the Company is dependent upon Johnson & Johnson and contract manufacturers including ChiRex to comply with such procedures and regulations. There can be no assurance that Johnson & Johnson or these manufacturers will meet the Company's requirements for quality, quantity or timeliness. See "Business--Manufacturing." Absence of Sales and Marketing Organization. The Company has no experience in marketing, sales or distribution. To directly market any of its potential products, the Company must obtain access to marketing and sales forces with technical expertise and with supporting distribution capability. To this end, the Company has entered into a collaboration with Johnson & Johnson which permits cti to co-promote Lisofylline with Johnson & Johnson in the United States while providing that Johnson & Johnson will have primary responsibility for commercializing Lisofylline. If the Company develops additional products with commercial potential outside of the Johnson & Johnson collaboration, cti may need to develop marketing and additional sales resources, may seek to enter into collaborative arrangements with other parties which have established marketing and sales capabilities or may choose to pursue the commercialization of such products on its own. There can be no assurance that the Company, Johnson & Johnson or, to the extent the Company enters into any commercialization arrangements with any other third parties, such other third parties, will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for products. The successful commercialization of the Company's products in certain markets will be dependent, among other things, on the establishment of commercial arrangements with others in such markets. Such arrangements could include the granting of marketing or other rights to third parties in exchange for royalties, milestone development payments or other payments. There can be no assurance that any such additional arrangements will be established. If the Company is not able to establish such arrangements, it would encounter delays in introducing its products into certain markets. While the Company believes that parties to any such arrangements will have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources they devote to these activities will not be within the Company's control. There can be no assurance that the Company will enter into any such arrangements on acceptable terms or that any such parties will perform their obligations as expected or that any revenue will be derived from such arrangements. See "Business--Marketing." 12 Management of Growth. The Company's success will depend in part on its ability to expand its operations as the Company begins to commercialize its potential drug products. Such growth is expected to place a significant strain on the Company's managerial, operational and financial resources. The Company's ability to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. These demands are expected to require the addition of new management personnel and the development of additional expertise by existing management personnel. There can be no assurance that the Company will be able to effectively manage the expansion of its operations, that its systems, procedures or controls will be adequate to support the Company's operations or that Company management will be able to exploit opportunities for the Company's products or proprietary technology. There can be no assurance that the Company will be successful in adding technical personnel as needed to meet the staffing requirements of the Company's collaboration with Johnson & Johnson or any additional collaborative relationships into which the Company may enter. An inability to manage growth, if any, could have a material adverse effect on the Company's business, results of operations, financial condition and cash flow. Attraction and Retention of Key Employees and Consultants. The Company is highly dependent on the principal members of its scientific and management staff, the loss of whose services might impede the achievement of research and development objectives. Recruiting and retaining qualified scientific personnel to perform research and development work are critical to cti's success. Although cti believes it will be successful in attracting and retaining skilled and experienced scientific and technical personnel, there can be no assurance that cti will be able to attract and retain such personnel on acceptable terms. In addition, if cti reaches the point where its activities require additional expertise in clinical testing, in obtaining regulatory approvals, and in production and marketing, there will be increased demands on cti's resources and infrastructure. The inability to obtain additional qualified personnel could materially and adversely affect prospects for cti's success. There is intense competition for qualified scientists and managerial personnel from numerous pharmaceutical and biotechnology companies, as well as academia, government organizations, research institutions and other entities. There can be no assurance that cti will be able to attract and retain the qualified personnel necessary for the development of its business. Loss of the services of or failure to recruit key managerial scientific and technical personnel could have a material adverse effect on cti's research and product development programs. In addition, cti relies on consultants and advisors, including its scientific and clinical advisors, to assist the Company in formulating its research and development strategy. All of cti's consultants and advisors are employed by employers other than the Company, or are self-employed, and have commitments to or consulting or advisory contracts with other entities that may limit their availability to the Company. See "Business--Human Resources" and "Management." Product Liability; Insurance. The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human pharmaceutical products. Although the Company is insured against such risks up to a $20 million annual aggregate limit in connection with human clinical trials, there can be no assurance that the Company's present clinical trials liability insurance coverage is adequate or that the Company will be able to maintain such insurance on acceptable terms. The Company has no products commercially available for sale and has not procured product liability insurance covering claims in connection with commercially marketed products. There can be no assurance that the Company will be able to obtain comparable insurance on commercially reasonable terms if and when it commences the commercial marketing of any products or that such insurance will provide adequate coverage against potential liabilities. A successful product liability claim in excess of the Company's insurance coverage could have a material adverse effect on the Company and may prevent the Company from obtaining adequate product liability insurance in the future on commercially reasonable terms. Uncertainty of Pharmaceutical Pricing and Reimbursement. Sales of cti's proposed products will be dependent in part on the availability and extent of reimbursement for the cost of such products and related treatments from third- party health care payors, such as government and private insurance plans. Significant uncertainty exists as to the reimbursement status of newly approved health care products. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new medical products and services and by refusing, in some cases, to provide any coverage 13 of uses of approved products for disease indications other than those for which the FDA has granted marketing approval. If cti succeeds in bringing any of its proposed products to the market, there can be no assurance that any such products will be considered cost-effective or that third-party reimbursement will be available or will be sufficient to enable cti to sell its proposed products on a competitive basis and to maintain price levels sufficient to realize an appropriate return on its investment in product development. If adequate coverage and reimbursement levels are not provided by government and other third-party payors, the market acceptance of cti's products would be adversely affected. In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to cti before any of the Company's proposed products are approved for marketing. While cti cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on cti's business, financial condition and prospects. Use of Hazardous Materials. The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Concentration of Ownership. Directors and officers of cti, and their affiliates, beneficially own 1,871,149 shares of the Company's Common Stock (including shares of Common Stock issuable upon conversion of the Company's Series A Convertible Preferred Stock and shares of Common Stock subject to options or warrants exercisable or convertible within 60 days of January 15, 1997) representing approximately 19.16% of the voting power of the Company's outstanding securities. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Shareholders." No Prior Public Market; Likely Volatility of Stock Price. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that a liquid trading market for the Common Stock will develop or, if one develops, that it will be sustained after the Offering. The initial public offering price of the Common Stock will be determined by negotiations among the Company and the representatives of the Underwriters and may not be indicative of the prices that will prevail in the public market. See "Underwriting." Future trading prices of the Common Stock will depend on many factors, including, among other things, the Company's operating results and the market for similar securities. The market prices for securities of pharmaceutical and biotechnology companies have been highly volatile and the market from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. It is likely that the market price of the Common Stock will be highly volatile. Factors such as announcements of technological innovations or new commercial products by the Company, its collaborative partners or the Company's present or potential competitors, announcements by the Company or others of results of preclinical testing and clinical trials, developments or disputes concerning patent or other proprietary rights, developments in the Company's relationships with Johnson & Johnson or future collaborative partners, acquisitions, litigation, changes in reimbursement policies, adverse legislation, regulatory decisions, releases of reports by security analysts, or public concern regarding the safety, efficacy or other implications of the drugs sought to be developed or biotechnology in general and economic and other external factors, as well as period-to-period fluctuations in the Company's operating results and general market conditions, may have a significant impact on the future price of the Common Stock. Shares Eligible for Future Sale; Registration Rights; Possible Adverse Effect on Future Market Price. Sales of a substantial number of shares of Common Stock in the public market after this Offering could adversely affect the market price of the shares of Common Stock. Of the 12,846,824 shares of Common Stock to be outstanding upon completion of this Offering and the Johnson & Johnson Stock Purchase, the 3,000,000 shares offered hereby (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely transferable without restrictions under the Securities Act of 1933, as amended (the "Securities Act"), unless they are held by "affiliates" of the Company, as that term is used under the Securities Act and the regulations promulgated thereunder. Taking into consideration the effect of certain "lock-up" agreements 14 entered into by all officers, directors and certain other shareholders of the Company, an additional shares which have been held by non-affiliates for more than three years will be eligible for immediate sale in the public market without restriction, and an additional shares will become eligible for sale beginning approximately 90 days after the Effective Date, subject to the provisions of Rules 144 and 701 under the Securities Act. Shareholders of the Company holding in the aggregate approximately shares of Common Stock have agreed, pursuant to certain "lock-up" agreements, not to sell or otherwise dispose of such shares for a period of 180 days after the Effective Date without the prior written consent of UBS Securities LLC. At the end of such 180-day period, approximately shares of Common Stock will be eligible for immediate sale in the public market without restrictions. The remaining shares of Common Stock will have been held for less than two years upon the expiration of such lock-up agreements and will become eligible for sale under Rule 144 at various dates thereafter as the holding period and other requirements of Rule 144 are satisfied. In addition, holders of stock options and warrants convertible or exercisable for an aggregate of shares of Common Stock have entered into 180-day lock-up agreements and of such shares may be sold 180 days after the Effective Date upon exercise. The Company intends to file one or more registration statements on Form S-8 enabling certain option holders to sell shares for which options are exercisable upon the expiration of the lock-up agreements. The Company is obligated to register approximately 5,473,688 shares of Common Stock and warrants to purchase 77,907 shares of Common Stock for sale to the public beginning 180 days after the closing of this Offering. See "Management--Stock Option Plans," "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." Anti-Takeover Provisions; Possible Issuance of Preferred Stock; Rights Plan. The Company's Restated Articles of Incorporation and Bylaws contain provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, cti. These provisions could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. In addition, shares of the Company's preferred stock may be issued in the future without further shareholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of cti. The Company has no present plans to issue any shares of preferred stock. In addition, the Company has adopted a Rights Agreement that, along with certain provisions of the Company's Restated Articles of Incorporation, have the effect of discouraging certain transactions involving a change of control of the Company. See "Description of Capital Stock." Dilution. There will be immediate, substantial dilution of the shares of Common Stock purchased pursuant to this Offering. Based upon an assumed initial public offering price of $15.00 per share, new investors purchasing shares of Common Stock pursuant to this Offering will experience immediate dilution of $9.12 per share. See "Dilution." 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered hereby are estimated to be approximately $41.0 million ($47.3 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. In addition, the proceeds to the Company from the Johnson & Johnson Stock Purchase are estimated to be approximately $4.5 million. See "Johnson & Johnson Stock Purchase." The combined net proceeds to the Company from this Offering and the Johnson & Johnson Stock Purchase are estimated to be $45.5 million ($ million if the Underwriters' over-allotment option is exercised in full), after deducting estimated underwriting discounts and commissions and estimated expenses payable by the Company. The Company intends to use the substantial majority of the net proceeds of this Offering and the Johnson & Johnson Stock Purchase to fund its research and development activities with respect to the Company's Lisofylline and CT- 2584 programs, including preclinical testing, clinical trials and process development activities, and to fund other research and development activities. The amounts actually expended for research and development activities and the timing of such expenditures will depend upon numerous factors, including the progress of the Company's research and development programs, the results of preclinical and clinical trials, the timing of regulatory submissions and approvals, if any, technological advances, determinations as to the commercial potential of the Company's compounds, and the status and timing of competitive products. The amount of expenditures will also depend upon the continued participation of Johnson & Johnson in the Collaboration Agreement, the timing and availability of alternative methods of financing the Company's research and development activities and preclinical and clinical trials, and the establishment of collaborative agreements with other companies. In addition, the Company's research and development expenditures will vary as product development programs are added, expanded or discontinued. A variety of other factors, some of which are beyond the Company's control, could affect the application of the proceeds. The balance of the net proceeds of this Offering and the Johnson & Johnson Stock Purchase is expected to be used to improve facilities, to purchase capital equipment and for general corporate purposes. The Company has not identified precisely the amount it plans to spend on these specific programs or the timing of such expenditures. Pending such uses, the Company intends to invest the net proceeds from this Offering and the Johnson & Johnson Stock Purchase in U.S. government obligations and other highly rated liquid debt instruments. The Company may also from time to time consider the acquisition of other companies, technologies or products that complement the business of the Company, although no agreements or understandings are in effect with respect to any such transactions at this time. See "Risk Factors--Need for Substantial Additional Funds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." JOHNSON & JOHNSON STOCK PURCHASE In connection with the execution of the Collaboration Agreement, Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, has granted to the Company an option (the "Johnson & Johnson Option") to sell to JJDC a number of shares of Common Stock equal to not more than ten percent of the number of shares of Common Stock sold by cti at the closing of this Offering, at a price per share equal to the initial per share price to public set forth on the cover of this Prospectus. The Company has exercised the Johnson & Johnson Option in full, and JJDC is committed to purchase, in a private placement that will occur concurrent with the closing of this Offering, 300,000 shares of Common Stock at an aggregate purchase price of $4.5 million, assuming the sale of 3,000,000 shares of Common Stock at the closing of this Offering at an initial public offering price of $15.00 per share. Upon the closing of this Offering and the Johnson & Johnson Stock Purchase, JJDC will own approximately 5.65% of the Common Stock. The closing of this Offering is not conditioned upon the closing of the Johnson & Johnson Stock Purchase. 16 DIVIDEND POLICY The Company has not declared or paid any cash dividends on its capital stock since its inception. The Company currently intends to retain all of its cash and any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. CAPITALIZATION The following table sets forth, at December 31, 1996, (i) the actual capitalization of the Company; (ii) the pro forma capitalization of the Company giving effect to the automatic conversion of all outstanding shares of Convertible Preferred Stock at December 31, 1996 into 4,603,352 shares of Common Stock upon the closing of this Offering; and (iii) the pro forma capitalization of the Company as adjusted to reflect the sale of 3,000,000 shares of Common Stock offered hereby and the receipt by the Company of the estimated net proceeds therefrom (after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and the sale of 300,000 shares of Common Stock pursuant to the Johnson & Johnson Stock Purchase), in each case assuming an initial public offering price of $15.00 per share:
DECEMBER 31, 1996 ------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (in thousands) Long-term obligations, less current portion..... $ 2,005 $ 2,005 $ 2,005 Shareholders' equity: Preferred stock, 10,000,000 shares authorized (of which 146,193.272 shares have been designated as Series A Convertible Preferred Stock, without par value, 14,925.373 shares have been designated as Series B Convertible Preferred Stock, without par value, and 100,000 shares have been designated as Series C Preferred Stock, without par value); 146,193.272 shares of Series A Convertible Preferred Stock, 14,925.373 shares of Series B Convertible Preferred Stock and no shares of Series C Convertible Preferred Stock issued and outstanding, actual; no shares of preferred stock issued and outstanding, pro forma and pro forma as adjusted.............. 52,326 -- -- Common Stock, no par value, 100,000,000 shares authorized; 4,943,472 shares issued and outstanding, actual; 9,546,824 shares issued and outstanding, pro forma; and 12,846,824 shares issued and outstanding, pro forma as adjusted (1)................................. 51,810 104,136 149,636 Deficit accumulated during development stage.. (74,083) (74,083) (74,083) -------- -------- ------- Total shareholders' equity.................. 30,053 30,053 75,553 -------- -------- ------- Total capitalization........................ $ 37,002 $ 37,002 $82,502 ======== ======== =======
- -------- (1) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of stock options outstanding as of December 31, 1996 at a weighted average exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock issuable upon exercise of warrants outstanding as of December 31, 1996 at a weighted average exercise price of $19.12 per share. See "Management-- Stock Option Plans" and "Description of Capital Stock." 17 DILUTION The pro forma net tangible book value of the Company as of December 31, 1996, after giving effect to the Johnson & Johnson Stock Purchase, was $34,553,720, or approximately $3.51 per share of Common Stock. "Pro forma net tangible book value per share" represents the amount of the Company's total tangible assets after giving effect to the Johnson & Johnson Stock Purchase, less total liabilities, divided by the number of shares of Common Stock outstanding plus the number of shares sold in the Johnson & Johnson Stock Purchase and after giving effect to the automatic conversion of all outstanding shares of Convertible Preferred Stock at December 31, 1996 into 4,603,352 shares of Common Stock upon the closing of this Offering. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. After giving effect to the sale by the Company of the 3,000,000 shares of Common Stock offered hereby (based upon an assumed initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of the Company as of December 31, 1996 would have been $75,553,720, or $5.88 per share of Common Stock. This represents an immediate increase in net tangible book value per share of $2.37 to existing shareholders and an immediate dilution in net tangible book value of $9.12 per share to investors in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $15.00 Pro forma net tangible book value per share as of December 31, 1996................................................... $3.51 Increase per share attributable to investors in this Offer- ing........................................................ 2.37 ----- Pro forma net tangible book value per share after this Offer- ing.......................................................... 5.88 ------ Dilution per share to investors in this Offering.............. $ 9.12 ======
The following table summarizes, on a pro forma basis as of December 31, 1996, the total consideration paid and the average price per share paid by existing shareholders, by Johnson & Johnson pursuant to the Johnson & Johnson Stock Purchase, and by investors purchasing shares offered hereby. The calculations in the table with respect to shares of Common Stock purchased by Johnson & Johnson and investors in this Offering reflect an assumed initial public offering price of $15.00 per share (before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company).
SHARES PURCHASED TOTAL CONSIDERATION ------------------ -------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing shareholders .. 9,546,824 74.3% $110,816,851 69.1% $ 11.61 Johnson & Johnson Stock Purchase............... 300,000 2.3 4,500,000 2.8 15.00 Investors in this Offer- ing.................... 3,000,000 23.4 45,000,000 28.1 15.00 ---------- ----- ------------ ----- Total................. 12,846,824 100.0% $160,316,851 100.0% ========== ===== ============ =====
The preceding tables assume no exercise of (i) stock options outstanding as of December 31, 1996 to purchase 1,208,608 shares of Common Stock at a weighted average exercise price of $11.78 per share and (ii) warrants outstanding as of December 31, 1996 to purchase 77,907 shares of Common Stock at a weighted average exercise price of $19.12 per share. If all such options and warrants were exercised in full, there would be an immediate increase in pro forma net tangible book value per share after this Offering of $0.58 to existing shareholders, and the dilution to investors in this Offering would be $8.54 per share. 18 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's consolidated statements of operations for each of the three years in the period ended December 31, 1996 and for the period from September 4, 1991 (date of incorporation) to December 31, 1996, and with respect to the consolidated balance sheets at December 31, 1995 and 1996, are derived from the consolidated financial statements of the Company included elsewhere in this Prospectus that have been audited by Ernst & Young LLP, independent auditors, and is qualified by reference to such financial statements and the notes related thereto. The consolidated balance sheet data at December 31, 1992, 1993 and 1994 and the consolidated statement of operations data for the years ended December 31, 1992 and 1993 are derived from audited financial statements of the Company not included in this Prospectus. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
PERIOD FROM SEPTEMBER 4, 1991 (DATE OF YEARS ENDED DECEMBER 31, INCORPORATION) ----------------------------------------------- TO DECEMBER 31, 1992 1993 1994 1995 1996 1996 ------- -------- -------- -------- -------- --------------- (in thousands, except per share data) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Collaboration agreements........... $ -- $ -- $ -- $ 100 $ 9,121 $ 9,221 Operating expenses: Research and development.......... 3,926 11,862 14,368 14,606 16,109 60,871 General and administrative....... 1,661 4,052 5,283 6,144 7,602 24,743 ------- -------- -------- -------- -------- -------- Total operating expenses........... 5,587 15,914 19,651 20,750 23,711 85,614 ------- -------- -------- -------- -------- -------- Loss from operations.... (5,587) (15,914) (19,651) (20,650) (14,590) (76,393) Other income (expense): Investment income..... 292 723 616 1,167 1,174 3,974 Interest expense...... (29) (137) (464) (509) (512) (1,653) ------- -------- -------- -------- -------- -------- Net loss................ $(5,324) $(15,328) $(19,499) $(19,992) $(13,928) $(74,072) ======= ======== ======== ======== ======== ======== Pro forma net loss per share (1).............. $ (1.63) ======== Shares used in computa- tion of pro forma net loss per share......... 8,527
DECEMBER 31, ----------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- ------- -------- -------- (in thousands) CONSOLIDATED BALANCE SHEETS DATA: Cash, cash equivalents and securities available-for- sale........................ $ 28,648 $ 27,452 $ 9,131 $ 21,906 $ 30,987 Working capital.............. 27,563 23,387 4,094 18,342 26,300 Total assets................. 33,422 35,230 17,278 28,048 37,002 Long-term obligations, less current portion............. 319 3,635 2,620 2,606 2,005 Deficit accumulated during development stage........... (5,324) (20,652) (40,151) (60,119) (74,083) Total shareholders' equity... 31,851 28,848 10,051 21,858 30,053
- -------- (1) See Note 1 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements which involve risks and uncertainties. When used in this Prospectus, the words "believes," "anticipates," "expects" and similar expressions are intended to identify such forward-looking statements. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Since commencement of operations in 1992, the Company has been engaged in research and development activities, including conducting preclinical studies and clinical trials, and recruiting its scientific and management personnel, establishing laboratory facilities and raising capital. The Company has not received any revenue from the sale of products to date and does not expect to receive revenues from the sale of products for at least the next several years. In the fourth quarter of 1995 the Company began to receive revenue under a collaboration agreement with BioChem Pharma, and in the fourth quarter of 1996 the Company began to receive revenue under the Collaboration Agreement with Johnson & Johnson. The Company expects that its revenue sources for at least the next several years will consist primarily of future expense reimbursements and milestone payments under its collaboration agreements with Johnson & Johnson and BioChem Pharma, and of interest income. The timing and amounts of such revenues will likely fluctuate. The Company will be required to conduct significant research, development and clinical activities during the next several years to fulfill its obligations under the Collaboration Agreement with Johnson & Johnson. There can be no assurance that Johnson & Johnson will not terminate the Collaboration Agreement in accordance with its terms. See "Business--Collaborations." As of December 31, 1996 the Company had incurred aggregate net losses of approximately $74.1 million since its inception. The Company expects to continue to incur significant additional operating losses over the next several years as its research, development and clinical trial efforts expand. Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and revenues recognized. To date, the Company's operations have been funded primarily from the sale of equity securities, which have raised aggregate net proceeds of approximately $103.0 million. RESULTS OF OPERATIONS Years Ended December 31, 1996 and 1995 During the year ended December 31, 1996 the Company recorded a $5.0 million non-refundable license fee and $871,000 in development cost reimbursement from Johnson & Johnson in connection with the Collaboration Agreement and a $250,000 milestone payment from BioChem Pharma in connection with a collaboration agreement. The Company also received a $3.0 million non- refundable signing fee from Schering AG in connection with a collaboration agreement which was terminated by Schering AG in April 1996. See "Risk Factors--No Assurance of Successful Product Development; Uncertainties Related to Clinical Trials" and Note 11 of Notes to Consolidated Financial Statments. During the year ended December 31, 1995 the Company received a milestone payment of $100,000 under the collaboration agreement with BioChem Pharma. See "Business--Collaborations." Research and development expenses increased to approximately $16.1 million for the year ended December 31, 1996 from approximately $14.6 million for the year ended December 31, 1995. This increase was primarily due to expanded manufacturing, preclinical and clinical-related development activities with respect to Lisofylline, which 20 increase was partially offset by costs of approximately $1.2 million incurred in connection with the purchase of all the intellectual property of Lipomed Corporation in October 1995, which was accounted for as in-process research and development expense. The Company expects that research and development expenses will increase significantly in future years as the Company expands its research and development programs and undertakes additional clinical trials, including research, development and clinical activities undertaken pursuant to the Collaboration Agreement with Johnson & Johnson. General and administrative expenses increased to approximately $7.6 million for the year ended December 31, 1996 from approximately $6.1 million for the year ended December 31, 1995. This increase was primarily due to transaction costs associated with the collaboration agreement with Schering AG, which was terminated by Schering AG in April 1996, transaction costs associated with the Collaboration Agreement with Johnson & Johnson, offering costs associated with the Company's withdrawn registration statement in 1996, and operating expenses associated with supporting the Company's increased research, development and clinical activities. General and administrative expenses are expected to increase to support the Company's expected increase in research, development and clinical trial efforts. Investment income principally comprises interest income from investment of the Company's cash reserves. Interest expense results primarily from the financing of laboratory and other equipment. Investment income was approximately $1.2 million for each of the years ended December 31, 1996 and 1995, as average cash balances and interest earned thereon was little changed between years. Interest expense was approximately $500,000 for both the year ended December 31, 1996 and 1995. Years Ended December 31, 1995 and 1994 Revenue from the BioChem Pharma collaboration totalled $100,000 in 1995, all of which was received in the third quarter of 1995. The Company did not have any operating revenue during 1994. Research and development expenses increased to approximately $14.6 million in 1995 from approximately $14.4 million in 1994. This increase was primarily due to costs of approximately $1.2 million incurred in connection with the purchase of all the intellectual property of Lipomed Corporation in October 1995, which was accounted for as in-process research and development expense, partially offset by a reduction in manufacturing costs associated with Lisofylline. General and administrative expenses increased to approximately $6.1 million in 1995 from approximately $5.3 million in 1994. This increase was primarily due to operating expenses associated with supporting the Company's increased research, development and clinical activities, including business development, marketing studies and recruitment of additional personnel. Investment income net of interest expense increased to approximately $658,000 in 1995 from approximately $152,000 in 1994. This increase was associated with interest earnings on a higher average balance of cash reserves resulting from a private placement of equity securities in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through the sale of equity securities. As of December 31, 1996 the Company had raised aggregate net proceeds of approximately $103.0 million from such financing activities, including $30.5 million and $16.9 million from the sale of Series A Convertible Preferred Stock in 1995 and 1996, respectively, $5.0 million from the sale of Series B Convertible Preferred Stock to Johnson & Johnson in 1996, $49.3 million from the sale of Common Stock in 1992 and 1993, $850,000 from a bridge loan which was subsequently converted to equity, and approximately $400,000 from the exercise of stock options and warrants. The Company expensed approximately $320,000 in deferred offering costs related to its withdrawn initial public offering in 1996. As of December 31, 1996 the Company has recorded approximately $360,000 of deferred offering costs related to its currently planned offering. In addition, the Company financed the purchase of approximately $11.3 million of property and equipment through financing 21 agreements, of which approximately $2.8 million remained outstanding as of December 31, 1996. In November 1996 Johnson & Johnson agreed to purchase a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering directly from the Company in a private placement that will occur concurrent with the closing of this Offering at a per share price equal to the initial public offering price. Assuming an initial public offering price of $15.00 per share, the Johnson & Johnson stock purchase will result in proceeds to the Company of $4.5 million. See "Johnson & Johnson Stock Purchase." The Company's principal sources of liquidity are its cash balances, cash equivalents and securities available-for-sale, which totaled approximately $31.0 million as of December 31, 1996. The Company invests in U.S. government obligations and other highly rated liquid debt instruments. The Company expects that its capital requirements will increase as the Company expands its research and development programs and undertakes additional clinical trials. In connection with such expansion, the Company expects to incur substantial expenditures for hiring additional management, scientific and administrative personnel, for planned expansion of its facilities, and for the purchase or lease of additional equipment. The Company does not expect to generate a positive cash flow from operations for several years due to substantial additional research and development costs, including costs related to drug discovery, preclinical testing, clinical trials, manufacturing costs and operating expenses associated with supporting such activities. The Company expects that its existing capital resources, together with the net proceeds of this Offering and the Johnson & Johnson Stock Purchase and the interest earned thereon, combined with anticipated funding from Johnson & Johnson under the Collaboration Agreement, will enable the Company to maintain its current and planned operations at least through the end of 1998. In the event that Johnson & Johnson were to terminate its participation in the Collaboration Agreement prior to such date, cti expects that it would eliminate certain presently planned development activities. Furthermore, the Company will need to raise substantial additional capital to fund its operations beyond such time. The Company's future capital requirements will depend on, and could increase as a result of, many factors, including the continuation of the collaboration with Johnson & Johnson, continued scientific progress in its research and development programs, the magnitude of such programs, the progress of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims, competing technological and market developments, changes in collaborative relationships, the terms of any additional collaborative arrangements that the Company may enter into, the ability of the Company to establish research, development and commercialization arrangements pertaining to products other than those covered by existing collaborative arrangements, the cost of establishing manufacturing facilities, the cost of commercialization activities and the demand for the Company's products if and when approved. The Company intends to raise additional funds through additional equity or debt financings, research and development financings, collaborative relationships or otherwise. Because of these long-term capital requirements, the Company may seek to access the public or private equity markets whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that additional financing will be available to the Company, or, if available, that it will be on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to shareholders may result. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research, development and clinical activities or to seek to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself. See "Risk Factors--History and Continuation of Losses; Early Stage of Development," "--Need for Substantial Additional Funds," "--Reliance on Relationship with Johnson & Johnson" and "-- Dilution." At December 31, 1996 the Company had available for Federal income tax purposes net operating loss carryforwards of approximately $70 million and research and development credit carryforwards of approximately $1.8 million. These carryforwards begin to expire in 2007. The Company's ability to utilize its net operating loss and research and development credit carryforwards is subject to an annual limitation in future periods pursuant to the "change in ownership" rates under Section 382 of the Internal Revenue Code of 1986. See Note 10 of Notes to Consolidated Financial Statements. 22 BUSINESS This Prospectus contains forward-looking statements which involve risks and uncertainties. When used in this Prospectus, the words "believes," "anticipates," "expects" and similar expressions are intended to identify such forward-looking statements. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL The Company focuses on the discovery, development and commercialization of small molecule drugs for the treatment of cancer and inflammatory and immune diseases. The Company is conducting Phase III clinical trials for its lead product candidate, Lisofylline, which is being developed to prevent or reduce treatment-related toxicities, specifically infection, mucositis and treatment- related mortality, among cancer patients receiving high dose radiation and/or chemotherapy. In November 1996 cti entered into a Collaboration and License Agreement with Johnson & Johnson for the joint development and commercialization of Lisofylline. The Company is focusing its oncology development efforts on a portfolio of drugs that it believes will address the three principal causes of cancer treatment failure: (i) Lisofylline--a supportive care agent being investigated to prevent or reduce the incidence of serious and fatal infections, mucositis (damage to the epithelial cells lining the mouth, stomach and intestinal tract) and treatment-related mortality among patients receiving high dose radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer drug under investigation for the treatment of patients with multidrug resistant tumors and (iii) tumor sensitizing agents being investigated to enhance sensitivity to radiation among tumors that have deleted or mutated tumor suppression genes. The Company believes that, in addition to its oncology applications, Lisofylline may be effective as an agent to prevent or reduce the incidence and severity of acute lung injury ("ALI") and mortality among patients requiring mechanical ventilation for respiratory failure following pneumonia, multiple traumatic injuries, or sepsis. Since its inception, the Company has invested more than $60 million developing its products and building a unique drug discovery platform based on its proprietary technology in phospholipid chemistry. SCIENTIFIC OVERVIEW Cell communication occurs through a complex process that commences when "first messengers" outside the cell, such as hormones, cytokines and growth factors, recognize and bind to cellular receptors, some of which are embedded in the cell membrane. The first messenger initiates a series of biochemical events within the cell, known as signal transduction, which result in cellular responses. In the 1970s scientists discovered that, in response to extracellular binding of first messengers, certain molecules, including cell membrane lipids, are chemically altered to form "second messengers" which participate in transducing chemical information from the cell membrane to the cell nucleus. Certain signal transduction pathways are essential for normal day-to-day cellular processes, and are often referred to as "housekeeping pathways" or "physiologic pathways." These housekeeping pathways are involved in the normal growth and replenishment of cells in the body, such as blood cells and the cells lining the intestinal tract. In contrast, there are also signal transduction pathways, termed "stress-activated pathways" or "SAPs," which are part of the cellular response to injury following exposure to cell- damaging stimuli such as radiation, chemotherapy or oxidative injury and which are also activated in many disease states. The Company believes that such cell-damaging stimuli cause a number of their toxic effects by altering the chemical composition of certain cell membrane lipids and phospholipids, resulting in the production of biologically reactive phospholipids termed phosphatidic acids ("PAs") and oxidized lipids termed hydroperoxyoctadecadienoic acids ("HPODEs"). These phospholipids and oxidized lipids in turn activate stress-related signaling pathways within the cell which carry the cell-damaging message to the cell nucleus, resulting in the activation of transcription factors. The activation of these transcription factors may in turn lead to the (i) production of inflammatory cytokines and the resulting activation of inflammatory and immune responses, (ii) production of cytokines and chemokines which inhibit the growth and renewal of the stem cells in the bone marrow and of the cells lining the intestinal tract and (iii) promotion of cell membrane damage leading to cell death. 23 PA elevation, appearance of HPODEs and activation of SAPs are associated with many disease states and do not appear to be primarily utilized for normal cellular processes. The Company believes that therapeutics which regulate the production and/or degradation of phospholipids or oxidized lipids such as PAs and HPODEs and which regulate the activation of SAPs may offer greater specificity and safety profiles for the treatment of oncologic, inflammatory and immune diseases than pharmaceuticals that modulate the housekeeping pathways necessary for normal day-to-day cellular function. The diagram below demonstrates the different cellular responses resulting from the activation of housekeeping pathways and stress-activated pathways: [DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS] HOUSEKEEPING PATHWAYS STRESS-ACTIVATED PATHWAYS The process by which growth These are also signal production factors outside a cell transmit pathways termed "stress-activated their chemical signals inside the pathways," or "SAPs," which are cell is termed "signal part of the cellular response to transduction." Certain signal injury following exposure to cell transduction pathways, such as the damaging stimuli such as mitogen-activated pathway ("MAP") radiation, chemotherapy or are essential for normal day-to- oxidative injury. Activation of day cellular processes such as the stress-activated pathways may lead normal growth and replenishment of to inflammation and tissue injury. cells in the body. These pathways are often referred to as "housekeeping pathways." 24 PRODUCTS UNDER DEVELOPMENT The following table summarizes the potential therapeutic indications, current development status and current collaborators for the Company's products under development:
DEVELOPMENT POTENTIAL PROGRAM THERAPEUTIC INDICATIONS DEVELOPMENT STATUS(1) COLLABORATORS(2) - ----------------------------------------------------------------------------------------------- ONCOLOGY Lisofylline Prevent or reduce infection, Pivotal Phase III trial for BMT Johnson & Johnson mucositis and treatment- ongoing BioChem Pharma related mortality following Phase II trial for AML ongoing high dose radiation and/or Pivotal Phase III trial for chemotherapy AML ongoing CT-2584 Anti-cancer agent targeting Phase I trials ongoing BioChem Pharma multidrug resistant tumors CT-2412 Tumor sensitizer Research lead -- - ----------------------------------------------------------------------------------------------- INFLAMMATION Lisofylline Prevent or reduce acute lung Phase II trial completed Johnson & Johnson injury and mortality among BioChem Pharma patients requiring mechanical ventilation for respiratory failure - ----------------------------------------------------------------------------------------------- IMMUNOLOGY CT-3578 Treatment of acute organ Research lead -- transplant rejection - -----------------------------------------------------------------------------------------------
(1) Research lead refers to a compound that exhibits pharmacological properties which are evaluated in vitro and in animal models prior to the commencement of the additional pharmacology and toxicology studies, formulation work and manufacturing scale-up required to submit an IND. See "--Government Regulation" for a description of the phases of human clinical trials. (2) See "--Collaborations" for a description of cti's collaboration agreements and commercial rights to such products. ONCOLOGY Overview Cancer is the second leading cause of death in the United States, resulting in over 550,000 deaths annually. The National Cancer Advisory Board reports that more than eight million people in the United States have cancer, and projects that cancer will surpass heart disease as the leading cause of death in the United States by the end of the decade. Approximately 1.4 million new cases of cancer are diagnosed each year in the United States. The most commonly used methods for treating cancer patients include surgery, radiation and drug chemotherapy. A cancer patient often receives a combination of these treatment modalities depending upon the type and extent of the disease. At some point in their disease treatment, 70 percent of all cancer patients will receive radiation therapy and 50 percent of all newly diagnosed cancer patients will receive chemotherapy. Despite their benefits for treating cancer, there are significant limitations of, and complications associated with, radiation and chemotherapy which result in a high rate of treatment failure. For example, less than ten percent of patients treated with chemotherapy are cured. The principal causes of treatment failure include treatment-related toxicities, multidrug resistance and tumor resistance to radiation. Treatment-Related Toxicities. Despite their benefits for treating cancer, radiation and chemotherapy treatment result in toxicities that limit the use of potentially more effective doses. These treatment-related toxicities are directly responsible for placing patients at risk for serious and often life- threatening infections and other undesirable side effects. Radiation and chemotherapy are toxic to rapidly dividing cells, which include not only cancer cells but also certain normal cells such as bone marrow cells, hair follicle cells and the epithelial 25 cells lining the mouth, stomach and intestinal tract. The most common and problematic of the severe side effects attributable to radiation and chemotherapy are neutropenia--bone marrow suppression of infection-fighting white blood cells ("WBCs") and mucositis--damage to the epithelial cells lining the mouth, stomach and intestinal tract. Epithelial cells form an important barrier, preventing potentially lethal bacterial, fungal and viral organisms which reside in the intestinal tract from entering the sterile blood stream and organs. Damage from radiation or chemotherapy to intestinal epithelial cells disrupts this important barrier, allowing infectious pathogens to gain access to the systemic blood circulation. When neutropenia and mucositis occur together, patients are at high risk for serious and fatal infections. Patients often require supportive care agents as an adjunct to the primary therapy in order to lessen the toxicities associated with radiation and chemotherapy. More than 575,000 patients receive chemotherapy each year in the United States, with more than 20 percent developing severe neutropenia and mucositis. WBC growth factors such as Neupogen(R) (G-CSF), marketed by Amgen Inc., target the fever and neutropenia (two surrogate markers that indicate risk for developing infection) induced by radiation and chemotherapy, but in most studies have failed to prevent serious or fatal infections, have had no impact on survival, and have failed to treat other acute toxicities of cancer treatment such as mucositis. Despite these limitations, Neupogen generated worldwide sales in excess of $1 billion in 1996. There are currently no supportive-care measures that adequately treat or prevent mucositis. Multidrug Resistance. Multidrug resistance to conventional chemotherapeutic agents is a major impediment to the effective treatment of certain cancers. Approximately 90 percent of all cancer patients undergoing chemotherapy (40 percent to 45 percent of all new cancer cases) express or will develop multidrug resistance. Because most chemotherapeutic agents share a similar mechanism of action, once a tumor develops resistance to a single therapeutic agent, it becomes resistant to a broad range of chemotherapeutic drugs. Tumor Resistance to Radiation. Radiation therapy kills tumor cells by generating highly reactive and toxic oxygen free radicals, resulting in damage to cell replication machinery (e.g., DNA). Tumors are classified as being sensitive (e.g., lymphomas) or resistant (e.g., colon or skin cancers) to radiation therapy. Almost 50 percent of certain cancer cell types, such as prostate, lung and bladder cancer, are resistant to radiation therapy at the time of diagnosis. Mechanisms by which tumor cells develop resistance to radiation include mutations or deletions in so-called tumor suppression genes (e.g., p53) that control cell replication, abnormal regulation of proteins which inhibit programmed cell death, such as bcl-2, or mechanisms by which DNA is repaired during cell replication. The p53 tumor suppression gene is mutated or deleted in more than 50 percent of newly diagnosed cancers and is a major contributor to the failure of radiation therapy among such malignancies. The Company is focusing its oncology development efforts on a portfolio of drugs that it believes will address the three principal causes of cancer treatment failure. These include (i) Lisofylline--a supportive care agent being investigated to prevent or reduce the incidence of serious and fatal infections, mucositis and treatment-related mortality among patients receiving high doses of radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer drug being investigated for the treatment of patients with multidrug resistant tumors and (iii) tumor sensitizing agents including CT-2412--a research lead with the potential ability to enhance sensitivity to radiation among tumors that have deleted or mutated p53 tumor suppression genes, which the Company believes will increase the effectiveness of radiation treatment on such tumors. Lisofylline Lisofylline is a synthetic small molecule drug in Phase III clinical trials among cancer patients receiving high dose radiation and/or chemotherapy. Unlike blood cell growth factors or chemotherapy protecting agents, Lisofylline is being developed to prevent or reduce the incidence of serious and fatal infections, mucositis and treatment-related mortality. The Company believes that the use of Lisofylline may permit the safer delivery of higher, potentially more effective doses of radiation and chemotherapy. The Company is collaborating with Johnson & Johnson to jointly develop and commercialize Lisofylline. See "--Collaborations." The Company's development strategy for Lisofylline is to initially target life threatening situations where Lisofylline might be used and where no comparable treatment alternatives exist. The Company is conducting or 26 plans to conduct pivotal Phase III clinical trials of Lisofylline in patients who receive ablative, or bone marrow destroying, doses of chemotherapy who require BMT, patients with newly diagnosed AML who receive standard high dose induction chemotherapy or patients with solid tumors such as head and neck or breast cancers who receive dose-intensive radiation and/or chemotherapy. Common to each of these three categories of anti-cancer treatment (ablative, induction and dose-intensive) is the occurrence of neutropenia and the breakdown of the epithelial barrier cells lining the mouth, stomach and intestinal tract, placing patients at a high risk of life threatening infections, severe mucositis and mortality. For BMT and AML, the Company intends to pursue approval under FDA initiatives intended to provide accelerated review and approval of therapies intended to treat patients suffering from serious, life-threatening or severely debilitating diseases and that provide a meaningful therapeutic benefit to patients over existing treatments. The Company believes that this strategy may shorten the time to market, accelerate product adoption by oncologists and provide a platform for product line extensions in less urgent, but clinically meaningful applications such as mucositis. However, there can be no assurance that Lisofylline will be evaluated for regulatory approval on such accelerated basis. See "--Government Regulation." In 1995 more than 20,000 patients in the United States were treated with ablative doses of chemotherapy requiring BMT or peripheral blood stem cell ("PBSC") replacement. This type of chemotherapy regimen is one of the fastest growing types of cancer treatments in the United States, with an estimated annual growth rate of 20 percent to 30 percent. In 1995 in the United States approximately 75,000 patients received induction-type chemotherapy regimens for the treatment of leukemias, such as AML, and lymphomas, and almost 200,000 patients received dose-intensive chemotherapy for a variety of solid tumor types. Clinical Trials--BMT. In the first quarter of 1996 the Company completed a 60 patient, multi-center, double blind placebo controlled Phase II trial which investigated the effect of two different doses (2 mg/kg and 3 mg/kg) of Lisofylline on the rate of blood cell recovery and the incidences of fever, infection, toxicity and mortality in cancer patients undergoing high dose radiation and/or chemotherapy followed by BMT. On an intent to treat analysis at 100 days following BMT, this study demonstrated that administration of 3 mg/kg of Lisofylline resulted in a statistically significant reduction in mortality (p = 0.022), the incidence of serious and fatal infections (p = 0.005), and the duration of absolute neutropenia (p = 0.046) (defined as the number of days following BMT with fewer than 100 neutrophils per microliter of blood) when compared to placebo recipients or patients randomized to receive 2 mg/kg of Lisofylline. In addition, there was a strong trend toward a reduction in the overall incidence of mucositis (p = 0.08) and in the incidence of severe mucositis (p = 0.104) among higher dose Lisofylline recipients compared to placebo recipients or patients randomized to receive the lower dose of Lisofylline. Certain endpoints of the trial regarding neutrophil and platelet recovery, the duration of fever and transfusion requirements were not met. No serious adverse side effects attributable to Lisofylline were detected in this trial. The table below summarizes those results of the Phase II BMT trial of Lisofylline in patients 100 days after receiving high dose radiation and/or chemotherapy followed by BMT which the Company plans to more fully assess in its Phase III clinical trials:
LISOFYLLINE 3MG/KG(1) PLACEBO P VALUE(2) ----------- ------- ---------- Mortality rate........................... 11% 44% 0.022 Incidence of serious and fatal infec- tions................................... 0% 39% 0.005 Duration of absolute neutropenia (3)..... 3 days 6 days 0.046 Incidence of severe mucositis............ 22% 44% 0.104
- -------- (1) Patients receiving a 2mg/kg dose of Lisofylline did not demonstrate statistically significant results when compared with placebo recipients. (2) A p value of less than or equal to 0.05 is considered statistically significant. A p value of less than or equal to 0.15 demonstrates a trend toward statistical significance. (3) Duration of absolute neutropenia is defined as the number of days following BMT with fewer than 100 neutrophils per microliter of blood. 27 In the third quarter of 1996 the Company initiated a 106 patient, multi- center, double blind placebo controlled pivotal Phase III trial for Lisofylline in patients undergoing high dose radiation and/or chemotherapy followed by BMT. This trial utilizes a 3 mg/kg dose of Lisofylline. The primary endpoints of this study are neutropenia-related infection and mortality. Based on the Company's discussions with the FDA, if the endpoints of this study are met with statistical significance, the Company believes that the results of this trial, together with the results of the completed Phase II BMT trial and the safety data from the ongoing Phase II AML trial, would be adequate to provide a basis for an NDA for Lisofylline for BMT indications. The Company is also planning to commence an additional 80 patient Phase III trial which will examine the effect of a 5 mg/kg dose of Lisofylline on patients with cancer receiving BMT from unrelated donors. In addition to being at high risk for serious and fatal infections, these patients have a high incidence of severe mucositis and cancer treatment-related deaths. This study will determine the effect of higher doses of Lisofylline on infection and mucositis and provide supportive dosing and efficacy data for mucositis applications of Lisofylline. If effective, the Company believes that the use of Lisofylline may increase the number of patients who are eligible to receive BMT from unrelated donors. See "Risk Factors--No Assurance of Successful Product Development; Uncertainties Related to Clinical Trials." Clinical Trials--AML. The Company has ongoing a 75 patient, single center, double blind placebo controlled Phase II trial of Lisofylline (3mg/kg) among patients with newly diagnosed AML undergoing standard high dose induction chemotherapy. This trial, which is being conducted in the United States at the M.D. Anderson Cancer Center, will examine the effects of Lisofylline on the incidence of infection and mortality, both of which are serious side effects of induction chemotherapy in AML. Sixty-four evaluable patients have been enrolled to date. In the fourth quarter of 1996 the Company initiated an 80 patient, multi- center, double blind placebo controlled pivotal Phase III trial of Lisofylline among patients with newly-diagnosed AML undergoing standard high dose induction chemotherapy. This trial will examine the effect of a 3mg/kg dose of Lisofylline on the incidence of infection and mortality among such patients. The Company believes that if the Phase II AML trial demonstrates that Lisofylline reduces infection and mortality with statistical significance, the results of the Phase II AML trial, together with the results of the completed Phase II BMT trial and, if positive, the ongoing Phase III BMT trial, may be adequate to provide a basis for a supplemental NDA for Lisofylline for AML indications. Clinical Trials--Mucositis. The Company intends to commence in the second half of 1997 a 100 patient, multi-center, double blind placebo controlled Phase II/III trial comparing a 3mg/kg dose of Lisofylline administered four times daily to a 6mg/kg dose Lisofylline administered two times daily and to placebo among patients with solid tumors receiving dose-intensive radiation and/or chemotherapy at risk for developing severe mucositis and infection. Mechanism of Action. Following exposure to radiation, chemotherapy or oxidative injury, oxygen free radicals (a highly reactive form of oxygen) are generated. These oxygen free radicals are "soaked up" both in the blood stream and in cell membranes by a pool of lipids termed "oxidizable lipids" to produce highly reactive oxidized lipids such as HPODEs. These oxidized lipids have been shown to have immediate effects on cell membranes, resulting in membrane perturbation or disruption which may lead to cell damage or cell death among the barrier cells lining the intestine or respiratory tract. As such, HPODEs may contribute to the early breakdown in barrier function observed following radiation, chemotherapy or oxidative injury. In addition to the direct effects that HPODEs may have on cell membranes, they may also lead to the activation of a number of SAPs within the cell. While the biomolecular target for Lisofylline is presently unknown, its therapeutic activity appears to be due to the result of Lisofylline's effect on oxidizable lipids, including those in the cell membrane, and the activation of SAPs. Lisofylline decreases the pool of oxidizable lipids, while increasing neutral, less oxidizable lipid pools, and decreases the production of HPODEs and other oxidized lipids in a dose dependent manner following radiation or chemotherapy. In doing so, Lisofylline appears to inhibit the early, immediate effects of HPODEs on cell membranes and appears to prevent the activation of SAPs and the ensuing cellular inflammatory and injurious response. 28 The Company believes that the effects of Lisofylline on oxidizable lipids and on the activation of SAPs may represent a critical upstream point of intervention in the initiation of the cellular stress response. By modulating the production of such oxidized lipids and phospholipids and the activation of SAPs, Lisofylline may be able to prevent the early and late damage to the epithelial barrier cells lining the mouth, stomach and intestinal tract, resulting in a reduction in infection, mucositis and mortality following high dose anti-cancer treatment. Because epithelial barrier cells also line the lung tissue in the respiratory tract, cells which are susceptible to oxidative injury, the Company believes that Lisofylline may also be effective for preventing or reducing ALI in patients requiring mechanical ventilation for respiratory failure. See "--Inflammatory Disease." The Company is utilizing its proprietary lipid technology as a platform to investigate structure-function relationships with respect to the Lisofylline chemical moiety. The Company is developing chemical analogs of Lisofylline, such as CT-2408R, which has the potential to be administered orally. CT-2584 CT-2584 is the Company's novel small molecule drug under investigation for the treatment of patients with multidrug (e.g., chemotherapy) resistant cancers, including sarcomas, prostate, colon, lung and breast cancer. The Company believes that CT-2584 has a unique mechanism of action which may allow the drug to be (i) toxic to cancers which have multidrug resistance to conventional chemotherapeutic agents, (ii) more toxic to cancer cells than to non-cancerous cells, (iii) not susceptible to multidrug resistance and (iv) anti-angiogenic. The Company's development strategy for CT-2584 is to initially target multidrug resistant cancers, such as sarcomas, for which first line treatments are lacking or ineffective and where such applications may qualify for accelerated regulatory approval. The Company believes that targeting therapeutic applications of the drug where alternative treatments are lacking or ineffective may also accelerate market acceptance. The Company intends to pursue line extensions of CT-2584 to be used as a second line therapy for cancers such as prostate, colon, lung and breast cancers which frequently express or acquire multidrug resistance to conventional first line chemotherapeutic agents, resulting in treatment failure. Because CT-2584's mechanism for tumor cell killing appears to be unique, and because it does not possess the toxicities of conventional anti-cancer agents, the Company believes that CT-2584 may ultimately be used alongside conventional chemotherapeutic agents as a first line therapy for a variety of cancer types. Preclinical and Clinical Trials. In preclinical testing, CT-2584 demonstrated toxicity to all tumor cell lines tested and to human tumor biopsy samples. These cell lines and samples included sarcomas, prostate, brain, colon, breast, lung and ovarian cancers, as well as certain leukemias and lymphomas. Tumors that were multidrug resistant to high levels of conventional chemotherapeutic agents were rendered more sensitive to those agents in the presence of low concentrations of CT-2584. CT-2584 also significantly inhibited cancer cell-induced new blood vessel formation (angiogenesis) at drug levels below which cancer cell killing is observed. In November 1995 the Company initiated a Phase I trial, co-sponsored by the Cancer Research Campaign, at the Christie Hospital in the United Kingdom among patients with advanced cancers including colon cancer. In May 1996 the Company initiated a parallel Phase I trial at the Memorial Sloan Kettering Cancer Research Center in the United States for patients with advanced cancers including prostate and ovarian cancer. More than 20 patients have been treated with CT-2584 as of January 1, 1997 at four different dose levels without exhibiting the bone marrow or gastrointestinal toxicities observed with conventional high dose anti-cancer treatment regimens. A maximum tolerated dose level has not been achieved to date. The majority of patients enrolled in this trial have tumor types which are known to express multidrug resistance. As of January 1, 1997 seven patients with refractory cancers have experienced disease stabilization or disease regression following more than two cycles of CT-2584 therapy. Based on these preliminary results, the Company anticipates starting disease-specific Phase II trials in the United States in the second half of 1997. 29 Mechanism of Action. CT-2584's unique mechanism of action of tumor cell killing is believed to result from the effects it has on tumor cell phospholipids such as PA. Unlike normal growing cells, such as bone marrow cells, tumor cells overproduce PAs through the activation of an enzyme called phosphatidylcholine phospholipase-D ("PC-PLD"). CT-2584 appears to overactivate tumor cell PC-PLD, and this enzyme may be its biochemical target in effecting tumor cell killing. Because of its unique mechanism of action, CT-2584 appears to inactivate or bypass multidrug resistance mechanisms and does not appear to be susceptible to multidrug resistance. Company scientists have cloned PC-PLD, and the Company intends to establish high throughput assays based on PC-PLD and its other proprietary technologies to discover more potent or selective analogs of CT-2584. Tumor Sensitizing Agents The Company has recently focused a drug discovery effort on the development of agents which would enhance the effectiveness of radiation. The Company believes that its drug discovery and core technology platform may provide a novel approach to the development of tumor sensitizing agents. The Company is investigating the role of cell membrane lipids and phospholipids and their contribution to the mechanisms by which tumors express or develop resistance to radiation. The Company has identified compounds, including CT-2412, which have the potential ability to enhance sensitivity to radiation in certain resistant cancers, including those which have deleted or mutated p53 tumor suppression genes. INFLAMMATORY DISEASE Acute lung injury ("ALI") may be caused by or associated with many diseases or conditions, but is most frequently observed following mechanical ventilation for pneumonia, multiple traumatic injuries and sepsis. More than one million patients are at risk each year in the United States for developing ALI. ALI, when severe, leads to a condition termed Adult Respiratory Distress Syndrome ("ARDS"). ALI can be fatal in up to 35 percent of the patients who develop ARDS. There are no specific therapies to prevent or treat the estimated 150,000 new cases of ALI diagnosed each year. ALI results from oxidative injury to the epithelial barrier cells which line the respiratory tract following exposure to high levels of oxygen in connection with mechanical ventilation and/or following resuscitation with blood transfusions after multiple traumatic injury. In each setting, oxidative injury to the epithelial cell membranes lining the lung causes a breakdown in the normal barrier function, leading to the inability to provide adequate oxygen to the blood stream and organs and resulting in multiorgan failure ("MOF") and death. In addition to its potential oncology applications, Lisofylline is also under investigation by cti as an agent to prevent or reduce the incidence and severity of ALI and mortality among patients requiring mechanical ventilation for respiratory failure following pneumonia, multiple traumatic injuries or sepsis. The mechanisms underlying the toxicity to gastrointestinal barrier cells observed in the oncology setting may also operate to cause the toxicity to respiratory barrier cells observed in the critical care setting. The Company's development strategy for Lisofylline in critical-care applications is to target patient populations at high risk for developing ALI, where early intervention is feasible and clinically meaningful endpoints can be assessed after relatively short (14-28 days) duration of drug treatment. Clinical Trials. The Company has completed a 13 patient, multi-center, double blind placebo controlled Phase II feasibility study of Lisofylline in patients suffering from septic shock randomized to receive a low dose (1.5mg/kg) of Lisofylline or placebo. This study examined the safety and pharmacokinetics of Lisofylline given to critically ill patients. Of the 12 patients evaluable for endpoint analysis, Lisofylline recipients experienced a 40 percent improvement from baseline in median MOF scores compared to placebo recipients. All patients receiving Lisofylline survived to day 28 compared to 67 percent of placebo recipients. In January 1997 the National Heart, Lung and Blood Institute (the "NHLBI"), through its ARDS Network, notified the Company that, after reviewing the preclinical and clinical data to date, it had selected Lisofylline for investigation in a multi-center, double blind placebo controlled Phase II/III trial among patients experiencing 30 ALI. The ARDS Network was established by the NHLBI in cooperation with the FDA to accelerate the investigation and approval of novel therapies for lung injury. This trial is expected to begin in the second half of 1997. The trial will examine the effect of a 3mg/kg dose of Lisofylline on the duration of mechanical ventilation and early mortality among patients who develop ALI. Mechanism of Action. The Company believes that following exposure to high levels of inspired oxygen by mechanical ventilation or following blood transfusion resuscitation after multiple traumatic injury, the generation of reactive oxygen free radicals converts oxidizable lipids to oxidized lipids such as HPODEs. See""--Oncology--Lisofylline--Mechanism of Action." These HPODEs exert their damaging effects on cell membrane lipids and phospholipids which may lead to the activation of SAPs, resulting in cellular inflammation and injury. In addition, HPODEs may also cause an immediate disturbance in the integrity of the cells lining the respiratory tract, allowing the undesired movement of proteins and fluids into the lung air spaces, and decreasing the ability of oxygen in the lung to cross into the bloodstream and reach the tissues. In animal studies, Lisofylline prevented the occurrence of lung injury and/or mortality following exposure to high levels of inspired oxygen, resuscitation following blood loss and shock, and following severe systemic bacterial infections. In clinical studies, Lisofylline decreased the pool of oxidizable lipids and decreased HPODE generation and the activation of SAPs and subsequent production of multiple inflammatory cytokines. The Company believes that the effects of Lisofylline on such lipids and on the activation of SAPs may represent a critical upstream point of intervention in the initiation of the complex biochemical cascade that leads to cellular and systemic inflammation, cell injury and cell death. IMMUNE DISEASE The Company is investigating a class of novel compounds which inhibit the PA regulating enzyme diacylglycerol kinase ("DAG Kinase"), and which have been identified for potential use in the prevention of organ transplant rejection and in the treatment of immune diseases. Early in vitro testing suggests that one of these compounds, CT-3578, unlike currently used immunosuppressives including cyclosporine A, leads to non-responsiveness of the immune system to specific foreign antigens. The Company believes that such a compound could induce tolerance to a specific foreign antigen and thus allow patients to accept organ transplants from genetically different donors without the need for long-term immunosuppressive therapy. PROPRIETARY DRUG DISCOVERY TECHNOLOGY The Company's proprietary drug discovery technology consists of three components: (i) technology for quantitative measuring of specific species of lipids and phospholipids; (ii) cloning of critical lipid regulatory enzymes; and (iii) using the cloned enzymes to validate targets and to develop high throughput screens capable of analyzing large chemical libraries. The Company has developed proprietary technology that enables it to determine the effects of a variety of physical and chemical stimuli (such as radiation and chemotherapy), growth factors, cytokines and oncogene-induced events on the production of oxidized lipids such as HPODEs, various species of PAs and the enzymes which control their production and degradation. Standard industry techniques for measuring lipid second messengers and structural lipid membrane components are time consuming and often inadequate for measuring lipids and phospholipids like HPODEs and PAs, which are produced in relatively small quantities following stimulation and are degraded rapidly after their production. Moreover, separation of specific species of oxidized lipids and PAs is difficult. The Company possesses several proprietary lipid analytical technologies which can identify different oxidized lipids and different species of PA produced in response to a variety of stimuli in various cell types. These technologies provide a qualitative and quantitative methodology to examine the effects of cti compounds on a variety of such lipids and phospholipids that are involved in normal and/or pathological functions in certain cells. The Company believes that PAs have different functions within cells, depending on how they are made and their biochemical species. In order to further investigate the role of these phospholipids in cellular response mechanisms and to provide a platform to develop novel targets for drug development, Company scientists have 31 cloned several of the critical enzymes that produce or metabolize (degrade) PAs. The following table lists the human enzymes cloned by the Company, their biological effects and implied areas of indication:
CLONED ENZYME BIOLOGICAL EFFECT DISEASE AREA ------------- ----------------- ------------ PC-PLD (phosphatidylcholine- Cancerous transformation, Cancer phospholipase-D) angiogenesis LPAAT (lyso-PA acyl transferase) Stress activated protein Inflammation kinase ("SAPK") activation; TNFa, Interleukin-6 ("IL-6") release CDS (cytidyl diphosphate- SAPK activation; TNFa, IL-6 Inflammation diacylgycerol synthase) release
An additional PA regulating enzyme, diacylglycerol kinase ("DAG-Kinase"), has been identified as a target enzyme for modifying the immune response and is inhibited by cti's lead immunosuppressive compound, CT-3578. Through application of genetic, molecular and biochemical techniques, the Company may be able to determine the relationship between the PA species controlled by these enzymes and abnormal cellular functions which are thought to be related to disease processes. The Company believes that PA modulating enzymes, when coupled with high throughput screens and combinatorial diversity libraries, may provide it with unique therapeutic targets for drug development for oncological, inflammatory and immune diseases. The Company has also developed certain proprietary technologies that permit the qualitative and quantitative analysis of a variety of complex lipids for their content of oxidizable and oxidized lipid components such as HPODEs. The Company believes that such technologies may be utilized in conjunction with its chemical libraries and novel cloned enzymes to elucidate the relationship of such complex oxidized lipids to conditions such as cancer, inflammatory and immune disease. From these studies, the Company intends to indentify additional novel targets for future drug development. STRATEGY The key elements of the Company's business strategy are to: Target large markets which are not adequately served by existing therapeutics. The Company focuses its drug development activities on cancer and inflammatory and immune diseases--three therapeutic areas that represent large market opportunities not adequately served by existing therapeutics. The Company intends to develop its oncology product portfolio by integrating its understanding of cancer disease management with novel products derived from its internal research and discovery efforts. The Company's two potential cancer drugs in clinical trials, Lisofylline and CT-2584, target the toxic side effects of current cancer treatment modalities and multidrug resistant cancer cells, respectively. Lisofylline is also in clinical trials as an agent for the prevention or reduction of ALI and mortality among patients requiring mechanical ventilation for respiratory failure, conditions for which no effective therapies currently exist. The Company believes that these agents, if effective, may provide additional treatment options and opportunities which are not presently available to health care providers and their patients. The Company intends to further develop its product portfolio to exploit these potential opportunities through internal research and discovery efforts, inlicensing or product acquisitions. Maximize product opportunities by entering into late-stage collaborative relationships. The Company believes that by developing its products through mid- to late-stage clinical development before seeking potential development and/or commercialization partners, the Company is better positioned to (i) assess the potential value of its products, (ii) evaluate the commercialization requirements for such products and (iii) if advantageous, choose a suitable collaborative partner on more favorable terms than would be available if the Company were to enter into collaborative relationships for products in early-stage clinical or preclinical development. The Company is collaborating with Johnson & Johnson for the worldwide (excluding Canada) development and commercialization of Lisofylline and with BioChem Pharma for the development and commercialization of Lisofylline and CT-2584 in Canada. 32 Accelerate regulatory approval, market penetration and acceptance. The Company's intends initially to launch its products for life threatening or potentially life saving indications, followed by product line extensions to less urgent indications. The Company believes that this strategy will accelerate the regulatory review and approval of its products and facilitate their acceptance for use and adoption by health care providers and third party payors. The Company intends to initially pursue approval for Lisofylline for BMT and AML, and CT-2584 for sarcomas, under FDA initiatives intended to provide accelerated review and approval of therapies intended to treat patients suffering from serious, life-threatening or severely debilitating diseases and that provide a meaningful therapeutic benefit to patients over existing treatments. Once approval has been obtained for the initial indication, cti will seek to extend the use of Lisofylline in less urgent, but clinically meaningful applications such as mucositis. However, there can be no assurance that any of the Company's products will be evaluated for regulatory approval on such an accelerated basis. Focused sales and marketing efforts. The Company intends to develop its own sales and marketing infrastructure in the United States to co-promote Lisofylline with Johnson & Johnson as permitted under the Collaboration Agreement and to launch and commercialize its portfolio of other potential oncology products, either on its own or jointly with Johnson & Johnson or other collaborators. With respect to the commercialization of its oncology products outside the United States, and with respect to the worldwide commercialization of its portfolio of products for inflammatory and immune diseases, the Company's strategy is to pursue commercialization arrangements with collaborators, including its collaboration with Johnson & Johnson. Apply and protect proprietary technology to create a unique drug discovery platform for new product opportunities. The Company is leveraging its proprietary technology to create a unique platform for future drug discoveries. The Company believes that PA modulating enzymes, when coupled with high throughput screens and combinatorial diversity libraries, may provide the Company with unique therapeutic targets for drug development for cancer and inflammatory and immune diseases. COLLABORATIONS Johnson & Johnson In November 1996 the Company entered into a Collaboration and License Agreement (the "Collaboration Agreement") with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical Corporation), each of which are wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson & Johnson"), for the joint development and commercialization of Lisofylline. Upon execution of the Collaboration Agreement, Johnson & Johnson paid to cti a $5.0 million nonrefundable license fee. Under the Collaboration Agreement, cti is responsible for the development of Lisofylline in the United States, and Johnson & Johnson has committed to fund 60 percent of cti's budgeted development expenses incurred in connection with obtaining regulatory approval for Lisofylline in the United States. For each of 1997 and 1998 Johnson & Johnson has agreed, subject to certain termination rights, to fund up to $12.0 million of cti's budgeted development expenses per year. Any development expenses in excess of such currently budgeted agreed upon amounts will be funded solely by cti unless otherwise mutually agreed. Johnson & Johnson will be responsible for obtaining regulatory approval for Lisofylline for markets outside of the United States and Canada at its own expense. The Company and Johnson & Johnson will co-promote Lisofylline in the United States, and each will share equally in any resulting operating profits and losses recognized. Although cti and Johnson & Johnson will co-promote Lisofylline in the United States, Johnson & Johnson will have primary responsibility for commercializing Lisofylline. See "--Marketing." Johnson & Johnson has the exclusive right to develop and market Lisofylline, at its own expense, for markets other than the United States and Canada, subject to specified royalty payments to cti. Johnson & Johnson will make additional payments to, and equity investments in, cti if certain milestones are achieved in the development and commercialization of Lisofylline. The collaboration with Johnson & Johnson initially covers the development of Lisofylline to prevent or reduce the toxic side effects among cancer patients receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT Indication") through December 31, 1998. The collaboration also covers the development 33 of Lisofylline for the treatment of patients with AML undergoing high dose chemotherapy (the "AML Indication") through June 30, 1997. Johnson & Johnson has an option to continue to participate in the development of Lisofylline for the AML Indication following the completion of cti's ongoing Phase II AML trial. Johnson & Johnson also has certain options to expand the collaboration to include the development of Lisofylline for any other indication for which Lisofylline is being developed by cti. In the event that Johnson & Johnson exercises any such option, it would be required to fund 60 percent of cti's budgeted development expenses incurred in connection with the development of Lisofylline for such indication, including expenses incurred prior to the exercise of such option, and would also be required to pay additional license fees and milestone payments to cti. Thereafter, any development expenses in excess of the then agreed upon budgeted amounts for any such additional indication would be funded solely by Johnson & Johnson unless otherwise mutually agreed. If Johnson & Johnson does not exercise such option with respect to any such indication, cti would be free to develop Lisofylline for such indication either on its own or in collaboration with third parties. Johnson & Johnson also has the option to sponsor research at cti with respect to discovering compounds structurally related to Lisofylline. The Company is dependent on the future payments from Johnson & Johnson to continue the development and commercialization of Lisofylline as presently planned. Johnson & Johnson may terminate the Collaboration Agreement at any time and for any reason after November 8, 1997, subject to a six month notice period. Johnson & Johnson would have no further obligation to fund cti's development expenses related to Lisofylline following such termination, however, the financial and other obligations of Johnson & Johnson (other than Johnson & Johnson's obligation to make additional payments to, and equity investments in, cti if certain development milestones are achieved) would continue during such six month notice period. In addition, Johnson & Johnson has the right to terminate the Collaboration Agreement at any time based on material safety or tolerability issues related to Lisofylline upon 30 days' notice. In the event of a termination of the Collaboration Agreement by Johnson & Johnson, cti would regain all development and commercialization rights. Without Johnson & Johnson's continued collaborative support, cti would not be able to continue the development of Lisofylline as presently planned, and the Company's financial condition would be materially and adversely affected. See "Risk Factors--Reliance on Relationship with Johnson & Johnson." In accordance with the terms of a Stock Purchase Agreement entered into between the Company and Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, in connection with the Collaboration Agreement, JJDC purchased shares of cti's Series B Convertible Preferred Stock for an aggregate purchase price of $5.0 million. Pursuant to the Stock Purchase Agreement, cti is entitled to require JJDC to purchase additional shares of Common Stock upon the closing of this Offering and, subsequent to the offering, upon achievement of certain milestones. JJDC has agreed to purchase a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering directly from the Company in a private placement that will occur concurrent with the closing of this Offering at a per share price equal to the initial public offering price. See "Johnson & Johnson Stock Purchase" and "Certain Transactions." BioChem Pharma In March 1995 the Company entered into a collaboration agreement with BioChem Pharma for the development and commercialization of Lisofylline and CT-2584 in Canada. Under the collaboration agreement (the "BioChem Collaboration Agreement"), BioChem Pharma will be responsible for obtaining regulatory approval for Lisofylline and CT-2584 in Canada. Although BioChem Pharma will have no obligation to conduct any research and development activities, it will have the right to have cti perform clinical trials in Canada at BioChem Pharma's expense. BioChem Pharma will have the exclusive right to commercialize Lisofylline and CT-2584 in Canada, subject to the payment of royalties to cti. The Company will also receive payments under the BioChem Collaboration Agreement if certain milestones are achieved. BioChem Pharma may terminate the BioChem Collaboration Agreement with respect to any product at any time for any reason upon 30 days' notice. In connection with the BioChem Collaboration Agreement, BioChem Pharma agreed to purchase shares of Series A Convertible Preferred Stock in the Company's 1995 Private Placement for an aggregate purchase price of $2.5 million. 34 PATENTS AND PROPRIETARY RIGHTS The Company has dedicated significant resources to protect its intellectual property. In the United States, the Company has eleven issued patents and 73 pending patent applications, including divisional patent applications and continuations-in-part, covering a variety of new chemical entities, pharmaceutical compositions, synthetic processes, methods of use, discovery, research tools and diagnostics. Twelve of the Company's issued or allowed patents and pending patent applications cover the pharmaceutical composition, commercial synthetic manufacturing process and oncology, anti-inflammatory and other methods of use for Lisofylline and one pending patent application covers the chemical compounds and pharmaceutical compositions of CT-2584 and CT-3578. The Company intends to file additional patent applications, when appropriate, with respect to improvements in its core technology and to specific products and processes that it develops. Generally it is cti's policy to file foreign counterparts in countries with significant pharmaceutical markets and a patent granting and enforcement infrastructure. The Company has filed 56 foreign national patent applications in 14 countries and the European Patent Office, including 17 counterparts of certain of its issued and pending U.S. patent applications for Lisofylline and eleven counterparts of certain of its issued and pending U.S. patent applications for CT-2584 and CT-3578. There can be no assurance that any patents will issue from any present or future applications or, if patents do issue, that such patents will be issued on a timely basis or that claims allowed on issued patents will be sufficient to protect the Company's technology. In addition, there can be no assurance that the patents issued to cti will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide proprietary protection or commercial advantage to the Company. With respect to such issued U.S. patents or any patents that may issue in the future, there can be no assurance that they will effectively protect the technology involved, foreclose the development of competitive products by others or otherwise be commercially valuable. The commercial success of the Company will also depend in part on the Company's neither infringing patents or proprietary rights of third parties nor breaching any technology licenses which relate to the Company's technologies and potential products. In general, the development of therapeutic products is intensely competitive and many pharmaceutical companies, biotechnology companies, universities and research institutions have filed and will continue to file patent applications and receive patents in this field. If patents are issued to other entities that contain competitive or conflicting claims with respect to the technology and compounds pursued by cti and such claims are ultimately determined to be valid, no assurance can be given that cti would be able to obtain licenses to these patents at a reasonable cost or develop or obtain alternative technology or compounds. The Company is aware of certain patents belonging to third parties that could be interpreted broadly to compromise the Company's freedom to sell Lisofylline in the United States for use in preventing lung injury following traumatic injury or sepsis. The Company believes, upon advice of patent counsel, that the manufacture, use and sale of Lisofylline by cti does not infringe any valid claim of such third party patents. If such patents were to restrict the use of Lisofylline for such indications, the Company may be required to obtain a license from such parties for such indications. There can be no assurance that any such license would be available to the Company upon reasonably acceptable terms, if at all. The Company could also face significant costs associated with any litigation relating to such patents. See "Risk Factors--Ability to Protect Intellectual Property." The Company has sought and intends to aggressively seek patent protection in the United States, Europe and Japan to protect any products that it may develop. The Company also intends to seek patent protection or rely upon trade secrets to protect certain of its enabling technologies that will be used in discovering and evaluating new drugs which could become marketable products. However, there can be no assurance that such steps will effectively protect the technology involved. To protect any such trade secrets and other proprietary information, cti relies on confidentiality and material transfer agreements with its corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for breach or that the Company's trade secrets will not otherwise become known or independently discovered by competitors. The Company also has its employees, members of its Scientific Advisory Board and Clinical Advisory Board, and its consultants enter into agreements requiring disclosure to cti of ideas, developments, 35 discoveries or inventions conceived during employment or during consulting and assignment to cti of proprietary rights to such matters related to the business and technology of cti. The extent to which efforts by others will result in patents and the effect on cti of the issuance of such patents is unknown. Further, to enforce any patents issued to the Company or determine the scope and validity of other parties' proprietary rights, the Company may have to engage in litigation, which would result in substantial cost to, and diversion of efforts by, the Company. There can be no assurance that the Company's issued or licensed patents would be held valid. An adverse outcome could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the Company to cease or modify its use of such technology, any of which could have a material adverse effect on the Company. If the Company elects or is required to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, substantial cost to the Company could result even if the eventual outcome is favorable to the Company. There can be no assurance that others will not independently develop substantially equivalent proprietary information or otherwise obtain access to cti's know-how or that others will not be issued patents which may prevent the sale of Company products or require licensing and the payment of significant fees or royalties by cti for the pursuit of its business. Trade secrets and other unpatented proprietary information of cti may be difficult to protect, notwithstanding confidentiality agreements with cti's employees and consultants. See "Risk Factors--Ability to Protect Intellectual Property." MANUFACTURING The Company currently does not have the internal facilities to manufacture products under current Good Manufacturing Practices ("cGMP") prescribed by the FDA. The Company seeks to develop such capacity through manufacturing relationships. The Company has qualified and selected manufacturers which it believes comply with cGMP and other regulatory standards, and Lisofylline is currently being manufactured by third party vendors on a fee for service basis. In January 1997 the Company entered into a supply agreement with ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical intermediates and active ingredients, for the manufacture and supply of Lisofylline and corresponding intermediate compounds. Under the terms of the agreement, ChiRex will manufacture and supply Lisofylline bulk drug and a key intermediate compound in sufficient quantities to meet the Company's requirements for ongoing and future clinical trials and commercial requirements during launch and commercialization. ChiRex is obligated to comply with all regulatory requirements and policies concerning cGMP for all phases of production. The agreement will expire on December 31, 2001, but may be terminated by cti upon 12 months written notice prior to such date. The Company believes it has developed a process for manufacturing Lisofylline in its own laboratories and those of external manufacturers that would enable its manufacture in commercial quantities. Under the terms of the Collaboration Agreement with Johnson & Johnson, the Company will be responsible for the manufacture of Lisofylline for development and commercialization purposes until November 8, 1999. Thereafter, Johnson & Johnson will assume responsibility for the manufacture of Lisofylline. However, Johnson & Johnson may elect to assume responsibility for the manufacture of Lisofylline at any time prior to such date. The Company currently uses ChiRex for the manufacture of Lisofylline bulk drug and uses three suppliers for clinical trial quantities of the finished drug product. Following commercial launch of Lisofylline, the Company expects that it will continue to use ChiRex to manufacture Lisofylline bulk drug and expects that OMJ Pharmaceuticals, Inc., an affiliate of Johnson & Johnson, will be the Company's primary supplier for the finished drug product pursuant to the Collaboration Agreement. The Company has established a quality control and quality assurance program, including a set of standard operating procedures and specifications, designed to ensure that the Company's products are manufactured in accordance with cGMP and other applicable domestic and foreign regulations. However, the Company is and expects to continue to be dependent upon Johnson & Johnson and contract manufacturers such as ChiRex to comply with such procedures and regulations. There can be no assurance that Johnson & Johnson or these manufacturers will meet the Company's requirements for quality, quantity or timeliness. Lisofylline has never been manufactured on a commercial scale, and no assurance can be given that the Company, together with Johnson & Johnson or such other third party contract manufacturers, will be able to make the transition to commercial production. 36 If the Company develops other products with commercial potential outside of the Johnson & Johnson collaboration, cti will need to develop additional manufacturing resources, and may seek to enter into additional collaborative arrangements with other parties which have established manufacturing capabilities or may elect to have a third party such as ChiRex manufacture its products on a contract basis. If cti is unable to enter into collaborative relationships or obtain or retain third party manufacturing on commercially acceptable terms, it may be delayed in its ability to commercialize products or may not be able to commercialize its products as planned. The Company will be dependent upon such collaborators or third parties to supply it in a timely manner with products manufactured in compliance with cGMP or similar standards imposed by foreign regulators. Collaborators and contract manufacturers may violate cGMP upon occasion and the FDA has intensified its oversight of manufacturers. There can be no assurance that the FDA would not take action against a collaborator or a contract manufacturer who violates cGMP. Such actions may include requiring such collaborator or contract manufacturer to cease manufacturing activities. See "Risk Factors--Reliance on Third Party Manufacturers; Manufacture of Products in Commercial Quantities." MARKETING The Company intends to develop its own sales and marketing infrastructure in the United States to commercialize its portfolio of oncology products, including the oncology products that the Company plans to co-promote with Johnson & Johnson pursuant to the Collaboration Agreement and any other oncology products that the Company may commercialize, either on its own or, to the extent the Company enters into any commercialization arrangements, with collaborators. With respect to the commercialization of its oncology products outside the United States, and with respect to the worldwide commercialization of its portfolio of products for inflammatory and immune disease, the Company's strategy is to pursue commercialization arrangements with collaborators. The Company has no experience in marketing, sales or distribution. The Company believes, however, that the United States oncology market is accessible by a limited marketing staff due to the concentrated market of prescribing physicians. Approximately 5,000 oncologists control the vast majority of prescriptions for cancer therapeutics. Under the Collaboration Agreement, Johnson & Johnson will have primary responsibility for commercializing Lisofylline. To assist in commercializing Lisofylline for the BMT Indication, cti will employ medical affairs and marketing personnel who will work with Johnson & Johnson's sales force to provide various medical and marketing support functions. In connection with the launch and commercialization of Lisofylline for all other indications, cti will be permitted to provide its own field sales force to co-promote Lisofylline under the direction and control of Johnson & Johnson. See "--Collaborations." If the Company develops additional products with commercial potential outside of the Johnson & Johnson collaboration, cti may need to develop marketing and additional sales resources, and may seek to enter into collaborative arrangements with third parties which have established marketing and sales capabilities or may choose to pursue the commercialization of such products on its own. There can be no assurance that the Company, Johnson & Johnson or, to the extent the Company enters into any commercialization arrangements with any other third partries, such other third parties, will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for products. There can be no assurance that cti will enter into any such alliances or that the terms of any such alliances will be favorable to cti. See "Risk Factors--Absence of Sales and Marketing Organization." COMPETITION Competition in the pharmaceutical and biotechnology industries is intense. The Company faces competition from a variety of sources, both direct and indirect. The Company believes there may be several pharmaceutical or biotechnology companies that focus on cell membrane lipids in regulating cellular processes. Many other companies compete indirectly with cti for the same therapeutic indications but with different approaches by focusing, for example, on signal transduction, cell receptor technology, transcription factors and gene therapies. The Company also competes with other large pharmaceutical companies that produce and market synthetic 37 compounds and with other specialized biotechnology firms in the United States, Japan, Europe and elsewhere. Many of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established biotechnology companies. Many of these competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. The Company expects to encounter significant competition for the principal pharmaceutical products it plans to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. Accordingly, the relative speed with which the Company and Johnson & Johnson or any future collaborators can develop products, complete preclinical testing and clinical trials and approval processes, and supply commercial quantities of the products to the market are expected to be important competitive factors. A number of biotechnology and pharmaceutical companies are developing new products for the treatment of the same diseases being targeted by cti. In some instances, such products have already entered clinical trials or received FDA approval. Significant levels of research in biotechnology, medicinal chemistry and pharmacology occur in academic institutions, governmental agencies and other public and private research institutions. These entities have become increasingly active in seeking patent protection and licensing revenues for their research results. They also compete with cti in recruiting and retaining skilled scientific talent. The Company believes that its ability to compete successfully will be based on its ability to create and maintain scientifically advanced technology, develop proprietary products, attract and retain scientific personnel, obtain patent or other protection for its products, obtain required regulatory approvals and manufacture and successfully market its products either alone or through outside parties. Many of cti's competitors have substantially greater financial, marketing and human resources than cti. The Company will continue to seek licenses with respect to technology related to its field of interest and may face competition with respect to such efforts. There can be no assurance that the Company's competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than the Company. See "Risk Factors--No Assurance of Successful Product Development; Uncertainties Related to Clinical Trials," "-- Substantial Competition" and "--Ability to Protect Intellectual Property." GOVERNMENT REGULATION Drug Approval Process Regulation by governmental authorities in the United States and other countries is a significant factor in the development, production and marketing of cti's proposed products. All of cti's products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures in the United States by the FDA and similar health authorities in foreign countries. Various federal statutes and regulations also govern or influence the testing, manufacturing, quality control, safety, labeling, storage, record-keeping and marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations require the expenditure of substantial resources. Any failure by cti or its collaborators or licensees to obtain, or any delay in obtaining, regulatory approval could adversely affect the marketing of any product that cti may hope to develop and its ability to receive revenues therefrom. The Company has neither applied for nor received regulatory approval to market any products. The steps required before a pharmaceutical agent may be marketed in the United States include (i) preclinical laboratory, in vivo and formulation studies, (ii) the submission to the FDA of an Investigational New Drug application ("IND"), which must become effective before human clinical trials may commence, 38 (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug in its intended indication, (iv) the submission of a New Drug Application ("NDA") to the FDA, and (v) the FDA approval of the NDA. In order to clinically test, produce and market products for diagnostic or therapeutic use, a company must comply with mandatory procedures and safety standards established by the FDA and comparable agencies in foreign countries. Before beginning human clinical testing of a potential new drug, a company must file an IND and receive clearance from the FDA. The IND is a summary of the preclinical studies which were carried out to characterize the drug, including toxicity and safety studies, as well as an in-depth discussion of the human clinical studies which are being proposed. Approval of a local institutional review board ("IRB") and informed consent of trial subjects is also required. Human clinical trials are typically conducted in three sequential phases which may overlap. Phase I involves the initial introduction of the drug into healthy human subjects or patients where the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to (i) identify possible adverse effects and safety risks, (ii) determine the efficacy of the product for specific, targeted indications, and (iii) determine dosage tolerance and optimal dosage. When Phase II evaluation demonstrates that the product may be effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage and clinical efficacy and to further test for safety in an expanded patient population at multiple clinical study sites. A pivotal Phase III trial is an adequate and well-controlled study which provides the primary basis for determining whether there is "substantial evidence" to support the claims of effectiveness for new drugs and forms the basis for an NDA. The regulatory authority or the sponsor may suspend clinical trials at any point in this process if either entity concludes that clinical subjects are being exposed to an unacceptable health risk, that the study is not being conducted in compliance with applicable regulatory requirements, or for other reasons. See "Risk Factors--No Assurance of Successful Product Development; Uncertainties Related to Clinical Trials." The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing and commercial shipment of the product. The FDA may deny approval of an NDA if applicable regulatory criteria are not satisfied, or may require additional data. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Once issued, a product approval may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Satisfaction of these FDA requirements, or similar requirements by foreign regulatory agencies, typically takes several years and the time needed to satisfy them may vary substantially, based upon the type, complexity and novelty of the drug product. The effect of government regulation may be to delay or to prevent marketing of potential products for a considerable period of time and to impose costly procedures upon the Company's activities. There can be no assurance that the FDA or any other regulatory agency will grant approval for any products being developed by the Company on a timely basis, or at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. Delay in obtaining or failure to obtain regulatory approvals would have a material adverse affect on the Company's business. Marketing the Company's products abroad will require similar regulatory approvals and is subject to similar risks. In addition, the Company is unable to predict the extent of adverse government regulations that might arise from future United States or foreign governmental action. See "Risk Factors--No Assurance of FDA Approval; Comprehensive Government Regulation." 39 The FDA has implemented accelerated review and approval procedures for certain pharmaceutical agents that have been studied for their safety and effectiveness in treating serious, life-threatening or severely debilitating diseases, and that provide a meaningful therapeutic benefit to patients over existing treatments. Products intended to remove a serious or life-threatening toxicity of cancer treatment may potentially qualify for review under these procedures. The Company believes that Lisofylline may qualify for this accelerated review and approval process and designed its pivotal Phase III BMT trial with the objective of securing accelerated approval. The FDA has granted the Company priority review status for its planned NDA for Lisofylline for BMT indications. However, significant uncertainty exists as to the extent to which these will result in accelerated review and approval. Further, the FDA retains considerable discretion in determining eligibility for accelerated review and approval and is not bound by discussions that an applicant may have with FDA staff. Accordingly, the FDA could employ such discretion to deny eligibility of Lisofylline as a candidate for accelerated review or require additional clinical trials or other information before approving Lisofylline. In addition, the approval of a product under the accelerated approval procedures is subject to various conditions, including the requirement to verify clinical benefit in postmarketing studies and the authority on the part of the FDA to withdraw approval under streamlined procedures if such studies do not verify clinical benefit or under various other circumstances. The Company cannot predict the ultimate impact, if any, of the accelerated approval process on the timing or likelihood of FDA approval of Lisofylline or any of its other potential products. Facilities and manufacturing procedures used for the manufacture of products for clinical use or for sale must be operated in conformity with cGMP regulations, the FDA regulations governing the production of pharmaceutical products. The Company intends to operate its facilities or to arrange for the manufacture of products at facilities which are operated, as required, in accordance with cGMP where necessary; however, no assurance can be provided that such manufacture will successfully comply with cGMPs. In addition, the FDA also regulates promotion, marketing and distribution of drug products, and inspects drug manufacturers to evaluate compliance with regulatory requirements. Among other things, the FDA evaluates truthfulness and accuracy of materials submitted to it, or otherwise prepared by a drug manufacturer, and may take legal or regulatory action against companies or their products if such materials contain any untrue statement of a material fact. Before the Company's products can be marketed outside of the United States, they are subject to regulatory approval similar to that required in the United States, although the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. No action can be taken to market any product in a country until an appropriate application has been approved by the regulatory authorities in that country. The current approval process varies from country to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be approved. The pricing review period often begins after market approval is granted. No assurance can be given that, even if a product is approved by a regulatory authority, satisfactory prices will be approved for such product. No assurance can be provided that the Company's INDs or NDAs will be successfully reviewed by the FDA, or that similar applications will be successfully reviewed by foreign regulatory authorities. Further, the FDA and foreign authorities may at any time take legal or regulatory action against a product or the Company if it concludes that cti has not complied with applicable laws and regulations or that earlier evaluations of a product's safety or effectiveness may not have been adequate or appropriate. Such action may include, but is not limited to, restrictions on manufacture and shipment of products, seizure of products, injunctions and civil and criminal penalties. The FDA's policies may change and additional government regulations may be promulgated which could prevent or delay regulatory approval of the Company's potential products. Moreover, increased attention to the containment of health care costs in the United States and in foreign markets could result in new government regulations which could have a material adverse effect on the Company's business. The Company is unable to predict the likelihood of adverse governmental regulation which might arise from future legislative or administrative action, either in the United States or abroad. 40 Third Party Reimbursement and Health Care Reform The commercial success of the Company's products under development will be substantially dependent upon the availability of government or private third- party reimbursement for the use of such products. There can be no assurance that Medicare, Medicaid, health maintenance organizations and other third-party payors will authorize or otherwise budget such reimbursement. Such governmental and third party payors are increasingly challenging the prices charged for medical products and services. If the Company succeeds in bringing one or more products to market, there can be no assurance that such products will be viewed as cost-effective or that reimbursement will be available to consumers or will be sufficient to allow the Company's products to be marketed on a competitive basis. Furthermore, federal and state regulations govern or influence the reimbursement to health care providers of fees and capital equipment costs in connection with medical treatment of certain patients. In response to concerns about the rising costs of advanced medical technologies, the current administration of the federal government has publicly stated its desire to reform health care, including the possibility of price controls and revised reimbursement policies. There can be no assurance that actions taken by the administration, if any, with regard to health care reform will not have a material adverse effect on the Company. If any actions are taken by the administration, such actions could adversely affect the prospects for future sales of the Company's products. Further, to the extent that these or other proposals or reforms have a material adverse effect on the Company's ability to secure funding for its development or on the business, financial condition and profitability of other companies that are prospective collaborators for certain of the Company's product candidates, the Company's ability to develop or commercialize its product candidates may be adversely affected. See "Risk Factors--Uncertainty of Pharmaceutical Pricing and Reimbursement." Given recent government initiatives directed at lowering the total cost of health care throughout the United States, it is likely that the United States Congress and state legislatures will continue to focus on health care reform and the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. The Company cannot predict the likelihood of passage of federal and state legislation related to health care reform or lowering pharmaceutical costs. In certain foreign markets pricing of prescription pharmaceuticals is already subject to government control. Continued significant changes in the nation's health care system could have a material adverse effect on the Company's business. Environmental Regulation In connection with its research and development activities and its manufacturing materials and products, the Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, and wastes. Although the Company believes that it has complied with these laws, regulations and policies in all material respects and has not been required to take any significant action to correct any noncompliance, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. The Company's research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. See "Risk Factors--Use of Hazardous Materials." FACILITIES The Company leases approximately 65,000 square feet of space at 201 Elliott Avenue West in Seattle, Washington for its executive office, laboratory and administrative operations. The lease expires January 31, 2003, with two consecutive five-year renewal options at the then prevailing market rent. The Company's existing and planned facilities are believed to be adequate to meet its present requirements, and the Company currently believes that suitable additional space will be available to it, when needed, on commercially reasonable terms. See "--Manufacturing." 41 LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. HUMAN RESOURCES As of January 1, 1997 cti employed 106 individuals full-time (including 35 holding doctoral or other advanced degrees). In recruiting additional staff members, cti expects to receive continued input from its consultants and members of its Scientific Advisory Board and Clinical Advisory Board. The Company's policy is to have each employee and consultant enter into an agreement which contains provisions prohibiting the disclosure of confidential information to anyone outside cti and requires disclosure to cti of ideas, developments, discoveries or inventions conceived during employment and assignment to cti of proprietary rights to such matters related to the business and technology of cti. The extent to which this policy will effectively protect cti's proprietary technology and trade secrets is unknown. See "--Patents and Proprietary Rights." The Company has assembled a Scientific Advisory Board ("SAB") composed of leaders in the fields of immunology, cell and molecular biology, and synthetic and medicinal chemistry, and a Clinical Advisory Board ("CAB") composed of leaders in the fields of hematology, oncology, immunology, cell and molecular biology, critical care and medicinal chemistry. The SAB assists cti in identifying scientific and product development opportunities, in reviewing with management the progress of cti's specific projects, and in recruiting and evaluating cti's scientific staff. The CAB assists cti in determining clinical regulatory strategy and trial results and identifying optimal indications for cti's products. Although cti expects to receive guidance from the members of its SAB and CAB, all of such members are employed on a full-time basis by others and, accordingly, are not likely to devote more than a small portion of their time to cti. See "Management--Scientific Advisory Board," and "Management--Clinical Advisory Board." 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the directors and executive officers of cti as of January 31, 1997:
NAME AGE POSITION ---- --- -------- Max E. Link, Ph.D.(1)............. 56 Chairman of the Board of Directors James A. Bianco, M.D.(1).......... 40 President, Chief Executive Officer and Director Jack W. Singer, M.D............... 54 Executive Vice President, Research Program Chairman and Director Louis A. Bianco................... 44 Executive Vice President, Finance and Administration Maurice J. Schwarz, Ph.D.......... 57 Executive Vice President, Product Development Robert A. Lewis, M.D. ............ 51 Executive Vice President, Chief Scientific Officer Susan O. Moore.................... 48 Executive Vice President, Human Resource Development Jack M. Anthony................... 50 Executive Vice President, Marketing and Business Development Dalton W. Weekley................. 54 Managing Director, Project Planning and Controls Jack L. Bowman(2)................. 64 Director Jeremy L. Curnock Cook(1)(2)...... 47 Director Wilfred E. Jaeger, M.D.(2)(3)..... 41 Director David W. Martin, Jr., M.D......... 56 Director Terrence M. Morris(2)(3).......... 49 Director Phillip M. Nudelman, Ph.D.(1)(3).. 61 Director
- -------- (1)Member of the Executive Committee. (2)Member of the Compensation Committee. (3)Member of the Audit Committee. Dr. Link joined the Board of Directors in July 1995 as its Vice Chairman and has served as Chairman of the Board of Directors since January 1996. In addition, Dr. Link has held a number of executive positions with pharmaceutical and healthcare companies. Most recently, he served as Chief Executive Officer of Corange, Limited, from May 1993 until June 1994. Prior to joining Corange, Limited, Dr. Link served in a number of positions within Sandoz Pharma Ltd., including Chief Executive Officer, from 1990 until April 1992, and Chairman, from April 1992 until May 1993. Dr. Link currently serves on the boards of directors of Alexion Pharmaceuticals, Inc., Human Genome Sciences, Inc., Procept, Inc. and Protein Design Labs, Inc. Dr. Link received his Ph.D. in Economics from the University of St. Gallen. Dr. Bianco is the principal founder of cti and has been cti's President and Chief Executive Officer since February 1992 and a Director of cti since the Company's inception in September 1991. Prior to joining cti, Dr. Bianco was an Assistant Professor of Medicine at the University of Washington, Seattle, and an Assistant Member in the clinical research division of the Fred Hutchinson Cancer Research Center ("FHCRC"), the world's largest bone marrow transplant center. From 1990 to 1992, Dr. Bianco was the director of the Bone Marrow Transplant Program at the Veterans Administration Medical Center in Seattle. Dr. Bianco received his B.S. degree in Biology and Physics from New York University and his M.D. from Mount Sinai School of Medicine. Dr. Singer is a founder and Director of cti and currently serves as cti's Executive Vice President, Research Program Chairman. He has been a Director of cti since the Company's inception in September 1991. From April 1992 to July 1995, Dr. Singer was cti's Executive Vice President, Research and Development. Prior to joining cti, Dr. Singer was Professor of Medicine at the University of Washington and full Member of the FHCRC. From 1975 to 1992, he was the Chief of Medical Oncology at the Veterans Administration Medical Center in Seattle. In addition, from 1978 to 1992, he served as director for the National Transplant Board for the Veterans Administration. Dr. Singer has authored approximately 220 scientific publications in the areas of cell biology, 43 hematopoiesis and BMT. Prior to joining cti, he headed the Growth Factor Research Program at the FHCRC. Dr. Singer received his B.A. degree in Mathematics from Columbia College and his M.D. from State University of New York, Downstate Medical College. His clinical training was performed at the University of Chicago and at the University of Washington. Mr. Bianco is a founder of cti and has been cti's Executive Vice President, Finance and Administration since February 1, 1992, and a Director of cti from the Company's inception in September 1991 to April 1992 and from April 1993 to April 1995. From January 1989 through January 1992, Mr. Bianco was a Vice President at Deutsche Bank Capital Corporation in charge of risk management. Mr. Bianco is a Certified Public Accountant and received his M.B.A. from New York University. Dr. Schwarz has been cti's Executive Vice President, Product Development since May 1994. Dr. Schwarz held a variety of product development positions at Ciba-Geigy for 26 years prior to joining cti, most recently as Vice President of Pharmaceutical and Analytical Development and Chairman of the Development Operations Board at Ciba-Geigy Pharmaceuticals Division. Dr. Schwarz received his B.A. and Ph.D. degrees in chemistry from the University of Oregon. Dr. Lewis has been cti's Executive Vice President, Chief Scientific Officer since April 1996. Prior to joining cti, from September 1994 to May 1995, he was Senior Vice President and Director, Preclinical Research and Development at Syntex-Roche. From February 1992 to September 1994 he was President, Discovery Research at Syntex. From February 1986 to February 1992, he held various Senior and Executive Vice Presidential offices at Syntex. While at Syntex, he held associate professorships at Stanford University and at the University of California, San Francisco, where he also held an adjunct professorship from 1992 to 1994. Prior to joining Syntex, Dr. Lewis was Associate Professor of Medicine at Harvard Medical School. Dr. Lewis received his M.D. from the University of Rochester and B.S. degree in chemistry from Yale University. Ms. Moore has been cti's Executive Vice President, Human Resource Development since July 1995. From March 1993 to July 1995, Ms. Moore was cti's Vice President of Human Resources. Prior to joining cti, Ms. Moore was self- employed as a compensation consultant. From 1991 to December 1992, Ms. Moore was the Director of Human Resources of ICOS Corporation, a biotechnology company. Mr. Anthony has been cti's Executive Vice President, Marketing and Business Development since January 1997. From April 1996 to January 1997 he was cti's Vice President of Marketing and Business Development. Prior to joining cti, Mr. Anthony was Vice President of Marketing and Business Development at Inhale Therapeutic Systems, a drug delivery company, from October 1994 to April 1996. From August 1989 to October 1994 he was Vice President of Marketing and Business Development and of Applied Immune Sciences (AIS), a cell and gene therapy concern. From 1973 to 1989 Mr. Anthony held various executive management positions at Baxter Healthcare Corporation lastly as Vice President, Blood Therapy Group. Mr. Weekley has been cti's Managing Director, Project Planning and Controls since July 1995. From April 1994 to July 1995, Mr. Weekley was cti's Director of Planning Support Services. Prior to joining cti, he was an Executive Director/Senior Consultant of Milestone Computing, Inc., a management consulting firm. Mr. Bowman has been a Director of cti since April 1995. From 1987 until January 1994, Mr. Bowman was a company group chairman at Johnson & Johnson, having primary responsibility for a group of companies in the diagnostic, blood glucose monitoring and pharmaceutical businesses. From 1980 to 1987, Mr. Bowman held various positions at American Cyanamid Company, most recently as Executive Vice President. Mr. Bowman was a member of the Board of Trustees of The Johns Hopkins University and serves on the Board of Directors of NeoRx Corporation, CytRx Corporation, PharmaGenics, Inc. and Cellegy Pharmaceuticals, Inc. Mr. Curnock Cook has been a Director of cti since March 1995. He has been Head of the Rothschild Bioscience Unit and a director of Rothschild Asset Management Limited since 1987. He is a director of several British companies, including The International Biotechnology Trust, plc, Biocompatibles International, plc, Therexsys, Ltd. and Vanguard Medica Group, plc. He also serves on the Boards of Directors of Creative Biomolecules, Inc., Targeted Genetics, Corp., Sugen Inc. and Ribozyme Pharmaceuticals, Inc. in the United States. 44 Dr. Jaeger has been a Director of cti since September 1992. He is a founding general partner of Three Arch Partners, a venture capital firm which focuses on health care investments. Prior to joining Three Arch Partners in 1993, he was a partner at Schroder Venture Advisers (presently named Collinson Howe Venture Partners) and The Phoenix Partners. Dr. Jaeger received his M.D. from the University of British Columbia in Vancouver, B.C., Canada, in 1981. He practiced medicine for six years before earning an M.B.A. from Stanford University. Dr. Jaeger is also a director of Intensiva Healthcare Corporation and several privately held companies. Dr. Martin has been a Director of cti since July 1995. From April 1995 to November 1996, he was President and a director, and from January 1996 to November 1996 he was also Chief Executive Officer, of Lynx Therapeutics, Inc. From January 1994 to April 1995, he was President of Chiron Therapeutics and a Senior Vice President of Chiron Corporation. From 1991 through 1993, he was an Executive Vice President of the DuPont Merck Pharmaceutical Company. From 1982 to 1990, Dr. Martin held various positions at Genentech, Inc., most recently as Senior Vice President Research and Development. He is currently a director of Varian Associates, Inc. Mr. Morris has been a Director of cti since July 1995. He is the Chief Executive Officer of T. Morris & Company (d/b/a Morningside Ventures), which coordinates and manages a private venture capital portfolio for Kummell Investments Limited, an international investment concern based in Hong Kong. Mr. Morris has served as Chief Executive Officer of Morningside Ventures since 1991. His previous positions include product line manager at Baxter Healthcare and strategy consultant with the Boston Consulting Group. Mr. Morris is a director of several privately held companies. Dr. Nudelman has been a Director of cti since March 1994. Since 1990 he has been the President and Chief Executive Officer of Group Health Cooperative of Puget Sound, a health maintenance organization. Dr. Nudelman received his B.S. degree in Microbiology, Zoology and Pharmacy from the University of Washington, and holds an M.B.A. and a Ph.D. in Health Systems Management from Pacific Western University. Dr. Nudelman is a member of the American Hospital Association House of Delegates, Regional Policy Board, and chairs the Governing Counsel for Health Care Systems. Dr. Nudelman serves on the Boards of Directors of Advanced Technology Laboratories, Inc., SpaceLabs Medical, Inc., Cytran Ltd. and Intensiva Healthcare Corporation. The Board of Directors of cti is divided into three approximately equal classes of Directors serving staggered three-year terms and until their successors are elected and qualified. As a result, approximately one-third of the total number of Directors will be elected every year. The current terms of Drs. Bianco, Singer and Jaeger expire in 1997, the current terms of Dr. Nudelman and Mr. Bowman expire in 1998, the current term of Mr. Curnock Cook expires in 1998 or, if earlier, the first annual meeting following the conversion of the Series A Convertible Preferred Stock in accordance with its terms, and the current terms of Drs. Link and Martin and Mr. Morris expire in 1999. Executive Officers of cti serve at the discretion of the Board of Directors. Under cti's Bylaws, the number of Directors constituting the entire Board of Directors may be decreased or increased by majority action of either the Board of Directors or the shareholders, but no decrease in the number of Directors may have the effect of shortening the term of any incumbent Director. Currently, the Board of Directors has fixed the number of Directors at nine. James A. Bianco and Louis A. Bianco are brothers. Mr. Curnock Cook was elected as a Director by the holders of the Series A Convertible Preferred Stock, who are entitled to vote as a separate class to elect one Director to the Board of Directors. See "Certain Transactions." SCIENTIFIC ADVISORY BOARD The Company has a Scientific Advisory Board and plans to make arrangements from time to time with other scientists to work with cti's management and the Scientific Advisory Board. The Scientific Advisory Board is chaired by Dr. Michael R. Hanley. Scientific Advisory Board members are expected to meet as a board with management and key scientific employees of cti on a semi-annual basis and in smaller groups or individually from time to time on an informal basis. The Scientific Advisory Board members assist cti in identifying scientific and product development opportunities, in reviewing with management the progress of cti's specific projects, and in recruiting and evaluating cti's scientific staff. Members of cti's Scientific Advisory Board are leaders in the fields of immunology, cell and molecular biology, and synthetic and medicinal chemistry. 45 Current Members of cti's Scientific Advisory Board include: Michael R. Hanley, Ph.D. is the Chairman of cti's Scientific Advisory Board. He is a Professor, Department of Biological Chemistry, at the University of California, Davis School of Medicine. He is a noted authority in cell communication processes and proto-oncogenes, as well as an expert in phosopholipid signaling mechanisms in the central nervous system focusing on regulation of neurotransmitter receptors. Dr. Hanley has authored over 80 manuscripts and has served as an editorial member for several journals, including Molecular and Cellular Neurobiology and Nature. Irwin M. Arias, M.D. is a Professor and Chairman of the Department of Physiology at Tufts University School of Medicine. He is a noted authority in the physiology of multidrug resistance proteins. He is the recipient of numerous awards and honors. Bruce Beutler, M.D. is an Associate Professor of Medicine at the University of Texas Southwestern Medical Center and an Associate Investigator at the Howard Hughes Medical Institute. He is internationally recognized for his work on Tumor Necrosis Factor ("TNF") and has authored over 95 manuscripts, reviews and books on TNF, its characterization, signaling, mechanisms of action and activity in a variety of preclinical and clinical settings. Dr. Beutler serves as the President of the International Congress on TNF and Related Cytokines and Consulting editor for Journal of Clinical Investigation. Edward A. Dennis, Ph.D. is the Vice Chair of Medical Biochemistry at the University of California, San Diego. He is a noted authority on phospholipases, cell signaling, and phospholipid metabolism. Dr. Dennis serves on the Scientific Advisory Board and Management Committee of, and chairs the Management Executive Board of, the Keystone Symposia. He sits on the Editorial Board of the Journal of Cellular Biochemistry and on the Publications Committee of the American Society for Biochemistry and Molecular Biology. He has authored over 185 manuscripts. Edwin Krebs, M.D. is a Professor Emeritus, Department of Pharmacology and Biochemistry, at the University of Washington in Seattle and a Senior Investigator Emeritus at the Howard Hughes Medical Institute. He is a recognized authority on the mechanisms of action of second messengers, including protein kinases and phosphorylation reactions. He is the recipient of numerous awards and honors and has authored 297 manuscripts. In 1992, Dr. Krebs was awarded the Nobel Prize in Physiology of Medicine for his work on second messenger pathways. Wouter H. Moolenaar, Ph.D. is the Head of the Division of Cellular Biochemistry at the Netherlands Cancer Institute. He is an expert in phospholipid signal transduction, focusing on their role in responses to growth factors and in cell differentiation. He has authored over 60 manuscripts and several chapters pertaining to the role of phosphatidic acid in cell signaling. Klaus Resch, M.D. is a noted authority in membrane phospholipid biochemistry, their role in immune system activation and inflammation. He is a Professor and the Head of the Institute for Molecular Pharmacology of the Hanover Medical School, Medizinische Hochschule Hannover, and a former Vice President of the German Society for Pharmacology and Toxicology. He has authored over 250 scientific publications. The Company has entered into consulting agreements with each member of the Scientific Advisory Board. These agreements generally have a three-year term and may be terminated by either party upon 30 days' written notice. These agreements also generally restrict the consultant from competing with cti during the term of the agreement. These agreements contain provisions prohibiting the disclosure of confidential information to anyone outside of cti and require disclosure to cti of ideas, developments, discoveries or inventions conceived during consulting and assignment to cti of proprietary rights to such matters related to the business and technology of cti. Each consultant is required to serve on cti's Scientific Advisory Board and provide such other consulting services as cti may reasonably request. Each Scientific Advisory Board member is paid an annual fee and is granted an option to purchase Common Stock. 46 CLINICAL ADVISORY BOARD The Company has a Clinical Advisory Board which meets with cti's management and the Scientific Advisory Board not less than three times per year and in smaller groups or individually from time to time on an informal basis. The Clinical Advisory Board members assist cti in determining its clinical regulatory strategy and trial results and identifying optimal indications for its products. Members of cti's Clinical Advisory Board are leaders in the fields of hematology, oncology, immunology, cell and molecular biology, critical care and medicinal chemistry. Current members of cti's Clinical Advisory Board include: E. Donnall Thomas, M.D. is the Chairman of cti's Clinical Advisory Board. He is the former Associate Director of Clinical Research and presently a Professor Emeritus at the FHCRC. Dr. Thomas was a founding Member of the FHCRC. His research has spanned a wide array of fields from radiation biology to developmental immunology, and from cancer causing genes to gene transfer therapies. For his pioneering work in BMT, Dr. Thomas was awarded the Nobel Prize for Medicine in 1990. His work demonstrated the feasibility and clinical effectiveness of marrow transplant therapy, and he has contributed to the training of a significant majority of the physicians now performing BMTs worldwide. Among the other honors awarded to Dr. Thomas in recognition of his medical research are the American Cancer Society Award for Distinguished Service in Basic Research and the Kettering Prize of the General Motors Cancer Research Foundation. He is a member of the U.S. National Academy of Sciences. Karen H. Antman, M.D. is the Chief of the Division of Medical Oncology, College of Physicians & Surgeons of Columbia University. Dr. Antman is an expert in emerging treatment strategies for solid tumors, notably breast cancer and sarcomas. From 1994 to 1995 she served as President of the American Society of Clinical Oncology (ASCO). Since 1993 Dr. Antman has served on the Sarcoma Committee of the Southwest Oncology Group, and has been its chairperson since 1995. From 1993 to 1994 she was program committee chair of the American Association for Cancer Research (AACR). She is on the editorial board of several prestigious journals, including Associate Editor of The New England Journal of Medicine. She has authored over 100 manuscripts and textbooks. Frederick Appelbaum, M.D. is the Director of Clinical Research and Senior Vice President of the FHCRC. He is a recognized authority in the treatment of patients with leukemia and lymphoma. He serves on several editorial boards and national committees, including the FDA Advisory Committee on Biologics; is Chairman of the Southwest Oncology Group Leukemia Committee; and serves on the Board of Directors of the American Society for Blood and Marrow Transplantation. He has authored more than 450 manuscripts. H. Franklin Bunn, M.D. is the Director of the Hematology Division of the Brigham and Women's Hospital and Professor of Medicine at Harvard Medical School. His research interest focuses on blood cell production and regulation. He is the recipient of numerous awards and honors and is Chairman of the Advisory Committee of the American Society of Hematology. O. Michael Colvin, M.D. is the Director of the Duke Comprehensive Cancer Center at Duke University Medical Center. Dr. Colvin is an expert in therapeutic drug modeling and rational drug design. His work led to the discovery of several chemotherapeutic agents. He was previously Chief of the Division of Pharmacology and Experimental Therapeutics at The Johns Hopkins Oncology Center. He has authored over 100 manuscripts. Milo Gibaldi, Ph.D. is the Gibaldi Endowed Professor of Pharmaceutics of the School of Pharmacy at the University of Washington, with past faculty appointments at Columbia University and the State University of New York at Buffalo. His expertise in drug metabolism has led to consultantships with such pharmaceutical firms as Hoffman-LaRoche, Ciba-Geigy and Glaxo. Dr. Gibaldi has also served on the U.S. Food and Drug Administration's Panel on Generic Drugs. His research has focused on gastrointestinal absorption of drugs and the development of stable formulations for therapeutic compounds. 47 William P. Peters, M.D., Ph.D. is a Director of the Meyer L. Prentis Comprehensive Cancer Center of Metropolitan Detroit and the President and Chief Executive Officer of the Karmanos Cancer Institute. He is a recognized leader in the use of dose-intensive chemotherapy regimens with peripheral blood stem cell support as a cost-effective approach to the treatment of cancer. He has published extensively and is the recipient of many honors and awards, among them the American Cancer Society Clinical Fellowship Award and the R. Wayne Rundles Award for Excellence in Cancer Research. Thomas A. Raffin, M.D. is the Chief of the Division of Pulmonary and Critical Care Medicine of the Stanford University Medical Center. He is a recognized authority on mechanisms of ALI, MOF and Systemic Inflammatory Response Syndrome ("SIRS") among critically ill patients. He serves on numerous editorial boards and societies, including the Editorial Board of Chest and Critical Care Medicine, the American Thoracic Society and the Society of Critical Care Medicine. He has authored more than 175 manuscripts and 60 chapters. Merle A. Sande, M.D. is a Professor and the Chairman of the Department of Medicine at the University of Utah, School of Internal Medicine. He is a noted authority in infectious disease and serves on the editorial boards of several journals, including Journal of Infectious Disease and Infection and Immunity. He is a member of the AIDS Task Force and is the Chairman of the AIDS Subcommittee of the Infectious Disease Society of America. Thomas E. Starzl, M.D., Ph.D. is the Director of the Transplantation Institute of the University of Pittsburgh. He is a noted expert in the field of immunology and solid organ transplantation. He is the recipient of numerous awards and was founding President of several prestigious societies, including the American Society of Transplant Surgeons. He has authored approximately 1,400 manuscripts and more than 160 book chapters. The Company has entered into consulting agreements with each member of the Clinical Advisory Board. These agreements generally have a three-year term and may be terminated by either party upon 30 days' written notice. These agreements also generally restrict the consultant from competing with cti during the term of the agreement. These agreements contain provisions prohibiting the disclosure of confidential information to anyone outside of cti and require disclosure to cti of ideas, developments, discoveries or inventions conceived during consulting and assignment to cti of proprietary rights to such matters related to the business and technology of cti. Each consultant is required to serve on cti's Clinical Advisory Board and provide such other consulting services as cti may reasonably request. Each Clinical Advisory Board Member is paid an annual fee and is granted an option to purchase Common Stock. 48 EXECUTIVE COMPENSATION The following table sets forth all compensation paid for the years ended December 31, 1995 and 1996 to the Company's Chief Executive Officer and the four other most highly compensated executive officers who were serving as executive officers at December 31, 1996 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS(1) ---------------------------------- ------------ OTHER SECURITIES ALL ANNUAL UNDERLYING OTHER NAME AND COMPEN- OPTIONS/ COMPEN- PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($)(2) SARS (#) SATION ($) - ------------------ ---- ---------- --------- ------------- ------------ ---------- James A. Bianco, M.D............ 1996 358,032 27,475 -- 85,714 72,223(4) President and Chief 1995 315,984 -- -- 137,955(3) 7,402(5) Executive Officer Jack W. Singer, M.D. ........... 1996 248,976 -- -- 28,571 10,524(5) Executive Vice President, 1995 248,976 -- -- 20,957(3) 9,762(5) Research Program Chairman Louis A. Bianco................. 1996 263,088 10,000 -- 21,428 55,367(4) Executive Vice President, 1995 232,195 -- -- 55,098(3) 6,772(5) Finance and Administration Maurice J. Schwarz, Ph.D........ 1996 187,500 12,936 -- 28,571 65,619(6) Executive Vice President, 1995 187,500 -- 8,200(6) 28,571(3) 45,802(6) Product Development Robert A. Lewis, M.D............ 1996(7) 181,512 -- 6,964(7) 67,142 26,144(7) Executive Vice President, Chief Scientific Officer
- -------- (1) The Company did not make any long-term incentive plan payments to any of the Named Executive Officers in 1995 and 1996. (2) Other annual compensation in the form of perquisites and other personal benefits has been omitted where the aggregate amount of such perquisites and other personal benefits constituted the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer for the applicable year. (3) In April 1995, the Board of Directors approved the repricing of outstanding options to $11.725 per share by exchanging such outstanding options for a fewer number of options pursuant to a Black-Scholes formula. All other terms and conditions of the options remained unchanged. Grants for the year ended December 31, 1995 include options which were initially granted in prior years and have been repriced and exchanged for a fewer number of options in 1995 as follows: Dr. Bianco, 64,285 options were repriced and exchanged for 57,857 options; Dr. Singer, 14,285 options were repriced and exchanged for 12,857 options; Mr. Bianco, 42,857 options were repriced and exchanged for 36,428 options; and Dr. Schwarz, 21,428 options were repriced and exchanged for 17,142 options. (4) All other compensation represents payment of unused sick leave for Dr. Bianco and Mr. Bianco accrued during 1992, 1993 and 1994, pursuant to the terms of their employment agreements then in effect, aggregating $64,526 and $47,415, respectively, and reimbursement for long-term disability insurance premiums of $7,697 and $7,952, respectively. (5) Represents reimbursement for long-term disability insurance premiums. (6) All other compensation includes the amount of loan principal and interest forgiven in 1995 and 1996 of $42,210 and $60,789, respectively, in connection with Dr. Schwarz's relocation to the Seattle area and $3,592 and $4,830 of relocation expenses which were reimbursed in 1995 and 1996, respectively. Other annual compensation represents amounts reimbursed for the payment of income taxes on the reimbursement of Dr. Schwarz's relocation expenses in 1994. See "Employment Agreements." (7) Includes compensation for employment beginning on April 1, 1996, the date on which Dr. Lewis joined the Company as Executive Vice President, Chief Scientific Officer. All other compensation represents reimbursement of relocation expenses. Other annual compensation represents amounts reimbursed for the payment of income taxes on the reimbursement of Dr. Lewis' relocation expenses. 49 The following table sets forth for each of the Named Executive Officers the number of options granted during the year ended December 31, 1996 and the potential realizable value of such grants: OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS -------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES SECURITIES OPTIONS OF STOCK PRICE UNDER- GRANTED TO APPRECIATION FOR LYING EMPLOYEES EXERCISE OPTION TERM(3) OPTIONS IN FISCAL PRICE EXPIRATION --------------------- NAME GRANTED (1) YEAR (%) ($/SH) (2) DATE 5% ($) 10% ($) - ---- ----------- ---------- ---------- ---------- --------- ----------- James A. Bianco, M.D.... 85,714 16.9% $11.725 11/19/06 $ 632,141 $ 1,601,995 Jack W. Singer, M.D..... 28,571 5.6% 11.725 11/07/06 210,711 533,992 Louis A. Bianco......... 21,428 4.2% 11.725 11/07/06 158,032 400,489 Maurice J. Schwarz, Ph.D................... 28,571 5.6% 11.725 11/07/06 210,711 533,992 Robert A. Lewis, M.D.... 2,857 * 11.725 03/29/06 21,070 53,397 42,857 8.5% 11.725 04/01/06 316,070 800,997 21,428 4.2% 11.725 11/07/06 158,032 400,489
- -------- * Less than one percent. (1) Options were granted under the 1994 Equity Incentive Plan (the "1994 Plan"). (2) Stock options were granted at an exercise price equal to 100% of the estimated fair value of the Company's Common Stock, as determined by the Board of Directors on the date of grant. (3) Potential realizable value is based on the assumption that the Common Stock appreciates at the annual rates shown (compounded annually) from the date of grant until the expiration of the option term. These assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. There can be no assurance that any of the values reflected in this table will be achieved. The following table sets forth for each of the Named Executive Officers, the fiscal year-end number and value of unexercised options. No options were exercised by any of the Named Executive Officers during 1996. AGGREGATED OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY OPTIONS UNEXERCISED OPTIONS AT AT FISCAL YEAR-END FISCAL YEAR-END (#) 1996 ($)(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- James A. Bianco, M.D.... 85,574 138,095 $ 0 $ 0 Jack W. Singer, M.D..... 16,195 33,333 0 0 Louis A. Bianco......... 43,669 32,857 0 0 Maurice J. Schwarz, Ph.D................... 15,238 41,904 0 0 Robert A. Lewis, M.D.... 2,857 64,285 0 0
- -------- (1) Based on the estimated fair value of the underlying securities at December 31, 1996, the fiscal year end, no options were "in-the-money." COMPENSATION OF DIRECTORS Directors who are also employees of the Company are not paid an annual retainer nor compensated for serving on the Board. Non-employee Directors are paid $2,000 per meeting of the Board or committees, up to a maximum of $10,000 per Director each calendar year. All Directors are reimbursed for their expenses incurred in attending Board meetings. In addition, each non-employee Director is entitled to certain automatic option grants under the 1994 Plan. See "--Stock Option Plans." 50 In December 1996 the Board approved the grant to each non-employee Director of a 10-year, fully vested nonstatutory stock option to purchase 14,285 shares of Common Stock, other than Dr. Link, who was granted an option to purchase 28,570 shares of Common Stock. Such option grants will not be effective until approved by the shareholders at the 1997 Annual Meeting of Shareholders. The exercise price of such options is $11.725. The Board also formally eliminated a $10,000 annual cash retainer for non-employee directors which had been previous company policy. See Note 9 of Notes to Consolidated Financial Statements. EMPLOYMENT AGREEMENTS Dr. Bianco, President and Chief Executive Officer, entered into an employment agreement with cti, effective December 17, 1996 which agreement will expire on December 31, 1999. The agreement provides that Dr. Bianco would receive a base salary at an annual rate of $393,835 in 1997 or such greater amount as the Board of Directors shall determine. The agreement provides that, in the event that cti terminates Dr. Bianco's employment without cause or Dr. Bianco terminates his employment for cause, cti shall, at such time, pay Dr. Bianco an amount equal to twenty-four months' base salary, all of Dr. Bianco's stock options in cti shall immediately become vested and cti shall continue to provide certain benefits through the term of the agreement. The agreement also provides for the forgiveness over the term of the agreement of certain indebtedness of Dr. Bianco to cti. See "Certain Transactions." In addition, the agreement provides that Dr. Bianco is entitled to four weeks of paid vacation per year and that any unused vacation time shall be paid in cash upon the termination of Dr. Bianco's employment for any reason or at such earlier time as required to avoid forfeiture of accrued but unused vacation time. The employment agreement restricts Dr. Bianco from competing with cti for the term of the agreement and for two years after termination of his employment with cti, unless cti shall have terminated Dr. Bianco's employment without cause or Dr. Bianco shall have terminated his employment for cause. The agreement also provides that, in the event a "Change in Ownership" (as defined in Dr. Bianco's employment contract) occurs, then all stock options of Dr. Bianco shall immediately become vested. Mr. Bianco, Executive Vice President, Finance and Administration, entered into a three-year employment agreement with cti, effective February 1, 1992, which agreement was extended for an additional three-year period to expire on January 31, 1998 by a letter agreement dated May 27, 1994. Effective January 1, 1997, cti's Board of Directors increased Mr. Bianco's annual base salary to $298,080. His employment agreement provides that this base salary is subject to annual increases in proportion to increases in the CPI, plus 10% of the CPI-adjusted annual base salary, or such greater amount as the Board of Directors shall determine. The agreement provides that, in the event that cti terminates Mr. Bianco's employment without cause or Mr. Bianco terminates his employment for cause, cti shall, at such time, pay Mr. Bianco an amount equal to the total base salary otherwise payable through the expiration of the term of the agreement or six months' base salary, whichever is greater, and shall continue to provide certain benefits through the term of the agreement. The agreement also provides that Mr. Bianco is entitled to four weeks of paid vacation per year and that any unused vacation time and sick leave shall be paid in cash upon the termination of Mr. Bianco's employment for any reason. Dr. Schwarz, Executive Vice President, Product Development, entered into a two-year employment agreement with cti effective May 2, 1994, which is renewable automatically for successive one-year terms subject to certain termination provisions contained in the agreement. The agreement provides that Dr. Schwarz initially would receive an annual base salary of $187,500, subject to periodic increases based on performance. In the event cti terminates Dr. Schwarz's employment without cause, cti shall pay Dr. Schwarz such amounts owing for the remaining term of the agreement. The agreement further provides that in connection with his relocation, Dr. Schwarz be reimbursed for capital loss on the sale of his former residence in the form of a forgivable loan in an amount not to exceed $150,000. The loan shall be forgiven in three annual installments, subject to Dr. Schwarz's continued employment with cti, with any unforgiven portion becoming immediately due and payable within three months of any termination of Dr. Schwarz's employment. See "Certain Transactions." Dr. Lewis, Executive Vice President, Chief Scientific Officer, has a two- year severance agreement with cti, effective April 1, 1996. The agreement provides that, in the event that Dr. Lewis is terminated by cti without cause or that Dr. Lewis terminates his employment for good reason, cti shall continue to pay Dr. Lewis his monthly base 51 salary and benefits through the expiration of the term of the agreement. The inventions and proprietary information agreement restricts Dr. Lewis from competing with cti for two years after his termination of employment with cti. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the last completed fiscal year, the Compensation Committee consisted of Dr. Jaeger and Messrs. Curnock Cook and Bowman. None of these individuals was at any time during the last completed fiscal year, or at any other time, an officer or employee of the Company. In March 1995 The International Biotechnology Trust plc ("IBT"), which is an affiliate of Mr. Curnock Cook and Rothschild Asset Management Limited, purchased 22,388.061 shares of Convertible Preferred Stock for an aggregate purchase price of $7.5 million in the Company's 1995 Private Placement. The holders of the outstanding shares of Convertible Preferred Stock voting as a separate class are entitled to elect one Director to the Board of Directors. At the 1996 Annual Meeting of Shareholders Mr. Curnock Cook was elected as a Director by the holders of the outstanding shares of Convertible Preferred Stock voting as a separate class. In September 1996 IBT purchased an additional 14,925.373 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $5.0 million. See "Certain Transactions." STOCK OPTION PLANS In January 1994 the Board of Directors adopted, and in February 1994 the shareholders of the Company approved, the Company's 1994 Equity Incentive Plan (the "1994 Plan"). A total of 582,685 shares of Common Stock were initially reserved for issuance under the 1994 Plan and a predecessor plan, the Company's 1992 Stock Option Plan (the "1992 Plan"). In May 1995 and April 1996 the shareholders of the Company approved the adoption of amendments to the 1994 Plan to increase the aggregate number of shares authorized for issuance thereunder by 246,887 shares and 507,143 shares, respectively, bringing the total number of shares reserved under the 1994 Plan to 1,336,715 shares of Common Stock. As of December 31, 1996, 6,706 options have been exercised, 10- year options to purchase 1,208,608 shares were granted and outstanding, and options to purchase 121,401 shares of Common Stock remained available for future grants under the 1994 Plan. The 1994 Plan provides for (i) the grant of incentive stock options ("ISOs"), nonstatutory stock options ("NSOs") and stock appreciation rights ("SARs"), (ii) the award of stock bonuses (iii) the sale of stock, and (iv) any other equity-based or equity-related awards which the plan administrator determines to be consistent with the purpose of the 1994 Plan and the interests of the Company to employees (including officers) and independent consultants. The 1994 Plan also provides for the automatic grant of NSOs to non-employee Directors pursuant to the formula described below. The 1994 Plan supersedes the 1992 Plan, pursuant to which the Board of Directors was authorized to issue ISOs and NSOs upon terms and conditions similar to the 1994 Plan. Options granted under the 1992 Plan remain valid under the terms of the 1992 Plan. The number of shares available for future grants under the 1994 Plan will be increased by the number of shares for which options granted under the 1992 Plan expire, terminate or are canceled. The 1994 Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). The Committee determines the persons to whom awards will be made, the exercise or purchase price of each award, the number of shares to be covered by each option, the term of each option, the times at which each award may be exercised, and whether each option granted under the 1994 Plan is an ISO or a NSO. The exercise price of ISOs and NSOs granted by the Committee must be at least 100% of the fair market value of the underlying shares on the date of the grant, except that the exercise price of ISOs granted to an optionee holding more than 10% of the combined voting power of all classes of the Company's stock ("10% Shareholders") must be at least 110% of the fair market value of the underlying shares on the date of the grant. The Committee sets the vesting schedule for and the term of options granted under the 1994 Plan, subject to the limitations that (i) options granted to directors and officers of the Company may not be exercised within six months after the grant thereof, (ii) the term of ISOs may not exceed 10 years and (iii) the term of ISOs granted to 10% Shareholders may not exceed five years. The Committee may also advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction with respect to an award or give an employee an election to surrender an existing award in exchange for the grant of a new award. 52 Options granted under the 1994 Plan are nontransferable. In the event of the death or other termination of an optionee's employment with the Company, the 1994 Plan provides that the optionee's options may be exercised for a period of three months to one year thereafter. The 1994 Plan also provides that upon any termination of employment, the Committee may extend the exercise period for any period up to the expiration date of the option and may increase the portion of the option that is exercisable. The purchase price for shares of Common Stock purchased on exercise of options granted under the 1994 Plan must be paid in cash, including cash that may be the proceeds of a loan from the Company or, with the consent of the Committee, in whole or in part in shares of Common Stock of the Company. With the consent of the Committee, an optionee may request the Company to apply the shares to be received on exercise of a portion of an option to satisfy the exercise price for additional portions of the option. Under the 1994 Plan, each non-employee Director is automatically granted a 10-year, fully vested nonstatutory stock option to purchase 2,857 shares of Common Stock upon his or her election to the Board of Directors for the first time. In addition, each non-employee Director is automatically granted a 10- year, fully vested nonstatutory stock option to purchase 1,904 shares of Common Stock on each anniversary of his or her immediately preceding election to the Board of Directors. The exercise price of such options is 100% of the fair market value of the shares of Common Stock on the date of grant. The Committee may grant SARs either alone or in connection with a stock option. An SAR entitles the holder to payment from the Company of an amount equal to the excess, on the date of exercise, of the fair market value of one share over its fair market value on the date of grant (or, if granted in connection with an option, the exercise price per share under the option to which the SAR relates), multiplied by the number of shares covered by the portion of the SAR or option that is surrendered. The Committee may also award stock bonuses or issue shares for consideration subject to such terms, conditions and restrictions as the Committee may determine, including restrictions concerning transferability and forfeiture of the shares awarded. No cash consideration will be paid in connection with SARs and stock bonuses other than tax withholding amounts. Where shares are issued for consideration, such consideration may not be less than 75% of the fair market value of the shares on the date of issuance. The 1994 Plan provides for automatic acceleration of the vesting of options and SARs granted under the 1994 Plan if a merger, consolidation, reorganization, plan of exchange or liquidation results in the Company's shareholders receiving cash, stock or other property in exchange for their shares, except as specified below. Option holders will have the right during the 30-day period immediately prior to any such event to exercise their options or SARs without any limitation on exercisability. The 1994 Plan requires the purchase of options and SARs granted to officers or Directors following the expiration of the required six-month holding period. The 1994 Plan provides that, if the Company's shareholders receive stock of another corporation in exchange for shares of the Company in any merger, consolidation, reorganization or plan of exchange, all options granted under the 1994 Plan will be converted into options to purchase shares of the stock of the other corporation and all SARs will be converted into SARs measured by the stock of the other corporation. The 1994 Plan also allows the Committee to accelerate the vesting of the options and SARs granted under the 1994 Plan and to grant the option holders a 30 day period prior to such event to exercise their options or SARs, as provided above. The 1994 Plan also allows the Committee to accelerate the vesting of all options and SARs granted thereunder (including options and SARs granted to officers and Directors in the six months prior to such event) upon the occurrence of a "Change in Control." A "Change in Control" is defined as (a) the acquisition, directly or indirectly, by any individual, entity or group of beneficial ownership of securities representing 50.1% or more of either the then outstanding shares of Common Stock or the combined voting power in the election of Directors of then outstanding voting securities of the Company, (b) individuals who, as of the effective date of the 1994 Plan, constitute the Board of Directors (the "Incumbent Board") (including any individual whose subsequent election or nomination was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors or (c) approval by the shareholders of the Company of certain reorganizations, mergers or consolidations, or of certain liquidations, dissolutions or dispositions of all or substantially all of the assets of the Company. 53 The Committee may make awards under the 1994 Plan that have terms and conditions that vary from those specified in the 1994 Plan when such awards are granted in substitution for, or in connection with the assumption of, existing awards made by another corporation and assumed or otherwise agreed to be provided for by the Company in connection with a corporate merger or other similar transaction to which the Company or an affiliated company is a party. The Committee may also specify the terms and provisions of other equity-based or equity-related awards not described in the 1994 Plan which the Committee determines to be consistent with the purpose of the 1994 and the interests of the Company. The 1994 Plan may be amended by the Board of Directors at any time and will terminate on January 1, 2004 unless terminated earlier by the Board of Directors. No options may be granted after the termination of the 1994 Plan. However, options granted under the 1994 Plan will remain valid under the 1994 Plan until their respective expiration dates. As of December 31, 1996 the 10-year options to purchase 1,208,608 shares of Common Stock which are outstanding pursuant to the 1992 Plan and the 1994 Plan were granted to 144 employees (excluding executive officers), consultants and Directors, and generally vest in equal annual installments on the first three or four anniversaries of the date of grant. In April 1995 the Board of Directors approved the repricing of outstanding options to $11.725 per share by offering to exchange such outstanding options for a fewer number of options pursuant to a Black-Scholes formula. Subsequently, options for 434,664 shares, with initial exercise prices of $17.50 and $31.50 per share, were exchanged for 377,121 options with a price of $11.725 per share. All other terms and conditions of the options remained unchanged. EMPLOYEE STOCK PURCHASE PLAN In March 1996 the Board of Directors adopted, and in April 1996 the shareholders of the Company approved, the Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to encourage ownership of the Company's Common Stock by employees of the Company and to provide additional incentive for the employees to promote the success of the business of the Company. A maximum of 285,714 shares of Common Stock have been reserved for purchase under the Purchase Plan. As of December 31, 1996, no options to purchase shares of Common Stock have been granted and no shares of Common Stock have been purchased under the Purchase Plan. Employees of the Company or any of its subsidiaries who customarily work more than twenty hours per week and more than five months per calendar year, and who have been employed by the Company or any of its subsidiaries for at least one year may participate in the Purchase Plan. The Purchase Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). The Purchase Plan provides for the automatic grant of options to purchase shares of Common Stock ("Options"). The Options are granted on the first day of an offering period, which lasts approximately six months. Payroll deductions are accumulated in an account for each participant, based on the amounts specified by the participant in an enrollment form. At the end of the offering period, the participant's account balance is used to purchase shares of Common Stock pursuant to the Option. The purchase price of shares of Common Stock under an Option will equal 85% of the average of the fair market value of the shares at the beginning and at the end of the offering period. Options may not be assigned or transferred. No participant may purchase shares having a fair market value exceeding $25,000 in any calendar year. A participant may withdraw from an offering period at any time without affecting his or her eligibility to participate in future offering periods. There are no tax consequences to either the participant or the Company when the Option is issued. When shares are issued upon the exercise of the Option, there are no tax consequences to the participant (except to the extent any excess in the fair market value of the Common Stock over the exercise price constitutes a tax preference item which requires payment of the alternative minimum tax) or the Company. A participant's Option will terminate and his or her accumulated account balance will be returned if such participant ceases to be employed by the Company. 54 If a participant disposes of shares purchased under the Purchase Plan at least two years after the first day of the applicable offering period and at least one year after the date of purchase, the participants will recognize ordinary income in the year of disposition equal to the amount of the discount. The amount of ordinary income recognized by a participant will be added to the participant's basis in the shares. Any additional gain recognized upon the disposition will be long-term capital gain. The Company will not generally be entitled to a deduction if the participant complies with these holding periods. If a participant disposes of shares purchased under the Purchase Plan within two years from the first day of the applicable offering period or within one year from the date of purchase (a "disqualifying disposition"), the participant will recognize ordinary income in the year of such disposition equal to the amount by which the fair market value of the shares on the date the shares were purchased exceeded the purchase price. The amount of ordinary income will be added to the participant's basis in the shares, and any additional gain or resulting loss recognized on the disposition of the shares will be a capital gain or loss. The Company will be entitled to a deduction in the year of the disqualifying disposition equal to the amount of ordinary income recognized by the participant as a result of the disposition. The Purchase Plan provides that in the event of a "Change in Control," the Committee will either provide for the immediate exercise of the Options to the extent of accumulated payroll balances or provide for a successor to adopt the Purchase Plan. For purposes of the Purchase Plan, events constituting a "Change in Control" are (i) the direct or indirect sale or exchange by the shareholders of the Company of all or substantially all of the shares of Common Stock of the Company where the shareholders of the Company before the sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company, (ii) a merger in which the shareholders of the Company before such merger do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company or (iii) the sale, exchange or transfer of all or substantially all of the Company's assets. The Board of Directors may terminate or amend the Purchase Plan at any time. No termination of or amendment to the Purchase Plan may materially adversely affect the rights of a participant in the Purchase Plan without such participant's consent. In the event any change is made to the stock issuable under the Purchase Plan by reason of any stock split, stock dividend, combination of shares or recapitalization, appropriate adjustment will be made to the share reserve of the Purchase Plan and the number of shares that a participant may purchase with respect to an Option. 55 CERTAIN TRANSACTIONS In December 1993 cti loaned Dr. Bianco $200,000 at 5.35% annual interest. The promissory note originally provided for a single payment of principal and interest on the earlier of July 1, 1997 or the third anniversary of the effective date of the initial underwritten public offering of cti's Common Stock. In December 1996 Dr. Bianco entered into an employment agreement with the Company which provides for the forgiveness of one-third of the loan on each anniversary of the agreement. The unpaid portion of the loan will accelerate and become due and payable in the event that cti terminates Dr. Bianco's employment for cause or Dr. Bianco terminates his employment without cause. The unpaid portion of the loan will be forgiven in the event that cti terminates Dr. Bianco's employment without cause, Dr. Bianco terminates his employment for cause, dies or becomes disabled, a "Change in Ownership" (as defined in Dr. Bianco's employment agreement) occurs or cti's public market capitalization equals or exceeds $500 million. See "Management--Employment Agreements." The loan is secured by a pledge of 5,715 shares of Common Stock owned by Dr. Bianco. In May 1994 cti entered into an employment agreement with Dr. Schwarz. The agreement provides that in connection with his relocation, Dr. Schwarz be reimbursed for capital loss on the sale of his former residence in the form of a forgivable loan in an amount not to exceed $150,000. The loan shall be forgiven in three annual installments, subject to Dr. Schwarz's continued employment with cti, with any unforgiven portion becoming immediately due and payable within three months of any termination of Dr. Schwarz's employment. See "Management--Employment Agreements." In March 1995 The International Biotechnology Trust plc ("IBT"), which is an affiliate of Mr. Curnock Cook and Rothschild Asset Management Limited, purchased 22,388,061 shares of Series A Convertible Preferred Stock, for an aggregate purchase price of $7.5 million, in the Company's 1995 Private Placement. The holders of the outstanding shares of Series A Convertible Preferred Stock voting as a separate class are entitled to elect one Director to the Board of Directors. At the 1996 Annual Meeting of Shareholders Mr. Curnock Cook was elected as a Director by the holders of the outstanding shares of Series A Convertible Preferred Stock voting as a separate class. In September 1996 IBT purchased an additional 14,925.373 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $5.0 million. In March 1995 Kummell Investments Limited ("Kummell") purchased 14,925.374 shares of Series A Convertible Preferred Stock, for an aggregate purchase price of $5.0 million, in the 1995 Private Placement. In June 1995 Kummell purchased an additional 12,686.5672 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $4.25 million. In connection with the June 1995 transaction, the Company agreed that it would take all necessary action to nominate a designee of Kummell to serve as a Director until the 1996 Annual Meeting of Stockholders. In July 1995 the Company nominated Mr. Morris, as a designee of Kummell, to the Board of Directors to serve until the 1996 Annual Meeting of Stockholders. Mr. Morris is the Chief Executive Officer of Morningside Ventures, which coordinates and manages a private venture capital portfolio for Kummell. In September 1996 Kummell purchased an additional 14,925.373 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $5.0 million. In connection with the September 1996 transaction, the Company agreed that (i) it will take all necessary action to nominate a designee of Kummell at the 1999 Annual Meeting of Stockholders to serve as a Director until the 2002 Annual Meeting of Stockholders, and (ii) if prior to the 1999 Annual Meeting of Stockholders Mr. Morris shall cease to be a Director, it will take all necessary action to nominate a designee of Kummell as a Director to fill the vacancy created by Mr. Morris' termination. Such agreement will terminate upon the closing of this Offering. In December 1995 Dr. Link purchased 5,714 shares of Common Stock for an aggregate purchase price of $67,000. In November 1996 Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, purchased 14,925.373 shares of Series B Convertible Preferred Stock, for an aggregate purchase price of $5.0 million, pursuant to a Stock Purchase Agreement entered into between cti and JJDC in connection with the execution of the Collaboration Agreement. Pursuant to the Stock Purchase Agreement, cti is entitled to require JJDC to purchase additional shares of Common Stock upon the closing of this Offering and, 56 subsequent to the offering, upon achievement of certain milestones. JJDC has also agreed to purchase a number of shares of Common Stock equal to ten percent of the shares sold at the closing of this Offering directly from the Company in a private placement that will occur concurrent with the closing of this Offering at a per share price equal to the initial public offering price. See "Johnson & Johnson Stock Purchase" and "Business--Collaborations." 57 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of Common Stock, as of January 15, 1997 (after giving effect to the automatic conversion of all outstanding shares of Convertible Preferred Stock at January 15, 1997 into Common Stock upon the closing of this Offering), by (i) each shareholder known by the Company to be the beneficial owner of more than 5% of its outstanding shares of Common Stock, (ii) each of the Company's Directors and the Named Executive Officers and (iii) all Directors and executive officers as a group:
PERCENTAGE OWNERSHIP (1) --------------------- NAME AND ADDRESS NUMBER OF SHARES BEFORE AFTER OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING OFFERING (2) - ------------------- ---------------------- -------- ------------ Kummell Investments Lim- 1,239,511 12.98% 9.65% ited................... c/o Morningside Group 1188 Centre Street Newton Center, MA 02159 The International 1,066,098 11.17 8.30 Biotechnology Trust plc (3) ................... c/o Rothschild Asset Management Limited Five Arrows House St. Swithen's Lane London, England EC4N 8NR Collinson Howe Venture 945,268 9.89 7.35 Partners (4)........... 1055 Washington Boule- vard Stamford, CT 06901 Biotechnology Investment 814,073 8.53 6.34 Group, L.L.C. (5)...... c/o Collinson Howe Ven- ture Partners 1055 Washington Boule- vard Stamford, CT 06901 Johnson & Johnson Devel- 426,439(Before Offering) 4.47 opment Corporation (6).................... One Johnson & Johnson 726,439(After Offering) 5.65 Plaza New Brunswick, NJ 08933 James A. Bianco, M.D.** 359,232 3.73 2.78 (7).................... Jack L. Bowman** (8).... 6,666 * * Jeremy L. Curnock Cook** 1,070,860 11.21 8.33 (9).................... Wilfred E. Jaeger, 6,476 * * M.D.** (10)............ Max E. Link, Ph.D.** 10,476 * * (11)................... David W. Martin Jr., 4,762 * * M.D.** (12)............ Terrence M. Morris** 4,762 * * (13)................... Phillip M. Nudelman, 6,095 * * Ph.D.** (14)........... Jack W. Singer, M.D.** 215,944 2.26 1.68 (15)................... Louis A. Bianco (16).... 146,179 1.52 1.13 Maurice J. Schwarz, 15,238 * * Ph.D. (17)............. Robert A. Lewis, M.D. 2,857 * * (18)................... All Directors and Executive Officers as a group (15 persons) (19)...... 1,871,149 19.16 14.32
58 - -------- * Less than 1% ** Denotes Director of the Company (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of January 15, 1997, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned. (2) Percentage of beneficial ownership after the Offering also gives effect to the Johnson & Johnson Stock Purchase. See "Johnson & Johnson Stock Purchase." (3) Consists of 1,066,098 shares of Common Stock beneficially owned by The International Biotechnology Trust plc, a company formed under the laws of England ("IBT") managed by Rothschild Asset Management Limited ("Rothschild"). Rothschild has or shares voting and investment power with respect to the shares held by IBT and may be deemed to be the beneficial owner of such shares. Mr. Curnock Cook is a director of IBT and Rothschild, and may be deemed to be the beneficial owner of any shares beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook disclaims beneficial ownership of shares beneficially owned by IBT and Rothschild except to the extent of his proportionate interest therein. See footnote (9) below. (4) Collinson Howe Venture Partners ("CHVP") is a venture capital investment management firm which is the managing member of Biotechnology Investment Group, L.L.C., a Delaware limited liability company ("BIG"), and is the investment advisor to Schroder Ventures Limited Partnership ("SVLP"), Schroder Ventures U.S. Trust ("SVUST") and Schroders Incorporated ("SI"). As such, CHVP has or shares voting and investment power with respect to the shares held by BIG, SVLP, SVUST and SI and may be deemed to be the beneficial owner of such shares. The shares listed above consist of (i) 814,073 shares of Common Stock held by BIG, 66,184 shares of Common Stock held by SVLP, 16,546 shares of Common Stock held by SVUST and 35,608 shares of Common Stock held by SI, and (ii) an additional 8,229, 2,057 and 2,571 shares of Common Stock issuable upon exercise of options beneficially owned by SVLP, SVUST and SI, respectively, pursuant to an agreement with Dr. Jaeger. See footnotes (5) and (10) below. (5) BIG is a limited liability company which was created to acquire, hold, protect, manage and dispose of equity, debt and derivative securities of biotechnology and other companies. 771,429 of the shares of Common Stock held by BIG were acquired in January 1995 from The Edward Blech Trust ("EBT"). The sole beneficiary of EBT is the minor child of David Blech, a founder, former director and shareholder of the Company. The present members of BIG are (i) the managing member, CHVP, an investment management firm of which Jeffrey J. Collinson is President, sole director and majority shareholder, (ii) EBT, and (iii) Wilmington Trust Company ("WTC"), as voting trustee under a voting trust agreement (the "Voting Trust Agreement") among WTC, BIG and BIO Holdings L.L.C. ("Holdings"). The managing member of BIG is CHVP. The members of BIG share voting and investment power with respect to all shares held of record by BIG. All of the shares held of record by BIG have been pledged as collateral to Citibank, N.A. ("Citibank") to secure indebtedness owed to such bank. Each of Citibank and Holdings has the right pursuant to the Voting Trust Agreement to direct certain actions of WTC as a member of BIG. WTC, as the member holding a majority interest in Holdings, has the right to direct the actions of Holdings under the Voting Trust Agreement. Citibank, pursuant to a separate voting trust agreement among WTC, David Blech and Holdings, has the right to direct the actions of WTC as a member of Holdings with respect to the rights of Holdings under the Voting Trust Agreement. By virtue of their status as members of BIG, each of CHVP and EBT may be deemed to be the beneficial owner of all shares held of record by BIG. By virtue of his status as the majority owner and controlling person of CHVP, Jeffrey J. Collinson may also be deemed the beneficial owner of all shares held of record by BIG. Each of CHVP, EBT and Mr. Collinson disclaims beneficial ownership of shares held by BIG except to the extent of such person's proportionate interest therein. (6) Number of shares beneficially owned after the Offering includes 300,000 shares of Common Stock purchased by JJDC concurrent with the closing of this Offering. See "Johnson & Johnson Stock Purchase." (7) Includes 85,574 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 138,095 shares issuable upon exercise of options not yet vested. 52,381 of such options vest in equal installments on December 5, 1997 and 1998, and 85,714 of such options vest in equal installments on November 19, 1997, 1998 and 1999. (8) Consists of 6,666 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 3,809 shares issuable upon exercise of options not yet vested. Such options vest in equal installments on May 22, 1997 and 1998. (9) Includes 1,066,098 shares of Common Stock beneficially owned by IBT. IBT is managed by Rothschild and Rothschild has or shares voting and investment power with respect to the shares held by IBT and may be deemed to be the beneficial owner of such shares. Mr. Curnock Cook is a director of IBT and Rothschild and may be deemed to be the beneficial owner of any shares beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook disclaims 59 beneficial ownership of shares beneficially owned by IBT and Rothschild except to the extent of his proportionate interest therein. Also includes an immediately exercisable option to purchase 4,762 shares of Common Stock. See footnote (3) above and "Certain Transactions." (10) Consists of 6,476 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 12,857 shares issuable upon exercise of options beneficially owned by affiliates of CHVP pursuant to an agreement with Dr. Jaeger. Dr. Jaeger, a director of the Company, is a former partner at CHVP. Dr. Jaeger disclaims beneficial ownership of shares of Common Stock beneficially owned by affiliates of CHVP. See footnote (4) above. (11) Includes an immediately exercisable option to purchase 1,904 shares of Common Stock. (12) Consists of an immediately exercisable option to purchase 4,762 shares of Common Stock. (13) Consists of an immediately exercisable option to purchase 4,762 shares of Common Stock. (14) Consists of 6,095 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 3,809 shares issuable upon exercise of options not yet vested. Such options vest in equal installments on May 22, 1997 and 1998. (15) Includes 16,195 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 33,333 shares issuable upon exercise of options not yet vested. 4,762 of such options vest in equal installments on December 5, 1997 and 1998, and 28,571 of such options vest in equal installments on November 7, 1997, 1998 and 1999. (16) Includes 43,669 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 32,857 shares issuable upon exercise of options not yet vested. 11,429 of such options vest in equal installments on December 5, 1997 and 1998, and 21,428 of such options vest in equal installments on November 7, 1997, 1998 and 1999. (17) Consists of 15,238 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. Does not include 41,904 shares issuable upon exercise of options not yet vested. 5,714 of such options vest on June 1, 1997, 7,619 of such options vest in equal installments on December 5, 1997 and 1998, and 28,571 of such options vest in equal installments on November 7, 1997, 1998 and 1999. (18) Consists of an immediately exercisable option to purchase 2,857 shares of Common Stock. Does not include 64,285 shares issuable upon exercise of options not yet vested. 28,585 of such options vest on April 1, 1998, 14,271 of such options vest on April 1, 1999, and 21,429 of such options vest in equal installments on November 7, 1997, 1998, and 1999. (19) Includes an aggregate of 220,562 shares of Common Stock issuable upon exercise of options that are currently exercisable or exercisable within 60 days of January 15, 1997. See footnotes (7) through (18). Excludes, with respect to each of Mr. Bowman, Mr. Curnock Cook, Dr. Jaeger, Dr. Martin, Mr. Morris and Dr. Nudelman, 14,285 shares of Common Stock, and with respect to Dr. Link, 28,570 shares of Common Stock, which will become issuable upon exercise of outstanding options following the approval of such option grants by the Company's shareholders at the 1997 Annual Meeting of Shareholders. See Note 9 of Notes to Consolidated Financial Statements. 60 DESCRIPTION OF CAPITAL STOCK Upon the closing of this Offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, 100,000 of which have been designated as Series C Preferred Stock ("Series C Preferred"), and 9,900,000 of which are undesignated. COMMON STOCK Each holder of Common Stock is entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. In all matters other than the election of Directors or as otherwise required by law, when a quorum is present at any shareholders' meeting, the affirmative vote of the majority of shares present in person or represented by proxy shall decide any question before such meeting. Directors are elected by a plurality of the votes of the shares present in person or represented by proxy at a shareholders' meeting. The Board of Directors of cti is divided into three approximately equal classes of Directors serving staggered three-year terms. As a result, approximately one-third of the total number of Directors will be elected every year. See "Management--Executive Officers and Directors." The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of Directors, and, as a consequence, minority shareholders will not be able to elect Directors on the basis of their votes alone. Subject to preferences that may be applicable to any then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of the Common Stock would be entitled to share ratably in all assets remaining after payment of liabilities and the satisfaction of any liquidation preference of any then outstanding series of Preferred Stock. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this Offering will be, fully paid and nonassessable. As of December 31, 1996, there were outstanding 12,846,824 shares of Common Stock (after giving effect to (i) the automatic conversion of all outstanding shares of Convertible Preferred Stock into 4,603,352 shares of Common Stock upon the closing of this Offering and (ii) the sale of 300,000 shares of Common Stock to JJDC concurrently with the closing of this Offering), held of record by approximately 591 shareholders, outstanding options to purchase an aggregate of 1,208,608 shares of Common Stock and outstanding warrants to purchase an aggregate of 77,907 shares of Common Stock. See "Management--Stock Option Plans." PREFERRED STOCK The Board of Directors has the authority, without further vote or action by the shareholders, to issue up to 10,000,000 shares of Preferred Stock (less any shares of Preferred Stock then outstanding or reserved for issuance) in one or more series and to fix the designations and powers, preferences and rights, if any, and qualifications, limitations or other restrictions thereof, including, without limitation, the dividend rate (and whether dividends are cumulative), conversion rights, if any, voting rights, rights and terms of redemption (including sinking fund provisions, if any), redemption price and liquidation preferences of any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof. Although the Company has no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to delay or discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Company believes that the Preferred Stock will provide the Company with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. Having such authorized shares available for issuance will allow the Company to issue shares of Preferred Stock 61 without the expense and delay of a special shareholders' meeting. The authorized shares of Preferred Stock, as well as shares of Common Stock, will be available for issuance without further action by shareholders, unless such action is required by applicable law, the terms of any series of Preferred Stock then outstanding or the rules of any stock exchange on which the Company's securities may be listed. Immediately prior to the closing of this Offering, there will be outstanding 161,118.6453 shares of Convertible Preferred Stock. Upon the closing of this Offering, each share of Convertible Preferred Stock will automatically convert into 28.5714 shares of Common Stock for a total of 4,603,352 shares of Common Stock. An additional 100,000 shares of Preferred Stock are designated as Series C Preferred and are reserved for issuance pursuant to the Company's Rights Agreement. See "--Antitakeover Restrictions--Rights Agreement." There are no shares of Series C Preferred outstanding as of the date of this Prospectus. WARRANTS In September 1995 cti completed an exchange offer (the "Warrant Exchange") to exchange shares of its Common Stock for its outstanding warrants to purchase shares of Common Stock. In connection with the Warrant Exchange, the Company issued (i) 5,612 shares of Common Stock in exchange for warrants to purchase 190,992 shares at an exercise price of $38.50 per share which were issued to purchasers in the 1993 Private Placement (the "Unit Warrants"); (ii) 68,871 shares of Common Stock in exchange for warrants to purchase 182,786 shares at exercise prices ranging from $17.50 to $31.50 per share which were issued to sales agents in connection with the 1992 Private Placement and the 1993 Private Placement (the "Sales Agent Warrants"); (iii) 22,858 shares of Common Stock in exchange for warrants to purchase 57,143 shares at an exercise price of $17.50 per share which were issued to David H. Smith, M.D., a former Chairman of the Board of Directors of the Company (the "Smith Warrants"); and (iv) 7,228 shares of Common Stock in exchange for warrants to purchase 12,432 shares at an exercise price of $12.8975 per share which were issued to Aberlyn Capital Management Limited Partnership at an initial exercise price of $15.40 per share in connection with an equipment leasing transaction (the "Lease Warrants"). As of December 31, 1996, there were outstanding Sales Agent Warrants to purchase 68,901 shares of Common Stock at an exercise price of $17.50 per share and Sales Agent Warrants to purchase 9,006 shares of Common Stock at an exercise price of $31.50 per share. The Sales Agent Warrants will expire between August 11, 1997 and February 7, 1999. The exercise prices of the Sales Agent Warrants are subject to proportional adjustment in the event of stock splits and stock dividends. REGISTRATION RIGHTS After this Offering, the holders of 5,473,699 shares of Common Stock and the holders of warrants to purchase 77,907 shares of Common Stock (collectively, the "Registrable Securities") or their respective transferees will be entitled to certain registration rights with respect to such shares of Common Stock under the Securities Act. Pursuant to a registration agreement entered into in connection with the 1993 Private Placement (the "1993 Registration Agreement"), the holders of 471,390 shares of Common Stock, including 5,612 shares of Common Stock issued in exchange for Unit Warrants to purchase 190,992 shares of Common Stock in connection with the Warrant Exchange (collectively, the "1993 Registrable Securities"), are entitled to certain registration rights with respect to the 1993 Registrable Securities. Pursuant to the 1993 Registration Agreement, the Company will be required to use its best efforts to effect the registration of the 1993 Registrable Securities under the Securities Act not later than six months after the final closing date of this Offering (the "IPO Closing Date") and to keep such registration effective pursuant to Rule 415 under the Securities Act until May 31, 1999. Pursuant to the Sales Agent Warrants and the Smith Warrants, the holders of such warrants have certain demand and piggyback registration rights with respect to such warrants and the shares of Common Stock issuable 62 upon exercise of such warrants, including the shares of Common Stock issued in exchange for such warrants in connection with the Warrant Exchange (collectively, the "Warrant Securities"). The holders of the Warrant Securities hold 91,729 shares of Common Stock and warrants to purchase 77,907 shares of Common Stock. The holders of the Warrant Securities may, beginning six months to one year following the completion of an initial public offering of the Company's Common Stock, require the Company to file up to an aggregate of three registration statements permitting the sale of the Warrant Securities and to maintain the effectiveness of such registration statements for at least nine months. In addition the Company is required to file a registration statement on Form S-3 with respect to the Warrant Securities, at such time as it is eligible to do so, and to use its best efforts to effect such registration and maintain the effectiveness of such registration statement for a specified period of time, subject to certain conditions and limitations. Further, if the Company shall register any of its securities under the Securities Act, the holders of the Warrant Securities are entitled to notice of and inclusion in such registration, subject to the right of the managing underwriters to limit the number of shares to be included in such registration. Pursuant to the Lease Warrants, the holder of the 7,228 shares of Common Stock issued in exchange for the Lease Warrants in connection with the Warrant Exchange has certain demand registration rights with respect to such shares of Common Stock (the "Lease Warrant Securities"). The holder of the Lease Warrant Securities may, beginning one year following the completion of an initial public offering of the Company's Common Stock, require the Company to file one registration statement permitting the sale of the Lease Warrant Securities and to maintain the effectiveness of such registration statement for at least nine months. Pursuant to registration agreements entered into with the holders of the Series A Convertible Preferred Stock (the "Series A Registration Rights Agreements"), the holders of 146,193.2723 shares of Series A Convertible Preferred Stock that will automatically convert into an aggregate of 4,176,913 shares of Common Stock upon the closing of this Offering (such shares of Common Stock being referred to herein as the "Series A Registrable Securities") are entitled to certain registration rights with respect to the Series A Registrable Securities. Pursuant to the Series A Registration Agreements, the Company will be required to use its best efforts to effect the registration of the Series A Registrable Securities under the Securities Act not later than six months after the IPO Closing Date and to keep such registration effective pursuant to Rule 415 under the Securities Act until March 22, 1998, in the case of 2,727,023 Series A Registrable Securities issuable upon conversion of the 95,447.004 shares of Series A Convertible Preferred Stock issued in 1995 (the "1995 Registrable Securities"), and until September 17, 1999, in the case of the 1,449,890 Series A Registrable Securities issuable upon conversion of the 50,746.2683 shares of Series A Convertible Preferred Stock issued in 1996 (the "1996 Registrable Securities"). In addition, pursuant to the Series A Registration Agreements, if the Company shall not have effected the registration of all 1995 Registrable Securities by March 31, 1997, the holders of a majority in interest of 1995 Registrable Securities shall have the right (but only once) to make a written request to the Company for registration of all 1995 Registrable Securities, and if the Company shall not have effected the registration of all 1996 Registrable Securities by September 17, 1999, the holders of a majority in interest of 1996 Registrable Securities shall have the right (but only once) to make a written request to the Company for registration of all 1996 Registrable Securities. Pursuant to a Stock Purchase Agreement entered into with Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, in connection with the Collaboration Agreement (the "Johnson & Johnson Stock Purchase Agreement"), JJDC is entitled to certain registration rights with respect to the 300,000 shares of Common Stock to be purchased by JJDC concurrent with the closing of this Offering pursuant to the Johnson & Johnson Stock Purchase, the 426,439 shares of Common Stock issuable upon the automatic conversion of the Series B Convertible Preferred Stock, and any additional shares of Common Stock that cti may require JJDC to purchase upon the achievement of certain milestones (collectively, the "Johnson & Johnson Registrable Securities"). Pursuant to the Johnson & Johnson Stock Purchase Agreement, the Company will be required to use its best efforts to effect the registration of the Johnson & Johnson Registrable Securities under the Securities Act not later than the first to occur of twelve months after the IPO Closing Date, September 30, 1998 or the registration of any Series A Registrable Securities, and to keep such registration statement effective pursuant to Rule 415 under the Securities Act for the longer of 120 days after the 63 date of actual purchase by JJDC of Johnson & Johnson Registrable Securities, 120 days after the expiration of the "lock-up" agreement to which JJDC is a party (see "Underwriting") and any period during which the Company shall keep any registration statement effective pursuant to any of the agreements referred to above. Further, if at any time subsequent to the twelfth month after the IPO Closing Date the Company shall register any of its securities under the Securities Act, JJDC is entitled to notice of and inclusion in such registration, subject to the right of the managing underwriters to limit the number of shares to be included in such registration. Subject to certain limitations, the Company is required to bear all expenses, other than underwriting discounts and commissions, incurred in connection with the registration of the 1993 Registrable Securities, the Warrant Securities, the Lease Warrant Securities, the Series A Registrable Securities and the Johnson & Johnson Registrable Securities (collectively, the "Registrable Securities") pursuant to the agreements described above. The Company and the holders of the Registrable Securities have agreed to indemnify each other for certain liabilities arising out of material misstatements and omissions made by the other party in any registration statement covering Registrable Securities. If shareholders, by exercising their registration rights, cause a large number of shares to be sold in the public market, such sales may have an adverse effect on any future market price for the Common Stock. In addition, the existence of such registration rights and the existence of an effective registration statement over an extended period of time may have an adverse effect on the Company's efforts to raise needed capital. ANTITAKEOVER RESTRICTIONS Statutory and Charter Provisions Washington law contains certain provisions that may have the effect of delaying, deterring or preventing a change in control of the Company. Chapter 23B.17 of the Washington Business Corporation Act (the "WBCA") prohibits, subject to certain exceptions, a merger, sale of assets or liquidation of the Company involving an "interested shareholder" (defined as a person or group of affiliated persons who own beneficially 20% or more of the Company's voting securities) unless the transaction is determined to be at a "fair price" or otherwise approved by a majority of the Company's disinterested Directors or is approved by holders of two-thirds of the Company's outstanding voting securities, other than those held by the interested shareholder. A Washington corporation may, in its articles of incorporation, exempt itself from coverage of this provision, but the Company has not done so. In addition, Chapter 23B.19 of the WBCA prohibits the Company, with certain exceptions, from engaging in certain significant business transactions with an "acquiring person" (defined as a person or group of persons who acquire 10% or more of the Company's voting securities without the prior approval of the Company's Board of Directors) for a period of five years following the acquiring person's share acquisition date. The prohibited transactions include, among others, a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person, or otherwise allowing the acquiring person to receive any disproportionate benefit as a shareholder. The Company may not exempt itself from coverage of this statute. These statutory provisions may have the effect of delaying, deterring or preventing a change in control of the Company. The Company's Board of Directors is divided into three approximately equal classes of Directors serving staggered three-year terms. In addition, the Company's Restated Articles of Incorporation provide that Directors may be removed from office only at a meeting of shareholders called expressly for that purpose and only for cause. The Company's Restated Articles of Incorporation limit "cause" to willful misfeasance having a material adverse effect on the Company or conviction of a felony, provided that any action by a Director shall not constitute "cause" if, in good faith, the Director believed the action to be in or not opposed to the best interests of the Company or if the Director is entitled to be indemnified with respect to such action under applicable law, the Company's Restated Articles of Incorporation or Bylaws, or a contract with the Company. Further, the Company's Bylaws require a shareholder to provide notice to the Company of such shareholder's intent to nominate a person or persons for election as Directors not later than 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders or, in the case of an election to be held at a special meeting of shareholders for the election of Directors, the close of business on the tenth day following the 64 date on which notice of such meeting is first given to shareholders. A shareholder must also provide the Company with notice of such shareholder's intent to make any proposal at an annual meeting of shareholders not later than 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of cti. RIGHTS AGREEMENT Effective November 11, 1996 the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock, to shareholders of record as of the close of business November 21, 1996 and for each share of Common Stock issued thereafter pursuant to a Rights Agreement between the Company and Harris Trust Company of California, as Rights Agent (the "Rights Agreement"). One Right will be issued for each share of Common Stock issued in connection with the Offering. Each Right entitles the registered holder thereof to purchase from the Company one one-thousandth of a share (a "Unit") of Series C Preferred, at a price of $175.00 per Unit, subject to adjustment under certain circumstances set forth in the Rights Agreement. Upon the occurrence of certain events generally associated with an unsolicited attempt to take over cti, the Rights (except for Rights held by an Acquiring Person (as defined in the Rights Agreement)) will become exercisable and will cease to trade with the Common Stock. Upon the acquisition without the consent of the Company's Board of Directors and 15 percent or more of the outstanding shares of Common Stock or announcement of a tender offer or exchange offer for shares in excess of 15 percent or more of the outstanding shares of Common Stock, each Right (except for Rights held by an Acquiring Person) will be converted into a right to purchase at the then-current exercise price of the Right that number of shares of Common Stock having a market value of two times the exercise price of the Right or, in the event of a merger of cti into an Acquiring Person, securities of the Acquiring Person having a market value of two times the exercise price of the Right. Under certain conditions, cti may elect to redeem the Rights for a nominal amount or to exchange the Rights not held by an Acquiring Person for Common Stock on a one-for-one basis. The Rights are designed to protect and maximize the outstanding equity interests of the Company in the event of an unsolicited attempt by an acquiror to take over cti in a manner not approved by the Company's Board of Directors. Takeover attempts frequently include coercive tactics to deprive a corporation's board of directors and its shareholders of any real opportunity to determine the destiny of the corporation. The Rights have been declared by the Company's Board of Directors in order to deter such tactics. The Rights are not intended to prevent a takeover of cti and will not do so. Nevertheless, the Rights may have the effect of rendering it more difficult or discouraging an acquisition of cti deemed undesirable by the Company's Board of Directors. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company on terms or in a manner not approved by the Company's Board of Directors, except pursuant to an offer conditioned upon the negation, purchase or redemption of the Rights. In connection with its adoption of the Rights Agreement, the Company reserved for issuance 100,000 shares of Series C Preferred. The Series C Preferred will only be issued in the event Rights issued pursuant to the Rights Agreement are converted into shares of Series C Preferred. Holders of shares of Series C Preferred have preference over all other holders of Preferred Stock in the payment of dividends and upon any distributions. Each share of Series C Preferred would entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders and would vote together with the holders of the Common Stock as one class. Each share of Series C Preferred would also be entitled to quarterly dividend payments equal to the greater of (i) $1,000 and (ii) 1,000 times any quarterly dividend declared per share of Common Stock. In the event dividends on the Series C Preferred are in arrears in an amount equal to six quarterly dividends, the holders of the Series C Preferred obtain special voting rights pertaining to the election of directors. Additionally, while any dividends or distributions on the Series C Preferred are in arrears, the Company's right to make distributions on or redeem shares of any class of capital stock ranking on parity with or junior to the Series C Preferred is restricted. 65 In the event of the liquidation, dissolution or winding up of the Company, holders of Series C Preferred would receive the greater of (i) all accrued and unpaid dividends plus a $1,000 preference per share and (ii) the amount equal to the aggregate amount per share to be distributed to holders of Common Stock, and thereafter would be entitled to receive per share an aggregate payment equal to 1,000 times the aggregate amount per share to be distributed to holders of Common Stock. In the event of any consolidation, merger, share exchange or other similar transaction by the Company, each share of Series C Preferred would be exchanged or changed into an amount per share equal to 1,000 times the aggregate amount of stock, securities, cash and/or property into which each share of Common Stock is changed or exchanged. The shares of Series C Preferred would not be redeemable and would rank junior to all series of any other class of Preferred Stock issued from time to time. The issuance of Series C Preferred could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company would only issue the Series C Preferred in the event the Rights issued under the Rights Agreement are converted into shares of Series C Preferred. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for cti's Common Stock is Harris Trust Company of California. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering and the Johnson & Johnson Stock Purchase, the Company will have 12,846,824 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options and warrants. Of these shares, the 3,000,000 shares of Common Stock sold in this Offering will be freely transferable without restriction under the Securities Act unless they are held by "affiliates" or "underwriters" of the Company, as these terms are used under the Securities Act and the regulations promulgated thereunder. The remaining 9,846,824 shares of Common Stock are "restricted securities" as the term is defined by Rule 144 promulgated under the Securities Act (the "Restricted Shares") and may not be sold publicly unless they are registered under the Securities Act or are sold pursuant to Rule 144 or another exemption from registration. Of the Restricted Shares, 3,844,046 shares are held by affiliates and are subject to lock-up agreements (as described below under "Underwriting") expiring 180 days following the date of this Prospectus. Of the 6,002,778 Restricted Shares held by non-affiliates who are not subject to lock-up agreements, shares will have been held for more than three years and will be eligible for immediate sale in the public market without restriction under Rule 144(k) (as described below) as of the date of this Prospectus (the "Effective Date"), and an additional shares will be eligible for sale under Rules 144 and 701 under the Securities Act as of the Effective Date. Of the Restricted Shares held by non-affiliates who are subject to lock-up agreements, shares will be eligible for immediate sale in the public market without restriction under Rule 144(k) or subject to Rules 144 and 701 upon the expiration of such lock- up agreements. The remaining Restricted Shares will have been held for less than two years and will become eligible for sale under Rule 144 at various dates thereafter as the holding period provisions of Rule 144 are satisfied. In addition, holders of warrants and options exercisable for an aggregate of shares of Common Stock have entered into 180-day lock-up agreements, and of such shares may be sold 180 days after the Effective Date. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least two years is entitled to sell, within any three- month period, a number of shares (including both restricted and unrestricted shares held by affiliates) that does not exceed the greater of (i) one percent (1%) of the then outstanding Common Stock (approximately 128,468 shares immediately after this Offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale and certain other limitations and restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares 66 proposed to be sold for at least three years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations described above or certain other restrictions of Rule 144. The Securities and Exchange Commission has proposed certain amendments to Rule 144 and Rule 144(k) that would reduce the applicable requisite holding periods to one year and two years, respectively. Under Rule 701, any employee, officer or director of or consultant to the Company who purchased shares pursuant to a written compensatory plan or contract, including the 1992 Plan and the 1994 Plan, who is not an affiliate of the Company, is entitled to sell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell such shares without having to comply with the Rule 144 holding period restrictions. The Company intends to file one or more registration statements under the Securities Act to register Common Stock to be issued pursuant to the exercise of options, including options granted or to be granted under the 1992 Plan, the 1994 Plan and the Purchase Plan, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing. At December 31, 1996, options to purchase an aggregate of 1,410,042 shares of Common Stock were outstanding under the 1992 Plan and the 1994 Plan, and no options to purchase Common Stock were outstanding under the Purchase Plan. See "Management--Stock Option Plans." The holders of approximately 5,473,699 shares of Common Stock upon the closing of this Offering and 77,907 shares of Common Stock issuable upon the exercise of outstanding warrants and their permitted transferees are entitled to certain registration rights for their shares. See "Description of Capital Stock--Registration Rights." Prior to this Offering, there has been no public market for the securities of the Company. No predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional Common Stock will have on the market price of the Common Stock. Nevertheless, sales of a substantial number of such shares by existing shareholders or by shareholders purchasing in this Offering could have a negative impact on the market price of the Common Stock. 67 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom UBS Securities LLC, Montgomery Securities and Raymond James & Associates, Inc. are acting as representatives (the "Representatives"), have agreed to purchase from the Company the following respective numbers of shares of Common Stock:
NUMBER OF UNDERWRITERS SHARES ------------ --------- UBS Securities LLC................................................. Montgomery Securities.............................................. Raymond James & Associates, Inc.................................... --------- Total.......................................................... 3,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriting Agreement contains certain provisions whereby if any Underwriter defaults in its obligation to purchase shares, and the aggregate obligations of the Underwriters so defaulting do not exceed 10% of the shares offered hereby, the remaining Underwriters, or some of them, must assume such obligations. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering of the shares of Common Stock, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The officers, directors and certain other shareholders of the Company, who beneficially own an aggregate of shares of Common Stock (including 4,603,352 shares of Common stock issuable 68 upon the automatic conversion of all outstanding shares of Convertible Preferred Stock upon the closing of this Offering and 300,000 shares of Common Stock to be purchased by Johnson & Johnson concurrent with the closing of this Offering) and warrants to purchase shares of Common Stock prior to this Offering, have agreed, pursuant to certain "lock up" agreements, that they will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them for a period of 180 days after the effective date of this Offering. The Company has agreed that it will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock for a period of 180 days after the date of this Prospectus. The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, has granted to the Company an option (the "Johnson & Johnson Option") to sell to JJDC a number of shares of Common Stock equal to not more than ten percent of the number of shares of Common Stock sold by cti in this Offering at the public offering price. The Company has exercised Johnson & Johnson Option in full, and JJDC is committed to purchase, in a private placement that will occur concurrent with the closing of this Offering, 300,000 shares of Common Stock at an aggregate purchase price of $4.5 million, assuming the sale of 3,000,000 shares of Common Stock at the closing of this Offering at an initial public offering price of $15.00 per share. The Johnson & Johnson Stock Purchase will not be registered in this Offering or be covered by the Underwriting Agreement, and the Underwriters will not receive any fee in connection with the sale of such shares. See "Johnson & Johnson Stock Purchase." Prior to this Offering, there has been no public market for the Common Stock. The initial public offering price will be negotiated among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market and economic conditions, are certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operations, the prospects for, and timing of, future revenues of the Company, the present stage of the Company's development, and the above factors in relations to market values and various valuation measures of other companies engaged in activities similar to the Company. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this Offering at or above the initial offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "CTIC." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Shearman & Sterling, San Francisco, California. Certain legal matters with respect to information contained in this Prospectus under the captions "Risk Factors--Ability to Protect Intellectual Property" and "Business--Patents and Proprietary Rights" will be passed upon by Foley & Lardner, Washington, D.C., patent counsel to the Company. Pillsbury Madison & Sutro LLP, Menlo Park, California is acting as counsel for the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. Michael J. Kennedy, a partner of Shearman & Sterling, is Secretary of the Company. 69 EXPERTS The consolidated financial statements of Cell Therapeutics, Inc. at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996 and for the period from September 4, 1991 (date of inception) to December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). This Registration Statement, including exhibits thereto, and such reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Offices located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company has filed with the Commission a registration statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the shares of the Common Stock of the Company being offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. Statements made in this Prospectus concerning the contents of any documents referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description, and each such statement shall be deemed qualified in its entirety by such reference. 70 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors.......................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Shareholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Cell Therapeutics, Inc. We have audited the accompanying consolidated balance sheets of Cell Therapeutics, Inc. (a development stage company) as of December 31, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 and for the period from September 4, 1991 (date of incorporation) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cell Therapeutics, Inc. (a development stage company) at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the period from September 4, 1991 (date of incorporation) to December 31, 1996, in conformity with generally accepted accounting principles. Seattle, Washington January 24, 1997, except for paragraphs 2 and 3 of Note 12, as to which the date is , 1997 - ------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon completion of the reverse stock split described in paragraph 2 of Note 12 to the financial statements. Ernst & Young LLP Seattle, Washington January 24, 1997 F-2 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS
PRO FORMA SHAREHOLDERS' EQUITY AT DECEMBER 31, DECEMBER 31, -------------------------- 1996 1995 1996 (NOTE 12) ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......... $ 6,931,592 $ 5,483,515 Securities available-for-sale...... 14,974,430 25,503,049 Prepaid expenses and other current assets............................ 20,080 256,892 ------------ ------------ Total current assets................. 21,926,102 31,243,456 Property and equipment, net.......... 5,713,227 5,117,936 Notes receivable from officers, less current portion..................... 221,722 172,698 Other assets......................... 187,244 467,603 ------------ ------------ Total assets......................... $ 28,048,295 $ 37,001,693 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................... $ 1,057,428 $ 651,130 Accrued expenses................... 1,412,424 3,065,297 Current portion of long-term obli- gations........................... 1,114,520 1,226,971 ------------ ------------ Total current liabilities............ 3,584,372 4,943,398 Long-term obligations, less current portion............................. 2,605,698 2,004,575 Commitments -- -- Shareholders' equity: Preferred Stock: Authorized shares--10,000,000: Series A Convertible Preferred Stock, no par value: Designated shares--150,000 and 146,193.272 at December 31, 1995 and 1996, respectively Issued and outstanding shares-- 95,447.004 and 146,193.272 at December 31, 1995 and 1996, respectively (no shares pro forma) (liquidation preference $335 per share aggregating $48,974,746 at December 31, 1996)......................... 30,496,204 47,366,204 $ -- Series B Convertible Preferred Stock, no par value: Designated shares--14,925.373 Issued and outstanding shares-- 14,925.373 at December 31, 1996 (no shares pro forma) (liquidation preference $335 per share aggregating $5,000,000 at December 31, 1996)......................... -- 4,960,000 -- Series C Preferred Stock, no par value: Designated shares--100,000 No shares issued and outstanding (liquidation preference $1,000 per share).. -- -- -- Common Stock, no par value: Authorized shares--100,000,000 Issued and outstanding shares-- 4,933,410 and 4,943,472 at December 31, 1995 and 1996, respectively (9,546,824 shares pro forma)...................... 51,481,481 51,810,160 104,136,364 Deficit accumulated during develop- ment stage........................ (60,119,460) (74,082,644) (74,082,644) ------------ ------------ ------------ Total shareholders' equity........... 21,858,225 30,053,720 $ 30,053,720 ------------ ------------ ============ Total liabilities and shareholders' equity.............................. $ 28,048,295 $ 37,001,693 ============ ============
See accompanying notes. F-3 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM SEPTEMBER 4, 1991 (DATE OF YEAR ENDED DECEMBER 31, INCORPORATION) ---------------------------------------- TO DECEMBER 31, 1994 1995 1996 1996 ------------ ------------ ------------ --------------- Revenues: Collaboration agreements........... $ -- $ 100,000 $ 9,120,806 $ 9,220,806 Operating expenses: Research and development.......... 14,368,089 14,605,947 16,108,821 60,870,651 General and administrative....... 5,283,263 6,144,650 7,601,796 24,743,279 ------------ ------------ ------------ ------------ 19,651,352 20,750,597 23,710,617 85,613,930 ------------ ------------ ------------ ------------ Loss from operations.... (19,651,352) (20,650,597) (14,589,811) (76,393,124) Other income (expense): Investment income..... 616,223 1,167,369 1,174,219 3,973,759 Interest expense...... (464,154) (509,247) (512,597) (1,652,462) ------------ ------------ ------------ ------------ Net loss................ $(19,499,283) $(19,992,475) $(13,928,189) $(74,071,827) ============ ============ ============ ============ Pro forma (unaudited): Net loss per share.... $ (1.63) ============ Shares used in computation of net loss per share....... 8,526,525
See accompanying notes. F-4 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK DEFICIT DEFERRED --------------------------------------------- ACCUMULATED COMPENSATION COMMON STOCK SERIES A SERIES B DURING AND TECHNOLOGY ---------------------- ----------------------- --------------------- DEVELOPMENT LICENSING SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE COSTS TOTAL --------- ----------- ----------- ----------- ---------- ---------- ------------ -------------- ------------ December 1991 issuance of common stock to founders at $0.04179 per share (including 182,143 shares contributed by founders for compensation and technology)...... 1,914,313 $ 87,612 -- $ -- -- $ -- $ -- $(7,612) $ 80,000 April 1992 proceeds received from issuance of shares at $11.20 per share and 57,143 warrants at $0.07 each to the chairman of the Board of Directors....... 178,572 2,004,000 -- -- -- -- -- -- 2,004,000 Net proceeds from the issuance of common stock in August through December 1992 via private placement equity offering at $17.50 per share, net of offering costs of $3,467,352... 2,225,139 35,083,440 -- -- -- -- -- -- 35,083,440 Net loss for the year ended December 31, 1992............ -- -- -- -- -- -- (5,323,737) -- (5,323,737) Fair value of stock contributed by founders for compensation and technology...... -- -- -- -- -- -- -- 7,612 7,612 --------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------ Balance at December 31, 1992............. 4,318,024 37,175,052 -- -- -- -- (5,323,737) -- 31,851,315 August 1993 Repurchase of common stock at $0.04179 per share and July 1993 cancellation of 1,072 shares.... (61,415) (2,522) -- -- -- -- -- -- (2,522) Net proceeds from the issuance of common stock and warrants in October and November 1993 via private placement equity offering at $31.50 per unit, net of offering costs of $1,486,383...... 438,540 12,326,885 -- -- -- -- -- -- 12,326,885 Net loss for the year ended December 31, 1993............ -- -- -- -- -- -- (15,328,143) -- (15,328,143) --------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------ Balance at December 31, 1993............. 4,695,149 49,499,415 -- -- -- -- (20,651,880) -- 28,847,535 Net proceeds from the issuance of common stock and warrants in February 1994 via private placement equity offering at $31.50 per unit, net of offering costs of $85,823......... 25,001 701,677 -- -- -- -- -- -- 701,677 Proceeds from stock options exercised in July 1994 at $17.50 per share........... 79 1,375 -- -- -- -- -- -- 1,375 Net loss for the year ended December 31, 1994............ -- -- -- -- -- -- (19,499,283) -- (19,499,283) --------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------ Balance at December 31, 1994............. 4,720,229 50,202,467 -- -- -- -- (40,151,163) -- 10,051,304 Net proceeds from the issuance of Series A convertible preferred stock in March through June 1995 via private placement equity offering at $335.00 per share, net of offering costs of $1,478,541... -- -- 95,447.004 30,496,204 -- -- -- -- 30,496,204 Exchange of warrants for common stock in September 1995 valued at $11.725 per share........... 104,418 -- -- -- -- -- -- -- -- Issuance of common stock for purchased research and development in October 1995 at $11.725 per share........... 98,574 1,155,750 -- -- -- -- -- -- 1,155,750 Proceeds from issuance of stock and stock options exercised in February through December 1995 at $11.725 and $17.50 per share........... 10,189 123,264 -- -- -- -- -- -- 123,264 Net loss for the year ended December 31, 1995............ -- -- -- -- -- -- (19,992,475) -- (19,992,475) Unrealized gains on securities available-for- sale............ -- -- -- -- -- -- 24,178 -- 24,178 --------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------ Balance at December 31, 1995............. 4,933,410 51,481,481 95,447.004 30,496,204 -- -- (60,119,460) -- 21,858,225 Net proceeds from the issuance of Series A convertible preferred stock in September and October 1996 via private placement equity offering at $335.00 per share, net of offering costs of $130,000..... -- -- 50,746.268 16,870,000 -- -- -- -- 16,870,000 Net proceeds from the issuance of Series B convertible preferred stock in November 1996 via private placement equity offering at $335.00 per share, net of offering costs of $40,000...... -- -- -- -- 14,925.373 4,960,000 -- -- 4,960,000 Exchange of warrants for common stock in February 1996 valued at $11.725 per share........... 151 -- -- -- -- -- -- -- -- Proceeds from stock options exercised in January through November 1996 at $11.725 per share........... 1,974 23,121 -- -- -- -- -- -- 23,121 Proceeds from common stock warrants exercised in May 1996 at $38.50 per share....... 7,937 305,558 -- -- -- -- -- -- 305,558 Net loss for the year ended December 31, 1996............ -- -- -- -- -- -- (13,928,189) -- (13,928,189) Unrealized losses on securities available-for- sale............ -- -- -- -- -- -- (34,995) -- (34,995) --------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------ Balance at December 31, 1996............ 4,943,472 $51,810,160 146,193.272 $47,366,204 14,925.373 $4,960,000 $(74,082,644) $ -- $ 30,053,720 ========= =========== =========== =========== ========== ========== ============ ========== ============
See accompanying notes. F-5 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM SEPTEMBER 4, 1991 (DATE OF YEAR ENDED DECEMBER 31, INCORPORATION) ---------------------------------------- TO DECEMBER 31, 1994 1995 1996 1996 ------------ ------------ ------------ --------------- OPERATING ACTIVITIES Net loss................ $(19,499,283) $(19,992,475) $(13,928,189) $(74,071,827) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amor- tization.............. 1,617,438 1,718,765 1,658,475 6,461,261 Noncash research and development expense... -- 1,155,750 -- 1,155,750 Noncash interest ex- pense................. -- -- -- 25,918 Noncash rent expense... 33,396 33,396 54,216 494,288 Investment premium am- ortization............ 119,110 22,500 111,315 522,061 Changes in assets and liabilities: Prepaid expenses....... 166,123 (2,789) (236,812) (256,892) Notes receivable from officers.............. (11,022) (10,700) (46,200) (267,922) Other assets........... (143,476) 9,208 (201,679) (483,604) Accounts payable....... 330,197 329,525 (406,298) 651,130 Accrued expenses....... 906,428 (245,376) 1,652,873 3,065,297 ------------ ------------ ------------ ------------ Total adjustments....... 3,018,194 3,010,279 2,585,890 11,367,287 ------------ ------------ ------------ ------------ Net cash used in operat- ing activities......... (16,481,089) (16,982,196) (11,342,299) (62,704,540) INVESTING ACTIVITIES Purchases of securities available-for-sale..... (7,555,482) (13,165,743) (27,113,929) (76,026,027) Proceeds from sales of securities available- for-sale............... 11,034,146 3,856,167 -- 14,890,313 Proceeds from maturities of securities avail- able-for-sale.......... 2,048,016 1,059,296 16,439,000 35,099,787 Purchase of property and equipment.............. (1,654,517) (204,424) (1,046,640) (11,334,936) Dispositions of property and equipment.......... 114,993 36,476 -- 151,469 ------------ ------------ ------------ ------------ Net cash provided by (used in) investing ac- tivities............... 3,987,156 (8,418,228) (11,721,569) (37,219,394) FINANCING ACTIVITIES Sales of common stock to founders............... -- -- -- 80,000 Proceeds from borrowings from shareholder....... -- -- -- 850,000 Sale of Series A Pre- ferred Stock via pri- vate placement, net of offering costs......... -- 30,496,204 16,870,000 47,366,204 Sale of Series B Pre- ferred Stock via pri- vate placement, net of offering costs......... -- -- 4,960,000 4,960,000 Sale of common stock via private placements, net of offering costs...... 701,677 67,000 -- 49,307,084 Repurchase of common stock.................. -- -- -- (2,522) Proceeds from common stock options exer- cised.................. 1,375 56,264 23,121 80,760 Proceeds from common stock warrants exer- cised.................. -- -- 305,558 305,558 Repayment of long-term obligations............ (3,940,830) (2,954,434) (1,159,188) (8,471,269) Change in deferred of- fering costs........... (458,726) 458,726 -- -- Proceeds from the issu- ance of long-term obli- gations................ 3,515,334 1,800,000 616,300 10,931,634 ------------ ------------ ------------ ------------ Net cash provided by (used in) financing ac- tivities............... (181,170) 29,923,760 21,615,791 105,407,449 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equiv- alents................. (12,675,103) 4,523,336 (1,448,077) 5,483,515 Cash and cash equiva- lents at beginning of period................. 15,083,359 2,408,256 6,931,592 -- ------------ ------------ ------------ ------------ Cash and cash equiva- lents at end of peri- od..................... $ 2,408,256 $ 6,931,592 $ 5,483,515 $ 5,483,515 ============ ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of equipment pursuant to capital lease obligations...... $ -- $ -- $ 85,532 $ 362,425 ============ ============ ============ ============ Conversion of convert- ible debt and related accrued interest into common stock........... $ -- $ -- $ -- $ 875,918 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the pe- riod for interest...... $ 476,845 $ 529,847 $ 514,534 $ 1,626,025 ============ ============ ============ ============
See accompanying notes. F-6 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Cell Therapeutics, Inc. (the "Company") focuses on the discovery, development, and commercialization of small molecule drugs for the treatment of cancer and inflammatory and immune diseases. The Company's principal business strategy is to focus its development activities on therapeutic areas that represent large market opportunities which are not adequately served by existing therapies. The Company incorporated on September 4, 1991, but did not commence operations until February 1992. The Company operates in a highly regulated and competitive environment. The manufacturing and marketing of pharmaceutical products require approval from and are subject to ongoing oversight by the Food and Drug Administration in the United States and by comparable agencies in other countries. Obtaining approval for a new therapeutic product is never certain and may take several years and involve expenditure of substantial resources. Competition in researching, developing, and marketing pharmaceutical products is intense. Any of the technologies covering the Company's existing products under development could become obsolete or diminished in value by discoveries and developments of other organizations. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances are eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid debt instruments with maturities of three months or less at the time acquired to be cash equivalents. Cash equivalents represent short-term investments consisting of investment-grade corporate and government obligations, carried at cost, which approximates market value. Securities Available-for-Sale Management determines the appropriate classification of debt securities at the time of purchase. Management currently classifies its investment portfolio as available-for-sale and carries the securities at fair value based on quoted market prices with unrealized gains and losses included within the deficit accumulated during development stage. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in investment income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in investment income. Management of Credit Risk The Company is subject to concentration of credit risk from its cash investments. Under the Company's investment guidelines, credit risk is managed by diversification of the investment portfolio and by the purchase of investment-grade securities. Collaboration Agreement Receivables and Revenues Collaboration agreement receivables represent amounts earned, but not yet collected, under collaboration and license agreements. Collaboration agreement revenues are recognized as the earnings process is completed, based on the provisions of each agreement. F-7 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment Property and equipment, including assets pledged as security in financing agreements, are carried at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized over the lesser of the useful life or the term of the applicable lease using the straight-line method. Depreciation commences at the time assets are placed in service and is computed using the straight-line method over the estimated useful lives of the assets (three to five years). Deferred Offering Costs The Company records legal and other issuance costs related to its offerings of stock as deferred offering costs until the offerings are completed and the costs are netted against gross proceeds. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Generally, stock compensation, if any, is measured as the difference between the exercise price of a stock option and the fair market value of the Company's stock at the date of grant, which is then amortized over the related vesting period. The value of stock options granted to consultants is recorded as an expense and amortized over the lives of the respective contracts. Net Loss Per Share Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common stock equivalents from preferred stock, stock options, and warrants are excluded from the computation as their effect is antidilutive, except that, in accordance with Securities and Exchange Commission requirements, common and common equivalent shares issued during the 12-month period prior to the filing of the proposed initial public offering have been included in the calculation as if they were outstanding for all periods, using the treasury stock method and the assumed initial public offering price. Net loss per share for the years ended December 31, 1994, 1995 and 1996, and the number of shares used in the computation of the net loss per share, are as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Net loss per share..................... $ (3.72) $ (3.78) $ (2.55) ========= ========= ========= Shares used in computation of net loss per share............................. 5,235,477 5,290,325 5,458,170 ========= ========= =========
Pro Forma Net Loss Per Share Unaudited pro forma net loss per share is computed based on the number of shares plus the number of common shares issuable upon conversion of all outstanding shares of Series A and Series B Convertible Preferred Stock. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-8 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reclassifications Certain prior year items have been reclassified to conform to the current year presentation. 2. SECURITIES AVAILABLE-FOR-SALE Securities available-for-sale consist of the following as of December 31:
1995 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- ---------- ---------- ----------- U.S. Government obliga- tions...................... $ 2,026,138 $ 272 $ -- $ 2,026,410 Corporate obligations....... 12,924,114 29,639 (5,733) 12,948,020 ----------- ------- ------- ----------- $14,950,252 $29,911 $(5,733) $14,974,430 =========== ======= ======= ===========
1996 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- ---------- ---------- ----------- U.S. Government obliga- tions...................... $ 920,704 $ 1,214 $ -- $ 921,918 Corporate obligations....... 24,593,162 25,577 (37,608) 24,581,131 ----------- ------- -------- ----------- $25,513,866 $26,791 $(37,608) $25,503,049 =========== ======= ======== ===========
As of December 31, 1995 and 1996, the securities available-for-sale had contractual maturities of less than one year. Expected maturities will differ from contractual maturities because issuers of the securities may have the right to prepay obligations without prepayment penalties. 3. PROPERTY AND EQUIPMENT Property and equipment are composed of the following as of December 31:
1995 1996 ----------- ----------- Leasehold improvements.............................. $ 4,288,000 $ 4,296,136 Lab equipment....................................... 3,468,103 3,642,378 Furniture and office equipment...................... 2,577,024 3,441,253 ----------- ----------- 10,333,127 11,379,767 Less accumulated depreciation and amortization...... 4,619,900 6,261,831 ----------- ----------- $ 5,713,227 $ 5,117,936 =========== ===========
As of December 31, 1995 and 1996, furniture and office equipment included $276,893 and $362,425, respectively, of equipment acquired under capitalized leases. Accumulated depreciation related to this equipment totaled $147,545 and $217,179 at December 31, 1995 and 1996, respectively. Annual maturities of the capital lease obligations for 1997 and 1998, respectively, approximate $96,000 and $35,000. 4. EQUITY OFFERINGS In 1992, the Company completed its first private placement equity offering. Total gross proceeds amounted to $38,550,792, representing 2,225,139 shares of the Company's common stock, including the required conversion of amounts advanced (principal and interest of $850,000 and $25,918, respectively) from a principal shareholder aggregating 50,053 shares. F-9 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. EQUITY OFFERINGS (CONTINUED) In 1993, the Company concluded a second round of equity financing through a private offering of common stock and warrants at $31.50 per unit. Each unit consisted of one share of common stock and a warrant to purchase one-half share of common stock. The warrants had an exercise price of $38.50 per share and expired in 1996. Total gross proceeds of the second round of equity financing amounted to $13,813,268, representing 438,540 shares of common stock and warrants to purchase 219,258 shares of common stock, including 21,256 shares of common stock and warrants to purchase 10,627 shares of common stock sold to the sales agents and their affiliates (including an affiliated sales agent, whose chief executive officer was a principal shareholder of the Company). Offering costs related to the first and second offerings included $2,052,268 and $228,982, respectively, paid to the affiliated sales agent. In connection with the offerings, the sales agents received warrants to purchase 215,769 shares of common stock at $17.50 per share, expiring in 1997 (including warrants to purchase 167,800 shares of common stock issued to the affiliated sales agent) and warrants to purchase 42,423 shares of common stock at $31.50 per share, expiring in 1998 (including warrants to purchase 7,538 shares of common stock issued to the affiliated sales agent). In 1994, the Company sold additional units of common stock and warrants under terms equivalent to those of the second round of equity financing. The Company received gross proceeds of $787,500, representing 25,001 shares of common stock and warrants to purchase 12,500 shares of common stock at $38.50 per share, which expired in 1996. Offering costs included $28,613 paid to the affiliated sales agent. In addition, the sales agents received warrants to purchase 2,500 shares of common stock at $31.50 per share, expiring in 1999 (including warrants to purchase 1,071 shares of common stock issued to the affiliated sales agent). In 1995, the Company concluded a third round of equity financing through a private offering of Series A Convertible Preferred Stock at $335 per share. Total gross proceeds of the offering amounted to $31,974,745, representing 95,447.004 shares of Series A Convertible Preferred Stock. In 1996, the Company concluded a fourth round of equity financing through a private offering of Series A Convertible Preferred Stock at $335 per share. Total gross proceeds of the offering amounted to $17,000,000, representing 50,746.268 shares of Series A Convertible Preferred Stock. Holders of Series A Convertible Preferred Stock have preferential rights to noncumulative dividends ($33.50 per share per annum) when and if declared by the Board of Directors, and a liquidation preference of $335 per share. Each share of Series A Convertible Preferred Stock is convertible into 28.5714 shares of common stock at a conversion price of $11.725 per share (the "Conversion Price"), subject to adjustment upon the occurrence of certain dilutive events, and is automatically converted into common stock upon the occurrence of certain events, including the closing of an initial public offering of the Company's common stock at a price per share of not less than $17.50 and an aggregate offering price of not less than $20 million. The shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock have certain registration rights. The Series A Convertible Preferred Stock has the right to vote with the common stock on an as-converted basis and, voting as a separate class, is entitled to elect one director. As of December 31, 1996, the Company had reserved 4,176,913 shares of common stock for issuance upon the conversion of the Series A Convertible Preferred Stock. In 1996, the Company sold 14,925.373 shares of Series B Convertible Preferred Stock to Johnson & Johnson Development Corporation at $335 per share in a private placement. Total gross proceeds of the sale amounted to $5,000,000. The Series B Convertible Preferred Stock has the same rights, preferences and conversion features as the Series A Convertible Preferred Stock, but is subordinate to it with respect to payment of dividends and liquidation preference. The shares of common stock issuable upon conversion of the Series B Convertible Preferred Stock have certain registration rights. The Series B Convertible Preferred Stock has the right to vote with the common stock on an as-converted basis. As of December 31, 1996, the Company had reserved 426,439 shares of common stock for issuance upon conversion of the Series B Convertible Preferred Stock. See Note 11. F-10 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. EQUITY OFFERINGS (CONTINUED) In November 1996, the Board of Directors approved a shareholder rights plan whereby a Right attaches to each share of common stock. Upon the occurrence of certain acquisition related events, each Right entitles the holder of each outstanding share of common stock to purchase one one-thousandth of a share (a "Unit") of Series C Preferred Stock at $175 per Unit, subject to adjustment. Upon exercise, each holder of a Right will have the right to receive value equal to two times the exercise price of the Right. A total of 100,000 shares of Series C Preferred Stock are reserved for issuance upon exercise of the Rights. 5. CONSULTING AND EMPLOYMENT AGREEMENTS Directors, Officers, and Employees The Company has employment agreements with its President and Chief Executive Officer and one other founding officer. The agreements expire in 1999 and 1998, respectively, and provide for annual base salaries (approximately $692,000 in the aggregate as of December 31, 1996), minimum annual and cost- of-living increases, and discretionary incentive bonus awards. In December 1993, the Board of Directors authorized a loan of $200,000 to the Company's President and Chief Executive Officer. The loan accrues interest at 5.35%. On each of December 17, 1997, 1998, and 1999, the Company shall forgive one-third of the principal amount of the loan together with accrued interest. The portion of this loan which is to be forgiven in 1997 is included in other current assets. Forgiveness of amounts remaining due under the loan will be forfeited upon certain termination-related circumstances and will be accelerated upon certain events, including a change in ownership of the Company, or upon the Company's attaining a minimum public market capitalization. The loan is secured by 5,715 shares of common stock. In 1992, the Company granted its then chairman warrants to purchase 57,143 shares of common stock at $17.50 per share. In 1994, the Company authorized a non-interest bearing loan of up to $150,000 to its Executive Vice President, Product Development in connection with relocation. In 1995 and 1996, $145,000 was advanced under the terms of the loan, of which $40,000 and $57,000 was forgiven and treated as compensation expense in 1995 and 1996, respectively. In 1996, the Company advanced a $35,000 non-interest bearing loan to its Executive Vice President, Marketing and Business Development in connection with his relocation. The Company shall forgive one-half of the loan on each of April 8, 1997 and 1998. The portion of this loan to be forgiven in 1997 is included in other current assets. The Company has also entered into severance agreements with certain of its officers having terms of one or two years. In addition to the employment and severance agreements with the corporate officers discussed above, the Company has entered into employment agreements with certain employees, whose employment agreement terms generally range from three to four years. The employment agreements can be terminated with cause, as defined in the agreements, upon 30 days' notice. Advisory Boards The Company has entered into consulting agreements with the members of its Scientific and Clinical Advisory Boards ("Advisory Boards") providing for aggregate annual fees of approximately $108,000, the issuance of 22,860 shares of common stock (a component of the 296,429 pool shares discussed in Note 8) and options to purchase 88,571 shares of common stock at $11.725 to $17.50 per share, all of which vest ratably over two to three years from the date of appointment. The consulting agreements with members of the Advisory Boards are cancelable upon 30 days' notice. F-11 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. CONTRACTUAL ARRANGEMENTS AND COMMITMENTS Licensed Technology In March 1992, the Company entered into agreements with the Fred Hutchinson Cancer Research Center ("FHCRC") under the terms of which the Company has received worldwide licenses and options to technology, or technology claimed, for five U.S. patent applications. The Company paid initial license fees totalling $100,000 and issued 76,572 shares of common stock valued at $3,200 to the FHCRC for such technology. The initial license fee and value of the stock granted to the FHCRC were expensed as in-process research and development. The Company is obligated to pay royalties on revenues resulting from future sales of products employing the technology and on revenues received from sublicenses for the technology, with minimum annual royalties of $50,000 prior to, and $100,000 after, the first commercial sale of such products. The agreements are for a term equal to the later of 15 years or the expiration of the last issued patent included within the licensed technology, unless terminated earlier for certain specified events, including the failure of the Company to take reasonable efforts to engage in research and development with respect to the licensed technology. Facilities Lease The Company has executed noncancelable operating leases for office and laboratory space that generally expire the first quarter of 2003, with two five-year renewal options at the then-current market rates. The lessor provided $450,000 for leasehold improvements and rent concessions, which is being amortized over the initial lease term. Rent expense amounted to $977,778, $993,471, and $995,866 for the years ended December 31, 1994, 1995, and 1996, respectively. Future minimum annual rental payments under the leases approximate the following for the years ended December 31: 1997.......................... $1,014,000 1998.......................... 1,133,000 1999.......................... 1,143,000 2000.......................... 1,143,000 2001.......................... 1,143,000 Thereafter.................... 1,239,000 ---------- $6,815,000 ==========
7. LONG-TERM OBLIGATIONS Long-term obligations consisted of the following at December 31:
1995 1996 ---------- ---------- Master financing agreements: Due December 1998, monthly payments of $55,827, including interest at 14.7%....................... $1,616,295 $1,154,281 Due December 1998, monthly payments of $45,820, including interest at 17.6%....................... 1,274,342 921,289 Due December 1996, monthly payments of $21,944, including interest at 17.6%....................... 239,847 -- Due August 1999, monthly payments of $20,523, including interest at 16.1%................................. -- 531,336 Capital lease obligations............................ 149,667 130,352 Deferred rent........................................ 440,067 494,288 ---------- ---------- 3,720,218 3,231,546 Less current portion................................. 1,114,520 1,226,971 ---------- ---------- $2,605,698 $2,004,575 ========== ==========
F-12 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. LONG-TERM OBLIGATIONS (CONTINUED) In December 1994, the Company entered into a master financing agreement with a financing company, whereby the Company borrowed $2,015,334 in exchange for granting the lessor a security interest in approximately the same net book value of specific fixed assets and warrants to purchase 12,432 shares of common stock at $12.8975 per share. In July 1995, the Company entered into master financing agreements with another finance company, whereby the Company borrowed $1,450,000 over 42 months and $350,000 over 18 months. In June 1996, the Company borrowed an additional $616,300 over 38 months from this finance company. For each borrowing, the Company granted the lessor a security interest in approximately the same net book value of specified fixed assets. Annual maturities of the master financing agreements for 1997 through 1999, respectively, approximate $1,128,000, $1,323,000, and $155,000. 8. CAPITAL STOCK In connection with the formation of the Company, certain shareholders contributed 296,429 shares of common stock to a pool to be issued to the FHCRC, the Scientific Advisory Board ("SAB"), and key employees. (Refer to Notes 5 and 6 with regards to the stock issued to the SAB and the FHCRC.) From this pool, 76,572, 22,860, 49,282, and 114,286 shares were distributed to the FHCRC, SAB, key employees and its former chairman of the Board of Directors, respectively. As of December 31, 1992, 33,429 undistributed shares reverted back to the contributing shareholders. The shares issued to key employees were subject to forfeiture and cancellation in the event such individuals' employment agreements were terminated. The restrictions on the stock expired in 1996. In August 1993, the Company repurchased 60,343 shares of common stock at $0.04179 per share from one of its founders pursuant to a stock repurchase agreement. Common Stock Reserved A summary of common stock reserved for issuance is as follows as of December 31:
1995 1996 --------- --------- Series A Preferred Stock.......................... 2,727,023 4,176,913 Stock Options..................................... 824,840 1,330,009 Series B Preferred Stock.......................... -- 426,439 Employee Stock Purchase Plan...................... -- 285,714 Warrants.......................................... 119,050 77,907 --------- --------- 3,670,913 6,296,982 ========= =========
9. STOCK OPTIONS AND WARRANTS Stock Options In 1994, shareholders approved the 1994 Equity Incentive Plan (the "1994 Plan") in replacement of the 1992 Stock Option Plan (the "1992 Plan"). The 1994 Plan provides for (a) the grant of incentive stock options (with terms not to exceed ten years), nonstatutory stock options and stock appreciation rights, (b) the award of stock bonuses, (c) the sale of stock, and (d) any other equity-based or equity-related awards which the Plan Administrator determines to be consistent with the purpose of the 1994 Plan and the interests of the Company. Option-vesting schedules are specified by the Plan Administrator. The number of shares available for future grant F-13 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) under the 1994 Plan is the number of shares of common stock available for issuance under the 1992 Plan at the time of approval of the 1994 Plan (177,993), plus such shares for which options previously granted under the 1992 Plan may expire, terminate, or be canceled. The 1994 Plan also provides for the automatic grant of nonstatutory options to nonemployee directors. In May 1995 and April 1996, shareholders approved share increases of 246,887 and 507,143, respectively, in the number of shares reserved for issuance under the 1994 Plan. As of December 31, 1996, the Company had reserved 1,330,009 shares of common stock for issuance under the 1992 and 1994 Plans, of which 488,336 were exercisable at an average price of $11.85 per share, and 121,401 were available for future grant. In April 1995, the Board of Directors approved the repricing of outstanding options to $11.725 per share by exchanging such outstanding options for a fewer number of options pursuant to a Black-Scholes formula. Subsequently, options for 434,664 shares, with prices of $17.50 and $31.50 per share, were exchanged for 377,121 options with a price of $11.725 per share. All other terms and conditions of the options remained unchanged. These amounts have been included as granted and canceled options in the summary activity table as shown below. The pro forma net loss under SFAS 123 noted below includes $672,884 and $143,707 in 1995 and 1996, respectively, related to this option repricing. A summary of the activity related to the 1992 and 1994 Plans follows:
SHARES AVERAGE UNDER EXERCISE PRICE OPTION PER SHARE --------- -------------- Balance December 31, 1993, unexercised............. 404,692 $20.37 Granted.......................................... 61,970 31.50 Canceled......................................... (10,923) 23.14 Exercised........................................ (79) 17.50 --------- Balance December 31, 1994, unexercised............. 455,660 21.84 Granted.......................................... 815,086 11.725 Canceled......................................... (504,499) 21.42 Exercised........................................ (4,653) 12.11 --------- Balance December 31, 1995, unexercised............. 761,594 11.81 Granted.......................................... 505,923 11.725 Canceled......................................... (56,935) 11.83 Exercised........................................ (1,974) 11.725 --------- Balance December 31, 1996, unexercised............. 1,208,608 11.78 =========
The weighted average fair value of options granted during 1996 was $2.34. Exercise prices for options outstanding at December 31, 1996 range from $11.725 to $17.50 per share, with an average remaining maximum term of approximately 8.5 years. In 1996, the Company adopted the accounting provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not require, entities to adopt the fair value of accounting for their stock-based compensation plans. Under this method, compensation cost for stock-based compensation plans is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Fair value is determined using minimum value option pricing models that take into account (1) the stock price at the grant date, (2) the exercise price, (3) a four-year expected life of the options, (4) no expected dividends, and (5) risk free interest rates ranging from 5.4% to 7.8%, and 5.2% F-14 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) to 6.2%, during 1995 and 1996, respectively, over the expected life of the options. In accordance with the provisions of SFAS 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost for options granted with exercise prices equal to or greater than fair value. Although not reflective of the effects of reported net income in future years until the rules of SFAS 123 are applied to all outstanding non vested options, if the Company elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net loss and pro forma net loss per share would have been increased as follows for the years ended December 31:
1995 1996 -------------------------- -------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ------------ ------------ ------------ Net loss................ $(19,992,475) $(20,812,869) $(13,928,189) $(14,536,137) Historical net loss per share.................. $ (3.78) $ (3.93) $ (2.55) $ (2.66)
Historical net loss per share is computed as described in Note 1. In December 1996, the Board of Directors approved the grant of an aggregate of 114,280 ten year fully vested nonstatutory options to non employee directors at an exercise price of $11.725 per share, subject to approval by shareholders at the 1997 Annual Meeting of Shareholders. These options will be recorded as granted upon shareholder approval. The Company will record compensation expense on the date of shareholder approval for the amount by which fair market value at that date exceeds the exercise price. Warrants During 1995, the Company offered to exchange shares of common stock for outstanding warrants to purchase common stock, issuing 104,569 shares of common stock in exchange for warrants to purchase 443,353 shares of common stock. During 1996, the Company concluded its offer to exchange shares of common stock for outstanding warrants of common stock, issuing 151 shares of common stock in exchange for warrants to purchase 377 shares of common stock. A summary of the warrants to purchase common stock which remain outstanding (and for which common stock is reserved for issuance) is as follows as of December 31, 1996:
SHARES OF COMMON PRICE PER SHARE OF STOCK COMMON STOCK EXPIRATION --------- ------------------ ---------- 68,901 $17.50 1997 7,935 31.50 1998 1,071 31.50 1999 ------ 77,907 ======
Employee Stock Purchase Plan In April 1996 the shareholders approved the adoption of the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). A maximum of 285,714 shares of the Company's common stock will be reserved for purchase under the Purchase Plan, under which eligible employees may purchase a limited number of shares of the Company's common stock at 85% of fair market value. As of December 31, 1996, no shares of the Company's common stock have been purchased under the Purchase Plan. F-15 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires an asset and liability approach for financial accounting and reporting for income taxes. The standard requires that deferred tax liabilities and assets be adjusted currently for effects of changes in tax laws or rates. As of December 31, 1996, the Company had net operating tax loss carryforwards of approximately $70 million and research and development credit carryforwards of approximately $1.8 million. The carryforwards begin to expire in the year 2007. Due to prior rounds of equity financing (see Note 4) and the Company's proposed initial public offering of common stock (see Note 12), the Company has incurred and will incur "ownership changes" pursuant to applicable regulations in effect under the Internal Revenue Code of 1986, as amended. Accordingly, the Company's use of losses incurred through the date of these ownership changes will be limited during the carryforward period. The Company estimates that use of the loss carryforwards would be limited to approximately $8 million per year. To the extent that any single year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance equal to the deferred tax assets due to the uncertainty of realizing the benefits of the assets. The Company's valuation allowance increased $7,332,000, $6,928,000 and $4,785,000 during 1994, 1995 and 1996, respectively. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows:
1995 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................. $19,535,000 $23,914,000 Research and development tax credit carryforwards................................... 1,667,000 1,752,000 Accruals on financial statements in excess of tax returns......................................... 301,000 444,000 Depreciation in financial statements in excess of tax returns..................................... 149,000 327,000 ----------- ----------- Net deferred tax assets............................ $21,652,000 $26,437,000 =========== =========== Valuation allowance for deferred tax assets........ $21,652,000 $26,437,000 =========== ===========
11. SIGNIFICANT AGREEMENTS On March 7, 1995, the Company and BioChem Therapeutic Inc. ("BioChem"), a wholly owned subsidiary of BioChem Pharma, Inc., signed collaboration and supply agreements (the "BioChem Collaboration Agreement" and the "BioChem Supply Agreement", respectively). The BioChem Collaboration Agreement grants an exclusive license to enable BioChem to seek Canadian regulatory approval for, and to use and sell, the Company's Lisofylline and/or CT-2584 compounds (and compositions thereof) (collectively, the "CTI Compounds") in Canada. Under the BioChem Collaboration Agreement, BioChem purchased 7,462.687 shares of Series A Convertible Preferred Stock for $2,500,000 in the Company's third private equity offering. See Note 4. In addition, the Company is entitled to receive payments for each of the CTI Compounds upon the satisfaction of specified product development milestones and royalties on all sales, if any. The BioChem Collaboration Agreement terminates upon the expiration of the last to expire patents covering the CTI Compounds or, absent a patent, upon the tenth anniversary of the first commercial sale of such CTI Compound. The Company recorded milestone payments of $100,000 and $250,000 under the BioChem Collaboration Agreement in 1995 and 1996, respectively. F-16 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. SIGNIFICANT AGREEMENTS (CONTINUED) Under the BioChem Supply Agreement, the Company is to supply to BioChem the CTI Compounds at a percentage mark-up above cost. The BioChem Supply Agreement terminates 20 years from the date of termination of the BioChem Collaboration Agreement with respect to each of the CTI Compounds. In October 1995, the Company purchased all of the intellectual property of Lipomed Corporation ("Lipomed") from its shareholders and expensed the purchase price as in-process research and development expense. The purchase price was $1,155,750 consisting of 98,574 shares of common stock. The agreement also provides for a possible future payment to Lipomed of $100,000 upon the occurrence of certain events. In February 1996, the Company entered into an agreement with Schering AG ("Schering") pursuant to which, among other things, the Company and Schering would collaborate in the funding, research, development and commercialization of Lisofylline and CT-2584 on the terms and conditions specified therein. Upon execution of the agreement, Schering paid the Company a $3,000,000 nonrefundable signing fee. The remainder of the agreement was contingent upon Schering finding the clinical trial results and related data from the Company's Phase II bone marrow transplantation ("BMT") trial acceptable within thirty days after its receipt. The Company furnished Schering with this data in late February 1996. On April 2, 1996, after a mutual extension of the thirty-day review period, Schering informed the Company that it did not wish to activate the agreement based on, among other factors, (i) its view that one of the endpoints of the Phase II BMT trial, white blood cell recovery, was not met and (ii) its view that the trial data regarding mortality rate and incidence of serious and fatal infection were difficult to interpret and that, as a result, Schering could not determine that the data was meaningful. In November 1996, the Company entered into a collaboration and license agreement with Ortho Biotech Inc. and the R.W. Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical Corporation) each of which are wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson & Johnson") for the joint development and commercialization of Lisofylline. Upon execution of the collaboration agreement, Johnson & Johnson paid to the Company a $5,000,000 nonrefundable license fee. In addition, Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson & Johnson, purchased 14,925.373 shares of the Company's newly issued Series B Convertible Preferred Stock at $335 per share for an aggregate purchase price of $5,000,000. See Note 4. Under the collaboration agreement, the Company will be responsible for development of Lisofylline in the United States. The Company will also be responsible for the manufacture of Lisofylline for development and commercialization purposes until November 1999, and Johnson & Johnson will be responsible for the manufacture of Lisofylline thereafter, unless Johnson & Johnson elects to assume such responsibility prior to such date. Johnson & Johnson has agreed to fund 60% of the Company's budgeted development expenses incurred in connection with obtaining regulatory approval for Lisofylline in the United States. For each of 1997 and 1998 Johnson & Johnson has agreed, subject to certain termination rights, to fund up to $12,000,000 of the Company's budgeted development expenses per year. Any development expenses in excess of such currently budgeted agreed upon amounts will be funded solely by the Company unless otherwise mutually agreed. Johnson & Johnson will be responsible for obtaining regulatory approval for Lisofylline for markets outside of the United States and Canada at its own expense. The Company recorded $870,806 of collaboration agreement revenues related to the reimbursement of development expenses by Johnson & Johnson in 1996. The Company and Johnson & Johnson will co-promote Lisofylline in the United States and each will share equally in any resulting operating profits and losses. Although the Company and Johnson & Johnson will co-promote Lisofylline in the United States, Johnson & Johnson will have primary responsibility for commercializing Lisofylline. Johnson & Johnson will have the exclusive right to develop and market Lisofylline, at its own expense, for markets outside of the United States and Canada, subject to specified royalty payments F-17 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. SIGNIFICANT AGREEMENTS (CONTINUED) to the Company. The Company will receive additional equity, license, milestone and similar payments under the agreement if certain milestones are achieved in the development and commercialization of Lisofylline. The collaboration with Johnson & Johnson initially covers the development of Lisofylline to prevent or reduce the toxic side effects among cancer patients receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT Indication") through December 31, 1998. The collaboration also covers the development of Lisofylline for the treatment of patients with acute myelogeneous leukemia ("AML") undergoing high dose chemotherapy (the "AML Indication") through June 30, 1997. Johnson & Johnson has an option to continue to participate in the development of Lisofylline for the AML Indication following the completion of the Company's ongoing Phase II AML trial. Johnson & Johnson also has certain options to expand the collaboration to include the development of Lisofylline for any other indication for which Lisofylline is being developed by the Company. In the event that Johnson & Johnson exercises any such option, it would be required to fund 60% of the Company's budgeted development expenses incurred in connection with the development of Lisofylline for such indication, including expenses incurred prior to the exercise of such option, and would also be required to pay additional license fees and milestone payments to the Company. Thereafter, any development expenses in excess of the then agreed-upon budgeted amounts for any such additional indication would be funded solely by Johnson & Johnson unless otherwise mutually agreed. If Johnson & Johnson does not exercise such option with respect to any such indication, the Company would be free to develop Lisofylline for such indication either on its own or in collaboration with third parties. Johnson & Johnson also has the option to sponsor research at the Company with respect to discovering compounds structurally related to Lisofylline. In connection with the execution of the collaboration agreement, JJDC, a wholly-owned subsidiary of Johnson & Johnson, has granted to the Company an option (the "Johnson & Johnson Option") to sell to JJDC a number of shares of common stock equal to not more than ten percent of the number of shares of common stock sold by the Company at the initial closing of its currently proposed initial public offering, at a price per share equal to the initial public offering price in such proposed offering. See Note 12. 12. SUBSEQUENT EVENTS Supply Agreement In January 1997, the Company entered into a supply agreement with ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical intermediates and active ingredients, for the manufacture and supply of Lisofylline and corresponding intermediate compounds. Under the terms of the agreement, ChiRex will manufacture and supply Lisofylline bulk drug product and a key intermediate compound in sufficient quantities to meet the Company's requirements for ongoing and future clinical trials and commercial requirements during launch and commercialization. The agreement will expire on December 31, 2001, but may be terminated by the Company upon 12 months' written notice prior to such date. Initial Public Offering and Related Events On January 23, 1997, the Company's Board of Directors authorized the Company to file a Registration Statement with the Securities and Exchange Commission to permit the Company to proceed with an initial public offering of its common stock (the "Offering"). In connection with the Offering, the Company's Board of Directors approved a reverse stock split of the outstanding shares of common stock on the basis of one new share of common stock for every three and one- half outstanding shares of common stock. The reverse stock split is expected to be approved by the shareholders in March 1997, and will become effective at the time an amendment to the Company's Restated Articles of Incorporation is filed with the Secretary of State of the State F-18 CELL THERAPEUTICS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. SUBSEQUENT EVENTS (CONTINUED) of Washington. All outstanding common and common equivalent shares and per- share amounts in the accompanying financial statements and related notes to financial statements have been retroactively adjusted to give effect to the reverse stock split. In addition, in connection with the Offering the Company is soliciting the consent of the holders of the Convertible Preferred Stock to the automatic conversion of all of the outstanding shares of Convertible Preferred Stock upon the closing of the Offering. Upon the closing of Offering, all of the outstanding shares of Series A Convertible Preferred Stock will automatically convert into 4,176,913 shares of common stock and all of the outstanding shares of Series B Convertible Preferred Stock will automatically convert into 426,439 shares of common stock (in each case subject to adjustment upon the occurrence of certain dilutive events). Unaudited pro forma shareholders' equity at December 31, 1996, as adjusted for the assumed conversion of the Series A and Series B Convertible Preferred Stock, is set forth in the accompanying balance sheet. On January 23, 1997, the Company's Board of Directors authorized the Company to exercise the Johnson & Johnson Option in full. Upon the exercise of the Johnson & Johnson Option, JJDC will be committed to purchase, in a private placement that will occur concurrent with the closing of the Offering, 300,000 shares of common stock at an aggregate purchase price of $4.5 million, assuming the sale of 3,000,000 shares of common stock at the closing of the Offering at an initial public offering price of $15.00 per share. See Note 11. F-19 [DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS] HOUSEKEEPING PATHWAYS STRESS-ACTIVATED PATHWAYS The process by which growth These are also signal production factors outside a cell transmit pathways termed "stress-activated their chemical signals inside the pathways," or "SAPs," which are cell is termed "signal part of the cellular response to transduction." Certain signal injury following exposure to cell transduction pathways, such as the damaging stimuli such as mitogen-activated pathway ("MAP") radiation, chemotherapy or are essential for normal day-to- oxidative injury. Activation of day cellular processes such as the stress-activated pathways may lead normal growth and replenishment of to inflammation and tissue injury. cells in the body. These pathways are often referred to as "housekeeping pathways." - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesperson or any other person has been authorized to give any information or make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date of this Prospectus or that there has been no change in the affairs of the Company since such date. ------------ Table of Contents
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 16 Johnson & Johnson Stock Purchase......................................... 16 Dividend Policy.......................................................... 17 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Data.................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 23 Management............................................................... 43 Certain Transactions..................................................... 56 Principal Shareholders................................................... 58 Description of Capital Stock............................................. 61 Shares Eligible for Future Sale.......................................... 66 Underwriting............................................................. 68 Legal Matters............................................................ 69 Experts.................................................................. 70 Available Information.................................................... 70 Index to Consolidated Financial Statements............................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,000,000 Shares [LOGO OF CELL THERAPEUTICS, INC.] Cell Therapeutics, Inc. Common Stock ----------------------- PROSPECTUS March , 1997 ----------------------- UBS Securities Montgomery Securities Raymond James & Associates, Inc. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee and the NASD filing fee. SEC Registration Fee............................................ $ 16,728 NASD Filing Fee................................................. 6,020 Nasdaq National Market Listing Fee.............................. 50,000 Transfer Agent and Registrar Fees and Expenses.................. * Printing and Engraving Expenses................................. * Legal Fees and Expenses......................................... * Accounting Fees and Expenses.................................... 125,000 Blue Sky Fees and Expenses...................................... * Miscellaneous Expenses.......................................... * -------- TOTAL......................................................... $850,000 ========
- -------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the "WBCA") authorize a court to award, or a corporation's board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article IX of the Registrant's Restated Bylaws (Exhibit 3.6 hereto) provides for indemnification of the Registrant's directors, officers, employees and agents to the maximum extent permitted by Washington law. The directors and officers of the Registrant also may be indemnified against liability they may incur for serving in such capacity pursuant to a liability insurance policy maintained by the Company for such purpose. Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's liability to the corporation or its shareholders for monetary damages for acts or omissions as a director, except in certain circumstances involving intentional misconduct, knowing violations of law or illegal corporate losses or distributions, or any transaction from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Article VI of the Registrant's Restated Articles of Incorporation (Exhibit 3.1 hereto) contains provisions implementing, to the fullest extent permitted by Washington law, such limitations on a director's liability to the Registrant and its shareholders. The Registrant has entered into an indemnification agreement with each of its executive officers and directors in which the Registrant agrees to hold harmless and indemnify the officer or director to the fullest extent permitted by Washington law. The Registrant agrees to indemnify the officer or director against any and all losses, claims, damages, liabilities or expenses incurred in connection with any actual, pending or threatened action, suit, claimor proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which the officer or director is, was or becomes involved by reason of the fact that the officer or director is or was a director, officer, employee, trustee or agent of the Registrant or any related company, partnership or enterprise, including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by the officer or director in an official capacity and any action, suit, claim or proceeding instructed by or at the direction of the officer or director unless such action, suit, claim or proceeding is or was authorized by the Registrant's Board of Directors. No indemnity pursuant to the II-1 indemnification agreements shall be provided by the Registrant on account of any suit in which a final, unappealable judgment is rendered against the officer or director for an accounting of profits made from the purchase or sale by the officer or director of securities of the Registrant in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, and amendments thereto, or for damages that have been paid directly to the officer or director by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Registrant. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors, and by the Registrant of the Underwriters, for certain liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Set forth below is certain information as to all securities issued by the Company since March 1, 1994 which were not registered under the Securities Act. As to all such securities except those issued in connection with stock splits, conversions and exchanges (as to which there was no "sale" within the meaning of the Securities Act), exemption was claimed under Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. The information below gives effect to a 1-for-2 reverse stock split effected in February 1994 and a 1-for-3 1/2 reverse stock split which will be effected prior to the effective date of this Registration Statement. (1) In December 1994 the Registrant issued warrants to purchase 12,432 shares of Common Stock at an initial exercise price of $15.40 per share to Aberlyn Capital Management Limited Partnership in connection with an equipment lease transaction. The exercise price of such warrants was subsequently reduced to $12.8975 per share. Such warrants were subsequently exchanged for 7,228 shares of Common Stock in the transaction described in paragraph (4) below. (2) Between March 1995 and April 1995 the Registrant sold an aggregate of 76,789.5116 shares of Series A Convertible Preferred Stock to a group of accredited investors for cash in the aggregate of $25,724,485. Each share of Series A Convertible Preferred Stock will automatically convert into 28.5714 shares of Common Stock upon the closing of this Offering. (3) In June 1995 the Registrant sold an aggregate of 18,657.4924 shares of Series A Convertible Preferred Stock to a group of accredited investors consisting of Kummell Investments Limited, The Phoenix Partners II Limited Partnership and The Phoenix Partners III Limited Partnership, for cash in the aggregate of $6,250,260. Each share of Series A Convertible Preferred Stock will automatically convert into 28.5714 shares of Common Stock upon the closing of this Offering. (4) In September 1995 the Registrant issued (i) 5,612 shares of Common Stock in exchange for warrants to purchase 190,992 shares of Common Stock at an exercise price of $38.50 per share which were issued to purchasers in a private placement transaction between October 1993 and February 1994; (ii) 68,720 shares of Common Stock in exchange for warrants to purchase 182,409 shares of Common Stock at exercise prices ranging from $17.50 to $31.50 per share which were issued to sales agents in connection with certain private placement transactions between August and December 1992 and between October 1993 and February 1994; (iii) 22,858 shares of Common Stock in exchange for warrants to purchase 57,143 shares of Common Stock at an exercise price of $17.50 per share which were issued to David H. Smith, M.D., a former Chairman of the Board of Directors of the Registrant; and (iv) 7,228 shares of Common Stock in exchange for the warrants described in paragraph (1) above. In February 1996 the registrant issued an additional 151 shares of Common Stock in exchange for warrants to purchase 377 shares of Common Stock at an exercise price of $17.50 per share which were issued to sales agents in connection with certain private placement transactions, including a private placement transaction between October 1993 and February 1994. II-2 (5) In October 1995 the Registrant issued an aggregate of 98,574 shares of Common Stock to six shareholders of Lipomed Corporation ("Lipomed") as consideration for all of the intellectual property of Lipomed. (6) In December 1995 the Registrant sold 5,715 shares of Common Stock to Max E. Link, Ph.D. for $67,000 in cash. (7) In May 1996 the Company sold 7,937 shares of Common Stock to a warrant holder for $305,558 in cash upon exercise of warrants to purchase shares of Common Stock at an exercise price of $38.50 per share. (8) Between September 1996 and October 1996 the Registrant sold an aggregate of 50,746.2683 shares of Series A Convertible Preferred Stock to a group of accredited investors consisting of Kummell Investments Limited, The International Biotechnology Trust plc, W.R. Smith II, Vulcan Ventures Inc., The Phoenix Partners III Limited Partnership and New York Life Insurance Company for cash in the aggregate of $17,000,000. Each share of Series A Convertible Preferred Stock will automatically convert into 28.5714 shares of Common Stock upon the closing of this Offering. (9) In November 1996 the Registrant sold 14,925.373 shares of Series B Convertible Preferred Stock to Johnson & Johnson Development Corporation for $5,000,000 in cash. Each share of Series B Convertible Preferred Stock will automatically convert into 28.5714 shares of Common Stock upon the closing of this Offering. (10) As of December 31, 1996 the Registrant had granted incentive stock options and non-statutory stock options to employees, directors and consultants under its 1992 Stock Option Plan (the "1992 Plan") and 1994 Equity Incentive Plan (the "1994 Plan"), covering an aggregate of 1,208,608 shares of Common Stock, at an average exercise price of approximately $11.76 per share. The Registrant has sold an aggregate of 6,706 shares of its Common Stock to employees, directors and consultants of the Registrant for aggregate consideration of $80,760 pursuant to the exercise of stock options under the 1992 Plan and the 1994 Plan. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION -------- ----------- 1.1++ Form of Underwriting Agreement between UBS Securities LLC, Montgomery Securities, Raymond James & Associates, Inc., and the Registrant 3.1(1) Registrant's Restated Articles of Incorporation 3.2(1) Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series A Convertible Preferred Stock) 3.3 Registrant's Articles of Amendment to Restated Articles of Incorporation Reducing the Number of Authorized Shares of Series A Convertible Preferred Stock 3.4 Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series B Convertible Preferred Stock) 3.5 Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series C Preferred Stock) 3.6 Form of Articles of Amendment to Restated Articles of Incorporation of Cell Therapeutics, Inc. Effecting a Reverse Stock Split. 3.7(5) Registrant's Restated Bylaws 4.1(2) Specimen Common Stock Certificate 4.2(3) Form of Rights Agreement dated as of November 11, 1996, between the Registrant and Harris Trust Company of California, which includes the Form of Rights Certificate as Exhibit A, the Summary of Rights to Purchase Preferred Stock as Exhibit B and the Form of Certificate of Designation of the Series C Preferred Stock as Exhibit C
II-3
EXHIBIT NUMBER DESCRIPTION -------- ----------- 5.1++ Opinion of Shearman & Sterling 10.1(2) Lease Agreement between David A. Sabey and Sandra L. Sabey and the Registrant, dated March 27, 1992, as amended March 31, 1993 and October 13, 1993 10.2 Third Amendment to Lease Agreement between David A. Sabey and Sandra L. Sabey and the Registrant, dated as of September 10, 1996. 10.3(1) Assignment of Lease between Manlove Travel and the Registrant, dated April 23, 1993 10.4 Letter Agreement between David A. Sabey, Sandra L. Sabey and the Registrant, dated as of September 6, 1996, amending the Assignment of Lease. 10.5 Employment Agreement between the Registrant and James A. Bianco, dated as of December 17, 1996 10.6(2) Employment Agreement between the Registrant and Louis A. Bianco, dated as of February 1, 1992, as amended May 27, 1994 10.7(1) Employment Agreement between the Registrant and Maurice J. Schwarz, dated May 2, 1994 10.8(1) Severance Agreement between the Registrant and Robert A. Lewis, dated April 1, 1996 10.9 Form of Strategic Management Team Severance Agreement. 10.10(1) Promissory Note between James A. Bianco, M.D. and the Registrant, dated December 23, 1993 10.11(1) Stock Pledge Agreement between James A. Bianco, M.D. and the Registrant, dated December 23, 1993 10.12(1) 1994 Equity Incentive Plan, as amended 10.13(1) 1992 Stock Option Plan, as amended 10.14(1) 1996 Employee Stock Purchase Plan 10.15(1) Form of Sales Agent Warrant for the 1992 Private Placement 10.16(1) Warrant, dated November 25, 1992, between the Registrant and David H. Smith, M.D. 10.17(1) Registration Agreement between the Registrant and the other parties included therein, dated as of November 23, 1993 10.18(1) Form of Sales Agent Warrant for the 1993 Private Placement 10.19(1) Subscription Agreement between the Registrant and the other parties included therein, dated as of March 21, 1995 10.20(1) Registration Rights Agreement between the Registrant and the other parties included therein, dated as of March 21, 1995 10.21(5) Registration Rights Agreement between the Company and the other parties included therein, dated as of September 17, 1996, as amended by Amendment No. 1 thereto dated as of October 11, 1996. 10.22(5) Letter Agreement between the Company and Kummell Investments Limited, dated September 17, 1996. 10.23(2) Collaboration Agreement by and between BioChem Therapeutic Inc. and the Registrant, dated March 7, 1995, as amended November 30, 1995 and December 6, 1995 10.24(2) Supply Agreement by and between BioChem Therapeutic Inc. and the Registrant, dated March 7, 1995 10.25+ Supply Agreement by and between ChiRex, Ltd. and the Registrant, dated January 21, 1997 10.26+ Collaboration and License Agreement, dated as of November 8, 1996, by and between the Registrant and Ortho Biotech Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation 10.27+ Stock Purchase Agreement, dated as of November 8, 1996, by and between the Registrant and Johnson & Johnson Development Corporation
II-4
EXHIBIT NUMBER DESCRIPTION -------- ----------- 10.28(1) Master Lease Agreement, dated as of December 28, 1994 between the Registrant and Aberlyn Capital Management Limited Partnership 10.29(1) Common Stock Purchase Warrant, dated December 28, 1994 between the Registrant and Aberlyn Capital Management Limited Partnership 10.30(1) Loan and Security Agreement, dated as of May 30, 1995, between the Registrant and Financing for Science International, Inc. 10.31(4) Loan and Security Agreement, dated as of June 28, 1996, between the Registrant and Financing for Science International, Inc. 10.32(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed Corporation, its Stockholders and the Registrant, as amended 10.33(2) Form of Scientific Advisory Board Consulting Agreement 10.34(2) Form of Clinical Advisory Board Consulting Agreement 11.1 Computation of net loss and pro forma net loss per share 22.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, independent auditors (included on page II-9 of this Registration Statement) 23.2++ Consent of Shearman & Sterling (included in its opinion filed as Exhibit 5.1) 23.3++ Consent of Foley & Lardner 24.1 Powers of Attorney (included on pages II-7 and II-8 of this Registration Statement) 27.1 Financial Data Schedule
- -------- +Confidential treatment requested. ++To be supplied by amendment. (1) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form S-1 (No. 33-4154). (2) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form 10. (3) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form 8-A. (4) Incorporated by reference to exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (5) Incorporated by reference to exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (b) Financial Statement Schedules None. All schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the financial statements or related notes. ITEM 17. UNDERTAKINGS 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in Act and will be governed by the final adjudication of such issue. II-5 2. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SEATTLE, STATE OF WASHINGTON, ON JANUARY 30, 1997. Cell Therapeutics, Inc. /s/ James A. Bianco, M.D. By: _________________________________ JAMES A. BIANCO, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints James A. Bianco and Louis A. Bianco, and each of them acting individually, as such person's attorney-in-fact, each with full power of substitution or resubstitution, for such person in any and all capacities, to sign any and all amendments to this Registration Statement and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney or his substitute or substitutes to any and all amendments to said Registration Statement. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ Max E. Link, Ph.D Chairman of the January 31, - ------------------------------------- Board and Director 1997 MAX E. LINK, PH.D /s/ James A. Bianco, M.D. President, Chief January 31, - ------------------------------------- Executive Officer 1997 JAMES A. BIANCO, M.D. and Director (Principal Executive Officer) /s/ Louis A. Bianco Executive Vice January 31, - ------------------------------------- President, Finance 1997 LOUIS A. BIANCO and Administration (Principal Financial Officer and Principal Accounting Officer) /s/ Jack W. Singer, M.D. Director January 31, - ------------------------------------- 1997 JACK W. SINGER, M.D. /s/ Jack L. Bowman Director January 31, - ------------------------------------- 1997 JACK L. BOWMAN II-7 SIGNATURE TITLE DATE /s/ Jeremy L. Curnock Cook Director January 31, - ------------------------------------- 1997 JEREMY L. CURNOCK COOK /s/ Wilfred E. Jaeger, M.D. Director January 31, - ------------------------------------- 1997 WILFRED E. JAEGER, M.D. /s/ David W. Martin, Jr., M.D. Director January 22, - ------------------------------------- 1997 DAVID W. MARTIN, JR., M.D. /s/ Terrence M. Morris Director January 31, - ------------------------------------- 1997 TERRENCE M. MORRIS /s/ Phillip M. Nudelman, Ph.D. Director January 31, - ------------------------------------- 1997 PHILLIP M. NUDELMAN, PH.D. II-8 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated January 24, 1997, except for paragraphs 2 and 3 of Note 12, as to which the date is , 1997, in the Registration Statement (Form S-1) and related Prospectus of Cell Therapeutics, Inc. for the registration of 3,450,000 shares of its Common Stock. Seattle, Washington - -------------------------------------------------------------------------------- The foregoing consent is in the form that will be signed upon the completion of the reverse stock split described in paragraph 2 of Note 12 to the financial statements. Ernst & Young LLP Seattle, Washington January 31, 1997 II-9 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE -------- -------------------- ------------ 1.1++ Form of Underwriting Agreement between UBS Securities LLC, Montgomery Securities, Raymond James & Associates, Inc., and the Registrant 3.1(1) Registrant's Restated Articles of Incorporation 3.2(1) Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series A Convertible Preferred Stock) 3.3 Registrant's Articles of Amendment to Restated Articles of Incorporation Reducing the Number of Authorized Shares of Series A Convertible Preferred Stock 3.4 Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series B Convertible Preferred Stock) 3.5 Registrant's Articles of Amendment to Restated Articles of Incorporation Establishing a Series of Preferred Stock (Series C Preferred Stock) 3.6 Form of Articles of Amendment to Restated Articles of Incorporation of Cell Therapeutics, Inc. Effecting a Reverse Stock Split. 3.7(5) Registrant's Restated Bylaws 4.1(2) Specimen Common Stock Certificate 4.2(3) Form of Rights Agreement dated as of November 11, 1996, between the Registrant and Harris Trust Company of California, which includes the Form of Rights Certificate as Exhibit A, the Summary of Rights to Purchase Preferred Stock as Exhibit B and the Form of Certificate of Designation of the Series C Preferred Stock as Exhibit C 5.1++ Opinion of Shearman & Sterling 10.1(2) Lease Agreement between David A. Sabey and Sandra L. Sabey and the Registrant, dated March 27, 1992, as amended March 31, 1993 and October 13, 1993 10.2 Third Amendment to Lease Agreement between David A. Sabey and Sandra L. Sabey and the Registrant, dated as of September 10, 1996. 10.3(1) Assignment of Lease between Manlove Travel and the Registrant, dated April 23, 1993 10.4 Letter Agreement between David A. Sabey, Sandra L. Sabey and the Registrant, dated as of September 6, 1996, amending the Assignment of Lease. 10.5 Employment Agreement between the Registrant and James A. Bianco, dated as of December 17, 1996 10.6(2) Employment Agreement between the Registrant and Louis A. Bianco, dated as of February 1, 1992, as amended May 27, 1994 10.7(1) Employment Agreement between the Registrant and Maurice J. Schwarz, dated May 2, 1994 10.8(1) Severance Agreement between the Registrant and Robert A. Lewis, dated April 1, 1996 10.9 Form of Strategic Management Team Severance Agreement. 10.10(1) Promissory Note between James A. Bianco, M.D. and the Registrant, dated December 23, 1993 10.11(1) Stock Pledge Agreement between James A. Bianco, M.D. and the Registrant, dated December 23, 1993 10.12(1) 1994 Equity Incentive Plan, as amended 10.13(1) 1992 Stock Option Plan, as amended 10.14(1) 1996 Employee Stock Purchase Plan 10.15(1) Form of Sales Agent Warrant for the 1992 Private Placement 10.16(1) Warrant, dated November 25, 1992, between the Registrant and David H. Smith, M.D. 10.17(1) Registration Agreement between the Registrant and the other parties included therein, dated as of November 23, 1993
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT DESCRIPTION PAGE -------- -------------------- ------------ 10.18(1) Form of Sales Agent Warrant for the 1993 Private Placement 10.19(1) Subscription Agreement between the Registrant and the other parties included therein, dated as of March 21, 1995 10.20(1) Registration Rights Agreement between the Registrant and the other parties included therein, dated as of March 21, 1995 10.21(5) Registration Rights Agreement between the Company and the other parties included therein, dated as of September 17, 1996, as amended by Amendment No. 1 thereto dated as of October 11, 1996. 10.22(5) Letter Agreement between the Company and Kummell Investments Limited, dated September 17, 1996. 10.23(2) Collaboration Agreement by and between BioChem Therapeutic Inc. and the Registrant, dated March 7, 1995, as amended November 30, 1995, and December 6, 1995 10.24(2) Supply Agreement by and between BioChem Therapeutic Inc. and the Registrant, dated March 7, 1995 10.25+ Supply Agreement by and between ChiRex, Ltd. and the Registrant, dated January 21, 1997 10.26+ Collaboration and License Agreement, dated as of November 8, 1996, by and between the Registrant and Ortho Biotech Inc. and The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation 10.27+ Stock Purchase Agreement, dated as of November 8, 1996, by and between the Registrant and Johnson & Johnson Development Corporation 10.28(1) Master Lease Agreement, dated as of December 28, 1994 between the Registrant and Aberlyn Capital Management Limited Partnership 10.29(1) Common Stock Purchase Warrant, dated December 28, 1994 between the Registrant and Aberlyn Capital Management Limited Partnership 10.30(1) Loan and Security Agreement, dated as of May 30, 1995, between the Registrant and Financing for Science International, Inc. 10.31(4) Loan and Security Agreement, dated as of June 28, 1996, between the Registrant and Financing for Science International, Inc. 10.32(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed Corporation, its Stockholders and the Registrant, as amended 10.33(2) Form of Scientific Advisory Board Consulting Agreement 10.34(2) Form of Clinical Advisory Board Consulting Agreement 11.1 Computation of net loss and pro forma net loss per share 22.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, independent auditors (included on page II-9 of this Registration Statement) 23.2++ Consent of Shearman & Sterling (included in its opinion filed as Exhibit 5.1) 23.3++ Consent of Foley & Lardner 24.1 Powers of Attorney (included on pages II-7 and II- 8 of this Registration Statement) 27.1 Financial Data Schedule
- -------- + Confidential treatment requested. ++ To be supplied by amendment. (1) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form S-1 (No. 333-4154). (2) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form 10. (3) Incorporated by reference to exhibits to the Registrant's Registration Statement on Form 8-A. (4) Incorporated by reference to exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (5) Incorporated by reference to exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

 
================================================================================
                                                                     Exhibit 3.3
                              STATE of WASHINGTON

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

        I, RALPH MUNRO, Secretary of State of the State of Washington and 
custodian of its seal, hereby issue this

                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.


UBI Number: 601 339 038                       Date: November 07, 1996

[SEAL OF THE STATE OF 
WASHINGTON APPEARS HERE]           Given under my hand and the Seal of the 
                                   State of Washington at Olympia, the State 
                                   Capital


                                   /s/ Ralph Munro
                                   ------------------------------------------
                                   Ralph Munro, Secretary of State
                                                           2-446543-7

================================================================================


 
                             ARTICLES OF AMENDMENT
                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   REDUCING THE NUMBER OF AUTHORIZED SHARES
                                      OF
                     SERIES A CONVERTIBLE PREFERRED STOCK


     Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment pursuant to RCW
23B.06.020(5), RCW 23B.10.020, and RCW 23B.10.060.

     1.   Name.  The name of the corporation is Cell Therapeutics, Inc.

     2.   Text of Amendments. Pursuant to the corporation's Restated Articles of
Incorporation, the amendment reduces the number of authorized shares the
corporation's Series A Convertible Preferred Stock. As of the date of the
amendment there are 146,193.2723 shares of the corporation's Series A
Convertible Preferred Stock outstanding. The amendment will restate Section 1 of
Paragraph (a) of Article 2 in its entirety. Following is the text of the
amendment adopted:

          "SECTION 1.  DESIGNATION AND AMOUNT.  There is hereby established a
     series of preferred stock of the Corporation which shall be designated as
     the Series A Convertible Preferred Stock (herein the "Preferred").  The
     number of shares of Preferred shall be 146,193.2723."

     3.   Adoption.  The foregoing amendment to the Restated Articles of
Incorporation of the Corporation was duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on October 15, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

 
     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of 
November 7, 1996.


                              CELL THERAPEUTICS


                              By: /s/ James A. Bianco,
                                 ---------------------------------------
                                      James A. Bianco, M.D.
                                      President

Attest:

 /s/ Michael J. Kennedy
- -------------------------------
     Michael J. Kennedy
     Secretary

                                       2

 
================================================================================
                                                                     Exhibit 3.4
                              STATE of WASHINGTON

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

        I, RALPH MUNRO, Secretary of State of the State of Washington and 
custodian of its seal, hereby issue this

                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.


UBI Number: 601 339 038                       Date: November 07, 1996

[SEAL OF THE STATE OF 
WASHINGTON APPEARS HERE]           Given under my hand and the Seal of the 
                                   State of Washington at Olympia, the State 
                                   Capital


                                   /s/ Ralph Munro
                                   ------------------------------------------
                                   Ralph Munro, Secretary of State
                                                   2-4465-43-7

================================================================================

 
                             ARTICLES OF AMENDMENT
                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   ESTABLISHING A SERIES OF PREFERRED STOCK


          Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment Establishing a Series of
Preferred Stock, pursuant to RCW 23B.06.020, RCW 23B.10.020, and RCW 23B.10.060.

          1.  Name.  The name of the Corporation is Cell Therapeutics, Inc.

          2.  Text of Amendments.  Pursuant to the Corporation's Restated
Articles of Incorporation, the amendments establish the designation,
preferences, limitations and relative rights of a series of Preferred Stock.
The amendments will comprise "Paragraph (b) --Series B Convertible Preferred
Stock" of Article 2.  Following is the text of each amendment adopted:

              "SECTION 1. DESIGNATION AND AMOUNT. There is hereby established a
series of preferred stock of the Corporation which shall be designated as the
Series B Convertible Preferred Stock (herein the "Series B Preferred"). The
number of shares of Series B Preferred shall be 14,925.373.

              SECTION 2.  RANK. All shares of Series B Preferred shall rank
junior, both as to payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, to all of the Corporation's now issued Series A Convertible
Preferred Stock (the "Series A Preferred"). All shares of Series B Preferred
shall rank prior, both as to payment of dividends and as to distributions of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, to all of the Corporation's now or hereafter issued
Common. The term "Common" shall mean the Common Stock, without par value, of the
Corporation as the same exists at the date hereof or as such stock may be
constituted from time to time.

              SECTION 3.  DIVIDENDS.  No dividends or other distributions shall
be made with respect to the Series B Preferred until all dividends on the Series
A Preferred have been paid or set apart. The holders of the Series B Preferred
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available

 
therefor, dividends at the rate of $33.50 per share per annum on each
outstanding share of Series B Preferred, payable in preference and priority to
any payment of any dividend on the Common.  No dividends or other distributions
shall be made with respect to the Common, until all dividends on the Series B
Preferred have been paid or set apart.  Such dividends on the Series B Preferred
shall not be cumulative and no right to such dividends shall accrue to holders
of Series B Preferred unless and until declared by the Board of Directors.

          SECTION 4.  LIQUIDATION PREFERENCE.  In the event of any liquidation,
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of the Corporation shall be made in the
following manner:

               (a)    After payment of the "Preference Amount" (as defined in
     Paragraph (a) -- Series A Convertible Preferred Stock" of Article 2 of  the
     Corporation's Restated Articles of Incorporation, and referred to herein as
     the "Series A Preference Amount") has been made to the holders of the
     Series A Preferred, the holders of Series B Preferred then outstanding
     shall be entitled to receive, prior and in preference to any distribution
     of any of the assets or surplus funds of the Corporation to the holders of
     the Common, by reason of their ownership of such stock, an amount for each
     share of Series B Preferred then held by them equal to $335.00
     appropriately adjusted for any combinations, consolidations, stock
     distributions or stock dividends or splits with respect to such shares plus
     all declared but unpaid dividends thereon (hereinafter such amount shall be
     referred to as the "Series B Preference Amount").  If upon the occurrence
     of such event of liquidation, dissolution or winding up, the assets and
     property legally available to be distributed among the holders of the
     Series B Preferred shall be insufficient to permit the payment to such
     holders of the Series B Preference Amount, then the entire assets and
     property of the Corporation legally available for distribution shall be
     distributed ratably among the holders of the Series B Preferred in
     accordance with the Series B Preference Amount.

               (b)    After payment has been made to the holders of the Series A
     Preferred and the holders of the Series B Preferred of the full amounts to
     which they shall be entitled as aforesaid, all remaining assets available
     for distribution, if any, shall be distributed ratably among the holders of
     the Common, the Series A Preferred and the Series B Preferred in proportion
     to the shares of Common then held by them and the shares of Common which
     they then have the right to acquire upon conversion of the shares of Series
     A Preferred and Series B Preferred, as the case may be, then held by them.

               (c)    For purposes of this Section 4, a merger or consolidation
     of the Corporation with or into any other corporation or corporations, or
     the merger of any other corporation or corporations into the Corporation,
     in which consolidation or merger the shareholders of the Corporation
     receive distributions in cash or securities of another corporation or
     corporations as a result of such consolidation or merger, or a sale of all
     or substantially all of the assets of the Corporation, shall not be treated
     as

                                       2

 
     a liquidation, dissolution or winding up of the Corporation, unless both
     (i) the shareholders of this Corporation receive in such consolidation,
     merger or sale of assets less than fifty percent (50%) of the voting equity
     securities of the successor or surviving corporation and (ii) the amount of
     cash and/or securities received by the shareholders of this Corporation is
     less than the total liquidation preference of the Series B Preferred as set
     forth in Section 4(a), in which case such consolidation, merger or sale of
     assets shall be treated as a liquidation, dissolution or winding up.  The
     valuation of any securities or other property other than cash received by
     the Corporation in any transaction covered by this Section 4(c) shall be
     computed at the fair value thereof at the time of receipt as determined in
     good faith by the Board of Directors.

               (d)    The holders of Series B Preferred shall have no priority
     or preference with respect to distributions made by the Corporation in
     connection with the repurchase of shares of Common issued to or held by
     employees, directors or consultants upon termination of their employment or
     services pursuant to agreements providing for the right of said repurchase
     between the Corporation and such persons.

          SECTION 5.  CONVERSION.  The holders of the Series B Preferred shall
have conversion rights (the "Conversion Rights") as follows:

               (a)    Right to Convert.  Each share of Series B Preferred shall
                      ----------------                                       
     be convertible, at the option of the holder thereof, at any time after the
     date of issuance of such share, at the office of the Corporation or any
     transfer agent for the Series B Preferred into such number of fully paid
     and nonassessable shares of Common as is determined by dividing $335.00 by
     the Series B Conversion Price (as hereinafter defined) in effect at the
     time of conversion.  The Series B Conversion Price shall initially be
     $3.35, subject to adjustment as provided in subsection (d) below.

               (b)    Automatic Conversion.
                      -------------------- 

                      (i)     Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price (after making any adjustment required by Section
     5(d)) upon the closing of a firm commitment underwritten public offering
     pursuant to an effective registration statement under the Securities Act of
     1933, as amended (the "Securities Act"), covering the offer and sale of
     Common for the account of the Corporation to the public at a price per
     share (prior to underwriter discounts and commissions and other offering
     expenses) of not less than $5.00 (subject to adjustment in the event of any
     recapitalization, stock split, stock dividend or other similar event) and
     an aggregate offering price to the public of not less than $20,000,000. In
     the event of the automatic conversion of the Series B Preferred upon a
     public offering as aforesaid, the person(s) entitled to receive the Common
     issuable upon such automatic conversion of Series B Preferred shall not be
     deemed to have converted such Series B Preferred

                                       3

 
     until immediately prior to the closing of such sale of securities, and
     after giving effect to any adjustment of the Series B Conversion Price
     required by Section 5(d).

                      (ii)    Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price upon the written consent of holders of not less
     than 66.67% of the then outstanding shares of Series B Preferred voting
     together as a single class.

                      (iii)   Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price immediately prior to the closing of any merger or
     consolidation of the Corporation that is not treated as a liquidation,
     dissolution or winding up under Section 4(c) if the shareholders of the
     Corporation receive distributions of equity securities of another
     corporation as a result of such consolidation or merger and (i) such class
     of equity securities has been continuously registered under Section 12 of
     the Securities Exchange Act of 1934, as amended, over the six month period
     ending with the closing of such merger or consolidation, (ii) such equity
     securities are listed on the New York Stock Exchange or any other national
     securities exchange, or are quoted on the Nasdaq National Market, (iii) the
     average Closing Price per share of such class of equity securities as
     calculated for the last 30 trading days (the "Trading Period") ending on
     the fifth trading day prior to the closing of such merger or consolidation
     equals or exceeds $5.00, (iv) such class of equity securities has an
     aggregate market float of not less than $20,000,000, and (v) such equity
     securities are issued in a transaction of the type specified in paragraph
     (a) of Rule 145 under the Securities Act and are registered on Form S-4 or
     an equivalent form promulgated under the Securities Act. As used herein,
     the term "Closing Price" for any day in question shall be the last reported
     sales price regular way or, in case no such reported sales take place on
     such day, the average of the closing bid and asked prices regular way for
     such day, in each case on the New York Stock Exchange Composite Tape or, if
     not listed on the New York Stock Exchange, on the principal national
     securities exchange on which such equity securities are listed or admitted
     to trading or, if not listed or admitted to trading on a national
     securities exchange, the last sale price regular way for such equity
     securities as published by the Nasdaq National Market ("Nasdaq"), or if no
     such sale takes place on such day, the average between the closing bid and
     asked prices for such class of equity securities as published by Nasdaq.
     The term "trading day" shall mean a day on which the market used for
     calculating the Closing Price is open for the transaction of business and
     on which there has been at least one share of Common traded.

               (c)    Mechanics of Conversion.  No fractional shares of Common
                      -----------------------                                 
     shall be issued upon conversion of Series B Preferred.  In lieu of any
     fractional shares to which the holder would otherwise be entitled, the
     Corporation shall pay cash equal to such fraction multiplied by the then
     effective Series B Conversion Price for such series of Series B Preferred.
     Any declared but unpaid dividends on any share of

                                       4

 
     Series B Preferred that is converted into Common pursuant to this Section 5
     shall, simultaneously upon conversion of such share of Series B Preferred,
     automatically be converted into such number of fully paid and nonassessable
     shares of Common as is determined by dividing the amount of declared but
     unpaid dividends on such converted share of Series B Preferred by the
     Series B Conversion Price in effect at the time of conversion.  Before any
     holder of Series B Preferred shall be entitled to convert the same into
     full shares of Common, he shall surrender the certificate or certificates
     therefor, duly endorsed, at the office of the Corporation or of any
     transfer agent for the Series B Preferred, and shall give written notice to
     the Corporation at such office that he elects to convert the same;
     provided, however, that in the event of an automatic conversion pursuant to
     --------  -------                                                          
     Section 5(b), the outstanding shares of all Series B Preferred shall be
     converted automatically without any further action by the holders of such
     shares and whether or not the certificates representing such shares are
     surrendered to the Corporation or its transfer agent; provided, further,
                                                           --------  ------- 
     that the Corporation shall not be obligated to issue certificates
     evidencing the shares of Common issuable upon such automatic conversion
     unless either the certificates evidencing such shares of Series B Preferred
     are delivered to the Corporation or its transfer agent as provided above,
     or the holder notifies the Corporation or its transfer agent that such
     certificates have been lost, stolen or destroyed and executes an agreement
     satisfactory to the Corporation to indemnify the Corporation from any loss
     incurred by it in connection with such certificates.

               The Corporation shall, as soon as practicable after such
     delivery, or after such agreement and indemnification, issue and deliver at
     such office to such holder of Series B Preferred, a certificate or
     certificates for the number of shares of Common to which he shall be
     entitled as aforesaid and a check payable to the holder in the aggregate
     amount of any cash amounts payable as the result of a conversion into
     fractional shares of Common.  Such conversion shall be deemed to have been
     made immediately prior to the close of business on the date of such
     surrender of the shares of Series B Preferred to be converted, or in the
     case of automatic conversion on the date of the closing of the offering or
     the effective date of such written consent (as the case may be), and the
     person or persons entitled to receive the shares of Common issuable upon
     such conversion shall be treated for all purposes as the record holder or
     holders of such shares of Common on such date.

               Upon the conversion of any outstanding shares of Series B
     Preferred into Common pursuant to this Section 5, all such shares of Series
     B Preferred shall resume the status of authorized but unissued shares of
     Series B Preferred.

               (d)    Adjustments to Series B Conversion Price.
                      ---------------------------------------- 

                      (1) In the event the Corporation at any time or from time
     to time effects a subdivision or combination of its outstanding Common into
     a greater or lesser number of shares without a proportionate and
     corresponding subdivision or

                                       5

 
     combination of its outstanding Series B Preferred, then and in each such
     event the Series B Conversion Price shall be decreased or increased
     proportionately.

                      (2) In the event the Corporation at any time or from time
     to time shall make or issue, or fix a record date for the determination of
     holders of Common entitled to receive, a dividend or other distribution
     payable in additional shares of Common or other securities or rights
     (hereinafter referred to as "Common Stock Equivalents") convertible into or
     entitling the holder thereof to receive additional shares of Common without
     payment of any consideration by such holder for such Common Stock
     Equivalents or the additional shares of Common, then and in each such event
     the maximum number of shares (as set forth in the instrument relating
     thereto without regard to any provisions contained therein for a subsequent
     adjustment of such number) of Common issuable in payment of such dividend
     or distribution or upon conversion or exercise of such Common Stock
     Equivalents shall be deemed to be issued and outstanding as of the time of
     such issuance or, in the event such a record date shall have been fixed, as
     of the close of business on such record date. In each such event the Series
     B Conversion Price shall be proportionately decreased as of the time of
     such issuance or, in the event such a record date shall have been fixed, as
     of the close of business on such record date.

                      (3) If at any time after the first date of which a share
     of Series B Preferred is first issued ("Original Issue Date"), the
     Corporation shall issue or sell Equity Securities, as defined in subsection
     (i) below, at a consideration per share that is less than the Series B
     Conversion Price in effect immediately prior to the time of such issue or
     sale (the "Lower Price"), then forthwith upon such issue or sale, the
     Series B Conversion Price of each share of Series B Preferred shall be
     adjusted to a price (calculated to the nearest cent) determined by
     multiplying such Series B Conversion Price as in effect immediately prior
     to issuance or sale by a fraction:

                      (A) the numerator of which is an amount equal to the sum
          of (x) the number of shares of Common outstanding immediately prior to
          such issue or sale, (y) the number of shares of Common issuable upon
          conversion or exchange of any obligations or of any shares of stock of
          the Corporation outstanding immediately prior to such issue or sale,
          and (z) an amount equal to the aggregate "consideration actually
          received" by the Corporation upon such issue or sale divided by the
          then existing Series B Conversion Price, and

                      (B) the denominator of which is the sum of the number of
          shares of Common outstanding immediately after such issue or sale and
          the number of shares of Common issuable upon conversion or exchange of
          any obligations or of any shares of stock of the Corporation
          outstanding immediately after such issue or sale.

          For purposes hereof the following provisions shall be applicable:

                                       6

 
                      (i)     The term "Equity Securities" shall mean any shares
     of Common, or any obligation, any share of stock or other security of the
     Corporation convertible into or exchangeable or exercisable for Common, or
     any security of the Corporation convertible into or exchangeable or
     exercisable for such convertible or exchangeable securities, except for (1)
     Common issued or issuable after the Original Issue Date to officers,
     directors, full-time employees or consultants of the Corporation pursuant
     to stock grant, stock purchase and/or stock option plans or any other stock
     incentive program, agreement or arrangement approved by the Board of
     Directors, (2) shares of Common issued upon exercise of warrants to
     purchase Common that may be hereinafter issued in connection with debt
     financings or equipment lease financing transactions, (3) shares issued
     pursuant to Section 5(d)(1), 5(d)(2), (4) shares of Common issued upon
     conversion of the Series B Preferred and (5) shares of Common issued as a
     dividend or distribution on the Series B Preferred; provided, however, that
                                                         --------  -------
     the aggregate number of shares of Common that the Corporation may issue or
     sell at a Lower Price that would be excluded from the definition of "Equity
     Securities" pursuant to clauses (1) and (2) of this subsection (i) shall
     not exceed 750,000 shares.

                      (ii)    In the case of an issue or sale for cash of shares
     of Common the "consideration actually received" by the Corporation therefor
     shall be deemed to be the amount of cash received, before deducting
     therefrom any commissions or expenses paid by the Corporation.

                      (iii)   In case of the issuance (otherwise than upon
     conversion or exchange of obligations or shares of stock of the
     Corporation) of additional shares of Common for a consideration other than
     cash or a consideration partly other than cash, the amount of the
     consideration other than cash received by the Corporation for such shares
     shall be deemed to be the fair value of such consideration as determined in
     good faith by the Board of Directors.

                      (iv)    In case of the issuance by the Corporation in any
     manner of any rights to subscribe for or to purchase shares of Common, or
     any options for the purchase of shares of Common or stock convertible into
     Common, all shares of Common or stock convertible into Common to which the
     holders of such rights or options shall be entitled to subscribe for or
     purchase pursuant to such rights or options shall be deemed "issued" and
     "outstanding" as of the date of the offering of such rights or the granting
     of such options, as the case may be, and the minimum aggregate
     consideration named in such rights or options for the shares of Common or
     stock convertible into Common covered thereby, plus the consideration, if
     any, received by the Corporation for such rights or options, shall be
     deemed to be the "consideration actually received" by the Corporation (as
     of the date of the offering of such rights or the granting of such options,
     as the case may be) for the issuance of such shares.

                                       7

 
                      (v)     In case of the issuance or issuances by the
     Corporation in any manner of any obligations or of any shares of stock of
     the Corporation that shall be convertible into or exchangeable for Common,
     all shares of Common issuable upon the conversion or exchange of such
     obligations or shares shall be deemed "issued" and "outstanding" as of the
     date such obligations or shares are issued, and the amount of the
     "consideration actually received" by the Corporation for such additional
     shares of Common shall be deemed to be the total of (1) the amount of
     consideration received by the Corporation upon the issuance of such
     obligations or shares, as the case may be, plus (2) the minimum aggregate
     consideration, if any, other than such obligations or shares, receivable by
     the Corporation upon such conversion or exchange, except in adjustment of
     dividends.

                      (vi)    The amount of the "consideration actually
     received" by the Corporation upon the issuance of any rights or options
     referred to in subsection (iv) above or upon the issuance of any
     obligations or shares which are convertible or exchangeable as described in
     subsection (v) above, and the amount of the consideration, if any, other
     than such obligations or shares so convertible or exchangeable, receivable
     by the Corporation upon the exercise, conversion or exchange thereof shall
     be determined in the same manner provided in subsections (ii) and (iii)
     above with respect to the consideration received by the Corporation in case
     of the issuance of additional shares of Common; provided, however, that if
     such obligations or shares of stock so convertible or exchangeable are
     issued in payment or satisfaction of any dividend upon any stock of the
     Corporation other than Common, the amount of the "consideration actually
     received" by the Corporation upon the original issuance of such obligations
     or shares of stock so convertible or exchangeable shall be deemed to be the
     fair value of such obligations or shares of stock, as of the date of the
     adoption of the resolution declaring such dividend, as determined by the
     Board of Directors at or as of that date. On the expiration of any rights
     or options referred to in subsection (iv), or the termination of any right
     of conversion or exchange referred to in subsection (v), or any change in
     the number of shares of Common deliverable upon exercise of such options or
     rights or upon conversion of or exchange of such convertible or
     exchangeable securities, the Series B Conversion Price then in effect shall
     forthwith be readjusted to such Series B Conversion Price as would have
     been obtained had the adjustments made upon the issuance of such option,
     right or convertible or exchangeable securities been made upon the basis of
     the delivery of only the number of shares of Common actually delivered or
     to be delivered upon the exercise of such rights or options or upon the
     conversion or exchange of such securities.

                      (vii)   In the event this Corporation shall declare a
     distribution payable in securities of other persons, evidences of
     indebtedness issued by this Corporation or other persons or options or
     rights not referred to in this Section 5(d)(3), then, in each such case,
     the holders of the Series B Preferred shall be entitled to the
     distributions provided for in Section 3 above, and no adjustment to the
     Series B

                                       8

 
     Conversion Price provided for in this Section 5(d)(3) shall be applicable.

                      (4)     Except as provided in Section 6(b), the
     Corporation will not, by amendment of its Articles of Incorporation or
     through any reorganization, transfer of assets, consolidation, merger,
     dissolution, issue or sale of securities or any other voluntary action,
     avoid or seek to avoid the observance or performance of any of the terms to
     be observed or performed hereunder by the Corporation but will at all times
     in good faith assist in the carrying out of all the provisions of this
     Section 5(d) and in the taking of all such action as may be necessary or
     appropriate in order to protect the Conversion Rights of the holders of the
     Series B Preferred against impairment.

                      (5)     Upon the occurrence of each adjustment or
     readjustment of the Series B Conversion Price for any series pursuant to
     Section 5(d), the Corporation at its expense shall promptly compute such
     adjustment or readjustment in accordance with the terms hereof and furnish
     to each holder of shares of such series of Series B Preferred a certificate
     setting forth such adjustment or readjustment and showing in detail the
     facts upon which such adjustment or readjustment is based. The Corporation
     shall, upon the written request at any time of any holder of Series B
     Preferred, furnish or cause to be furnished to such holder a like
     certificate setting forth (i) such adjustments and readjustments, (ii) the
     Series B Conversion Price at the time in effect, and (iii) the number of
     shares of Common and the amount, if any, of other property which at the
     time would be received upon the conversion of Series B Preferred.

                      (6)     In the event that this Corporation shall propose
     at any time:

                      (i)     to declare any dividend or distribution upon its
     Common, whether in cash, property, stock or other securities, whether or
     not a regular cash dividend and whether or not out of earnings or earned
     surplus;

                      (ii)    to offer for subscription pro rata to the holders
     of any class or series of its stock any additional shares of stock of any
     class or series or other rights;

                      (iii)   to effect any reclassification or recapitalization
     of its Common outstanding involving a change in the Common; or

                      (iv)    to merge or consolidate with or into any other
     corporation, or sell, lease or convey all or substantially all its property
     or business, or to liquidate, dissolve or wind up;

     then, in connection with each such event, the Corporation shall send to the
     holders of

                                       9

 
     the Series B Preferred at least twenty (20) days prior written notice of
     the date on which a record shall be taken for such dividend, distribution
     or subscription rights (and specifying the date on which the holders of
     Common shall be entitled thereto) or for determining rights to vote in
     respect of the matters referred to in (iii) and (iv) above; and in the case
     of the matters referred to in (iii) and (iv) above, at least twenty (20)
     days prior written notice of the date when the same shall take place (and
     specifying the date on which the holders of Common shall be entitled to
     exchange their Common for securities or other property deliverable upon the
     occurrence of such event).  Each such notice shall be given by first class
     mail, postage prepaid, addressed to the holders of Series B Preferred at
     the address for each such holder as shown on the books of the Corporation.

          SECTION 6.  VOTING RIGHTS.

               (a)    Except as otherwise required by law, each share of Series
     B Preferred issued and outstanding shall have the number of votes equal to
     the number of shares of Common into which such share of Series B Preferred
     could be converted at the record date for determination of the shareholders
     entitled to vote on such matters, or, if no such record date is
     established, at the date such vote is taken or any written consent of
     shareholders is solicited, such votes to be counted together with all other
     shares of stock of the Corporation having general voting power and not
     separately as a class. The holder of each share of Series B Preferred shall
     be entitled to notice of any shareholders' meeting in accordance with the
     bylaws of the Corporation. Fractional votes by the holders of Series B
     Preferred shall not, however, be permitted and any fractional voting rights
     shall (after aggregating all shares into which shares of Series B Preferred
     held by each holder could be converted) be rounded to the nearest whole
     number. The holders of Series B Preferred shall not be entitled to
     cumulative voting rights.

               (b)    So long as any shares of Series B Preferred shall be
     outstanding, the Corporation shall not, without first obtaining the
     affirmative vote or written consent of the holders of at least 66.67% of
     such outstanding shares of Series B Preferred, voting together as a single
     class:

                      (i)     amend the Corporation's Articles of Incorporation
     so as to adversely affect the voting powers or other rights or preferences
     of the Series B Preferred;

                      (ii)    authorize or issue shares of any class or series
     of stock not authorized herein having any preference or priority as to
     dividends or assets superior to or on a parity with any such preference or
     priority of the Series B Preferred, or authorize or issue shares of stock
     of any class or any bonds, debenture, notes or other obligations
     convertible into or exchangeable for, or having rights to purchase, any
     shares of stock of the Corporation having any preference or priority as

                                       10

 
     to dividends or assets superior to or on a parity with any such preference
     or priority of the Series B Preferred; or

                      (iii)   reclassify any shares of Common or any other
     shares of the Corporation into shares having any preference or priority as
     to dividends or assets superior to or on a parity with any such preference
     or priority of the Series B Preferred."


     3.   Adoption.  The foregoing amendments to the Restated Articles of
Incorporation of the Corporation were duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on November 7, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of November
7, 1996.


                              CELL THERAPEUTICS


                              By: /s/ James A. Bianco,
                                 ----------------------------------------
                                      James A. Bianco, M.D.
                                      President

Attest:

 /s/ Michael J. Kennedy
- ------------------------------- 
     Michael J. Kennedy
     Secretary

                                       11

 
                           STATE of WASHINGTON                      Exhibit 3.5

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

     I, RALPH MUNRO, Secretary of State of the State of Washington and custodian
of its seal, hereby issue this


                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.


a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.





UBI Number: 601 339 038                                  Date: November 07, 1996



[SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                                   Given under my hand and the Seal of the State
                                   of Washington at Olympia, the State Capital

                                   /s/ Ralph Munro
                                   ---------------------------------------------
                                   Ralph Munro, Secretary of State
                                                     2-446543-7

 
                             ARTICLES OF AMENDMENT
                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   ESTABLISHING A SERIES OF PREFERRED STOCK


          Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment Establishing a Series of
Preferred Stock, pursuant to RCW 23B.06.020, RCW 23B.10.020, and RCW 23B.10.060.

          1.  Name.  The name of the Corporation is Cell Therapeutics, Inc.

          2.  Text of Amendments.  Pursuant to the Corporation's Restated
Articles of Incorporation, the amendments establish the designation,
preferences, limitations and relative rights of a series of Preferred Stock.
The amendments will comprise "Paragraph (c) --Series C Convertible Preferred
Stock" of Article 2.  Following is the text of each amendment adopted:

              SECTION 1.  DESIGNATION AND AMOUNT.  There is hereby established a
series of preferred stock of the Corporation which shall be designated as
"Series C Preferred Stock" and the number of shares constituting such series
shall be 100,000.

              SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior
and superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of preferred stock of the Corporation
ranking prior and superior to the shares of Series C Preferred Stock with
respect to dividends, each holder of one one-thousandth (1/1,000) of a share (a
"Unit") of Series C Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for that
purpose, (i) quarterly dividends payable in cash on the last day of March, June,
September and December in each year (each such date being a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of such Unit of Series C Preferred Stock, in an amount per
Unit (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series C Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in

 
an amount per Unit equal to the aggregate per share amount of all non-cash
dividends or other distributions (other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock, by
reclassification or otherwise) declared on shares of Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or with respect to the
first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series C Preferred Stock.  In the event that the Corporation shall at any time
after November 8, 1996 (the "Rights Declaration Date") (i) declare any dividend
on outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock or (iii) combine outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
amount to which the holder of a Unit of Series C Preferred Stock was entitled
immediately prior to such event pursuant to the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.

          (B) The Corporation shall declare a dividend or distribution on Units
of Series C Preferred Stock as provided in paragraph (A) above immediately after
it declares a dividend or distribution on the shares of Common Stock (other than
a dividend payable in shares of Common Stock); provided, however, that, in the
                                               --------  -------              
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per Unit on the
Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.

          (C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series C Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series C Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series C Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date.  Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series C Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a unit-by-
unit basis among all Units of Series C Preferred Stock at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
Units of Series C Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30 days
prior to the date fixed for the payment thereof.

                                       2

 
              SECTION 3.  VOTING RIGHTS. The holders of Units of Series C
Preferred Stock shall have the following voting rights:

          (A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series C Preferred Stock shall entitle the holder thereof to one
vote on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the number of votes per Unit to which holders of Units of
Series C Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.

          (B) Except as otherwise provided herein or by law, the holders of
Units of Series C Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.

          (C) (i)  If at any time dividends on any Units of Series C Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends thereon,
then during the period (a "default period") from the occurrence of such event
until such time as all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all Units of
Series C Preferred Stock then outstanding shall have been declared and paid or
set apart for payment, all holders of Units of Series C Preferred Stock, voting
separately as a class, shall have the right to elect two Directors.

          (ii)  During any default period, such voting rights of the holders of
Units of Series C Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting rights nor any right of the
holders of Units of Series C Preferred Stock to increase, in certain cases, the
authorized number of Directors may be exercised at any meeting unless one-third
of the outstanding Units of Preferred Stock shall be present at such meeting in
person or by proxy.  The absence of a quorum of the holders of Common Stock
shall not affect the exercise by the holders of Units of Series C Preferred
Stock of such rights.  At any meeting at which the holders of Units of Series C
Preferred Stock shall exercise such voting rights initially during an existing
default period, they shall have the right, voting separately as a class, to
elect Directors to fill up to two vacancies in the Board of Directors, if any
such vacancies may then exist, or, if such right is exercised at an annual
meeting, to elect two Directors.  If the number which may be so elected at any
special meeting does not amount to the required number, the holders of the
Series C Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them of

                                       3

 
the required number.  After the holders of Units of Series C Preferred Stock
shall have exercised their right to elect Directors during any default period,
the number of Directors shall not be increased or decreased except as approved
by a vote of the holders of Units of Series C Preferred Stock as herein provided
or pursuant to the rights of any equity securities ranking senior to the Series
C Preferred Stock.

          (iii)  Unless the holders of Series C Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than 25% of the total number of the Units of
Series C Preferred Stock outstanding may request, the calling of a special
meeting of the holders of Units of Series C Preferred Stock, which meeting shall
thereupon be called by the Secretary of the Corporation.  Notice of such meeting
and of any annual meeting at which holders of Units of Series C Preferred Stock
are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Units of Series C Preferred Stock by mailing a copy of such
notice to him at his last address as the same appears on the books of the
Corporation.  Such meeting shall be called for a time not earlier than 20 days
and not later then 60 days after such order or request or in default of the
calling of such meeting within 60 days after such order or request, such meeting
may be called on similar notice by any stockholder or stockholders owning in the
aggregate not less than 25% of the total number of outstanding Units of Series C
Preferred Stock.  Notwithstanding the provisions of this paragraph (C)(iii), no
such special meeting shall be called during the 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.

          (iv)  During any default period, the holders of shares of Common Stock
and Units of Series C Preferred Stock, and other classes or series of stock of
the Corporation, if applicable, shall continue to be entitled to elect all the
Directors until holders of the Units of Series C Preferred Stock shall have
exercised their right to elect two Directors voting as a separate class, after
the exercise of which right (x) the Directors so elected by the holders of Units
of Series C Preferred Stock shall continue in office until their successors
shall have been elected by such holders or until the expiration of the default
period, and (y) any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of capital
stock which elected the Director whose office shall have become vacant.
References in this paragraph (C) to Directors elected by the holders of a
particular class of capital stock shall include Directors elected by such
Directors to fill vacancies as provided in clause (y) of the foregoing sentence.

          (v)  Immediately upon the expiration of a default period, (x) the
right of the holders of Units of Series C Preferred Stock as a separate class to
elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series C Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles or by-laws irrespective of any increase made
pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number
being subject, however, to change thereafter in any manner provided by law or in
the Articles or by-laws).  Any

                                       4

 
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.

          (vi)  The provisions of this paragraph (C) shall govern the election
of Directors by holders of Units of Preferred Stock during any default period
notwithstanding any provisions of the Articles to the contrary, including,
without limitation, the provisions of Article THIRD of the Articles.

                (D) Except as set forth herein, holders of Units of Series C
Preferred Stock shall have no special voting rights and their consents shall not
be required (except to the extent they are entitled to vote with holders of
shares of Common Stock as set forth herein) for taking any corporate action.

                SECTION 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly
dividends or other dividends or distributions payable on Units of Series C
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
outstanding Units of Series C Preferred Stock shall have been paid in full, the
Corporation shall not

                (i)   declare or pay dividends on, make any other distributions
          on, or redeem or purchase or otherwise acquire for consideration any
          shares of junior stock;

                (ii)  declare or pay dividends on or make any other
          distributions on any shares of parity stock, except dividends paid
          ratably on Units of Series C Preferred Stock and shares of all such
          parity stock on which dividends are payable or in arrears in
          proportion to the total amounts to which the holders of such Units and
          all such shares are then entitled;

                (iii) redeem or purchase or otherwise acquire for consideration
          shares of any parity stock, provided, however, that the Corporation
                                      --------  -------
          may at any time redeem, purchase or otherwise acquire shares of any
          such parity stock in exchange for shares of any junior stock;

                (iv)  purchase or otherwise acquire for consideration any Units
          of Series C Preferred Stock, except in accordance with a purchase
          offer made in writing or by publication (as determined by the Board of
          Directors) to all holders of such Units.

                (B) The Corporation shall not permit any subsidiary of the
          Corporation to purchase or otherwise acquire for consideration any
          shares of stock of the Corporation unless the Corporation could, under
          paragraph (A) of this Section 4, purchase or otherwise acquire such
          shares at such time and in such manner.

                SECTION 5. REACQUIRED SHARES. Any Units of Series C Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be

                                       5

 
retired and cancelled promptly after the acquisition thereof.  All such Units
shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.

          SECTION 6.  LIQUIDATION, DISSOLUTION OR WINDING UP.  (A)  Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
junior stock unless the holders of Units of Series C Preferred Stock shall have
received, subject to adjustment as hereinafter provided in paragraph (B), the
greater of either (a) $1.00 per Unit plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not earned or declared, to the
date of such payment, or (b) the amount equal to the aggregate per share amount
to be distributed to holders of shares of Common Stock, or (ii) to the holders
of shares of parity stock, unless simultaneously therewith distributions are
made ratably on Units of Series C Preferred Stock and all other shares of such
parity stock in proportion to the total amounts to which the holders of Units of
Series C Preferred Stock are entitled under clause (i)(a) of this sentence and
to which the holders of shares of such parity stock are entitled, in each case
upon such liquidation, dissolution or winding up.

          (B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the aggregate amount to which holders of Units
of Series C Preferred Stock were entitled immediately prior to such event
pursuant to clause (i)(b) of paragraph (A) of this Section 6 shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.

          SECTION 7.  CONSOLIDATION, MERGER, ETC.  In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of common stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series C Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged.  In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the immediately preceding sentence with respect to the
exchange or conversion of Units of Series C Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which

                                       6

 
shall be the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.

          SECTION 8.   REDEMPTION.  The Units of Series C Preferred Stock shall
not be redeemable.

          SECTION 9.   RANKING. The Units of Series C Preferred Stock shall rank
junior to all other series of the Preferred Stock and to any other class of
preferred stock that hereafter may be issued by the Corporation as to the
payment of dividends and the distribution of assets, unless the terms of any
such series or class shall provide otherwise.

          SECTION 10.  AMENDMENT.  The Articles, including, without limitation,
this resolution, shall not hereafter be amended, either directly or indirectly,
or through merger or consolidation with another corporations in any manner that
would alter or change the powers, preferences or special rights of the Series C
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding Units of Series C Preferred
Stock, voting separately as a class.

          SECTION 11.  FRACTIONAL SHARES.  The Series C Preferred Stock may be
issued in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series C Preferred Stock.

          SECTION 12.  CERTAIN DEFINITIONS.  As used herein with respect to the
Series C Preferred Stock, the following terms shall have the following meanings:

          (A) The term "Common Stock" shall mean the class of stock designated
as the common stock, no par value, of the Corporation at the date hereof or any
other class of stock resulting from successive changes or reclassification of
such common stock.

          (B) The term "junior stock" (i) as used in Section 4, shall mean the
Common Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series C Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 6, shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series C Preferred Stock has preference
or priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.

          (C) The term "parity stock" (i) as used in Section 4, shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series C Preferred Stock as to the payment of
        ---- -----                                                       
dividends and (ii) as used in Section 6, shall mean any class or series of
capital stock ranking pari passu with the Series C Preferred
                      ---- -----                            

                                       7

 
Stock in the distribution of assets on any liquidation, dissolution or winding
up of the Corporation.


     3.   Adoption.  The foregoing amendments to the Restated Articles of
Incorporation of the Corporation were duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on November 7, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of November
7, 1996.


                              CELL THERAPEUTICS


                              By: /s/ James A. Bianco
                                 --------------------------------
                                   James A. Bianco, M.D.
                                   President

Attest:

  /s/ Michael J. Kennedy
 ----------------------------
     Michael J. Kennedy
     Secretary

                                       8

 
                                                                     EXHIBIT 3.6

                                    FORM OF
                             ARTICLES OF AMENDMENT
                                       TO
                       RESTATED ARTICLES OF INCORPORATION
                                       OF
                            CELL THERAPEUTICS, INC.
                        EFFECTING A REVERSE STOCK SPLIT


   Cell Therapeutics, Inc. a Washington corporation, by James A. Bianco, M.D.,
its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing these Articles of Amendment pursuant to RCW 23B.10.060.

   1.     NAME.  The name of the Corporation is Cell Therapeutics, Inc.

   2.     TEXT OF AMENDMENT.  The Restated Articles of Incorporation are hereby
amended by changing Section 1 of the Article II thereof to read as follows:

          "1.  Classes.  The Corporation shall be authorized to issue two
               -------                                                   
      classes of shares of stock to be designated, respectively, "Common Stock"
      and "Preferred Stock."  The total number of shares which the Corporation
      shall have authority to issue is One Hundred Ten Million (110,000,000);
      the total number of authorized shares of Common Stock shall be One Hundred
      Million (100,000,000), and the total number of authorized shares of
      Preferred Stock shall be Ten Million (10,000,000)."

   3.     ADOPTION.  The foregoing amendment to the Restated Articles of
Incorporation of the Corporation was duly adopted by unanimous written consent
of the Board of Directors of the Corporation on January 22, 1997 and was duly
approved by the shareholders of the Corporation on February 28, 1997 in
accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040.

   4.     EFFECTING THE REVERSE STOCK SPLIT.  Upon the date these Articles of
Amendment are filed with the Secretary of State of the State of Washington, each
three and one-half shares of issued and outstanding shares of Common Stock of
this Corporation shall be automatically reclassified into one share of Common
Stock of this Corporation, thereby giving effect to a one-for-three and one-half
reverse stock split (the "Reverse Stock Split"). Furthermore, all outstanding
rights and obligations (including option plans, stock options and the exercise
price thereof, stock purchase warrants and the exercise prices thereof and the
conversion terms of the Corporation's shares of outstanding Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock) relating to this
Corporation's Common Stock shall be mathematically adjusted to reflect the
Reverse Stock Split so that the proportionate ratio of such rights and
obligations to the reclassified shares will be equal to the proportionate ratio

                                       1
 


 
of such rights and obligations to the shares outstanding immediately prior to
such reclassification. In lieu of the issuance of any fractional shares that
would otherwise result from the Reverse Stock Split, the Corporation shall issue
to any shareholder that would otherwise receive fractional shares one whole
share, the additional shares thereby issued being taken from authorized but
theretofore unissued shares of Common Stock. Following the effectiveness of this
Amendment, certificates representing the shares of Common Stock to be
outstanding thereafter shall be exchanged for certificates now outstanding
pursuant to procedures adopted by the Corporation's Board of Directors and
communicated to those who are to receive new certificates.

   IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to
Restated Articles of Incorporation Effecting a Reverse Stock Split to be
executed as of _______________, 1997.


                              CELL THERAPEUTICS, INC.



                              By:___________________________
                                    James A. Bianco, M.D.
                                    President


Attest:

____________________________ 
     Michael J. Kennedy
     Secretary

                                       2


 
                                                                    EXHIBIT 10.2
 
                      THIRD AMENDMENT TO LEASE AGREEMENT

     THIS THIRD AMENDMENT TO LEASE AGREEMENT ("Third Amendment") is entered into
by and between DAVID A. SABEY AND SANDRA L. SABEY, husband and wife 
("Landlord") and CELL THERAPEUTICS, INC., a Washington corporation ("Tenant"), 
with respect to the following facts:

                                   RECITALS
                                   --------

     A.   Landlord and Tenant are parties to that certain: 1) Lease Agreement
dated March 27, 1992, as amended, modified or supplemented by the certain First
Amendment to Lease Agreement dated March 31, 1993, Second Amendment to Lease
Agreement dated October 13, 1993; and 2) the Assignment of Lease dated April 23,
1993, whereby Tenant was assigned and assumed certain space in the Building
(collectively the "Lease Agreement"). Defined terms used herein, unless
otherwise expressly defined, shall have the meaning as set forth in the Lease
Agreement.

     B. Pursuant to Section 47 of the Lease Agreement (as added by the First
Amendment to the Lease Agreement), Landlord shall deliver and Tenant shall take
possession of the Additional Expansion Space upon the expiration of the current
tenant's lease of the Additional Expansion Space. Landlord has notified Tenant
of the availability of Additional Expansion Space and Tenant has notified
Landlord of its acceptance of the Additional Expansion Space.

     C.   Tenant desires to lease from Landlord and Landlord desires to lease to
Tenant, certain trade fixtures, equipment and improvements ("Trade
Improvements"), currently located in the Additional Expansion Space.

     D.   Landlord and Tenant are executing this Amendment to acknowledge
specific terms of Tenant's lease of the Additional Expansion Space, lease of
Trade Improvements in the Additional Expansion Space and to further amend the
Lease in accordance with terms set forth herein below.

                                  AMENDMENTS
                                  ----------

     NOW THEREFORE, in consideration of the mutual covenants of the parties, 
Landlord and Tenant hereby agree as follows:

1.   Premises. Paragraph 1.b of the Lease Agreement is hereby amended in its 
     entirety to read as follows:

     b.   Premises: The premises shall consist of:

          .  a Storage Area (approximately 3,410 net rentable square feet),
             Maintenance Office Space (398 square feet), and Storage Tank Space
             (64 square feet), located in the north garage servicing the
             Building as outlined on the attached floor plan, Exhibit A-1;

                                  Page 1 of 7

 
          .  the Third (3rd) Floor (23,162 net rentable square feet, which
             includes 17,372 net rentable square feet, which for purposes of
             this Lease Agreement is referred to as the "Tenant Space", and 5790
             net rentable square feet, which is the Additional Expansion Space),
             located in the Building as outlined on the attached floor plan,
             Exhibit A-4;

          .  the Fourth (4th) Floor (18,304 net rentable square feet) located in
             the Building as outlined on the attached floor plan, Exhibit A-5;
             and
 
          .  the Fifth (5th) Floor (18,304 net rentable square feet) located in 
             the Building as outlined on the attached floor plan, Exhibit A-6.

     Upon execution of this Third Amendment, Tenant shall occupy a total of
     60,977 net rentable square feet in the Building (Premises Area). This
     includes 1,207 net rentable square feet on the First (1st) Floor
     ("Hazardous Material Space"), located in the Building as outlined on the
     attached floor plan, Exhibit A-2, and the subject of an Assignment of
     Lease, dated April 23, 1993, between Tenant and Manlove Travel, Inc. The
     above total 60,977 net rentable square feet excludes the Storage Area,
     Maintenance Office Space and Storage Tank Space, specified above.

 2.  Percentage of Building.  Paragraph 1.c. is amended in its entirety to read
     as follows:

     c.   Tenant's Percentage of the Building: Tenant's percentage of the
          Building shall mean forty-six and six tenths percent (46.6%),
          calculated by dividing the Premises Area (60,977 net rentable square
          feet) by the area of the Building (130,949 square feet).

 3.  Base Rent:  Paragraph 1.h.(i) is amended in its entirety to read as 
     follows:

     h.   Annual Base Rent: Beginning on August 1, 1996, and continuing until
          the fifth (5th) anniversary of the Rent Commencement Date (January 31,
          1998), the Annual Base Rent shall be as follows:

SPACE ID NET RENTABLE ANNUAL RATE ANNUAL BASE RENT Storage Area 3,410 $10 $ 34,100.00 Maintenance Space 398 $10 $ 3,980.00 Tank Storage Space 64 0 0 1st Floor - Hazard. Mat. Space 1,207 $16 $ 19,312.00 3rd Floor - Tenant Space 17,372 $16 $ 277,952.00 3rd Floor - Additional Exp. Space 5,790 $16 $ 92,640.00 4th Floor 18,304 $16 $ 292,864.00 5th Floor 18,304 $16 $ 292,864.00 ============================================= TOTALS: 64,849 $1,013,712.00
Page 2 of 7 Beginning on February 1, 1998 and continuing until the Expiration Date (January 31, 2003), the Annual Base Rent Shall be as follows:
Space ID Net Rentable Annual Rate Annual Base Rent Storage Area 3,410 $12 $ 40,920,00 Maintenance Space 398 $12 $ 4,776.00 Tank Storage Space 64 0 0 1st Floor - Hazard. Mat. Space 1,207 $18 $ 21,726.00 3rd Floor - Tenant Space 17,372 $18 $ 312,696.00 3rd Floor - Additional Exp. Space 5,790 $18 $ 104,220.00 4th Floor 18,304 $18 $ 329,472.00 5th Floor 18,304 $18 $ 329,472.00 ============================================= TOTALS: 64,849 $1,143,282.00
Commencing August 1, 1996, the Annual Base Rent shall be paid in twelve (12) equal installments on or before the first (1st) day of each month during the Lease Term. 4. Additional Expansion Space. Section 47 of the Lease Agreement shall be amended in its entirety to read: 47. Additional Expansion Space. a. Tenant Occupancy. Landlord shall deliver the Additional Expansion Space to Tenant on September 1, 1996; provided, however, Tenant may enter the Expansion Space prior to the delivery date for the purposes of architectural, design or engineering review. Landlord's delivery of the Additional Expansion Space shall be in it's "AS IS" condition as of the date of delivery and Landlord shall not be required to make alterations, additions, or improvements to the Additional Expansion Space; except that Landlord shall seal the stairwell presently located within the Additional Expansion Space, eliminating access between the second floor and the Additional Expansion Space. b. Base Service Year. For purposes of determining Additional Rent for the Additional Expansion Space, the Additional Expansion Space shall have a Base Service Year of 1992. c. Trade Improvements. Landlord hereby agrees to lease to Tenant and Tenant hereby agrees to lease from Landlord, the Trade Improvements serving the Expansion Space all on the following terms and conditions: i. Term. Tenant shall lease from Landlord the Trade Improvements commencing on September 1, 1996, and terminating on the Expiration Date, unless earlier terminated in accordance with the Lease. It is the intent of the parties that the term of the lease for the Trade Improvements be co-terminous with the lease of the Premises. Page 3 of 7 ii. Condition and Uses. Landlord shall deliver the Trade Improvements in their "AS IS, WHERE IS" condition, without representation or warranty of any kind whatsoever, whether express or implied, including without limitation, warranty for habitability, suitability or for particular use and Landlord shall not be required to make any allegations, repairs or improvements to the Trade Improvements. Notwithstanding the foregoing, Landlord represents to Tenant that to the best of their knowledge, the Trade Improvements have been adequately maintained and repaired by the prior tenant and owner, Oncomembrane, Inc. and is in reasonably good working order, normal wear and tear excepted. Tenant hereby agrees that with respect to its use of the Personal Property, it will comply with all of the terms of the Lease, including without limitation, Section 6 of the Lease. iii. Repair, Maintenance and Alterations. Tenant hereby agrees to maintain and repair, at Tenant's sole cost and expense, the Trade Improvements at all times during the term hereof. Tenant shall maintain the Trade Improvements at all times in good repair. Tenant shall make no alterations or modifications to the Trade Improvements without the prior written consent of the Landlord. In addition to the foregoing, Tenant agrees that all other terms and conditions of the Lease shall apply to the Trade Improvements and its repair or maintenance, unless directly contrary to the foregoing terms in this paragraph. iv. Taxes and Insurance. Tenant shall pay, before delinquency any and all Real Property Taxes (as defined in the Lease) on the Trade Improvements and provide Landlord with evidence of such payment. Tenant shall maintain Liability and property damage insurance on the Trade Improvements at all times during the term hereof in accordance with the requirements of Section 16 of the Lease. v. Removal of Property and Surrender. Tenant shall not remove the Trade Improvements from the Premises without the prior written consent of the Landlord. Upon termination of the Lease, Tenant shall surrender the Trade Improvements to the Landlord in good working condition and repair, normal wear and tear excepted. d. Mechanical System. The Additional Expansion Space is serviced by mechanical and physical systems (collectively, "Mechanical System"), specifically air handling unit(s), boilers, chillers, natural gas, electricity and vacuum that also will continue to provide service to the first and second floors of the Building. Notwithstanding the terms of this paragraph, Tenant shall continue to be responsible for maintaining mechanical equipment (e.g., air handling unit and exhaust fans) located in the small mechanical room on the roof of the second floor of the Building which services the Organic Chemistry Lab of the Additional Expansion Space (labeled "OCL" on Exhibit A-4). Page 4 of 7 Tenant agrees to an equitable allocation of the costs and expenses of maintaining, repairing and replacing the Mechanical System between Tenant and first and second floor tenants, on a pro-rata, square footage basis, so long as the Mechanical System serves the first and second floors and the Additional Expansion Space. Landlord and Tenant agree to cooperate in good faith to work with the first and second floor tenant with respect to the equitable allocation of costs and expenses and the use of the Mechanical System by the first and second floor tenant. Tenant acknowledges that the first or second floor tenant (currently Pathogenesis Inc.) shall maintain, repair and replace the Mechanical System for the benefit of Tenant and the first or second floor tenant. Tenant shall reimburse Pathogenesis Inc., the successor first or second floor tenant or Landlord (in the event Landlord has undertaken maintenance and repair responsibility) on a pro-rata square foot basis, for any and all maintenance, repair or replacement costs. Tenant shall pay Pathogenesis, Inc. (or the party maintaining the Mechanical System) such costs on a monthly basis based on estimates. All costs and expenses shall be reconciled on an annual basis. Tenant shall have the option of disconnecting certain of the Mechanical Systems servicing the Additional Expansion Space and instead servicing all or a portion of the Additional Expansion Space with Tenant's mechanical systems currently servicing other space in the Building leased by Tenant under the lease. In such event, tenants pro-rata square footage allocation of costs for maintaining and repairing the Mechanical Systems shall be reduced accordingly. 5. Parking: Paragraph l.j. is amended in its entirety to read as follows: j. Parking: Tenant shall lease 82 parking stalls (plus 1 additional space for each 750 feet of expansion space) in and under cover of the Building, or in the adjacent building commonly known as the P-I Building, on an unassigned basis at $100.00 per space and adjusted to the prevailing monthly market rates as established by Landlord every three (3) years. Landlord will, if reasonably possible, accommodate Tenant's preference as to location of the parking stalls. The leasing of parking stalls by Tenant shall be subject to such rules and regulations as Landlord or its parking operator may adopt from time to time. Landlord shall also assist Tenant in locating twenty-five (25) additional parking stalls located within one block of the Building (plus 1 additional space for each 750 feet of expansion space). These additional stalls shall be provided at Tenant's sole cost and expense. 6. Miscellaneous. The additional Expansion Space shall be subject to all other terms and conditions of the Lease Agreement, including without limitation, the option to extend the Lease Term, determination of Annual Base Rent and Additional Rent during extension terms, Landlords rights to approve build out of the Additional Expansion Space and the terms and conditions with respect to assignment and subletting the Premises. Page 5 of 7 7. Amendment. Except as expressly modified and amended herein, the Lease Agreement shall remain in full force and effect. DATED this 10 day of September, 1996 -- --------- LANDLORD: DAVID A. SABEY AND SANDRA L. SABEY /s/ David A. Sabey ----------------------------------- David A. Sabey individually and as attorney-in-fact for Sandra L. Sabey STATE OF WASHINGTON ) ) ss COUNTY OF KING ) On this day personally appeared before me DAVID A. SABEY to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that he signed the same as his free and voluntary act and deed, for the uses and purposes therein mentioned. DATED this 9 day of Sept., 1996 - ----- /s/ Mary A. Hall ----------------------------------- [SEAL APPEARS HERE] Notary Public in and for the State of Washington, residing at Seattle -----------------------. My Commission Expires: 12-19-97 -------------. MARY A. HALL ----------------------------------- (print name) Page 6 of 7 TENANT: CELL THERAPEUTICS, INC. By: /s/ J. Bianco -------------------- Its: President and CEO ------------------- STATE OF WASHINGTON ) ) ss COUNTY OF KING ) ---------- On this 10th day of September, 1996, before me, the undersigned, a Notary ---- --------- Public in and for the State of Washington, duly commissioned and sworn, personally appeared James A. Bianco, MD, to be known to be the President and CEO ------------------- ----------------- of the corporation that executed the foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute the said instrument. Witness my hand and official seal hereto affixed the day and year first above written. /s/ Sally Teeters ------------------------------------------------ Notary Public in and for the State of Washington, residing at Everett ------------------------------------. My Commission Expires: August 7, 1997 -------------------------. Sally Teeters ------------------------------------------------ (print name)

 
                                                                    EXHIBIT 10.4
 
                              [LETTERHEAD OF CTI]

September 6, 1996

HAND DELIVERED
- --------------
Mr. David A. Sabey
Sabey Corporation
101 Elliott Avenue West, Suite 330
Seattle, WA 98119

Re:  Lease Amendment
     ---------------

Dear Dave:

Cti acknowledges that the Office Lease Agreement dated March 29, 1985, as 
amended (Lease) and assigned to cti under the Assignment of Lease (Assignment) 
dated April 23, 1993, should be further amended.

Accordingly, paragraph 1.l should read:

     1.l  Description. Landlord hereby leases to Tenant and Tenant hereby rents
          from Landlord those certain Premises, shown in Exhibit A and located
          in the City of Seattle, County of King, Washington, commonly known as
          Suite 110, Elliott Park, 201 Elliott Avenue West and described as that
          certain material storage space comprising 1,207 sq. ft. of net
          rentable square feet, said Premises being situated upon real property
          more particularly described on Exhibit "B", attached hereto and by
          this reference made a part hereof.

Furthermore, your April 26, 1996, letter sets forth the lease rates of $16 
through January 31, 1998 and $18 from February 1, 1998 through January 31, 2003,
per rentable square foot.  Thus, the annual rent for the space shall be $19,312 
(through January 31, 1998) and $21,726 (from February 1, 1998 through January 
31, 2003).

 
Mr. David A. Sabey
September 6, 1996
Page 2

- ------------------

Please acknowledge your agreement with this amendment by signing and dating the 
duplicate original of this letter and returning one original to us for our 
permanent records.

Best regards.

Sincerely,

CELL THERAPEUTICS, INC.

/s/ James Bianco
James A. Bianco, MD
President and Chief Executive Officer

JAB/ast

ACCEPTED AND AGREED BY:

SABEY CORPORATION

/s/ David A. Sabey                            9 SEPT 1996
- -------------------------------               -------------------------
David A. Sabey individually and               Date
as attorney-in-fact for
Sandra L. Sabey


 
                                                                    EXHIBIT 10.5
 
                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 
17th day of December, 1996, by and between JAMES A. BIANCO, M.D. ("Employee"), 
and CELL THERAPEUTICS, INC., a Washington corporation (the "Company").  In 
consideration of the mutual covenants and conditions set forth herein, the 
parties hereby agree as follows:

          1.   Employment.  The Company hereby employs Employee to serve as its 
               ----------
President and Chief Executive Officer and Employee hereby accepts such 
employment.  In his capacity as President and Chief Executive Officer, Employee 
shall be responsible for developing and presenting Company strategies and 
potential products or technologies, negotiating licensing and sublicensing 
agreements, an directing product research and overall corporate direction.  
Employee's duties will also include coordinating planning leading to the 
development of research facilities and business offices, in addition to 
overseeing daily operations of the physical/corporate plant.  As President and 
Chief Executive Officer, Employee agrees to perform such other duties during the
term hereof as the Board of Directors of the Company shall, from time to time, 
reasonably direct.  Employee agrees to utilize his skills and to render 
services to the best of his ability on a full-time basis during the term of this
Agreement; provided that the Employee may engage, with the prior written consent
           --------
of the Board of Directors, in other ventures that do not violate the covenant 
not to compete contained in Section 9 and do not materially interfere with the 
performance of the Employee's duties hereunder.

          2.   Term.  Unless earlier terminated pursuant to the provisions of 
               ----
Section 6 below, Employee's employment hereunder shall be for a period 
commencing on the date hereof (the "Effective Date") and continuing through and 
including December 31, 1999.  Prior to the expiration of the Term, the parties 
shall in good faith negotiate the terms of any extension thereof.

          3.   Compensation.
               ------------

               Base Salary.  For all services rendered by Employee under this 
               -----------
Agreement, Employee shall receive a salary at an annual rate of $358,032 for 
1996 and $393,835 for 1997 (effective January 1, 1997), as increased under 
Section 3b ("Base Salary"), or such higher annual rate as the Board of Directors
of the Company may from time to time establish in its sole discretion.

          b.   Annual Bonuses.  Employee shall receive such annual bonuses as 
               --------------
may be declared from time to time by the Board of Directors in its sole 
discretion.

          c.   Stock Option Plans.  The Company has adopted stock option and/or 
               ------------------
stock purchase plans for the benefit of certain employees of the Company.  
Employee shall be

 
entitled to participate in such plans, consistent with the terms of such plans 
and applicable law.

          d.   Loan Forgiveness.  Notwithstanding anything to the contrary 
               ----------------
contained in that certain promissory note dated December 23, 1993 made by the 
Employee in favor of the Company (the "Note"), the parties agree that the Note 
shall be amended to provide that, on each anniversary of the Effective Date of 
this Agreement, the Company shall forgive one-third of the principal amount of 
the loan which is evidenced by the Note together with the interest accruing 
thereunder pursuant to the terms of the Note; provided that in the event that 
                                              --------
the employment of Employee terminates prior to the forgiveness of all of the 
obligations under the Note for any reason other than by the Company without
cause or by the Employee for cause (as such terms are defined in Section 6a and
Section 6c, respectively) or as a result of death or disability (as defined in
Section 6f below) of Employee, the unpaid principal amount and the interest
accruing thereunder shall become immediately due and payable.  In the event that
(i) the employment of Employee is terminated by the Company without cause or by
the Employee for cause or as a result of death or disability of Employee, (ii) a
Change in Ownership (as defined in Section 14) occurs, or (iii) following a
public offering (a "Public Offering") of stock of the Company pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), the market capitalization of the Company equals or
exceeds $500 million, the unpaid principal amount and the interest accruing
thereunder shall be forgiven.  The Company shall pay to the Employee such
additional compensation as is necessary (after taking into account all federal,
state and local income taxes payable by the Employee as a result of the
cancellation of indebtedness described above. The amount of such payment shall
be determined by an accounting firm jointly selected by the Company and the
Employee and paid by the Company, and which may be the Company's independent
auditors.

          Upon the cancellation or payment of all the obligations under the 
Note, the Company's security interest in the shares of common stock of the 
Company pledged to the Company pursuant to the Stock Pledge Agreement dated 
December 23, 1993 by and between the Employee, the Company and Bogle & Gates, as
escrow agent, shall terminate.

          4.   Benefits.
               --------

          a.   Medical/Health Insurance.  The Company shall provide Employee 
               ------------------------
with Company paid medical and dental insurance for Employee, his spouse and 
dependents in accordance with such policies as shall be maintained by the 
Company, which shall be comparable to that currently enjoyed by Employee.

          b.   Vacation/Sick Leave.  Employee shall be entitled to vacation and 
               -------------------
sick leave in accordance with Company policy, provided Employee shall be 
                                              --------
entitled to (i) a minimum of four (4) weeks vacation annually during the Term, 
and (ii) a minimum of four (4) days of paid sick leave for each ten (10) weeks 
of consecutive employment.  Any unused vacation time shall be paid in a cash 
lump sum payment promptly after Employee's termination of employment, regardless
of the reason for such termination, or at such earlier time as required by
Company vacation policy to avoid forfeiture of accrued but unused vacation time.


 
          c.   Life/Disability Insurance.  The Company shall provide, at Company
               -------------------------
expense, universal (or other non-term) life insurance for the benefit of
Employee in amounts no less than $5 million. The Company's benefit plan for
executive officers shall provide, at Employee's expense, disability insurance
for the benefit of Employee and his beneficiaries through a company reasonably
acceptable to Employee. Employee's Base Salary shall be increased by the amount
of the annual premiums for such coverage. The Company shall cause its records to
reflect that the premiums for the disability policy have been paid by the
Employee, including Form W-2 prepared by the Company. The above benefits are
subject to the same being available to the Company at reasonable cost and any
limitations resulting from Employee's physical condition.

          d.   Expense Reimbursement.  The Company shall pay or reimburse 
               ---------------------
Employee for all reasonable travel and other expenses incurred or paid by 
Employee in connection with the performance of services under this Agreement 
upon presentation of expense vouchers and such other supporting information as 
the Company may from time to time reasonably request.

          e.   Health Club Membership.  The Company shall reimburse the Employee
               ----------------------
for one health club membership, including any initiation fee and dues incurred 
in connection therewith.

          5.   Warranties and Indemnification.  Employee represents to the 
               ------------------------------
Company that Employee is free to enter into this Agreement and that Employee has
no commitment, arrangement or understanding to or with any third party which 
restrains or is in conflict with this Agreement; or which would operate to 
prevent Employee from performing the services to the Company which Employee 
hereby has agreed to provide.  Employee agrees to indemnify and hold the Company
harmless from and against any and all liabilities or claims, including costs, 
expenses and reasonable attorney's fees arising out of any acts by Employee 
which, the foregoing representation or warranty to the contrary notwithstanding,
shall be in violation of or shall constitute a breach of any such commitment, 
arrangement or understanding.

          6.   Termination.
               -----------

          a.   By the Company with Cause.  The Company may terminate Employee's 
               -------------------------
employment hereunder at any time during the Term upon written notice to Employee
for cause, and except as provided below, the salary and benefits referred to in 
Sections 3 and 4 above shall cease upon the effective date of any such 
termination for cause.  As used herein, with respect to termination by the 
Company, the term "cause" shall mean (i) any material breach hereof by Employee 
which is not cured within thirty (30) days following notice of such breach given
by the Company, provided that no such prior notice and opportunity to cure need 
                --------
be given where such breach, or similar breach, has been the subject of such a 
notice and cure period on more than two prior occasions; or (ii) conviction of 
Employee for commitment of a felony; or (iii) any act of Employee, which in the
reasonable judgment of two-thirds of the Board of Directors of the Company,
constitutes willful dishonesty, larceny, fraud or gross

 
negligence by Employee in the performance of his duties to the Company, or 
willful misrepresentation to shareholders, directors or officers of the Company.

          b.   By the Company without Cause.  The Company may, by action of 
               ----------------------------
two-thirds of the Board of Directors, terminate Employee's employment at any 
time upon thirty (30) days' prior written notice and without cause; provided 
that prior to the effective date of termination, the Company shall pay to
Employee an amount equal to twenty-four (24) months' Base Salary then payable to
Employee. In addition, the Company shall continue to provide Employee the
benefits described in Section 4a, at the same or greater levels, through the
expiration of the term of this Agreement as set forth at Section 2 above or the
Company shall reimburse the Employee for his cost in obtaining substantially
equivalent benefits for the specified time period.

          c.   By the Employee with Cause.  Employee may terminate his 
               --------------------------
employment hereunder at any time upon written notice to the Company for cause.  
The amounts identified in Section 6b shall be paid to Employee as of the 
effective date of termination, together with the continuing benefits described 
therein, as Employee's sole remedy with respect to his termination of employment
(but not limiting Employee's remedies with respect to any defamatory conduct).  
As used herein with respect to termination by Employee prior to a Change in 
Ownership (as defined in Section 14 below), "cause" shall mean (i) any material 
breach hereof by the Company which is not cured within thirty (30) days 
following notice of such breach given by Employee; (ii) repeated and consistent 
bad faith attempts to bring about Employee's resignation through obstruction by 
the Company of the operations and programs of Employee in his capacity hereunder
which are not cured within thirty (30) days following notice of such acts given 
by Executive; (iii) the removal of Employee from the position of President of 
Chief Executive Officer, or the appointment of another person to perform the
duties ordinarily associated with such position(s) without the formal removal of
Employee's title(s); (iv) the transfer of Employee or the relocation of the
principal offices from which the activities of the Company are conducted to an
area more than fifty (50) miles outside the City of Seattle, Washington; or (v)
the failure of a Successor (as defined in Section 14 below) to assume and agree
to be bound by the terms of this Agreement. As used herein with respect to
termination by Employee on or following a Change in Ownership (as defined in
Section 14 below), "cause" shall mean (i) any breach hereof by the Company; (ii)
bad faith attempts to bring about Employee's resignation through obstruction by
the Company of the operations and programs of Employee in his capacity hereunder
which are not cured within thirty (30) days following notice of such acts given
by Executive; (iii) the diminution of, or adverse change in, the duties, status
or responsibilities of Employee whether or not the formal removal of Employee's
title(s) has occurred; (iv) the transfer of Employee or the relocation of the
principal offices from which the activities of the Company are conducted to an
area more than fifty (50) miles outside the City of Seattle, Washington; or (v)
the failure of a Successor (as defined in Section 14 below) to assume and agree
to be bound by the terms of this Agreement.

          d.   By the Employee without Cause.  If Employee terminates his 
               -----------------------------
employment without cause, such termination shall be treated as a termination 
with cause by Company, as provided in Section 6(a) above.

 
          e.   Disputes.  With respect to disputes involving the existence of 
               --------
"cause" hereunder, each party hereunder consents to submit itself to personal 
jurisdiction of the United States District Court in the Western District of 
Washington and state courts in the Seattle Washington area.  Notwithstanding the
foregoing, on or following a Change in Ownership, the determination as to 
whether "cause" exists shall be made by Employee in good faith.

          f.   Death and Disability.  This Agreement and Employee's employment 
               --------------------
and salary shall in any event terminate upon the death of Employee or the 
inability of Employee to perform the duties and functions of his position for a 
period of 120 days during any twelve (12) consecutive month period due to 
sickness or disability ("disability"), after which period Employee shall 
commence receiving benefits under the Company's short- and long-term disability
policies in accordance with their terms.

          g.   Acceleration of Vesting.  In the event this Agreement is 
               -----------------------
terminated by Employer without cause, or by Employee with cause, or Employee
dies or is disabled, all stock and stock options of employee in the Company
shall immediately become vested.

          h.   Life Insurance.  In the event this Agreement is terminated by 
               --------------
Employer or by Employee, or if Employee's employment otherwise terminates, 
Employee shall have the right to purchase all life insurance policies maintained
by the Company on the life of Employee at a cost of One Dollar ($1.00), plus any
administrative charges required by the insurance company to assign the 
policy(ies) to Employee.  If any of such policies have a cash surrender value, 
such cash surrender value existing  ninety (90) days prior to the termination 
shall be transferred with the policy to Employee.

          i.   Gross-Up.  Notwithstanding anything in this Agreement to the 
               --------
contrary, if any amounts due to the Employee under this Agreement and any other 
plan or program of the Company (collectively, the "Total Payments") will be 
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay the
Employee an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income tax and Excise Tax upon the
payment provided for by this subsection, shall be equal to the Total Payments.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Employee's residence on the date of
termination, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the event that the
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time of termination of the Employee's employment, the
Employee shall repay to the Company at the time that the amount of such
reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the

 
Gross-Up Payment being repaid by the Employee if such repayment results in a 
reduction in Excise Tax and/or a federal and state and local income tax 
deduction) plus interest on the amount of such repayment at the rate provided in
Section 1274(b)(2) of the Code.  In the event that the Excise Tax is determined 
to exceed the amount taken into account hereunder at the time of the termination
of the Employee's employment (including by reason of any payment the existence 
or amount of which cannot be determined at the time of the Gross-Up Payment), 
the Company shall make an additional gross-up payment in respect of such excess
(plus any interest payable with respect to such excess) at the time that the
amount of such excess is finally determined. The determinations to be made with
respect to this Section 6i shall be made by an accounting firm jointly selected
by the Company and the Employee and paid by the Company, and which may be the
Company's independent auditors.

          7.  Confidentiality.
              ---------------

          a.   Employee acknowledges that the Company's business and future 
success depends on the preservation of the trade secrets and other confidential 
information of the Company and its affiliates, suppliers and customers (the 
"Secrets").  The Secrets include existing, to-be-developed or acquired products,
processes, techniques, methods, computer programs, know-how, trade secrets, 
customers, suppliers, developments, patents, equipment, or business information 
made, sold, used developed or practiced by the Company in its business or 
proprietary to the Company or its affiliates, suppliers or customers.  "Secrets"
do not include any of the above information or medium generally known to the
industry or which comes to the attention of Employee through sources other than
the Company.  It is anticipated that all employees of the Company, including
Employee, will mark all items containing Secrets with prominent confidentiality
notices in accordance with policies to be adopted by the Company.  Employee
agrees to protect and to preserve as confidential during and after the term of
his employment all of the Secrets at any time known to Employee or in his
possession or control (whether wholly or partially developed by Employee or
provided to Employee, and whether embodied in a tangible medium or merely
remembered).

          b.   Employee shall neither use nor intentionally allow any other 
person to use any of the Secrets in any way, except for the benefit of the 
Company.  All tangible items embodying or disclosing any portion of the Secrets 
shall be and remain the property of the Company and shall be returned to the 
Company upon the termination of Employee's employment.  At such time, Employee 
shall also assemble all tangible items of work in progress, notes, plans, and 
other materials related in any way to Employee's employment, and will promptly 
deliver such items to the Company.  The failure to mark any item with
confidentiality notice(s) shall not ipso facto, cause such item to be excluded
                                    ----------
from classification as a Secret for purposes of this Section 7.

          c.  Employee's covenants in this paragraph shall supplement, and shall
not supplant, any other rights or remedies the Company may have under applicable
law for the protection of its properties and trade secrets.

          8.   Inventions.
               ----------

 
          a.   "Invention(s)" shall mean discoveries, designs, programs, 
improvements, developments, new concepts, methods, agents materials, and ideas 
whether patentable or not, and products, processes and know-how related to the 
use or production thereof.

          b.   Employee agrees that any Invention which Employee has made or may
make during the term of this Agreement shall be treated as part of the Company's
Secrets and shall be the sole and exclusive property of the Company, whether or 
not (i) patent applications or copyright registrations are filed thereon, 
(ii) the Invention is utilized by the Company, or (iii) the Invention is 
conceived or developed by Employee individually or jointly with others.  
However, Employee has no obligation to assign to the Company any Invention for 
which no Company Secrets and no equipment, supplies, or facilities of the 
Company were used and which was developed entirely on Employee's own time, 
unless:

          (i)    the Invention relates directly to the business of the Company,

          (ii)   the Invention relates to actual or demonstrably anticipated 
     research or development work of the Company,or

          (iii)  the Invention directly results from any work performed by 
     Employee for the Company.

          c.   Whenever requested by the Company, Employee agrees to assist and 
cooperate with the Company, at the Company's expense, in the obtaining, 
maintaining and enforcing of United States and foreign patents and copyright 
registrations for any Invention which is to be the property of the Company as 
provided above.  This assistance and cooperation shall include, but is not 
limited to:

          (i)    making application for United States foreign patents or 
     copyright registrations on any Invention if so requested by the Company;

          (ii)   assigning all of Employee's right, title and interest in and to
     such Invention and any patent applications or copyright registrations
     thereon to the company or its designee; and

          (iii)  executing all documents and rendering all assistance as may be 
     reasonably necessary to protect the rights of the Company or its designee 
     and to vest in the Company or its designee all rights to any such 
     Invention, patent application, patent copyright, or copyright registration.

          d.   Attached hereto as Exhibit A is a list of all issued patents, 
                                  ---------
pending patent applications, registered copyrights, and other inventions which 
Employee has owned or has developed prior to being retained by the Company.  Any
copyright, patent, pending application, or prospective patent application thus 
listed and not otherwise expressly assigned

 
in writing by Employee to the Company will be excluded from the terms of this 
Agreement.

          9.   Covenant Not to Compete.
               -----------------------

          a.   Applicability.  This Section 9 shall apply following the 
               -------------
termination of Employee's employment only in the event such termination is 
(i) by Employer for cause as defined in Section 6a above, or (ii) by Employee 
without cause as defined in Section 6c above.

          b.  Covenant.  For a period beginning on the date of this Agreement 
              --------
and ending two years following the date of termination of Employee's employment.
Employee hereby agrees that he will not, directly or indirectly, enter into the
employment of, render services to or acquire any interest whatsoever in (whether
for his own account as an individual proprietor, or as a partner, associate,
shareholder, officer, director, consultant, trustee or otherwise), any person or
entity engaged in any operations in competition in any area of the world with
any aspect of the business of the Company as presently conducted and as said
business may evolve in the ordinary course of business between the date of this
Agreement and the termination of Employee's employment hereunder (including
products under active development at such time); provided, however, that nothing
                                                 --------  -------
herein shall prevent the purchase or ownership by Employee of shares of stock in
a nominal amount by way of investment in any publicly-held corporation or
prevent the employment of or the rendering of services by Employee where he does
not contribute to the development or sale of products which compete with
products of the Company with whose development or sale the Employee was directly
involved.  In addition, nothing herein shall prevent Employee from practicing
and carrying on research as a physician.  Employee agrees that he will, during
the term of his employment with the Company, promptly and fully disclose to the
Company any business opportunity coming to Employee's attention, or conceived or
developed in whole or in part by Employee, which relates to the Company's
business or demonstrably anticipated business. Employee will not at any time
exploit such business opportunities for his own gain or that of any person or
entity other than the Company.

          10.  Remedies.  Employee acknowledges that damages for breach of his
               --------
covenants under Sections 7, 8 and 9 above will be difficult to determine and 
inadequate to remedy the harm which may be caused thereby, and therefore agrees 
that the Company may petition or seek to enjoin a putative violation by 
temporary or permanent injunction.  Any available injunctive relief shall be in 
addition to and not in place of any other remedies available at law or equity.  
Employee believes that the provisions of this Agreement are reasonable and that 
Employee is capable of gainful employment without breaching this Agreement.  
However, should any court or tribunal decline to enforce any provision of
Section 9 or 10 of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Company to the maximum extent of time, scope and geography which the court shall
find enforceable, and such provisions shall be so enforced.

          11.  Entire Agreement; Modification.  The provisions contained herein
               ------------------------------

 
constitute the entire Agreement between the parties and supersede any prior 
agreement between the parties with respect to the subject matter hereof and any 
waiver, alteration or modification of any provisions of this Agreement, or the 
replacement of this Agreement, shall not be valid unless in writing and signed
by all the parties signing hereunder.

     12.  Governing Law.  This Agreement shall be governed and construed in 
          -------------
accordance with the laws of the State of Washington.

     13.  Agreement Not Assignable.  Employee may not assign any of his rights 
          ------------------------
or delegate any of his duties hereunder.  Subject to Section 6c, the Company may
assign this Agreement to any of its Affiliates at any time owned by, owning or 
under common ownership with the Company.  In the event of such an assignment by 
the Company, such affiliates shall be deemed substituted for the Company at each
place where "the Company" appears herein; provided, however, the Company shall
                                          --------  -------
not be released from its obligations hereunder. Furthermore, the assignment of
this Agreement by the Company shall not enlarge the business activities 
considered to be conducted by the Company for purposes of Sections 7, 8, and 9
hereof. Subject to the foregoing, this Agreement shall bind the parties and
their respective heirs, successors, assigns and personal representatives.

     14.  Change in Ownership.  Upon (a) the sale or transfer of all or 
          -------------------
substantially all of the assets of the Company or of more than fifty percent
(or, following a Public Offering, forty percent) of the outstanding stock of any
voting class of the Company's stock to any single person or entity (in any one
or more of a series of related transactions), or (b) the merger (such sale,
transfer or merger being, a "Change in Ownership") of the Company with or into
any other entity (except a wholly owned subsidiary or a parent owning all of the
outstanding stock of the Company) (such single person or entity being, a
"Successor"), then all stock or stock options of Employee in the Company shall
immediately become vested.

     15.  Attorneys' Fees. In any action to enforce his rights hereunder in the
          ---------------
event of the termination of the Employee's employment by the Company without 
cause or by the Employee for cause, the Employee shall be reimbursed by the 
Company for his costs of enforcement, including, without limitation, reasonable
attorneys' fees.

     16.  Jurisdiction and Venue.  The parties each irrevocably consents and 
          ----------------------
submits to the personal jurisdiction of the State and Federal courts sitting in 
King County, Washington, and agrees that any action, suit or proceeding in 
connection with this Agreement shall be brought in such courts to the exclusion 
of all other courts, other than actions to enforce judgments or orders entered 
in such courts sitting in King County.

    17.  Notices.  All notices required or permitted hereunder shall be given in
         -------
writing and delivered in person, transmitted by facsimile, or sent by registered
or certified mail, postage prepaid, or reliable courier service to the parties
at the respective addresses set forth on the signature page hereof, or such
other address as a party may specify by notice for all subsequent notices to
it hereunder. Notices will be effective upon the earlier of receipt or

 
the second business day after mailing.

     18.  No Waiver. No waiver or modification of any of the terms of provisions
          ---------
hereof shall be valid unless in writing signed by the party against which the 
enforcement of such waiver or modification is sought, nor shall any waiver or 
failure to enforce any right hereunder be deemed to be a waiver of the same or 
any other right in any other instance.

     Signed by the parties as of the date first written above.

                  
                               CELL THERAPEUTICS, INC.



                               By: /s/ Jack Bowman


                                   Its:

                        
                               EMPLOYEE

                               JAMES A. BIANCO, M.D.


              Address:         10453 Maplewood Place S.W.
                               Seattle, Washington 98146

              Signature:       /s/ James Bianco

 


                                   EXHIBIT A
                                   ---------

                        Issued Patents, Pending Patent
                   Applications, Registered Copyrights, Etc.
                   ----------------------------------------

 
                                                                    EXHIBIT 10.9

                                    FORM OF
                           STRATEGIC MANAGEMENT TEAM
                              SEVERANCE AGREEMENT

     SEVERANCE AGREEMENT, dated as of _______________, by and between CELL 
THERAPEUTICS, INC., a Washington corporation ("CTI"), and [NAME](the 
"EXECUTIVE"); 

     WHEREAS, CTI recognizes the Executive's expertise in connection with 
Executive's employment by CTI;

     WHEREAS, CTI desires to provide certain severance pay to Executive upon the
terms and conditions below, if the Executive's employment in position as [TITLE]
is terminated for the reasons set forth herein; and

     NOW, THEREFORE, in consideration of the following premises, mutual
agreements and covenants and other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:

Definition of Terms.
- -------------------     

Termination for "CAUSE" shall mean termination of the Executive's employment by
CTI because of the Executive's: (A) conviction for, or guilty plea to, a felony
or a crime involving moral turpitude, which shall include independently verified
unremedied substance abuse involving drugs or alcohol; (B) action or inaction,
which in the reasonable judgment of a majority of the Board of Directors of CTI,
constitutes willful dishonesty, larceny, fraud or gross negligence by Executive
in the performance of Executive's duties to CTI, or willful misrepresentation to
shareholders, directors or officers of CTI; (C) material failure to comply with
the provisions of the parties' Inventions and Proprietary Information Agreement
(attached); (D) willful and repeated failure, after 10 business days notice, to
correct materially unsatisfactory or unacceptable work performance (including,
but not limited to, technical or managerial incompetence, misrepresentation or
concealment, negligent acts or omissions or willful misconduct); or (F) failure,
after notice, to materially meet such business objectives as shall be mutually
agree to by the parties.

Resignation for "GOOD REASON" shall mean the resignation of the Executive after 
the following: (A) notice in writing is given to Executive of Executive of 
Executive's relocation, without the Executive's consent, to a place of business 
outside the Greater Puget Sound area, or (B) a substantial diminution of the 
Executive's responsibilities and compensation from those responsibilities in 
effect on the date hereof, disregarding change in title and any alterations in 
Executive's responsibilities which CTI imposes in response to any unsatisfactory
or unacceptable work performance by Executive.

"SEVERANCE DATE" shall mean the date specified in a written notice of
termination from CTI to the Executive or the date which is the later of CTI's
actual receipt of Executive's written notice of resignation or the effective
date of resignation.

                                      -1-


 
"SEVERANCE END DATE" shall mean a date one (1) year from the Executive's 
Severance Date.

"SEVERANCE PAY" shall only mean the Executive's base salary at the Severance 
Rate.

"SEVERANCE RATE" shall mean only the Executive's base salary in effect 
immediately prior to the Severance Date and shall not include any commissions or
bonuses (unless already determined and awarded prior to the Severance Date), 
vacation pay, sick leave, or the like whatsoever.

1.  Termination of Employment.  Subject to the Executive's continuing 
    -------------------------
    obligations under the parties' Inventions and Proprietary Information
    Agreement (attached):

    (a)  Termination for Cause; Death; Disability; Resignation Without Good
         ------------------------------------------------------------------
         Reason. If the Executive's employment is terminated by CTI for Cause
         ------
         (as defined herein), or if the Executive resigns from employment
         hereunder, other than for Good Reason (as defined herein) or as a
         result of such Executive's death or disability (as defined in CTI's
         disability plan applicable to the Executive), the Executive shall be
         entitled only to receive: i) Severance Pay through and including the
         Severance Date; and ii) pay for all vacation time accrued as of the
         Severance Date.

    (b)  Termination Without Cause; Resignation for Good Reason. If the
         ------------------------------------------------------
         Executive's employment is terminated by CTI without Cause, or if the
         Executive resigns from Executive's employment for Good Reason, the
         Executive shall be entitled to receive Severance Pay plus pay for all
         vacation time accrued as of the Severance Date, such payment rendered
         as a series of payments in accordance with CTI's normal payroll
         procedures from the Severance Date to the Severance End Date. CTI shall
         continue to pay premiums to maintain any life insurance for Executive,
         existing and paid for by CTI as of the Severance Date until the
         Severance End Date. In addition, CTI shall reimburse the Executive for
         any costs incurred by the Executive in electing COBRA continuation
         coverage for the Executive and Executive's covered dependents under
         CTI's medical plan only for the period from the Severance Date until
         the earlier of: (1) a date twelve (12) months after the Severance Date;
         (2) a date on which the Executive is covered under the medical plan of
         another employer, which does not exclude pre-existing conditions; or
         (3) the Severance End Date. At Executive's sole cost and expense,
         Executive may elect to exercise any disability insurance conversion
         originally available to Executive under the then existing group or
         individual disability insurance policies. In the event of a breach of
         the Inventions and Proprietary Information Agreement, in addition to
         any other remedy available to CTI, CTI's obligation under this Section
         1(b) shall terminate immediately.

         The Executive shall have no right under this Agreement or otherwise to
         receive any bonus, stock options, or other compensation awarded or
         benefits provided, determined or paid subsequent to the Severance Date
         to other employees of CTI, pro rata or otherwise. However, if Executive
         is terminated by CTI without Cause or the Executive resigns from
         Executive's employment for Good Reason, all unvested

                                      -2-

 
          stock option shares to which the Executive may have rights on the
          Severance Date shall accelerate and immediately vest, and if and only
          if, CTI is a privately held company on the Executive's Severance Date,
          CTI shall recommend to the Board of Directors to extend an exercise
          period from three (3) months to two (2) years after the Severance Date
          for stock options other than any incentive stock options in which the
          Executive may have rights on the Severance Date; provided however,
          should CTI stock become publicly traded during any extended stock
          option exercise period granted hereunder, Executive may only exercise
          stock options in which Executive may have rights during the three (3)
          month period following the date a corresponding S-8 registration
          statement is declared effective; or ii) the last day of the extended
          stock option exercise period. The decision to accept CTI's
          recommendation to extend the exercise period shall be within the sole
          discretion of the Board of Directors. If CTI Common Stock is publicly
          traded on the Severance Date, any exercise period will remain as
          provided for in the parties' corresponding Stock Option Agreement(s).

2.   Agreement Termination; Employment at Will.  This Agreement shall terminate
     -----------------------------------------
     on the date of termination of the Executive's employment or, if applicable,
     the Severance End Date, but Executive's obligations under the attached
     Inventions and Proprietary Information Agreement shall continue in
     accordance with the terms and conditions therein.  Although this Agreement
     sets forth certain rights and obligations of CTI and Executive if
     Executive's employment is terminated without Cause by CTI or if
     the Executive resigns for Good Reason from CTI, nothing in this Severance
     Agreement is intended to limit CTI's right or ability to terminate the
     Executive's employment with or without Cause at any time or the Executive's
     ability to resign Executive's employment with or without Good Reason.  No
     term of this Severance Agreement shall be construed to conflict with or
     lessen Employee's obligations under the parties' Inventions and Proprietary
     Information Agreement (attached).

3.   Amendment; Waiver; Assignment.  This Agreement may not be modified, amended
     -----------------------------
     or waived in any manner except by an instrument in writing signed by both 
     parties.  Any such modification, amendment or waiver on the part of CTI 
     shall have been previously approved by the Board.  The waiver by either 
     party of compliance with any provision of this Agreement by the other party
     shall not operate or be construed as a waiver of any other provision of
     this Agreement or of any subsequent breach by such party of any provision
     of this Agreement.  This Agreement shall be binding upon any successor to 
     CTI, by merger or otherwise.  CTI may assign this Agreement to any of its 
     affiliates.  Executive may not assign the Agreement.

4.   Withholding.  Payments to the Executive of all compensation contemplated 
     -----------
     under this Agreement shall be subject to all applicable legal requirements
     with respect to the withholding of taxes and similar deductions.
     Additionally, if the Executive owes any moneys to CTI on the Severance
     Date, Executive's signature below constitutes Executive's written consent
     to deduct from any Severance Pay amounts that the Executive owes CTI.

                                      -3-

 
5.   Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED, 
     -------------
     CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
     WASHINGTON APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED ENTIRELY
     WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING
     CONFLICT OF LAWS.

6.   Supersedes Previous Agreements.  This Agreement supersedes all prior or 
     ------------------------------
     contemporaneous negotiations, commitments, agreements and writings with
     respect to the subject matter hereof.  All such other negotiations, 
     commitments, agreements and writings shall have no further force or effect,
     and the parties to any such other negotiation, commitment, agreement or
     writing shall have no further rights or obligations thereunder.

7.   Voluntary Agreement.  Executive understands the significance and 
     -------------------
     consequences of this Agreement and acknowledges that CTI has not coerced
     Executive's acceptance thereof, and has signed this Agreement only after
     full reflection and analysis.  Executive expressly confirms that the 
     Agreement is to be given full force and effect according to all of its
     terms.  Executive was advised to seek legal counsel prior to signing the 
     Agreement.

     IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized 
officer of CTI and by the Executive's individual capacity as of the date first 
written above.


CELL THERAPEUTICS, INC.



By:                                              By:
    ---------------------------------------          --------------------------
        [TYPED NAME]                                     [TYPED NAME]

Title:                                           Title:
       ------------------------------------             -----------------------

Date:                                            Date:
      -------------------------------------            ------------------------

Address: 201 Elliott Avenue West, Suite 400      Address:
         ----------------------------------               ---------------------
         Seattle, WA 98119
         ----------------------------------               ---------------------

                                      -4-

 
                                                                   EXHIBIT 10.25

                                                    Portions of this Exhibit
                                                    have been omitted pursuant
                                                    to a request for
                                                    confidential treatment. The
                                                    omitted portions are marked
                                                    ***** and have been filed
                                                    separately with the
                                                    Commission.

                                SUPPLY AGREEMENT


This Agreement is made the 21st day of January, 1997 between CELL THERAPEUTICS,
INC., whose registered office is at 201 Elliott Avenue West, Suite 400, Seattle,
Washington, 98119, USA ("Company"), and CHIREX, LTD., of Dudley, Cramlington,
Northumberland, NE23 7QG, ENGLAND ("Supplier").

                                    RECITALS

     WHEREAS, Company has developed a proprietary therapeutic agent,
lisofylline, and will require certain quantities of the Compound and other
intermediates used in manufacturing the Compound;

Company has developed a proprietary, commercial synthetic process for preparing
the Compound and other intermediates;

Supplier has certain technical expertise in and physical facilities for
commercial manufacturing of organic compounds;

Company desires that Supplier manufacture for Company, on an exclusive basis
during the initial term of the contract, the Compound (and corresponding
intermediates) in sufficient quantities to meet at least Company's needs for
pilot and validation lots, and commercial product launch and market supplies for
production years subsequent to New Drug Application ("NDA") approval; and

Supplier is willing to provide manufacturing services to Company for the
Compound and intermediates.

                                   AGREEMENTS

     NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, the parties agree as follows:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

1.   Definitions
     -----------

     COMPOUND is Company's proprietary compound, lisofylline, having a chemical
     --------
     name, ***** 

     CCA is the key intermediate *****, having a chemical name, *****.
     ---

                                  Page 1 of 21

 
     cGMP are current Good Manufacturing Practices, specifically as defined in
     ----                                                                     
     United States Code of Federal Regulations, Title 21, (S) 210 and 211,
     related FDA guidelines, and as interpreted by Company.

     EFFECTIVE TERMINATION DATE is the date written notice of termination is
     --------------------------                                             
     provided to the other party.

     EXPIRATION DATE is December 31, 2001, unless earlier terminated in
     ---------------                                                   
     accordance with the terms and conditions as set forth in Paragraph 3, Term
     and Termination.

     INTELLECTUAL PROPERTY (IP) includes, but is not limited to, patentable
     ---------------------                                                 
     inventions, trade secrets and know how.

     OFFICIAL COPY is an exact duplicate, having an appropriate certifying mark
     -------------                                                             
     (and signature), of original documents that are generated and held in
     Supplier's permanent files.

     PROJECT PLAN FOR PILOT LOTS (PROJECT PLAN) will be independently agreed to
     ------------------------------------------                                
     by the parties.  The Project Plan defines the detailed scope of work and is
     a comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of pilot lots of  Compound and/or intermediates prepared by Supplier for
     Company.

     VALIDATION LOT PLAN will be independently agreed to by the parties.  The
     -------------------                                                     
     Validation Lot Plan defines the detailed scope of work and is a
     comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of validation lots of Compound and/or intermediates prepared by Supplier
     for Company.

     COMMERCIAL OPERATION PLAN will be independently agreed to by the parties.
     -------------------------                                                 
     The Commercial Operation Plan defines the detailed scope of work and is a
     comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of commercial lots of Compound and or intermediates prepared by Supplier
     for Company.

     WORK-IN-PROGRESS is work commenced by Supplier for Company that Supplier
     ----------------                                                        
     has not yet completed, and may comprise, without limitation, engineering
     costs, raw materials, intermediate products, or manufacturing services for
     preparing Compound and/or intermediates.

                                  Page 2 of 21

 
2.   Agreement Scope
     ---------------

     a. Generally, Supplier will manufacture for Company and Company agrees to
        purchase the following quantities of the Compound and a key
        intermediate, CCA:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

        i.   At least ***** (Project Plan);

        ii.  At least *****, using CCA prepared by Supplier (Project Plan); and

        iii. At least *****, using CCA produced by Supplier. The parties
             forecast that a target quantity of 5 manufacturing-scale lots is
             required to ensure production of 3 consecutively validated lots
             (Validation Lot Plan).

        More specifically, the Project and Validation Lot Plans set forth
        technical detail regarding: the synthetic process for manufacturing and
        isolating Compound, CCA and other relevant intermediates; operational
        requirements for pilot lots and validation lots; and Supplier's and
        Company's activities and responsibilities in connection with Supplier's
        manufacture of pilot and validated lots of Compound and CCA. Both
        parties shall independently agree to and execute the Project and
        Validation Lot Plans.

     b. In addition to preparing the above pilot and validation lots of Compound
        and CCA, Supplier will manufacture and supply commercial quantities of
        Compound and CCA.  The Commercial Operation Plan sets forth technical
        detail regarding:  the synthetic process for manufacturing and isolating
        Compound, CCA and other relevant intermediates in commercial scale lots;
        operational requirements for manufacturing commercial material; and
        Supplier's and Company's activities and responsibilities in connection
        with Supplier's manufacture of commercial quantities of Compound and CCA
        for Company.

     c. At present, Supplier and Company have not established specific,
        commercial production quantities, but the following table provides
        current estimated commercial quantities through the 2001 production year
        (1998-2001), subject to modification in accordance with the procedures
        set forth in Paragraph 11, Commercial Forecasting.  Paragraph 11 also
        specifically establishes a  mechanism by which Company and Supplier will
        prepare and revise annual forecasts for commercial supplies of Compound.
        Subject to the provisions

                                  Page 3 of 21

 
        herein, Company and Supplier agree that Supplier will manufacture the
        Compound (and corresponding intermediates) for Company on an exclusive
        basis through the 2000 production year.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                          
YEAR                  1998      1999       2000       2001
- ---------------------------------------------------------------
ESTIMATED QUANTITY    *****     *****      *****      *****
- ---------------------------------------------------------------
3. Term and Termination -------------------- This Agreement shall commence upon complete execution by both parties, and unless terminated sooner in accordance with the terms and conditions set forth below, shall remain in full force and effect until the Expiration date. Thereafter, Company may renew this Agreement for successive one (1) year periods. Company shall provide written notice to Supplier of Company's intent to renew no more than twelve (12) months and no less than six (6) months prior to the Expiration date. Within thirty (30) days of Company's written notice to Supplier, Supplier will provide written notice to Company that it agrees to Company's renewal period. Either party may terminate this Agreement, upon twelve (12) months written notice to the other party; provided however that Supplier may not terminate this Agreement prior to supplying Company's commercial requirements for Compound through December 31, 2000. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Upon termination, where practical and without compromising the integrity or quality of the Work-in-Progress, Supplier will not create additional Work- in-Progress and will use its best efforts to minimize expense to Company in bringing the Work-in-Progress to a logical conclusion, as mutually agreed upon by Supplier and Company. Company agrees to purchase and Supplier agrees to sell, *****, available quantities of Compound and/or intermediates held in storage by Supplier on the Effective Termination Date. Company will remain liable for costs of services rendered through the Effective Termination Date and costs for services required to complete Work-in-Progress. 4. Manufacturing Standards ----------------------- Supplier will perform all work hereunder for Company in accordance with strict application of current laboratory research and manufacturing standards, as reflected by standards contained in the Project, Validation Lot and Commercial Operation Plans. Supplier will strictly comply with all current United States governmental regulatory requirements and policies concerning cGMP (as Page 4 of 21 interpreted by Company) for all phases of production (pilot, validation and commercial lots). 5. Material Warranty ----------------- Supplier warrants that it will exercise extreme care and high standards to achieve the desired results in accordance with standards and procedures agreeable to and accepted by the parties. In the event the material is non-conforming and the Material Review Board determines that the Supplier is responsible for the non-conformance in accordance with the provisions of Paragraph 6.d, Material Non-Conformance, Supplier and Company shall mutually agree to one (or a combination of) the following remedies: a) Supplier replacing non-conforming material with conforming material at no additional cost to Company; b) Supplier remediating unacceptable performance at no additional expense to Company; or c) Supplier refunding or crediting to Company any fees paid or payable by Company in connection with Supplier's unacceptable performance. In the event material is non-conforming and the Material Review Board determines that the Company is responsible for the non-conformance in accordance with the provisions of Paragraph 6d, Material Non-Conformance, the Company shall make payment to the Supplier of all fees due to the Supplier under this Agreement in respect of such non-conforming material. Should United States regulatory requirements change during the course of Supplier's performance of manufacturing services hereunder, Supplier will make every reasonable effort to meet the new requirements. In the event that modified regulatory requirements necessitate revisions in the manufacturing process, Supplier will submit to Company a revised technical proposal and cost estimate, for which, if necessary, the parties will further negotiate and to which the parties will mutually agree. 6. Documentation, Specifications, Release and Delivery --------------------------------------------------- a. Manufacturing Documentation --------------------------- Prior to or in conjunction with delivery of any material manufactured for Company, Supplier will provide Official Copies of at least the following documentation to Company: i. A complete copy of all relevant and completed Batch Production Records for each manufacturing run of Compound, and all intermediates; Page 5 of 21 ii. If applicable, complete and accurate Deviation Reports, containing all relevant information set forth in the Project, Validation Lot and Commercial Operation Plans; iii. Raw material specifications, which include a complete list of raw material suppliers; iv. Complete copies of all documentation for test procedures applied to intermediate materials, CCA and Compound; v. Testing results for analysis conducted on all raw and intermediate materials. Raw material analysis shall include vendor's certificate of analysis or Supplier shall conduct an agreed analysis on any raw material not bearing a vendor's certificate of analysis per raw material specifications as agreed to by Company and Supplier; vi. A Test Result Summary for any material (Compound, CCA) delivered, which will contain at least the following information: . Material name; . Batch/lot numbers; . Manufacture date; . Specification limits; . Actual test results; . Test procedure numbers; and . Authorized signature(s). b. Manufacturing and Testing Specifications ---------------------------------------- Prior to commencing manufacturing runs, Company will provide to Supplier all manufacturing specifications for the Compound, CCA or other intermediate material. Supplier will: i) ensure that its manufacturing processes comply with all relevant manufacturing specifications; ii) utilize only Company-approved Master Production Records; and iii) will maintain appropriate documentation to comply with all applicable US FDA regulatory requirements for cGMP. c. Material Release ---------------- Company is responsible for reviewing, evaluating and releasing both CCA and Compound manufactured by Supplier according to Company's specifications and procedures. However, Supplier is responsible for conducting all necessary analytical testing on material produced by Supplier for Company, Page 6 of 21 which is set forth in documentation establishing the analytical methods contained in the Project, Validation Lot or Commercial Operation Plans (by inclusion or reference therein). If Supplier intends to utilize a third party to conduct a portion or all of the analytical testing, Company shall have an opportunity to evaluate and approve the third party prior to the third party commencing work in support of Supplier's performance hereunder. In any event, Company reserves the right to repeat a portion of or all tests conducted by Supplier prior to Company's release of material to confirm that the material meets established specifications. d. Material non-conformance ------------------------ In the event that Company cannot release the material in accordance with the foregoing procedures or if the material is released and Company, Supplier or a third party later discovers that the material is not in compliance with material specifications, the material shall be non-conforming. Company and Supplier will establish a Material Review Board (MRB) composed of members of Company's Compliance and Manufacturing Operations Units, and Supplier's Quality Assurance and Manufacturing Departments to investigate and assess the circumstances of the non- conformance. Based on the MRB's evaluation and assessment, the MRB will establish a cause for the non-conformance. Company and Supplier will ascertain responsibility for the cause of the non-conformance, and the responsible party(ies) shall bear the financial obligation for the non- conformance, and Company and Supplier have rights and obligations as set forth in Paragraph 5, Material Warranty. In the event that the MRB is unable to resolve discrepancies among test results relied upon by Company for release of material manufactured by Supplier, Company and Supplier agree to submit the material to a mutually-agreed third party to verify disputed test results of Company or Supplier, using validated analytical methods previously utilized by both Company and Supplier. Company and Supplier agree to share equally in the cost of obtaining such verified results. Based on an analysis of these results, Company will either purchase material or have the option of enforcing its rights as defined in Paragraph 5 Material Warranty. Page 7 of 21 e. Shipping -------- Company will notify Supplier of intended shipments for material released by Company. Except as provided herein with respect to non- conforming product, title and risk of loss as to all materials shipped shall pass upon transfer by Supplier to such carrier at the manufacturing facility. Company will establish all shipment, packaging, labeling and storage requirements, with which Supplier will comply. The Project, Validation Lot or Commercial Plans will include these specific requirements. Supplier will ship Compound, CCA or other intermediates or material to a location specified in writing by Company. Company shall be responsible for paying all shipping costs, tariffs and duties assessed and due. Supplier will provide storage for packaged material, without charge, until Company provides shipping instructions to Supplier. Company will provide shipping instructions to Supplier for finished lots of Compound not more than ninety (90) days from the date Company releases finished lots of Compound. Supplier will maintain adequate business insurance to cover material replacement in the event of material loss during Supplier's manufacture or material storage up to a maximum of $750,000. 7. Independent Contractor and Third Party Subcontractors ----------------------------------------------------- Supplier is an independent contractor, not an employee or agent of Company, and will be solely responsible for maintaining its labor force and operations. Company and Supplier do not intend to create any partnership, joint venture, employment or agency relationship pursuant to this Agreement. Except upon the prior written consent of Company, Supplier shall have no right to bind Company by contract, or otherwise to transact any business in Company's name or on Company's behalf, in any manner or form, or to make any promises or representations on its behalf. Supplier will not represent to anyone that it is an agent of Company or otherwise authorized to bind or commit Company in any way. Supplier shall remain directly responsible for Supplier's performance hereunder, even though Supplier may utilize third party contractors that it deems have the requisite expertise and skill to meet Supplier's performance obligations under this Agreement. Should Supplier utilize third party personnel other than those to whom Company has agreed, Supplier will provide Company with an opportunity to review and confirm Supplier's selection. Should Company object to Supplier's candidate, Company and Supplier will negotiate to identify other, more suitable personnel. Page 8 of 21 8. Document Retention, Facility Access and Notice to Company --------------------------------------------------------- a. Document Retention ------------------ Supplier agrees to assist Company in its submission and maintenance post approval of the New Drug Application (NDA) for Compound and will compile, organize and retain all information necessary to support Company's regulatory requirements for Compound, and will provide Official Copies of relevant documentation within a mutually agreed period. Supplier will maintain a current Type I Facility Drug Master File and will provide to Company a Letter of Authorization to cross- reference the Drug Master File. All cGMP-related documentation and data (relating to Compound, CCA and other intermediates, including, without limitation, material samples, slides, records, and other documents and/or materials generated by Supplier on Company's behalf) shall be retained by Supplier unless otherwise indicated by the Company. Company shall notify Supplier in writing as to the disposition of any such documentation, data and information retained by Supplier prior to such action. All documentation or material furnished to Supplier by Company and used in connection with Supplier's performance under this Agreement, will be returned to Company upon the first to occur of: 1) completion of any specific project; or 2) termination of this Agreement, except for one (1) archival copy and required material samples which must be retained at least 5 years past approval of the NDA. b. Facility Access --------------- Upon giving prior written notice to Supplier, Company or its authorized designees shall have the right to inspect Supplier's facilities and documentation at normal business hours to ensure compliance with this Agreement, including applicable regulatory requirements. Company may review or request copies of regulatory or cGMP data at any time. Supplier will not unreasonably withhold access by Company to data, documentation, material, laboratories or facilities, wherever located, if such access is required for verification of Supplier's performance hereunder or in connection with government regulatory agency requests. c. Notice to Company ----------------- Supplier will immediately notify Company's Director of a duly authorized regulatory agency's (federal, state or municipal) communication, visit, investigation or inquiry of Supplier's process or facilities and relating to Company's Compound (Event), and Supplier's written confirmation thereof Page 9 of 21 shall not be later than twenty-four (24) hours from Supplier's first knowledge of the Event. Supplier's notice shall provide Company's Director of Compliance with the following information: i. The agency; ii. Purpose of communication, visit, investigation or inquiry; iii. Name(s) of inspector(s) and credential number; and iv. A copy of form(s) issued by inspector, if any. Communications to Supplier by the FDA regarding Supplier's Type I DMF will require notification of the Company's Director of Regulatory Affairs, both orally and in writing, within 24 hours of receipt of such communication. In addition, Supplier will handle Confidential and Proprietary Information in accordance with the provisions of Paragraph 13, Confidentiality. Supplier shall obtain Company's approval prior to Supplier providing to any third party copies of documentation which contain information related to Company. Company will assist Supplier in responding to the communication, visit, investigation or inquiry relating to Company's Compound. In addition to the foregoing, Supplier will notify Company's Director of Manufacturing Operations orally and in writing of any interruption in Supplier's manufacturing activities that relates to or affects Supplier's performance under this Agreement and could likely affect delivery schedules. Supplier's notice shall not be later than twenty- four (24) hours from Supplier's first knowledge of the manufacturing interruption. 9. Licensing and Permitting ------------------------ Supplier shall be responsible for applying for and obtaining all federal and local licenses and permits required in connection with its manufacture of Compound, CCA and other intermediates. In this regard, Company shall provide all reasonable assistance to Supplier. In addition, Supplier shall bear the cost of all license and permit fees. Page 10 of 21 10. Production Results ------------------ Each month, Supplier will provide to Company, particularly in connection with Supplier's manufacture of commercial quantities of Compound, Supplier's status and quantities of inventories of raw materials, intermediates and Compound. In addition, at the conclusion of production runs, as defined in the Project, Validation Lot and Commercial Operation Plans. Supplier will provide a final Campaign Report for the production runs, as requested by Company. 11. Commercial Forecasting ---------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Commencing in June 1997 and continuing ***** thereafter through the end of the Agreement term, Company and Supplier will meet to prepare commercial production and delivery forecasts. The parties intend that the ***** meetings will provide timely notice of potential conflicts in Company's needs for Compound and Supplier's scheduling and production vacancies or restrictions. Based on these discussions, Company and Supplier will agree to a "rolling" production and delivery schedule for each successive 12- month period. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) In June 1997, Company and Supplier will agree to an initial ***** forecast, which will commit both parties to production, delivery and payment obligations for the *****. Thereafter, at each quarterly meeting, Company and Supplier will commit to production, delivery and payment obligations for the ***** and establish a forecast for the *****. The commercial forecasting procedures discussed herein are subject to any provisions of Paragraph 3, Term and Termination. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Following each ***** meeting with Supplier, Company will issue a Purchase Order for Supplier's committed production and delivery, reflecting Supplier's and Company's current commitment. Product deliveries made thereafter will be applied against outstanding Purchase Orders, as specified by Company. 12. Costs and Payments ------------------ Generally, Company and Supplier agree to a fixed price for Supplier's manufacture of pilot plant and validation lots for both the Compound and the CCA intermediate. Commercial Compound prices will be based on a per- kilo, volume-adjusted manufacturing price, which take into account specific inflation, currency and yield adjustments (resulting from gained process efficiencies or technical advances in manufacturing). Supplier is liable for paying all necessary taxes, licensing fees and other assessments in connection with manufacturing material hereunder. All invoices will be billed in US dollars (USD $). Page 11 of 21 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Specifically, Company will be liable to Supplier for the ***** PILOT LOTS OF CCA (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) ***** Page 12 of 21 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) ***** Page 13 of 21 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Company and Supplier agree that ***** of the total payment--less ***** as discussed below--will be due to Supplier net ***** upon receipt of Supplier's invoice to Company. Supplier will invoice Company (in USD $) for the CCA intermediate and Compound produced during pilot plant or validation lot operations upon providing documentation to the Company as set forth in Paragraph 6a, Manufacturing Documentation. However, Company will reimburse Supplier for all ***** set forth above as they are incurred by Supplier. Reimbursement for ***** will be due net ***** upon receipt of Supplier's invoice. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Within ***** of Company's receipt of all completed production records (as specified in Paragraph 6.a, Manufacturing Documentation) Company will issue a Certificate of Analysis and product release document, provided that the corresponding documentation conforms with agreed specifications and standards as set forth in the Project Plan and Validation Lot Plan. Supplier will then invoice the Company for the remaining ***** balance which will be due net ***** upon receipt of Supplier's invoice. Company's payment of any outstanding dues will not serve to waive any rights it may have in law or as specifically stated herein, should delivered material not meet established standards. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Price for manufacturing commercial Compound lots and payment schedules will be discussed upon commencement of the ***** forecasting meeting as discussed in Paragraph 11, Commercial Forecasting. Supplier and Company will agree to manufacturing rates by the end of the ***** for the upcoming calendar year and will revise manufacturing rates accordingly. Factors that affect manufacturing rates will include: (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) ***** Page 14 of 21 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Company may increase Supplier's production of Compound intermediates above levels required to meet Company's forecasted needs for Compound. If so requested, Supplier will manufacture designated intermediates and will store this material without charge for future conversion to Compound. In this event, Supplier may invoice Company, at a mutually agreed price, for manufacturing the additional requested inventory of intermediates. Unless otherwise stated, all invoices from Supplier will be due net ***** from Company's receipt of the invoice. The cost for any capital improvements that Supplier and Company deem necessary for the manufacture of material under the Commercial Operation Plan shall be an itemized cost in the cost structure for manufacturing during the initial term of Supplier's commercial production for the Company. The parties agree that in the event a dispute arises regarding the accuracy of Supplier's costs, Company may appoint an independent financial auditor, at Company's sole expense, to review Supplier's records at reasonable and convenient times to verify Supplier's calculations. Said independent financial auditor shall be permitted to verify and report to Company on the accuracy of Supplier's price. Based on the findings of this independent auditor, Company and Supplier will negotiate and agree to commercial manufacturing price adjustments. 13. Confidentiality --------------- Supplier shall remain bound by the terms and conditions of the Confidential Disclosure Agreement between Company and Supplier, dated March 22, 1994, and amended April 25, 1996 (collectively, CDA), which is incorporated by reference in its entirety and attached hereto as Exhibit A. Company and Supplier agree that the Confidentiality Period set forth in the CDA shall be extended to run ten (10) years from the date of termination of this Agreement. Page 15 of 21 14. Intellectual Property --------------------- IP created during performance under and specifically in connection with this Agreement which is conceived: i. Solely by Company's personnel shall be owned by the Company (Company IP); ii. Solely by Supplier's personnel shall be owned by Supplier (Supplier IP); and iii. Jointly by Company's and Supplier's personnel shall be jointly owned by Company and Supplier (Joint IP). Inventorship in IP that is created and developed during performance under this Agreement shall be determined by Company, in consultation with Supplier, according to United States patent law and the Washington State Uniform Trade Secrets Act. Patents covering Supplier IP shall be prepared, filed and prosecuted solely by counsel selected by Supplier and reviewed and approved by Company (which approval shall not be unreasonably withheld), but at Company's sole cost and expense. Supplier shall provide Company with copies of all such patent applications and relevant communications therefor, including, but not limited to, patent office correspondence. Prior to filing a patent application or filing or responding to any outstanding communication in the Supplier IP patent application, Supplier will make all reasonable effort to provide Company with thirty (30) days notice to review and provide comment. Patents for Company and Joint IP shall be prepared, filed and prosecuted solely by counsel selected by Company and at Company's sole cost and expense. In the case of Company IP, Company will timely notify Supplier that Company has filed a patent application covering Company IP. In the case of Joint IP, Company shall provide Supplier with copies of all such Joint IP patent applications and relevant communications, including, but not limited to, correspondence from or to counsel or a patent office. Prior to filing a patent application or filing or responding to any outstanding communication from counsel or a patent office in connection with a Joint IP patent application, Company will provide Supplier with thirty (30) days notice to review and provide comment. Page 16 of 21 15. Intellectual Property Rights ---------------------------- If during the course of performing work under this Agreement, Supplier or Joint IP is created and developed which is pertinent to the synthesis of Compound or an intermediate, Supplier will assign all its rights in Supplier or Joint IP to Company, but shall retain a non-exclusive, royalty- free license to use Supplier or Joint IP in applications which do not compete with the synthesis of Company's Compound or intermediates. The parties acknowledge that Supplier owns or may own (or may have license rights in) manufacturing technology (Supplier Technology) that may offer certain manufacturing advantages if utilized in Supplier's performance under this Agreement. In the event that Supplier and Company agree that incorporating such Supplier Technology into Company's process for manufacturing Compound, CCA and/or intermediates is prudent and warranted, Supplier will use reasonable efforts to obtain Company's ability to utilize Supplier Technology, on reasonable terms to be negotiated. Furthermore, should Company integrate Supplier Technology into Company's process for manufacturing Compound, CCA and/or intermediates and Company subsequently requires the manufacturing services of a third party, Company will obtain Supplier's authorization for a third party's use of the Supplier Technology, on reasonable terms to be negotiated. 16. Publication and Promotion ------------------------- Supplier may only publish details of the synthesis or manufacture of Compound, CCA or intermediates upon obtaining prior written permission of Company. The text of any press release or other communication to be published in the media concerning the subject matter of this Agreement, Compound or the parties' relationship shall require the approval of both Company and Supplier. Company shall have the right to request removal of confidential information and may require that publication be delayed up to a maximum of three (3) months from first notification of such publication to enable Company to protect its Intellectual Property rights. Supplier agrees not to use or imply Company's name for advertising, self- promotion purposes, raising capital, recommending investments, which, inter alia, implies endorsement by Company, and will only reference Company's name after obtaining Company's prior written permission. Page 17 of 21 17. Indemnification --------------- a. Supplier to Company ------------------- Supplier shall indemnify, defend and hold harmless Company, its officers, directors, employees, and agents against any liability, obligation, loss, damage, penalty, action, judgment, suit, expenses (including reasonable attorney's fees) or disbursements of any kind and nature whatsoever arising out of: (i) any breach by Supplier of its obligations under this Agreement; (ii) a patent infringement claim relating to manufacturing technology provided by Supplier; or (iii) personal injury resulting from an adverse reaction of the Compound, which is due to Supplier's breach of Material Warranty, determined in accordance with the provisions of paragraph 6(d), provided that Company gives reasonable notice to Supplier of such claim, suit or action and such liability, obligation, loss, damage, penalty, action or judgment is not the result of Company's negligent act or omission or willful misconduct. Provided Supplier properly protects the interests of Company and Supplier and Company do not have conflicting defenses, Supplier shall have exclusive control of the defense of any such action and settlement or compromise negotiations, except that prior to accepting any settlement or compromise, Supplier will inform Company in writing of the terms of the anticipated settlement or compromise. Company will provide Supplier, at Supplier's expense with reasonable assistance in defending any claim, suit or action. Such assistance shall not be deemed a waiver of Company's indemnification rights hereunder. b. Company to Supplier ------------------- Company shall indemnify, defend and hold harmless Supplier, its officers, directors, employees, and agents against any liability, obligation, loss, damage, penalty, action, judgment, suit, expenses (including reasonable attorney's fees) or disbursements of any kind and nature whatsoever arising out of: (i) any breach by Company of its obligations under this Agreement; (ii) a patent infringement claim relating to the Compound, intermediates and/or manufacturing technology provided by Company; or (iii) personal injury resulting from an adverse reaction of the Compound, which is not caused by Supplier's breach of Material Warranty, determined in accordance with the provisions of paragraph 6(d), provided that Supplier gives reasonable notice to Company of such claim, suit or action and such liability, obligation, loss, damage, penalty, action or judgment is not the result of Supplier's negligent act or omission or willful misconduct. Page 18 of 21 Provided Company properly protects the interests of Supplier and Company and Supplier do not have conflicting defenses, Company shall have exclusive control of the defense of any such action and settlement or compromise negotiations, except that prior to accepting any settlement or compromise, Company will inform Supplier in writing of the terms of the anticipated settlement or compromise. Supplier will provide Company, at Company's expense with reasonable assistance in defending any claim, suit or action. Such assistance shall not be deemed a waiver of Supplier's indemnification rights hereunder. 18. Notices ------- All notices required or permitted to be given under this Agreement shall be in writing and shall be delivered personally, sent by secure facsimile or mailed prepaid to the persons named and addresses set forth below. If to Company: Director of Manufacturing Operations Cell Therapeutics, Inc. 201 Elliott Avenue West, Suite 400 Seattle, Washington 98119 Telephone No.: (206) 282-7100 Facsimile No.: (206) 284-6206 If to Supplier: Chairman and CEO ChiRex Ltd. Dudley, Cramlington Northumberland, NE23 7QG ENGLAND Telephone No.: 0191 250 0471 Facsimile No.: 0191 250 1154 19. Applicable Law and Jurisdiction ------------------------------- This Agreement shall be construed in accordance with, and its performance shall be governed by, the laws of the State of Washington, exclusive of choice of law provisions. 20. Force Majeure ------------- If Supplier cannot perform its obligations hereunder by reason of impediment such as Acts of God, war, rebellion, tumult, riot, civil commotion, insurrection, political disturbance, strike, lock-out, fire, flood, interruption of transportation, embargo, shortage of raw materials, instruction of the authorities or any other Page 19 of 21 cause or event of similar nature affecting Supplier and over which Supplier has no control, Supplier shall have the right to postpone performance of such obligation for the duration of such impediment. Supplier shall immediately notify Company (no later than twenty-four (24) hours from Supplier's first knowledge of the impediment) and provide an anticipated duration of the impediment. In addition, Supplier shall subsequently notify Company as quickly as possible of its cessation. In the case of Force Majeure affecting Supplier, should Supplier not be able to resume performance hereunder within two (2) weeks of the occurrence of the impediment, Company shall be entitled to obtain Compound or other materials from an alternative supplier. Materials obtained from another source will accordingly reduce commercial forecasts. Company will remain liable to Supplier only for fees and expenses of material manufactured by Supplier satisfying all requirements of this Agreement and shipped to Company in accordance with the provision of Paragraph 6.e, Shipping through the occurrence of the impediment. Supplier shall cooperate and make all effort to assist Company in transferring technology for manufacturing of Compound to the other source for material. 21. Amendments ---------- Any amendments, changes, or revisions to this Agreement must be proposed in writing by either party, and accepted in writing by the other party before they shall become effective and binding. 22. Assignment ---------- This Agreement being for specialized manufacturing services, Supplier shall not assign, transfer or convey this Agreement or any moneys due or to become due hereunder without the prior written consent of Company; however, this Agreement shall enure to benefit Company, its assigns, subsidiaries or successors in business. 23. Entire Agreement ---------------- This Agreement (all Exhibits and documents attached hereto and referenced herein) represents the entire understanding and agreement between Company and Supplier. In the event that a conflict arises between this Agreement and printed terms and conditions on any subsequently prepared document concerning performance of the parties under this Agreement, the terms and conditions provided in this Agreement shall prevail, unless the document satisfies the requirements herein for amendments to this Agreement. Page 20 of 21 IN WITNESS WHEREOF, the parties by their authorized representatives have set their hands on the day first above written. CELL THERAPEUTICS, INC. CHIREX LTD. By: /s/ Maurice J. Schwarz By: /s/ Alan R. Clark --------------------------------- ----------------------------------- Maurice J. Schwarz Alan R. Clark Title: EVP, Product Development Title: Chairman CEO -------------------------- -------------------------------- Address: 201 Elliott Avenue West Address: Dudley, Cramlington -------------------------- ---------------------------- Seattle, Washington 98119 Northumberland, NE237QG -------------------------- ---------------------------- USA ENGLAND -------------------------- ---------------------------- The remaining portion of this page left intentionally blank. Page 21 of 21

 
                                                                   EXHIBIT 10.26

                                                        Portions of this Exhibit
                                                        have been omitted
                                                        pursuant to a request
                                                        for confidential
                                                        treatment. The omitted
                                                        portions are marked
                                                        ***** and have been
                                                        filed separately with
                                                        the Commission.


                      COLLABORATION AND LICENSE AGREEMENT

                         dated as of November 8, 1996

                                by and between

                            CELL THERAPEUTICS, INC.

                                      and

                              ORTHO BIOTECH INC.

                                      and

              THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE




(The information below marked by ***** has been 
omitted by a request for confidential treatment. 
The omitted portion has been separately filed 
with the Commission.)


 
                               TABLE OF CONTENTS

PAGE ARTICLE I DEFINITIONS ----------- SECTION 1.01. Definitions................................................ 2 ARTICLE II MANAGEMENT ---------- SECTION 2.01. Steering Committee......................................... 13 SECTION 2.02. Meetings of the Steering Committee......................... 13 SECTION 2.03. Functions and Powers of the Steering Committee............. 14 SECTION 2.04. Steering Committee Actions................................. 15 SECTION 2.05. Obligations of Parties..................................... 15 SECTION 2.06. Limitations of Powers of Committees........................ 16 SECTION 2.07. Formation of Joint Development Committee and Joint Commercialization Committee................................ 16 SECTION 2.08. Accounting................................................. 16 ARTICLE III INITIAL LICENSING FEE AND MILESTONE PAYMENTS -------------------------------------------- SECTION 3.01. Initial Licensing Fee...................................... 16 SECTION 3.02. Milestone Payments......................................... 17 ARTICLE IV DEVELOPMENT ----------- SECTION 4.01. Formation of JDC........................................... 19 SECTION 4.02. Responsibilities of JDC.................................... 20 SECTION 4.03. Lead Development Party..................................... 21 SECTION 4.04. Right to Engage Third Parties.............................. 21 SECTION 4.05. Development Plan and Development Budget.................... 22 SECTION 4.06. Development Efforts........................................ 23 SECTION 4.07. Drug Approval Applications................................. 24 SECTION 4.08. Costs of Development....................................... 25
SECTION 4.09. Election by a Party to Terminate Its Participation in Development for Safety or Tolerability Reasons............. 27 SECTION 4.10. Development Coordination in Canada......................... 28 ARTICLE V OPTIONS ------- I. OPTION TO CONDUCT SPONSORED RESEARCH ------------------------------------ SECTION 5.01. Sponsored Research......................................... 28 SECTION 5.02. Dedicated Researchers...................................... 30 SECTION 5.03. ORTHO Funding.............................................. 30 II. ORTHO FIRST OFFER RIGHTS ------------------------ SECTION 5.04. ORTHO Option to Expand the Field........................... 31 SECTION 5.05. License Fee and Milestone Payments for Additional Indications................................................ 32 SECTION 5.06. Commercialization of Potential New Indications............. 33 SECTION 5.07. Election by a Party to Discontinue Sharing Expenses for an Additional Indication...................................... 34 ARTICLE VI LICENSES -------- SECTION 6.01. Patent License to ORTHO to Conduct Development............. 34 SECTION 6.02. Patent License to CTI to Conduct Development............... 35 SECTION 6.03. Patent License to ORTHO to Conduct Commercialization....... 35 SECTION 6.04. Patent License to CTI to Conduct Commercialization......... 35 SECTION 6.05. Exclusive Know-how License To ORTHO........................ 36 SECTION 6.06. Exclusive Know-how License to CTI.......................... 36 SECTION 6.07. Sublicensing............................................... 36 SECTION 6.08. Third Party Technology..................................... 37 SECTION 6.09. Development Milestones for the Royalty Bearing Territory... 37 SECTION 6.10. Covenant Not to Sue by Affiliates.......................... 38
ii ARTICLE VII COMMERCIALIZATION ----------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.01. Responsibilities of JCC.................................... 38 SECTION 7.02. ORTHO as Lead Marketing Party.............................. 39 SECTION 7.03. Commercialization Efforts.................................. 41 SECTION 7.04. Commercialization Plan and Budget.......................... 41 SECTION 7.05. Launch Plan................................................ 42 SECTION 7.06. Commercialization in Royalty Bearing Territory............. 43 SECTION 7.07. Control Over Advertising................................... 43 SECTION 7.08. Allowable Expenses and Allowable Operating Expenses........ 44 SECTION 7.09. Sales Efforts in the Co-Promotion Territory................ 44 SECTION 7.10. Training Program........................................... 44 SECTION 7.11. Pricing, Pricing Approvals and Product Distribution........ 44 SECTION 7.12. Product Recalls............................................ 45 SECTION 7.13. Tax Considerations......................................... 45 SECTION 7.14. Discounted Sales........................................... 45 SECTION 7.15. Co-Promotion Mechanism..................................... 45 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.16. *****...................................................... 46 ARTICLE VIII PROFIT SHARING AND ROYALTIES ---------------------------- SECTION 8.01. Share of Operating Profits or Losses....................... 46 SECTION 8.02. Co-Promotion Reports and Payments.......................... 47 SECTION 8.03. Term....................................................... 47 SECTION 8.04. Royalty Bearing Products................................... 47 SECTION 8.05. Sales by Sublicensees...................................... 49 SECTION 8.06. Royalty Reports and Payments............................... 49 SECTION 8.07. Payments................................................... 49 SECTION 8.08. Taxes...................................................... 49 SECTION 8.09. Foreign Exchange........................................... 49 SECTION 8.10. Payments to or Reports by Affiliates....................... 49 SECTION 8.11. No Overlapping Royalties................................... 50 ARTICLE IX MANUFACTURE AND SUPPLY ---------------------- SECTION 9.01. Manufacture and Supply..................................... 50
iii SECTION 9.02. Process Development, Manufacturing Approvals............... 50 SECTION 9.03. Quality Testing............................................ 50 SECTION 9.04. Shipment of Collaboration Compound......................... 51 SECTION 9.05. Warranties................................................. 51 SECTION 9.06. Manufacture and Supply After Initial Three Year Period..... 51 SECTION 9.07. Manufacture and Supply of Collaboration Products........... 52 SECTION 9.08. Specifications............................................. 52 SECTION 9.09. Transfer Pricing........................................... 52 SECTION 9.10. Inventory; Shortage of Supply; Coordination with Third Party Manufacturers........................................ 53 SECTION 9.11. Termination of Participation............................... 53 ARTICLE X CONFIDENTIALITY --------------- SECTION 10.01. Confidentiality; Exceptions............................... 53 SECTION 10.02. Authorized Disclosure..................................... 54 SECTION 10.03. Survival.................................................. 55 SECTION 10.04. Termination of Prior Agreement............................ 55 SECTION 10.05. Publications.............................................. 55 SECTION 10.06. Publicity Review.......................................... 55 ARTICLE XI OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS ---------------------------------------------------- SECTION 11.01. Ownership................................................. 56 SECTION 11.02. Disclosure of Patentable Inventions....................... 56 SECTION 11.03. Patent Filings............................................ 56 SECTION 11.04. Third Party Patent Rights................................. 57 SECTION 11.05. Enforcement Rights........................................ 57 SECTION 11.06. Defense and Settlement of Third Party Claims.............. 59 SECTION 11.07. Patent and Trademark Expenses............................. 60 SECTION 11.08. Assignment of Joint Patents............................... 60 SECTION 11.09. Trademarks................................................ 61
iv ARTICLE XII REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY ------------------------------------------- SECTION 12.01. Representations and Warranties............................ 61 SECTION 12.02. Performance by Affiliates................................. 62 SECTION 12.03. Exclusivity............................................... 62 ARTICLE XIII INFORMATION AND REPORTS ----------------------- SECTION 13.01. Information and Reports During Development and Commercialization......................................... 62 SECTION 13.02. Complaints................................................ 63 SECTION 13.03. Adverse Drug Experiences.................................. 63 SECTION 13.04. Records of Revenues and Expenses.......................... 64 ARTICLE XIV TERM AND TERMINATION -------------------- SECTION 14.01. Term...................................................... 65 SECTION 14.02. Termination for Material Breach........................... 65 SECTION 14.03. Termination by ORTHO...................................... 69 SECTION 14.04. Effect of Termination by ORTHO Pursuant to Section 14.03............................................. 69 SECTION 14.05. Surviving Rights.......................................... 70 SECTION 14.06. Accrued Rights, Surviving Obligations..................... 71 SECTION 14.07. Change of Control......................................... 71 ARTICLE XV INDEMNIFICATION --------------- SECTION 15.01. Indemnification for Royalty Bearing Products.............. 72 SECTION 15.02. Indemnification For Collaboration Products................ 73 SECTION 15.03. Indemnification For Independent Products.................. 73
v ARTICLE XVI DISPUTE RESOLUTION ------------------ SECTION 16.01. Disputes.................................................. 74 SECTION 16.02 Alternative Dispute Resolution............................ 75 SECTION 16.03. Arbitration Procedures.................................... 75 SECTION 16.04. Survivability............................................. 76 SECTION 16.05. Jurisdiction.............................................. 76 ARTICLE XVII MISCELLANEOUS ------------- SECTION 17.01. Assignment................................................ 76 SECTION 17.02. Retained Rights........................................... 77 SECTION 17.03. Research and Development Entities......................... 77 SECTION 17.04. Consents Not Unreasonably Withheld or Delayed............. 77 SECTION 17.05. Force Majeure............................................. 77 SECTION 17.06. Further Actions........................................... 78 SECTION 17.07. No Trademark Rights....................................... 78 SECTION 17.08. Notices................................................... 78 SECTION 17.09. Waiver.................................................... 79 SECTION 17.10. Severability.............................................. 79 SECTION 17.11. Ambiguities............................................... 79 SECTION 17.12. Governing Law............................................. 79 SECTION 17.13. Headings.................................................. 80 SECTION 17.14. Counterparts.............................................. 80 SECTION 17.15. Entire Agreement; Amendments.............................. 80 SECTION 17.16. Independent Contractors................................... 80 EXHIBITS EXHIBIT A - Determination of Certain Accounting Terms EXHIBIT B - Financial Statement Format EXHIBIT C - Lisofylline Product Genus EXHIBIT D-1 - CTI Patents EXHIBIT D-2 - ORTHO Patents EXHIBIT E - Form of Royalty Report
vi EXECUTION COPY ---- COLLABORATION AND LICENSE AGREEMENT ----------------------------------- COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), dated as of November 8, 1996 (the "Effective Date"), by and between CELL THERAPEUTICS, INC., a Washington corporation having its principal place of business at 201 Elliott Avenue West, Suite 400, Seattle, Washington 98119 (hereinafter referred to as "CTI") and ORTHO BIOTECH INC., a New Jersey corporation having its principal place of business at 700 U.S. Route 202 South, Raritan, New Jersey 08869 and THE R. W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE, a division of ORTHO PHARMACEUTICAL CORPORATION, a Delaware corporation having its principal office at U.S. Route 202, Raritan, New Jersey 08869 (hereinafter collectively referred to as "ORTHO"). CTI and ORTHO are sometimes referred to herein individually as a "Party" and collectively as the "Parties", and all references to "CTI" and "ORTHO" shall include their respective Affiliates, where appropriate under the terms of this Agreement. W I T N E S S E T H: - - - - - - - - - - WHEREAS, ORTHO is a part of a multinational health care company with research, development and marketing activities worldwide which desires to obtain additional potential drug products to sell for Oncology and possible other indications; WHEREAS, CTI is a late-stage development biotechnology company which has discovered and is developing a compound, Lisofylline, which, among other things, is a toxicity modifier for use in reducing the side effects associated with the use of different types of anti-cancer treatments such as radiation or chemotherapy. CTI has conducted, and is conducting, several clinical trials of Lisofylline, and is planning additional clinical trials and commercial activities; WHEREAS, the Parties intend to establish a collaboration for the development and commercialization of Lisofylline for Oncology indications, and possibly other indications, throughout the world. In connection therewith, CTI desires to grant to ORTHO, and ORTHO desires to obtain, rights to Co-Promote (as hereinafter defined) Lisofylline in the United States and to manufacture, develop and market Lisofylline for such Oncology and possible other indications in the rest of the world (other than Canada), all on the terms and conditions set forth in this Agreement; WHEREAS, the Parties intend to record, characterize and report their activities under this Agreement as separate activities of each of the Parties; 1 NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE I DEFINITIONS ----------- SECTION 1.01. Definitions. The following terms, when capitalized, ----------- shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined) as used in this Agreement: "Additional Indication" means, any Potential New Indication with --------------------- respect to which ORTHO has elected to exercise its option pursuant to Section 5.04(a), (b) or (c). "Advertising" means the advertising and promotion of Collaboration ----------- Products in the Co-Promotion Territory through any means, including, without limitation, (i) television and radio advertisements; (ii) advertisements appearing in journals, newspapers, magazines or other media; (iii) seminars and conventions; (iv) packaging design; (v) professional education programs; (vi) samples, visual aids and other selling materials; (vii) hospital formulary committee presentations; and (viii) presentations to state and other governmental formulary committees; provided, however, that Advertising shall exclude General Public Relations. "Affiliate" means any person, corporation, partnership, firm, joint --------- venture or other entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, CTI or ORTHO, as the case may be. As used in this definition, "control" means the possession of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of the outstanding voting securities or by contract or otherwise. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Allowable Expenses" means those expenses incurred after the ------------------ commercial launch of a Collaboration Product which are generally consistent with a Commercialization Plan and Commercialization Budget and are specifically attributable to Collaboration Products in the Co-Promotion Territory, and shall consist of ***** where permitted hereunder. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Allowable Operating Expenses" shall include *****, *****. Allowable ---------------------------- Operating Expenses shall exclude *****. 2 "AML Indication" means the use of a Collaboration Product for the -------------- treatment of patients with Acute Myelogenous Leukemia undergoing high-dose chemotherapy. "AML Milestone Payments" shall have the meaning set forth in ---------------------- Section 3.02(b). "BMT Approval Date" means the date on which CTI shall have received ----------------- Regulatory Approval for the first BMT Indication for a Collaboration Product in the Co-Promotion Territory. "BMT Indication" means the use of a Collaboration Product as a -------------- toxicity modifier for use in reducing the side effects in cancer patients undergoing high-dose radiation and/or chemotherapy followed by bone marrow or stem cell support. "BMT Milestone Payments" shall have the meaning set forth in ---------------------- Section 3.02(a). "BioChem Pharma" shall mean, collectively BioChem Pharma Inc. and -------------- BioChem Therapeutic, Inc. "Change of Control" of a Party means the occurrence of any of the ----------------- following with respect to such Party at any time after the date hereof: (a) any Third Party (other than an Affiliate on the date hereof) shall have become the beneficial owner of securities representing ***** or more of the aggregate voting power of the then outstanding voting securities of such Party; or (b) any sale by such Party of: (i) ORTHO; or (ii) all or substantially all of such Party's pharmaceutical and/or healthcare assets; or (iii) all or substantially all of such Party's assets other than its pharmaceutical and/or healthcare assets. For the purposes of this definition, the term "Party" expressly includes JOHNSON & JOHNSON ("J&J"), a New Jersey corporation and parent of ORTHO, and any other direct or indirect parent corporation of ORTHO. "Collaboration Compound" means Lisofylline and any Eligible Compound. ---------------------- "Collaboration Product" means a product in finished dosage form --------------------- including or incorporating any form or dosage of a Collaboration Compound for use in the Field, other than an Independent Product. "Combination Product" means a Collaboration Product containing a ------------------- Collaboration Compound and one or more additional active ingredients. 3 "Commercialization" and "Commercialize" shall refer to all activities ----------------- ------------- undertaken pursuant to an approved Commercialization Plan relating to the manufacture, marketing and sale of a Collaboration Product. "Commercialization Budget" shall have the meaning set forth in Section ------------------------ 7.04. "Commercialization Plan" shall have the meaning set forth in Section ---------------------- 7.04. "Confidential Information" shall have the meaning set forth in Section ------------------------ 10.01. "Co-Promote" means a co-participation including manufacturing to ---------- jointly promote Collaboration Products through ORTHO, CTI and their respective sales forces under a single trademark in the Co-Promotion Territory. "Co-Promotion Territory" means the United States, its territories and ---------------------- possessions. "Control" or "Controlled" shall refer to possession of the ability to ------- ---------- grant a license or sublicense of patent rights, know-how or other intangible rights as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Cost of Capital Allowance" means the amount recoverable by ORTHO ------------------------- under this Agreement for the use of its Utilized Capital allocated to the business of this collaboration related to Collaboration Products in the Co- Promotion Territory after the first commercial launch of a Collaboration Product. ORTHO's cost of capital shall be determined *****. "Cost of Goods Sold" means the cost of Collaboration Product inventory ------------------ sold and other manufacturing costs incurred with respect to Collaboration Products in the Co-Promotion Territory during the period. Cost of Goods Sold shall be calculated in the manner set forth in Exhibit A. "CTI Know-how" means proprietary Information which is within the ------------ Control of CTI and relates to the research, development, manufacture, use, importation, sale or offer for sale of Collaboration Compounds or Collaboration Products. Notwithstanding anything herein to the contrary, CTI Know-how shall exclude CTI Patents. "CTI Patent" means a Patent which covers the research, development, ---------- manufacture, use, importation, sale or offer for sale of Collaboration Compounds within the Field or Collaboration Products, which Patent is owned or Controlled by CTI, including CTI's interest in any Joint Patents. 4 "Development" and "Develop" shall refer to all activities relating to ----------- ------- obtaining Regulatory Approval of a Collaboration Product, and all activities relating to developing the ability to manufacture the same. This includes preclinical testing, toxicology, formulation, bulk production, fill/finish, manufacturing process development, manufacturing, quality assurance and quality control technical support, clinical studies, regulatory affairs and outside counsel regulatory legal services. Similar activities related to Potential New Indications prior to their designation as Additional Indications, and similar activities related to Eligible Compounds prior to their designation as Collaboration Compounds, shall be in the category of Pre-Selection Activities rather than Development. Development shall not include a Party's costs incurred in connection with the construction of a manufacturing facility. "Development Budget" shall have the meaning set forth in Section 4.05. ------------------ (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Development Expenses" means the expenses incurred by a Party or for -------------------- its account which are generally consistent with a Development Plan and Development Budget and are specifically attributable to the Development of a Collaboration Product (including royalties paid to a Third Party not otherwise recovered as a Cost of Goods Sold). Development Expenses shall include, but are not limited to, *****. "Development Indications" means all therapeutic indications for which ----------------------- Collaboration Products are being Developed or Commercialized as of the Effective Date. Development Indications as of the Effective Date consist of the BMT Indication and the AML Indication. "Development Plan" shall have the meaning set forth in Section 4.05. ---------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Direct Administrative Expenses" means the administrative costs ------------------------------ incurred by a Party or for its account ***** that are actually directly engaged in the Development or Commercialization of Collaboration Products. Direct Administrative Expenses shall be calculated in the manner set forth in Exhibit A. Administrative expenses incurred by a Party or for its account which are not specifically attributable to employees and information systems that are directly engaged in the Development or Commercialization of Collaboration Products shall not be recoverable as a Direct Administrative Expense or otherwise. 5 "Distribution Expenses" means the costs incurred by a Party or for its --------------------- account, specifically attributable to the distribution of a Collaboration Product in the Co-Promotion Territory, to be calculated in the manner set forth in Exhibit A. "Drug Approval Application" means an application for Regulatory ------------------------- Approval required to be approved before commercial sale or use of a Product as a drug in a regulatory jurisdiction. "Effective Date" shall have the meaning set forth in the Recitals to -------------- this Agreement. "Eligible Compound" means any chemical compound (other than ----------------- Lisofylline) created, developed, discovered or Controlled by CTI or an Affiliate of CTI having a structure falling within the genus for Lisofylline described in Exhibit C, including any of the same covered by a CTI Patent or by CTI Know-how. "Equalization Payment" means the amount payable by one Party to the -------------------- other to share the Operating Profit or Losses between the Parties as shown on Exhibit B. By way of example, in a total Operating Profits situation, if ORTHO has an Operating Profit of 40 and CTI has an Operating Loss of 10, then the Equalizing Payment made by ORTHO to CTI will be 25. In a total Operating Losses situation, if ORTHO has an Operating Loss of 40 and CTI has an Operating Loss of 10, the Equalization Payment made by CTI to ORTHO will be 15. "Ex-Manufacturer Selling Price" means the invoice price to wholesalers ----------------------------- (or their equivalent) less all cash discounts taken for prompt cash payment for a Collaboration Product. - - "Excepted Commercialization Matters" shall have the meaning set forth ---------------------------------- in Section 7.01(b). "Excepted Development Matters" shall have the meaning set forth in ---------------------------- Section 4.02(b). "FDA" means the United States Food and Drug Administration, or any --- successor agency. "Field" means, at any date of determination, the development, use, ----- manufacture, distribution, marketing and sale of Collaboration Compounds and Collaboration Products for the prevention and treatment of all Development Indications and Additional Indications for human medical uses. 6 "Financial Statements" means the form of Financial Statement shown and -------------------- described in Exhibit B. "General Public Relations" means any public relations activity ------------------------ (including a press release or image piece) which (i) promotes generally the business of a company or deals in a general manner with the activities of such company in a general pharmaceutical market (e.g., the Oncology health care market); and (ii) mentions in an incidental manner the fact that such company or its Affiliates markets or sells one or more Collaboration Products or provides other incidental information concerning one or more Collaboration Products. "GMPs" means manufacturing practices in conformity with the FDA's ---- regulations governing good manufacturing practices set forth in 21 C.F.R. Part 210 et seq. -- --- "Independent Product" means a product including or incorporating any ------------------- form or dosage of a Collaboration Compound for human medical uses which is developed and/or commercialized by a Party after the other Party has either (i) terminated its participation in Development pursuant to Section 4.09(c) hereof or (ii) elected to discontinue sharing Development Expenses or Pre-Marketing Expenses pursuant to Section 5.07 hereof. "Information" means (i) techniques and data within the Field relating ----------- to Collaboration Compounds, Collaboration Products and Eligible Compounds, including, but not limited to, inventions, practices, methods, knowledge, know- how, skill, experience, test data including pharmacological, toxicological, preclinical and clinical test data, analytical and quality control data, marketing, pricing, distribution, cost, sales and manufacturing data or descriptions and (ii) compounds, compositions of matter, assays and biological materials within the Field relating to Collaboration Compounds, Collaboration Products and Eligible Compounds. "Initial Development Plan and Budget" means the initial Development ----------------------------------- Plan and Budget concerning the Development of Lisofylline for Development Indications during the period commencing with the Effective Date and ending on (i) in the case of the BMT Indication December 31, 1998 and (ii) in the case of the AML Indication, June 30, 1997, which Initial Development Plan and Development Budget has been agreed to by the Parties and is attached to a separate letter exchanged between the Parties concurrently herewith. "Initial R&D Plan" shall have the meaning set forth in Section ---------------- 5.01(a). "Joint Commercialization Committee" or "JCC" means the committee --------------------------------- --- established pursuant to Section 2.07 below. "Joint Development Committee" or "JDC" means the committee established --------------------------- --- pursuant to Section 2.07 below. 7 "Joint Patent" shall have the meaning set forth in Section 11.03(a). ------------ "Launch Budget" shall have the meaning set forth in Section 7.05. ------------- "Launch Plan" shall have the meaning set forth in Section 7.05. ----------- "Lead Development Party" shall mean the Party responsible hereunder ---------------------- for the Development of a Collaboration Product, and the execution of the Development Plan related thereto, as further described in Section 4.03 hereof. "Lisofylline" means that certain compound designated (R)(-)-1-(5- ----------- hydroxyhexyl)-3,7-dimethylxanthine. "Losses" shall have the meaning set forth in Section 15.01(a). ------ "Major Market Country" means each of France, Germany, Italy and the -------------------- United Kingdom. "Manufacturing Party" shall be any Party responsible for the (i) ------------------- manufacturing and supply of Collaboration Compounds and Collaboration Products for use during Development and (ii) commercial manufacture and supply of Collaboration Products. "Marketing Expenses" means the costs which are generally consistent ------------------ with a Commercialization Budget and Commercialization Plan and are incurred after the first commercial launch of a Collaboration Product and are specifically attributable to the sale, promotion, advertising, and marketing of such Collaboration Product in the Co-Promotion Territory. Marketing Expenses shall be calculated in the manner set forth in Exhibit A. "Material Breach" shall have the meaning set forth in Section --------------- 14.02(f). "Milestone Payment" shall mean, collectively, the BMT Milestone ----------------- Payments, the AML Milestone Payments, the Mucositis Milestone Payments and the SIRS Milestone Payments. "Mucositis Indication" means the use of a Collaboration Product as a -------------------- toxicity modifier for use in reducing acute toxicity to the cells lining the mouth, stomach and intestinal tract in cancer patients undergoing high-dose radiation and/or chemotherapy to treat solid or hematological tumors. "Mucositis Milestone Payments" shall have the meaning set forth in ---------------------------- Section 3.02(c). 8 "Net Sales" means the amount invoiced by a Party or an Affiliate for --------- sales of Collaboration Products to a Third Party in the Co-Promotion Territory less: (i) discounts, including cash discounts, rebates, chargebacks, and retroactive price reductions or allowances actually allowed or granted from the billed amount (as adjusted pursuant to Section 7.14) and fees paid to distributors (other than to a distributor that is an Affiliate of such Party), (ii) credits or allowances actually granted upon claims, rejections or returns of such sales of Collaboration Products, including recalls, regardless of the Party requesting such recalls, (iii) taxes, duties or other governmental charges levied on or measured by the billing amount when included in billing, as adjusted for rebates, chargebacks, such reductions and refunds. "Net Sublicense Revenues" means all revenues or other consideration ----------------------- received from Third Parties as consideration for sublicensing of the manufacture, distribution, use or sale of Collaboration Products in the Co- Promotion Territory, less the expenses directly attributable to supplying goods and services to such sublicensees to enable their performance of the sublicenses. "Non-Manufacturing Party" shall be any Party that is not a ----------------------- Manufacturing Party. "Oncology" means therapeutic uses for anti-cancer treatments and -------- supportive care indications associated with the cancer or following chemotherapy and/or radiation. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Operating Profits or Losses" means the profits or losses resulting --------------------------- from the Commercialization of Collaboration Products in the Co-Promotion Territory and shall be equal to *****. A separate determination of Net Sales and Operating Profits or Losses shall be made for each Collaboration Product as outlined in Exhibit B. In the event multiple Collaboration Products are being marketed under this Agreement, the individual statements of Operating Profits or Losses shall then be combined into a single statement of Operating Profits or Losses for purposes of overall accounting between the Parties. "ORTHO Know-how" means proprietary Information which is within the -------------- Control of ORTHO and relates to the research, development, manufacture, use, importation, sale or offer for sale of Collaboration Compounds or Collaboration Products. Notwithstanding anything herein to the contrary, ORTHO Know-how shall exclude ORTHO Patents. "ORTHO Patent" means a Patent which covers the research, development ------------ manufacture, use, importation, sale or offer for sale of Collaboration Compounds within the Field or Collaboration Products, which Patent is owned or Controlled by ORTHO, including ORTHO's interest in any Joint Patents. 9 "Patent" means United States and foreign patents, applications and ------ provisional applications for United States and foreign patents, and all reexaminations, reissues, extensions, term restorations, divisionals, continuations and continuations-in-part thereof. "Patent and Trademark Expenses" means the fees, expenses and ----------------------------- disbursements of outside counsel, and payments to Third Party agents incurred in connection with the preparation, filing, prosecution and maintenance of CTI Patents, ORTHO Patents and trademarks covering Collaboration Compounds within the Field and Collaboration Products, including the costs of patent interference and opposition proceedings. "Phase II AML Trial" means CTI's Phase II/III clinical trial currently ------------------ designated under protocol 1016 and includes all modifications thereto (including a change in protocol number). "Phase III Clinical Trials" has the meaning ascribed thereto in 21 ------------------------- C.F.R. (S) 312.21(c). "Phase IIIB Clinical Trials" means product support clinical trials of -------------------------- a Collaboration Product (i.e., a clinical trial which the JDC determines is not required for receipt of Regulatory Approval but which may be useful in providing additional drug profile data) commenced before receipt of Regulatory Approval in the country where such trial is being conducted. These trials shall be considered a part of Commercialization. "Phase IV Clinical Trials" means product support clinical trials of a ------------------------ Collaboration Product commenced after receipt of Regulatory Approval in the country where such trial is being conducted. These trials shall be considered a part of Commercialization. "Post-Launch Product R&D Expenses" means the costs of Phase IV -------------------------------- Clinical Trials and ongoing product support (including manufacturing and quality assurance technical support, and laboratory and clinical efforts directed toward the further understanding of product safety and efficacy) and medical affairs (including regulatory support necessary for product maintenance) which are specifically attributable to a Collaboration Product in the Co-Promotion Territory where such Collaboration Product has been launched, excluding costs that are included within Costs of Goods Sold or Development Expenses. Post- Launch Product R&D Expenses shall be calculated in the manner set forth in Exhibit A. "Potential New Indication" means any indication other than a ------------------------ Development Indication or an Additional Indication. "Pre-Marketing" and "Pre-Marketing Activities" means all ------------- ------------------------ Commercialization activities undertaken prior to and in preparation for the launch of a Collaboration Product in the Co-Promotion Territory, consistent with a Commercialization Plan and prior to the first commercial launch of such Collaboration Product in the Co-Promotion Territory. 10 Pre-Marketing Activities shall include advertising, education, sales force training, Phase IIIB Clinical Trials, trademark selection, filing, prosecution and enforcement and other activities included within the Commercialization Plan prior to the first commercial launch of such Collaboration Product in the Co- Promotion Territory. "Pre-Marketing Expenses" means the costs (and related regulatory ---------------------- fees), excluding Development Expenses, specifically attributable to the Pre- Marketing of a Collaboration Product. "Pre-Selection Activities" or "Pre-Selection" means the scientific, ------------------------ ------------- technical and clinical activities undertaken to discover and/or evaluate a Potential New Indication as a candidate for inclusion as an Additional Indication hereunder, including screening, chemistry, pharmacology, pharmacokinetics, toxicology, formulation, process development, manufacture (including manufacture of bulk drug substance and fill/finish) for clinical trials, and clinical pharmacology. "Pre-Selection Expenses" means the expenses incurred by a Party or for ---------------------- its account specifically attributable to Pre-Selection Activities. "Products" means Collaboration Products, Royalty Bearing Products and -------- Independent Products, collectively. "R&D Subcommittee" shall have the meaning set forth in Section ---------------- 5.01(a). "Regulatory Agent" means that Party designated by an appropriate ---------------- authorization to the FDA or its regulatory equivalent to be the primary contact with and receiving party of all correspondence from the FDA in connection with any regulatory matter or filing. "Regulatory Approval" means any approvals (including pricing and ------------------- reimbursement approvals), product and/or establishment licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other governmental entity, necessary for the manufacture, use, storage, importation, export, transport or sale of Collaboration Products in a regulatory jurisdiction. "Royalty Bearing Product" means a Collaboration Product marketed ----------------------- directly or indirectly by ORTHO in the Royalty Bearing Territory pursuant to Section 7.06. "Royalty Bearing Sales" means the amount invoiced by a Party, an --------------------- Affiliate or their permitted sublicensees for sales of a Royalty Bearing Product, an Independent Product or (pursuant to Section 14.02) a Collaboration Product to a Third Party, less (i) discounts, including cash discounts, rebates, chargebacks, and retroactive price reductions or allowances actually allowed or granted from the billed amount (as adjusted pursuant to Section 7.14), 11 and fees paid to distributors (other than a distributor that is an Affiliate of such Party), (ii) credits or allowances actually granted upon claims, rejections or returns of such sales of such Products, including recalls, regardless of the Party requesting such recalls, (iii) freight, postage, shipping and insurance charges paid for delivery of such Products, to the extent billed, (iv) taxes, duties or other governmental charges levied on or measured by the billing amount when included in billing, as adjusted for rebates, chargebacks and refunds, and (v) provisions for uncollectible accounts determined in accordance with such Party's normal accounting procedures consistently applied within and across its pharmaceutical operating units. "Royalty Bearing Territory" means the world, excluding the Co- ------------------------- Promotion Territory and Canada. "Royalty Percentage" shall have the meaning set forth in Section ------------------ 8.04(b). "Safety" means adverse experiences which are significant, serious or ------ life threatening and have a toxicological effect on one or more body tissues. "Selling Expenses" shall have the meaning set forth in Exhibit A. ---------------- "SIRS Indication" means the use of a Collaboration Product for the --------------- inhibition and treatment of systemic inflammatory response syndrome. "SIRS Milestone Payment" shall have the meaning set forth in Section ---------------------- 3.02(d). "Sponsored Research Program" shall have the meaning set forth in -------------------------- Section 5.01(a). "Steering Committee" means the committee described in Section 2.01. ------------------ "Tangible Advertising" means (a) all Advertising described in clause -------------------- (i) or (ii) of the definition of the term "Advertising" and (b) all Advertising embodied in a writing or other tangible material. "Third Party" means any entity other than CTI or ORTHO and their ----------- respective Affiliates. "Tolerability" means adverse drug experiences which are unpleasant to ------------ such an extent that they can materially and adversely affect market potential or market penetration of a Collaboration Compound or Collaboration Product, but which do not necessarily require discontinuation of drug therapy. 12 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) "Utilized Capital" means the amount of ORTHO's capital specifically ---------------- attributable to the support of a particular Collaboration Product in the Co- Promotion Territory, and shall consist solely of the amount of ORTHO's consolidated net working capital dedicated to the carrying cost of *****, and shall specifically exclude any of the same related to *****. ARTICLE II MANAGEMENT ---------- SECTION 2.01. Steering Committee. CTI and ORTHO shall create, within ------------------ sixty (60) days after the Effective Date (or such later time as may be mutually agreed to by the Parties), a Steering Committee. The Steering Committee shall have an equal number of representatives from each Party and the size of the Steering Committee shall not exceed a total of four (4) members. Members of the Steering Committee shall be composed of senior personnel of the Parties. One member of the Steering Committee selected by CTI and one member of the Steering Committee selected by ORTHO shall have appropriate experience in pharmaceutical product research and development. One member of the Steering Committee selected by CTI and one member of the Steering Committee selected by ORTHO shall have appropriate executive experience. Members of the Steering Committee shall serve on such terms and conditions as shall be determined by the Party selecting such person for membership on the Steering Committee. An alternate member designated by a Party may serve temporarily in the absence of a permanent member designated by such Party. SECTION 2.02. Meetings of the Steering Committee. The Steering ---------------------------------- Committee: (a) shall hold meetings at such times and places as shall be determined by a majority of the entire membership of the Steering Committee, but in no event shall such meetings be held less frequently than once every six (6) months; (b) may conduct meetings in person or by telephone conference, provided that, any decision made during a telephone conference meeting is - -------- evidenced in a conformed writing signed by one of the members of the Steering Committee from each of the Parties; (c) shall keep minutes reflecting actions taken at meetings; (d) may act without a meeting if prior to such action a written consent thereto is signed by all members of the Steering Committee; and (e) may amend or expand upon the foregoing procedures for its internal operation by unanimous written consent. 13 SECTION 2.03. Functions and Powers of the Steering Committee. The ---------------------------------------------- activities of the Parties under this Agreement shall be managed by the Steering Committee to the extent set forth herein. The Steering Committee shall perform the following functions: (a) coordinate the long-range strategy and planning for the Development and Commercialization of Collaboration Products in the Co-Promotion Territory for all Development Indications and any and all Additional Indications in the manner contemplated by this Agreement; (b) attempt to settle disputes or disagreements that are unresolved by the JDC relating to Excepted Development Matters which are referred to it by the JDC pursuant to Section 4.02(b) or other Development matters which are referred to it by either Party pursuant to Section 16.01; (c) attempt to settle disputes or disagreements that are unresolved by the JCC relating to Excepted Commercialization Matters which are referred to it by the JCC pursuant to Section 7.01(b), other matters which are referred to it by CTI pursuant to Section 7.01(b), or other Commercialization matters which are referred to it by either Party pursuant to Section 16.01; (d) subject to Section 4.05(d), review, modify and approve the Development Budgets submitted to it by the JDC pursuant to Article IV; (e) review planned pricing and manufacturing decisions by the JCC, as further provided herein; (f) review and approve a proposal by either Party (i) to stop a Phase I clinical trial or Phase II clinical trial of a Collaboration Product because of Safety or Tolerability, (ii) to stop a Phase III Clinical Trial of a Collaboration Product for any reason other than in accordance with its protocol, or (iii) to terminate its participation in Development of a Collaboration Product under Section 4.09; (g) if ORTHO exercises its option(s) pursuant to Section 5.04 to expand the Field to include Additional Indications, review and approve the Development Budgets submitted to it by the JDC pursuant to Section 4.05(b); and (h) perform such other functions as appropriate to further the purposes of this Agreement as determined by the Parties. SECTION 2.04. Steering Committee Actions. Actions to be taken by the -------------------------- Steering Committee pursuant to the terms of this Agreement shall be taken only following the unanimous vote of the members of the Steering Committee. The Steering Committee shall attempt to have all decisions approved by all members of the Steering Committee. If the 14 members of the Steering Committee cannot reach a unanimous decision with respect to Development matters related to a Development Indication referred to it for approval within sixty (60) days following such referral, the final decision on such matters shall be made by CTI, except for Excepted Development Matters. If the Steering Committee cannot reach a unanimous decision with respect to Development matters related to an Additional Indication referred to it for approval within sixty (60) days following such referral, the final decision in such matters shall be made by ORTHO, except for Excepted Development Matters. If the members of the Steering Committee cannot reach a unanimous decision with respect to any of the Excepted Development Matters which have been referred to it pursuant to Section 4.02(b) for resolution or approval by the JDC, the status quo shall be maintained with respect to Excepted Development Matters items (i) and (ii) in Section 4.02(b). As to Excepted Development Matter item (iii) in Section 4.02(b), the clinical trial shall be terminated if the Steering Committee does not reach another decision after prompt consideration. If the members of the Steering Committee cannot reach a unanimous decision with respect to a Commercialization matter referred to it for approval within sixty (60) days following such referral, the final decision on such matter shall be made by ORTHO, except for Excepted Commercialization Matters as provided in Section 7.01(b). Except as provided for above in this Section 2.04, if the Steering Committee fails to reach agreement on a matter before it for decision, the matter shall be referred to executive officers of the Parties pursuant to Section 16.01. The manner described in this Section 2.04 to resolve disputes regarding Excepted Development matters and Excepted Commercialization Matters shall be the sole mechanism for resolving such Matters under this Agreement. If either CTI or ORTHO wishes to seek a nonbinding opinion from a Third Party with respect to any issue before the Steering Committee for decision, it may do so at its own expense; provided, however, that if both Parties agree to seek such -------- ------- opinion, such expense shall be shared equally by the Parties. SECTION 2.05. Obligations of Parties. CTI and ORTHO shall provide ---------------------- the Steering Committee and its authorized representatives with reasonable access during regular business hours to all records and documents relating to this Agreement which it may reasonably require in order to perform its obligations hereunder; provided, however, that if such documents are under a bona fide -------- ------- obligation of confidentiality to a Third Party then a Party may withhold access thereto to the extent necessary to satisfy such obligation. 15 SECTION 2.06. Limitations of Powers of Committees. ----------------------------------- (a) The Steering Committee shall have only such powers as are specifically delegated to it hereunder. Except as set forth in Section 2.03, the Steering Committee shall not be involved with the day-to-day management of the collaboration under this Agreement. (b) Notwithstanding the creation of the Steering Committee, the JDC, the JCC, or any subcommittees thereof, each Party to this Agreement shall retain the rights, powers, and discretion granted to it hereunder, and such committees and subcommittees shall not be delegated or vested with any such rights, powers, or discretion unless such delegation or vesting is expressly provided for herein or the Parties expressly so agree in writing. Such committees or subcommittees shall not have the power to amend or modify this Agreement, which may be amended or modified only as provided in Section 17.15. SECTION 2.07. Formation of Joint Development Committee and Joint -------------------------------------------------- Commercialization Committee . The Parties shall establish the JDC and the JCC - ---------------------------- within thirty (30) days after the Effective Date as more fully set forth in Articles IV and VII hereof. SECTION 2.08. Accounting. ---------- (a) For the purposes of determining all costs and expenses hereunder, any cost or expense allocated by either Party to a particular category for a particular Collaboration Product shall not also be allocated to another category for such Collaboration Product, and any cost or expense allocated to a particular Collaboration Product in a particular country shall not be allocated to another Collaboration Product of such Party or the same Collaboration Product in a different country. (b) Each Party agrees to determine Net Sales, Royalty Bearing Sales, Allowable Expenses, Development Expenses, Pre-Marketing Expenses, Pre-Selection Expenses and all other costs and expenses hereunder with respect to Collaboration Products, Royalty Bearing Products and Independent Products consistent with the definitions thereof contained herein and using its standard accounting procedures, consistent with United States generally accepted accounting principles, to the extent practical as if such Products were solely owned products of such Party, except as specifically provided in this Agreement. Each Party shall keep reasonably detailed records of the foregoing from which the material components of such items can be derived. ARTICLE III INITIAL LICENSING FEE AND MILESTONE PAYMENTS -------------------------------------------- SECTION 3.01. Initial Licensing Fee. As partial payment for the --------------------- patent licenses granted by CTI pursuant to Section 6.01 hereof, ORTHO shall pay to CTI a license 16 fee equal to five million dollars ($5,000,000) upon execution of this Agreement. This fee shall be nonrefundable and shall be noncreditable against any future obligations of ORTHO under this Agreement. SECTION 3.02. Milestone Payments. ------------------ (a) BMT Milestone Payments. ORTHO shall make the following payments ---------------------- ("BMT Milestone Payments") to CTI within ten (10) business days after the first achievement of each of the following milestones (or, in the event that any such milestone is achieved by CTI, within ten (10) business days after CTI shall have given ORTHO notice that such milestone has been achieved): (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.)
BMT MILESTONES PAYMENT ------------------------------------------------------------------------ --------------- (i) The acceptance by the FDA for filing of the first Drug ***** Approval Application for a Collaboration Product for a BMT Indication in the United States. (ii) Regulatory Approval for the first BMT Indication for a ***** Collaboration Product in the United States. (iii) Regulatory Approval for the first BMT Indication for a ***** Collaboration Product in a Major Market Country. (iv) Regulatory Approval for the first BMT Indication for a ***** Collaboration Product in Japan.
(b) AML Milestone Payments. In the event that ORTHO shall have exercised its option pursuant to Section 4.05(b) to continue Development of Collaboration Products for an AML Indication, ORTHO shall make the following milestone payments ("AML Milestone Payments") to CTI within ten (10) business days after the first achievement of each of the following milestones (or, in the event that any such milestone is achieved by CTI, within ten (10) business days after CTI shall have given ORTHO notice that such milestone has been achieved): (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.)
AML MILESTONES PAYMENT ------------------------------------------------------------------------ --------------- (i) The commencement of a Phase III Clinical Trial, or the ***** conversion of a clinical trial into a Phase II/III clinical trial, for a Collaboration Product for an AML Indication, but not prior to the time that ORTHO has accepted the updated June 30, 1997 Development Plan for the AML Indication.
17 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (ii) If ORTHO has not accepted the Development Plan in ***** subsection 3.02(i) above, then upon completion of a Phase III Clinical Trial, or a Phase II/III Clinical Trial not requiring further Phase III Clinical Trials, for a Collaboration Product for an AML Indication, but not prior to sixty (60) days after ORTHO has received all of the data from said trial and gives notice that ORTHO wishes to continue development of the Collaboration Product for an AML Indication. (iii) If payment of (i) or (ii) is made, then Regulatory Approval ***** for the first AML Indication for a Collaboration Product in the United States. (iv) If payment of (i) or (ii) is made, then Regulatory Approval ***** for the first AML Indication for a Collaboration Product in a Major Market Country. (v) If payment of (i) or (ii) is made, then Regulatory Approval ***** for the first AML Indication for a Collaboration Product in Japan.
(c) Mucositis Milestone Payments. In the event that ORTHO shall have ---------------------------- exercised its option pursuant to Section 5.04 to include a Mucositis Indication as an Additional Indication, ORTHO shall make the following milestone payments ("Mucositis Milestone Payments") to CTI within ten (10) business days after the first achievement of each of the following milestones (or, in the event that any such milestone is achieved by CTI, within ten (10) business days after CTI shall have given ORTHO notice that such milestone has been achieved): (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.)
MUCOSITIS MILESTONES PAYMENT -------------------------------------------------------------- --------------- (i) The acceptance by the FDA for filing of the first Drug ***** Approval Application for a Collaboration Product for a Mucositis Indication in the United States. (ii) The filing with the relevant regulatory agency or authority ***** of ORTHO's first Drug Approval Application for a Collaboration Product for a Mucositis Indication in the first Major Market Country which accepts such filing. (iii) The filing with the relevant regulatory agency or authority ***** of ORTHO's first Drug Approval Application for a Collaboration Product for a Mucositis Indication in Japan.
18 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (iv) Regulatory Approval for the first Mucositis Indication for a ***** Collaboration Product in the United States. (v) Regulatory Approval for the first Mucositis Indication for a ***** Collaboration Product in a Major Market Country. (vi) Regulatory Approval for the first Mucositis Indication for a ***** Collaboration Product in Japan.
(b) SIRS Milestone Payments. In the event that ORTHO shall have exercised its option pursuant to Section 5.04 to include a SIRS Indication as an Additional Indication, ORTHO shall make the following payments ("SIRS Mile stone Payments") to CTI within ten (10) business days after the first achievemen t of each of the following milestones (or, in the event that any such milestone is achieved by CTI, within ten (10) business days after CTI shall have given ORTHO notice that such milestone has been achieved): (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.)
SIRS MILESTONES PAYMENT ------------------------------------------------------------------- --------------- (i) The commencement of a Phase III Clinical Trial, or the ***** conversion of a clinical trial into a Phase II/III clinical trial, for a Collaboration Product for a SIRS Indication. (ii) The acceptance by the FDA for filing of the first Drug ***** Approval Application for a Collaboration Product for a SIRS Indication in the United States. (iii) Regulatory Approval for the first SIRS Indication for a ***** Collaboration Product in the United States. (iv) Regulatory Approval for the first SIRS Indication for a ***** Collaboration Product in a Major Market Country. (v) Regulatory Approval for the first SIRS Indication for a ***** Collaboration Product in Japan.
ARTICLE IV DEVELOPMENT ----------- SECTION 4.01. Formation of JDC. Within thirty (30) days after the ---------------- Effective Date (or such later time as may be mutually agreed to by the Parties), the Parties shall establish the JDC. The JDC shall consist of an equal number of representatives of CTI and ORTHO to be agreed upon by the Parties from time to time. Either Party may designate 19 a substitute for a member unable to be present at a meeting. One of the ORTHO members of the JDC, chosen at the sole discretion of ORTHO, along with one of the CTI members of the JDC, chosen at the sole discretion of CTI, shall serve as co-chair of the JDC. Regardless of the number of representatives from each Party on the JDC, each Party shall have one vote on any issue in dispute. Meetings of the JDC shall be held at least quarterly and may be called by either Party with not less than ten (10) business days notice to the other unless such notice is waived, and meetings shall be held at the office of the Party not calling the meeting, unless otherwise agreed. The JDC may be convened, polled or consulted from time to time by means of telecommunication or correspondence. Each Party will disclose to the other proposed agenda items reasonably in advance of each meeting of the JDC. Each Party shall bear its own costs for participation in the JDC. SECTION 4.02. Responsibilities of JDC. ----------------------- (a) The JDC shall oversee the Development of (i) Collaboration Products for Development Indications, and (ii) to the extent ORTHO exercises its option(s) under Section 5.04 to expand the Field to include Additional Indications, Collaboration Products for such Additional Indications, in order to obtain Regulatory Approvals in the Co-Promotion Territory as set forth in this Article IV. The JDC will also oversee the preparation of Development Plans and Development Budgets and submit them to the Steering Committee for review and as required, approval and will facilitate the flow of Information with respect to Development being conducted for each Collaboration Product for each Development Indication and Additional Indication, if any. In addition, as part of an approved Commercialization Budget and/or an approved Launch Budget, the JDC will provide such support with respect to Phase IIIB Clinical Trials and Phase IV Clinical Trials as may be reasonably requested by the JCC. (b) Decisions shall be made by the JDC by consensus after an open discussion of the matters as to which decisions are being made. If the JDC fails to reach consensus as to any matter involving Development, excepting (i) increasing a Development Budget, other than pursuant to Section 4.05 (ii) altering a Development Plan in any material respect, including changing the indications for which a Collaboration Product is being developed, or (iii) terminating a Phase III Clinical Trial prior to completion in accordance with its protocol ("Excepted Development Matters"), the decision of CTI will be final and determinative with respect to all Development Indications and matters related thereto and so long as such decision does not contradict or modify the terms of this Agreement. If the JDC fails to reach consensus as to any matter involving Additional Indications, the decision of ORTHO will be final and determinative so long as such decision does not contradict or modify the terms of this Agreement. Excepted Development Matters shall be referred to the Steering Committee for resolution pursuant to Section 2.04. 20 (c) The JDC will have the power to form subcommittees with appropriate representation from CTI and ORTHO, including the R&D Subcommittee pursuant to Section 5.01 in the event that ORTHO exercises its option to commence the Sponsored Research Program as provided therein. (d) During clinical trials for any Collaboration Products, the JDC and JCC shall work together to assure a smooth transition from Development of such Collaboration Product to Commercialization of such Collaboration Product, including without limitation, product indications, product positioning and Pre- Marketing activities. In addition, the JDC shall keep the JCC informed of proposed changes in the formulation of Collaboration Products and the progress of all clinical trials being conducted. SECTION 4.03. Lead Development Party. ---------------------- CTI will be the lead Development Party with respect to obtaining Regulatory Approval for all Collaboration Products in the Co-Promotion Territory and, as a result, shall be obligated and responsible for carrying out Development pursuant to each Development Plan. CTI will assemble its development team and commence reporting to the JDC within thirty (30) days following the Effective Date. ORTHO agrees to carry out such Development tasks as are reasonably requested by CTI and accepted by ORTHO. ORTHO agrees to apply its expertise to assist CTI in all aspects of each Development Plan. ORTHO will be the lead Development Party with respect to obtaining Regulatory Approval for all Royalty Bearing Products in the Royalty Bearing Territory, and, acting in this capacity, shall have the right to act independently of the JDC; provided, -------- however, that ORTHO shall not take any action in connection with obtaining - ------- Regulatory Approval for a Royalty Bearing Product in the Royalty Bearing Territory that would materially and adversely affect CTI's ability to conduct Development pursuant to the Development Plan. SECTION 4.04. Right to Engage Third Parties. (a) In the course of ----------------------------- its business, CTI regularly uses Third Parties to perform certain Development activities. CTI may continue to do so during the course of this Agreement and expenses relating to such Third Party Development will be included in Development Expenses; provided, however, that CTI shall enter into such Third -------- ------- Party contracts on an arm's-length basis at reasonable rates customary in the U.S. pharmaceutical industry. (b) CTI shall notify ORTHO in writing fifteen (15) days prior to entering into a material contract with a Third Party to perform any Development activities, unless such contract may be cancelled or terminated by CTI without penalty on less than sixty (60) days notice. During the fifteen (15) day period following such notice from CTI, ORTHO shall have the right to offer to perform itself such Development activities that CTI proposed to contract to a Third Party. If ORTHO decides to offer to perform such Development activities, it shall notify CTI in writing during such fifteen (15) day period and shall include with such notice the terms of its offer to perform such Development activities. CTI shall 21 have no obligation to accept such offer, but shall consider such offer in good faith and negotiate towards entering into an agreement with ORTHO if ORTHO's offer and capabilities are economically equivalent to those of such Third Party. All other things being equal, CTI shall accept ORTHO's offer if it is less expensive than such Third Party's offer. SECTION 4.05. Development Plan and Development Budget. --------------------------------------- (a) The Development of each Collaboration Product in the Co-Promotion Territory for each Development Indication and Additional Indication, if any, shall be governed by a development plan ("Development Plan") and development budget ("Development Budget"), which shall provide for Development of Collaboration Products for Development Indications and Additional Indications, if any, in the Co-Promotion Territory and, together with updates, shall (except as provided in Section 5.04) be prepared by CTI after discussion and consultation with ORTHO and the JCC, for Development Budget approval by the Steering Committee. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) The Parties have agreed upon and approved the Initial Development Plan and Budget. After the completion of the Phase II AML Trial, CTI shall provide ORTHO with all of the raw data related to the Phase II AML Trial and a draft clinical trial report (which shall be compiled from a secured and audited database and shall include patient listing statistics, methods and procedures) prepared by CTI with respect to the Phase II AML Trial (such data and report being collectively referred to herein as the "AML Trial Information"). The AML Trial Information shall be accompanied by a draft revised Development Plan and Development Budget for the AML Indication. ORTHO shall have the right, exercisable upon delivery of written notice to CTI not later than sixty (60) days following the date that the AML Trial Information is presented to ORTHO, to continue Development of Collaboration Products for an AML Indication hereunder for the period after June 30, 1997. In the event that ORTHO makes such election, it shall pay to CTI an amount equal to sixty percent (60%) of all expenses that were incurred by CTI in connection with the Development of Collaboration Products for an AML Indication on or after the Effective Date to the date of determination, other than any such amounts that were included in the Initial Development Plan and Budget and previously paid on a 60% basis by ORTHO, plus interest on such amount at an annual rate equal to *****. If ORTHO elects to exercise its option pursuant to this Section 4.05(b) to continue Development of Collaboration Products for an AML Indication, then ORTHO shall make the AML Milestone Payments to CTI pursuant to Section 3.02(b) hereof as provided therein. If any of the milestones set forth in Section 3.02(b) shall have been achieved prior to the date that ORTHO shall have exercised its option pursuant to Section 4.05(b) to continue Development of Collaboration Products for an AML Indication hereunder, then ORTHO shall make the AML Milestone Payments which correspond to such achieved milestones concurrently with the exercise of such option. (c) With respect to Collaboration Products for Additional Indications, the initial Development Plan and initial Development Budget for each such Additional Indication 22 shall be agreed between the Parties pursuant to Section 5.04, and each subsequent Development Plan and Development Budget for each such Additional Indication shall be proposed by the JDC and submitted to the Steering Committee for review and Development Budget approval. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (d) Each Development Plan shall describe the proposed overall program of Development for the subject Collaboration Product for the particular Development Indication or Additional Indication, as the case may be, in the Co- Promotion Territory, including preclinical studies, toxicology, formulation, process development, clinical studies and regulatory plans and other elements of obtaining Regulatory Approval in the Co-Promotion Territory, and shall include projected timelines for obtaining such Regulatory Approval. The Development Plan shall include a summary of estimated Development Expenses of the program expected during the Development process through obtaining Regulatory Approval in the Co-Promotion Territory for each proposed indication and route of delivery, and shall also include a detailed Development Budget for all Development activities proposed for the following ***** months. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (e) Each Development Plan and Development Budget shall be updated annually by CTI after discussion and consultation with ORTHO and the JCC, and submitted by ***** of each calendar year to the Steering Committee for review and Development Budget approval. Each updated Development Budget shall be based on the corresponding updated Development Plan and shall be prepared in accordance with generally accepted accounting principles. The rate of any cost increases shall be reasonable and customary as measured by an agreed-upon index such as the All Urban Consumer Price Index. The Steering Committee shall provide comments on each such updated Development Plan and Development Budget within thirty (30) days following its submission to them and within ninety (90) days following such original submission the Steering Committee shall either approve the Development Budget submitted by the JDC or approve a modified Development Budget prepared by the Steering Committee consistent with the objectives for the Collaboration Products and the aims of the collaboration. If the Steering Committee fails to approve any change in the Development Budget or a material change in the Development Plan of the type described in Section 4.02(b)(ii), the Development Budget and Development Plan shall remain at its previously approved level or previous unmodified form. SECTION 4.06. Development Efforts. CTI and ORTHO each agree to ------------------- collaborate diligently in the development of Collaboration Products and to use commercially reasonable and diligent efforts to develop and bring Collaboration Products to market in the Co-Promotion Territory as soon as practicable. Each Party further agrees to execute and substantially perform the obligations assumed by it under the Development Plan within the Development Budget and to cooperate with the other Party in carrying out the Development Plan. 23 SECTION 4.07. Drug Approval Applications. -------------------------- (a) Co-Promotion Territory. Consistent with the Development Plan but ---------------------- subject to the remainder of this Section 4.07, CTI shall be responsible for preparing and filing Drug Approval Applications and seeking Regulatory Approvals for Collaboration Products in the Co-Promotion Territory, including preparing all reports necessary as part of a Drug Approval Application. All such Drug Approval Applications shall be filed in the name of CTI, and a copy of each such Drug Approval Application shall be simultaneously provided to ORTHO. CTI shall be responsible for prosecuting such Drug Approval Applications and ORTHO shall have the right of cross-reference. In connection with all Drug Approval Applications being prosecuted by CTI under this Section 4.07(a), CTI agrees to provide ORTHO with a copy (which may be wholly or partly in electronic form) of all filings to regulatory agencies that it makes hereunder. The Parties shall consult and cooperate in the preparation of each Drug Approval Application and in obtaining Regulatory Approvals within the Co-Promotion Territory. CTI shall provide ORTHO with reasonable advance notice of any scheduled meeting with any regulatory agency relating to any Drug Approval Application, and ORTHO shall have the right to participate in any such meeting. CTI shall promptly furnish ORTHO with copies of all material correspondence CTI has had with any regulatory agency, and contact reports concerning material conversations or material meetings with any regulatory agency, in each case relating to any such Drug Approval Application. Upon receipt of Regulatory Approval of the Drug Approval Application for the first Collaboration Product hereunder, CTI shall submit an appropriate document to the regulatory agency designating ORTHO as the Regulatory Agent and thereafter ORTHO shall assume primary responsibility for dealings with the regulatory agency with respect thereto, including filing all supplements and other documents with such agency with respect to such existing Drug Approval Application. In the event that any regulatory agency threatens or initiates any action to remove a Collaboration Product from the market in the Co-Promotion Territory, ORTHO shall notify CTI of such communication within one business day of receipt by ORTHO. In connection with all Drug Approval Applications with respect to which ORTHO is Regulatory Agent, ORTHO agrees to provide CTI with a copy (which may be wholly or partly in electronic form) of all filings to regulatory agencies that it makes hereunder. The Parties shall consult and cooperate in the preparation of each such Drug Approval Application and in obtaining Regulatory Approvals within the Co-Promotion Territory. ORTHO shall provide CTI with reasonable advance notice of any scheduled meeting with any regulatory agency relating to any such Drug Approval Application and CTI shall have the right to participate in any such meeting. ORTHO shall promptly furnish CTI with copies of all material correspondence or material meetings with any regulatory agency in each case relating to any such Drug Approval Application. As between Parties, CTI shall be the legal and beneficial owner of all Drug Approval Applications and related approvals in the Co-Promotion Territory. Upon receipt of regulatory approval of each subsequent separate Drug Approval Application with respect to a 24 Collaboration Product the process described above shall be repeated and CTI shall appoint ORTHO as Regulatory Agent upon approval thereof. CTI shall have the right of cross-reference with respect to all Drug Approval Applications for which ORTHO is Regulatory Agent. In furtherance of the desire of the Parties that each have access to all relevant information and the fact that, as Regulatory Agent and as a function of ORTHO having responsibility hereunder for the maintenance and monitoring of all safety and similar data with respect to Collaboration Products, CTI shall have the right to have one or more of its employees be resident at ORTHO's place of business where access to such data is generally made available to the relevant ORTHO employees performing such safety and monitoring functions. All costs of such employees shall be CTI's, provided -------- ORTHO shall train such employees in whatever procedures are required to enable such employees to have such informational access with respect to Collaboration Products, and provided further that such employees shall be subject to all ORTHO -------- ------- security, safety and other relevant policies applicable to ORTHO employees. (b) Royalty Bearing Territory. ORTHO shall be responsible for ------------------------- preparing and filing Drug Approval Applications and seeking Regulatory Approvals for Collaboration Products in the Royalty Bearing Territory, including preparing all reports necessary as part of a Drug Approval Application. ORTHO shall be responsible for prosecuting all such Drug Approval Applications, and CTI shall have the right of cross reference. In connection with all Drug Approval Applications being prosecuted by ORTHO hereunder, ORTHO agrees to provide CTI with a copy (which may be wholly or partly in electronic form) of all filings to regulatory agencies in each Major Market Country that it makes hereunder. Within thirty (30) days following the end of each calendar quarter ORTHO shall report to CTI regarding the status of each pending and proposed Drug Approval Application in the Royalty Bearing Territory. In the event that any regulatory agency threatens or initiates any action to remove such Collaboration Product from the market in any country in the Royalty Bearing Territory, ORTHO shall notify CTI of such communication within one business day of receipt by ORTHO. SECTION 4.08. Costs of Development. -------------------- (a) General. All Development Expenses incurred pursuant to an ------- approved Development Plan for a Collaboration Product shall be shared by the Parties in the Co-Promotion Territory in the manner as set forth in this Article IV. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) Sharing. Except as is provided in subsection (f) below, ORTHO ------- shall fund sixty percent (60%) of all Development Expenses for Collaboration Products in the Co-Promotion Territory. CTI shall be solely responsible for the remaining forty percent (40%) of such Development Expenses. ORTHO's maximum responsibility for Development Expenses shall not be greater than ***** for the period commencing with the Effective Date and ending on December 31, 1996, and twelve million dollars ($12,000,000) for each of calendar years 1997 and 1998, in each case plus sixty 25 percent (60%) of any additional Development Expenses that may be incurred by CTI pursuant to a Development Budget agreed upon by the Parties pursuant to Section 4.05(b) in connection with any Collaboration Product for any Additional Indication as to which ORTHO shall have exercised its option pursuant to Section 5.04. (c) Royalty Bearing Territory. ORTHO shall bear all Development ------------------------- Expenses for Collaboration Products that are specifically related to the Development, manufacture, use and/or sale of a Collaboration Product in the Royalty Bearing Territory. As provided in Section 13.01, Information developed by CTI relating to the Development of Collaboration Products in the Co-Promotion Territory can be used by ORTHO for the Development of such Collaboration Products in the Royalty Bearing Territory without further charge (other than reasonable duplicating, postage and related out-of-pocket costs). (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (d) Advance Payments. Within ten days after the Effective Date, ORTHO ---------------- shall make an advance payment to CTI equal to ***** of the budgeted Development Expenses from the Effective Date through December 31, 1996. Thereafter, ORTHO shall advance to CTI, on ***** of each calendar year, ***** of the budgeted Development Expenses for the first calendar quarter of such calendar year, based on the most recently approved Development Budget. (e) Regular Payments. Each Party shall calculate and maintain records ---------------- of Development Expenses incurred by it in accordance with procedures to be agreed upon between the Parties, which shall include an appropriate procedure for netting payments owed to each under this Section 4.08(e). Each Party shall report quarterly to the other Party on its Development Expenses, with such reports to be submitted within thirty (30) days after the end of each calendar quarter. Each Party shall repay to the other Party its share (less any amounts which have been paid in advance pursuant to Section 4.08(d)) within forty-five (45) days of its receipt of each such report. (f) Overruns. Notwithstanding the provisions of Section 4.08(b), CTI -------- shall be solely responsible for any Development Expenses for a Collaboration Product for a Development Indication exceeding during a calendar year the most recently approved Development Budget for such year and such overage shall be charged to its account, unless the overage is the result of actions of ORTHO (in which case ORTHO shall bear the expense), or is approved unanimously by the Steering Committee (in which cases ORTHO shall be responsible for sixty percent (60%) of such Development Expenses and CTI shall be responsible for forty percent (40%) of such Development Expenses). (g) Increase with Respect to Additional Indications. Notwithstanding ----------------------------------------------- anything contained in this Agreement to the contrary, in the event that the JDC shall have failed to reach a consensus as to the Development Budget for an Additional Indication, and ORTHO shall have exercised its rights under this Agreement to increase the Development Budget for such Additional Indication, ORTHO shall be solely responsible for any 26 Development Expenses for such Collaboration Product for such Additional Indication exceeding during a calendar year the most recent Development Budget for such Collaboration Product for such Additional Indication that was agreed to by a unanimous vote of the JDC. SECTION 4.09. Election by a Party to Terminate Its Participation in ----------------------------------------------------- Development for Safety or Tolerability Reasons. - ---------------------------------------------- (a) Termination of Participation in Development. In the event that ------------------------------------------- (i) issues regarding the Safety of Lisofylline arise during the Development of a Collaboration Product which are materially and adversely different from the Safety profile of Lisofylline existing as of the Effective Date or (ii) clinical data obtained after the Effective Date reveal a materially and adversely different Tolerability profile for Lisofylline from such profile as it existed as of the Effective Date, each Party shall have the right to terminate its participation in the worldwide Development of a Collaboration Products as provided below in Section 4.09(c). (b) Steering Committee Review of Termination of Participation in ------------------------------------------------------------ Development. The Party desiring to terminate its participation in Development - ----------- pursuant to Section 4.09(a) shall notify the Steering Committee of its desire to so terminate and the Steering Committee shall consider such Party's notice within ten (10) days after receipt thereof and make a decision within such ten (10) day period. If the Steering Committee decides unanimously not to so terminate, then the terminating Party may not terminate. If there is no such unanimous agreement at the Steering Committee, the terminating Party may thereupon terminate as aforesaid. (c) Effect of Termination of Participation in Development. In the ----------------------------------------------------- event one Party's participation in Development of a Collaboration Product is terminated pursuant to this Section 4.09, then (i) such termination shall be effective thirty (30) days following review and decision by the Steering Committee pursuant to Section 4.09(b), (ii) the terminating Party shall not be responsible for any Development Expenses related to such Collaboration Product after termination is effective, (iii) subject to Section 12.03, the nonterminating Party may thereafter proceed with development and commercialization of the Product in question as an Independent Product, either alone or in conjunction with Third Parties, and (iv) the terminating Party shall grant exclusive worldwide licenses (even as to the granting Party) under CTI Patents or ORTHO Patents, as applicable, Joint Patents and know-how Controlled by such Party to the non-terminating Party for the continued development and commercialization of the Product in question, shall transfer any related Drug Approval Applications or Regulatory Approvals (including transfer of all relevant data and information relevant to regulatory authorities), and otherwise cooperate to enable the non-terminating Party under this Section 4.09 to continue said development and commercialization. In the event a termination of participation in Development of a Collaboration Product occurs under this Section 4.09, such Independent Product shall thereafter bear a royalty equal to that payable for Independent Products under 27 Section 5.07(b). Such royalty shall be payable until the aggregate amount of royalties paid in respect of such Independent Product shall equal the aggregate amount of Development Expenses attributable to such Independent Product paid by the Party receiving such royalty. (d) Termination Rights Not Exclusive. The rights set forth in this -------------------------------- Section 4.09 to terminate participation in Development for Safety or Tolerability reasons shall be separate from, and in addition to, the rights of ORTHO to terminate this Agreement pursuant to Section 14.03. SECTION 4.10. Development Coordination in Canada. Notwithstanding ---------------------------------- anything contained in this Agreement to the contrary, but subject to any information covered by a confidentiality agreement with a Third Party, CTI may provide any Information that is relevant to the Development of Collaboration Products to BioChem Pharma that CTI is required to provide pursuant to its existing Collaboration Agreement, dated as of March 7, 1995, as amended on November 30, 1995 and December 6, 1995 between CTI and BioChem Pharma; provided, -------- however, that CTI shall not provide any Confidential Information that CTI shall - ------- have received from ORTHO to BioChem Pharma unless and until BioChem Pharma shall have entered into a confidentiality agreement containing provisions as protective as those of Article X hereof. ARTICLE V OPTIONS ------- I. OPTION TO CONDUCT SPONSORED RESEARCH ------------------------------------ SECTION 5.01. Sponsored Research. ------------------ (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) ORTHO may at any time elect to sponsor research and development activities to be performed by CTI with respect to identifying, discovering, creating, optimizing and/or synthesizing Eligible Compounds (the "Sponsored Research Program"). Within ***** after ORTHO's election to implement the Sponsored Research Program, the Parties, working together in good faith, shall attempt to agree upon and approve a plan regarding the general scope of the research to be carried out under the Sponsored Research Program, together with reasonable detail regarding resource allocation, research direction and focus and related matters, for the first one (1) year of the Sponsored Research Program (such plan, if so agreed, being the "Initial R&D Plan"). If the Parties are unable to agree on such plan, then no Sponsored Research Program shall commence, and neither Party shall have any obligations under Section 5.01, 5.02 or 5.03 hereof. The Sponsored Research Program will be managed by CTI under the oversight of a subcommittee of the JDC (the "R&D Subcommittee") comprised of equal numbers of qualified CTI and 28 ORTHO appointees (but no more than two (2) each) and chaired by an ORTHO appointee. CTI agrees to undertake the research and development activities described in the Initial R&D Plan (and any subsequent research plans adopted pursuant to subsection (c) below) unless otherwise agreed by the R&D Subcommittee and any such other activities under the Sponsored Research Program as are reasonably requested by the R&D Subcommittee. No material change shall be made to the Initial R&D Plan or any subsequent research plan adopted pursuant to subsection 5.01(c) below without the unanimous consent of the R&D Subcommittee. The research and development activities to be performed by CTI hereunder shall be conducted at and/or coordinated from the facilities of CTI under the supervision and direction of the director of the Sponsored Research Program. CTI shall be responsible for the administrative management and fiscal control of the research activities performed by CTI in support of the Sponsored Research Program, subject to compliance with the Initial R&D Plan and any subsequent research plans adopted pursuant to subsection (c) below and to the provisions of this Section 5.01 generally. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) The R&D Subcommittee will meet as often as the Parties consider necessary but in no event less than quarterly for the purpose of monitoring progress and suggesting changes to the Initial R&D Plan and any subsequently adopted research plans, as appropriate. CTI shall provide the R&D Subcommittee, and, if requested, ORTHO, within ***** completion of each calendar quarter of the Sponsored Research Program and at other times if reasonably requested, with written progress reports summarizing the current status and progress of CTI's activities under the Sponsored Research Program and any issues relating thereto, and shall otherwise be reasonably available to meet to discuss the status and progress of the Sponsored Research Program. ORTHO shall have the right to arrange to visit CTI at its offices and laboratories and to discuss the Sponsored Research Program and its results in detail with the technical employees and consultants of CTI, provided that such visits shall be during -------- normal business hours and shall not unreasonably interrupt the operations of CTI. CTI shall retain separate dedicated laboratory notebooks of all research and development performed by CTI pursuant to the Sponsored Research Program. ORTHO shall have the right to audit such laboratory notebooks not more frequently than twice per one year term of the Sponsored Research Program and once in the one year period following the termination of the Sponsored Research Program on reasonable advance notice to CTI. Such laboratory notebooks shall be retained for a period of ***** following the termination of the Sponsored Research Program, and if any Patent applications relating to the Program have been filed, then such laboratory notebooks shall be retained until the expiration of such Patents. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (c) The initial term of the Sponsored Research Program shall commence on the date specified in the Initial R&D Plan and shall terminate on the first anniversary thereof. ORTHO shall be entitled to elect to renew the Sponsored Research Program for additional one year periods, exercisable upon delivery of written notice to CTI in each case not later than ***** prior to the expiration date of each term of the Sponsored Research Program. During the ***** prior to the expiration date of each term of the 29 Sponsored Research Program, the Parties shall discuss and endeavor to agree upon research and development plans for the next term of the Sponsored Research Program. SECTION 5.02. Dedicated Researchers. CTI shall, as soon as is --------------------- practicable after the date specified in the Initial R&D Plan, assemble a team of scientists, clinicians, engineers, technical associates and assistants and other personnel under the supervision and direction of the director of the Sponsored Research Program. CTI will devote the number of qualified scientists required pursuant to the Initial R&D Plan, working full-time on the Sponsored Research Program throughout the completion of the Sponsored Research Program, such resources to be allocated as described in the Initial R&D Plan or subsequent research plans or as determined by the R&D Subcommittee. No material deviation from the resource allocation set out in the Initial R&D Plan or any subsequent research plan adopted pursuant to subsection 5.01(c) may be made without the unanimous consent of the R&D Subcommittee. For purposes of this Agreement, the phrase "full-time" shall mean forty (40) hours per week, excluding holidays, and a "qualified scientist" is one with a Ph.D. or M.D. and who possesses the requisite knowledge and experience to carry on research of the kind indicated based on standards generally applicable in the United States pharmaceutical industry. SECTION 5.03. ORTHO Funding. ------------- (a) ORTHO shall reimburse CTI quarterly for its research activities in connection with the Sponsored Research Program at an actual annual rate per qualified scientist working full time as agreed by the Parties. CTI shall calculate and maintain records of expenses incurred by it in connection with the Sponsored Research Program, which records shall identify in reasonable detail such expenses undertaken pursuant to the Sponsored Research Program, in accordance with procedures to be agreed upon between the Parties. CTI shall report quarterly to ORTHO on such expenses, with such reports to be submitted within forty five (45) days after the end of each calendar quarter and sixty (60) days after the end of each calendar year. The reimbursement payment required by this Section 5.03(a) shall be paid by ORTHO within thirty (30) days following receipt of such notice. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) Notwithstanding ORTHO's funding of the Sponsored Research Program, CTI shall own, or hold exclusive rights to, the entire right, title and interest in and to all inventions and know-how developed by CTI employees and consultants pursuant to the Sponsored Research Program, and all patent rights deriving therefrom, subject to ORTHO's rights under this Agreement. Such patent rights and know-how shall not constitute "CTI Patents" or "CTI Know-how" under this Agreement merely by virtue of ORTHO's funding of the Sponsored Research Program. Other than the options granted to ORTHO under Section 5.04 and the Royalty specified in the next sentence, ORTHO shall have no right, title or interest in such patent rights or know-how arising solely out of ORTHO's funding of the Sponsored Research Program. CTI shall pay to ORTHO a Royalty of ***** of Net Sales of 30 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) R&D Products (as defined in the succeeding sentence) on a country-by-country basis for the greater of (i) ***** from the first commercial sale of an R&D Product in such country and (ii) the last to expire of any valid and enforceable CTI Patent which covers the use or sale of such R&D Product in such country. As used in this Section 5.03(b), "R&D Product" means a chemical compound discovered pursuant to the Sponsored Research Program that is subsequently commercialized as a pharmaceutical product by CTI or an assignee. II. ORTHO FIRST OFFER RIGHTS. ------------------------ SECTION 5.04. ORTHO Option to Expand the Field. -------------------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) In the event that CTI wishes to have research and development activities carried out in respect of any Collaboration Compound for any Potential New Indication, with a view to including such Potential New Indication as an Additional Indication, CTI shall make a written proposal to ORTHO setting forth in reasonable detail the scope of the research and development activities proposed by CTI, together with all data available to CTI relating thereto. Such presentation shall be accompanied by a draft development plan and development budget for one or more potential Collaboration Products including or incorporating such Collaboration Compound for such Potential New Indication. ORTHO shall have the right with respect to each such proposal, exercisable upon delivery of written notice to CTI not later than ***** following the date that such Potential New Indication is presented to ORTHO, to include such Potential New Indication as an Additional Indication hereunder. With respect to each such Additional Indication as to which ORTHO makes such election, it shall pay to CTI an amount equal to sixty percent (60%) of all Pre-Selection Expenses directly attributable to such Additional Indication from the Effective Date hereof. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) In the event that ORTHO shall have failed to exercise its option under subsection 5.04(a) with respect to any Potential New Indication, CTI shall be free to conduct research and development activities in respect of such Collaboration Compound for such Potential New Indication at its own expense. Such research and development activities shall constitute "Pre-Selection Activities" hereunder. Prior to commencing clinical trials for such Collaboration Compound for such Potential New Indication, CTI shall make a written proposal to ORTHO setting forth in reasonable detail the scope of the clinical development activities proposed by CTI, together with all data available to CTI relating thereto. Such presentation shall be accompanied by a draft development plan and development budget for one or more potential Collaboration Products including or incorporating such Collaboration Compound for such Potential New Indication, and a report setting forth in reasonable detail all Pre-Selection Expenses directly attributable to such Additional Indication. ORTHO shall have the right with respect to each such proposal, exercisable upon delivery of written notice to CTI not later than ***** following the date that such Potential New Indication is presented to ORTHO, to include such Potential New Indication as an Additional Indication hereunder. With respect to each such Additional Indication as to which ORTHO makes 31 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) such election, it shall pay to CTI an amount equal to (i) sixty percent (60%) of all Pre-Selection Expenses directly attributable to such Additional Indication from the Effective Date hereof plus (ii) interest on such amount at an annual rate equal to ***** from the Effective Date hereof. (c) In the event that ORTHO shall have failed to exercise its option under subsection 5.04(b) with respect to any Potential New Indication, CTI shall be free to conduct clinical development activities in respect of such Collaboration Compound for such Potential New Indication at its own expense. Such clinical development activities shall constitute "Pre-Selection Activities" hereunder. Within five (5) business days of the receipt of Regulatory Approval from the FDA with respect to a product including or incorporating such Collaboration Compound for such Potential New Indication, CTI shall provide ORTHO with a copy of such Drug Approval Application with respect to such product including or incorporating such Collaboration Compound for such Potential New Indication, together with a report setting forth in reasonable detail all Pre- Selection Expenses directly attributable to such Potential New Indication. ORTHO shall have the right with respect to each such proposal, exercisable upon delivery of written notice to CTI not later than thirty (30) days following the date that such Potential New Indication is presented to ORTHO, to include such Potential New Indication as an Additional Indication hereunder. With respect to each such Additional Indication as to which ORTHO makes such election, it shall pay to CTI an amount equal to (i) sixty percent (60%) of all Pre-Selection Expenses directly attributable to such Additional Indication from the Effective Date hereof plus (ii) interest on such amount at an annual rate equal to ***** from the Effective Date hereof. (d) If ORTHO exercises such option within any of the periods set forth in subsections 5.04(a), (b) or (c) above, the Parties shall, within the next thirty (30) days, agree upon a definitive development plan and development budget in respect of such Additional Indication, such plan and budget to be consistent in scope with the Initial Development Plan and Development Budget. Upon exercise of such option, the Potential New Indication as to which such option shall have been exercised shall constitute an "Additional Indication" hereunder, such Additional Indication shall become a "Development Indication" hereunder, and the development plan and development budget agreed between the Parties shall become the "Development Plan" and "Development Budget" with respect to such Additional Indication. SECTION 5.05. License Fee and Milestone Payments for Additional ------------------------------------------------- Indications. - ----------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) If, on or prior to the BMT Approval Date, ORTHO shall have exercised one or more options pursuant to Section 5.04 to include a Potential New Indication (other than a Mucositis Indication) as an Additional Indication hereunder, then ORTHO shall pay to CTI a one-time license fee equal to ***** within ten (10) 32 business days following the BMT Approval Date as partial payment for the expansion of the Field. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) If as of the BMT Approval Date ORTHO shall not have exercised any option pursuant to Section 5.04 to include a Potential New Indication (other than a Mucositis Indication) as an Additional Indication hereunder, and if thereafter ORTHO shall exercise an option pursuant to Section 5.04 to include a Potential New Indication (other than a Mucositis Indication) as an Additional Indication hereunder, then ORTHO shall concurrently with the first exercise of such option pay to CTI a one-time license fee equal to ***** as partial payment for the expansion of the Field. (c) If ORTHO elects to exercise an option pursuant to Section 5.04 to include a Mucositis Indication as an Additional Indication hereunder, then ORTHO shall make the Mucositis Milestone Payments to CTI pursuant to Section 3.02(c) hereof. If any of the milestones set forth in Section 3.02(c) shall have been achieved prior to the date that ORTHO shall have exercised an option pursuant to Section 5.04 to include a Mucositis Indication as an Additional Indication hereunder, then ORTHO shall make the Mucositis Milestone Payments which correspond to such achieved milestones concurrently with the exercise of such option. (d) If ORTHO elects to exercise an option pursuant to Section 5.04 to include a SIRS Indication as an Additional Indication hereunder, then ORTHO shall make the SIRS Milestone Payments to CTI pursuant to Section 3.02(d) hereof. If any of the milestones set forth in Section 3.02(d) shall have been achieved prior to the date that ORTHO shall have exercised an option pursuant to Section 5.04 to include a SIRS Indication as an Additional Indication hereunder, then ORTHO shall make the SIRS Milestone Payments which correspond to such achieved milestones concurrently with the exercise of such option. (e) Other than the Milestone Payments set forth in this Section 5.05 and the Milestone Payments set forth in Section 3.02, there are no other Milestone Payments due under the provisions of this Agreement. SECTION 5.06. Commercialization of Potential New Indications. CTI ---------------------------------------------- shall not commercialize any product including or incorporating any Collaboration Compound for any Potential New Indication, nor shall CTI assign or license any of its rights in any such product for such Potential New Indication to any Third Party, until ORTHO shall have failed to exercise its option under subsection 5.04(c) within the applicable time period. Following ORTHO's failure to exercise its option under subsection 5.04(c) within the applicable time period, CTI shall be free to (i) commercialize such product for such Potential New Indication, and (ii) assign or license to any Third Party any or all of its rights to such Product for such Potential New Indication, in each case without any further obligation to ORTHO with respect thereto. Notwithstanding the foregoing, CTI may license its rights to 33 any Collaboration Compounds for any Development Indications, Additional Indications or Potential New Indications outside of the Co-Promotion Territory and the Royalty Bearing Territory to Third Parties pursuant to the terms of agreements entered into between CTI and such Third Parties prior to the Effective Date. SECTION 5.07. Election by a Party to Discontinue Sharing Expenses for ------------------------------------------------------- an Additional Indication. - ------------------------ (a) Without prejudice to Section 5.04, either Party may at any time during the Development or Commercialization of a Collaboration Product for an Additional Indication elect to discontinue sharing the Development Expenses and Pre-Marketing Expenses of such Collaboration Product for such Additional Indication, by providing six (6) months' written notice. The terminating Party shall continue to be obligated during the termination notice period to perform all of its obligations under this Agreement with respect to such Additional Indication, but not its obligations under Section 3.02. Following such election, all rights in and to such Collaboration Product shall revert irrevocably to the other Party (the "Independent Party"), and the Independent Party may at its expense continue to develop and commercialize such Collaboration Product for such Additional Indication as an Independent Product, either alone or in conjunction with Third Parties, subject to Section 12.03 hereof. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) The Independent Party pursuant to this Section 5.07 shall owe to the other Party a royalty of ***** of Royalty Bearing Sales of Independent Products on a country-by-country basis for ***** from the first commercial sale of such Independent Products in said country. Such royalty shall be payable until the aggregate amount of royalties paid in respect of such Independent Product shall equal ***** or for a period of *****, whichever is later. ARTICLE VI LICENSES -------- SECTION 6.01. Patent License to ORTHO to Conduct Development. CTI ---------------------------------------------- grants to ORTHO an exclusive (except as to CTI) paid-up, worldwide license, with a right to sublicense as described in Section 6.07, under the CTI Patents to conduct Development in accordance with the terms of this Agreement with respect to Collaboration Products and an exclusive (even as to CTI) license to develop Independent Products in accordance with the terms of this Agreement. A list of the CTI Patents identified as of the Effective Date is attached hereto as Exhibit D-1. Such list shall be modified from time to time to reflect any changes to CTI Patents and shall be expanded from time to time to include any Patents owned or Controlled 34 by CTI relevant to the Development of Additional Indications or the discovery or evaluation of Collaboration Compounds or Eligible Compounds; provided, however, -------- ------- that CTI shall have no obligation to modify or expand such list with respect to any Independent Product being developed or commercialized by ORTHO, unless otherwise required by the other provisions of this Agreement. SECTION 6.02. Patent License to CTI to Conduct Development. ORTHO -------------------------------------------- grants to CTI an exclusive (except as to ORTHO) paid-up, worldwide license, with a right to sublicense as described in Section 6.07, under the ORTHO Patents to conduct Development in accordance with the terms of this Agreement with respect to Collaboration Products and an exclusive (even as to ORTHO) license to develop Independent Products in accordance with the terms of this Agreement. A list of the ORTHO Patents identified as of the Effective Date is attached hereto as Exhibit D-2. Such list shall be modified from time to time to reflect any changes to ORTHO Patents and shall be expanded from time to time to include any Patents owned or Controlled by ORTHO relevant to the Development of Additional Indications or the discovery or evaluation of Collaboration Compounds or Eligible Compounds; provided, however, that ORTHO shall have no -------- ------- obligation to modify or expand such list with respect to any Independent Product being developed or commercialized by CTI. SECTION 6.03. Patent License to ORTHO to Conduct Commercialization. ---------------------------------------------------- CTI grants to ORTHO an exclusive (except as to CTI) worldwide license in the Co-Promotion Territory and the Royalty Bearing Territory, with a right to sublicense as described in Section 6.07, under the CTI Patents to conduct Commercialization (including the right to make, have made, use, import, offer, distribute, sell, offer for sale and have sold) in the Co-Promotion Territory and the Royalty Bearing Territory in accordance with the terms of this Agreement with respect to Collaboration Products and to commercialize (including the right to make, have made, use, import, offer, distribute, sell, offer for sale and have sold) Independent Products in accordance with the terms of this Agreement. Such licenses with respect to Royalty Bearing Products and Independent Products shall be subject to royalty payments as provided herein. Such licenses shall be exclusive (even as to CTI) in the Co-Promotion Territory and the Royalty Bearing Territory, except that CTI shall retain the right to conduct manufacturing, Pre- Marketing Activities, Commercialization and related activities to the extent specifically provided for in this Agreement. SECTION 6.04. Patent License to CTI to Conduct Commercialization. -------------------------------------------------- ORTHO grants to CTI an exclusive (except as to ORTHO) license in the Co- Promotion Territory, with a right to sublicense as described in Section 6.07, under the ORTHO Patents to conduct manufacturing, Pre-Marketing Activities, Commercialization in the Co-Promotion Territory and related activities with respect to Collaboration Products to the extent specifically provided for in this Agreement. Subject to the royalty payments provided herein, ORTHO grants to CTI an exclusive (even as to ORTHO) worldwide license, with a 35 right to sublicense as described in Section 6.07, under the ORTHO Patents to commercialize (including the right to make, have made, use, import, distribute, sell, offer for sale, and have sold) Independent Products. SECTION 6.05. Exclusive Know-how License To ORTHO. Subject to ----------------------------------- Article X, CTI grants ORTHO a paid-up, exclusive (except as to CTI) license in the Co-Promotion Territory and the Royalty Bearing Territory, with a right to sublicense as described in Section 6.07, to use CTI Know-how solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products in the Co-Promotion Territory and the Royalty-Bearing Territory. ORTHO covenants and agrees not to develop, make, have made, use, sell, offer for sale, have sold or import any product using the CTI Know-how other than with respect to activities expressly contemplated hereby. Such license shall be exclusive (even as to CTI) in the Co-Promotion Territory and Royalty Bearing Territory with respect to the manufacture, use, sale and importation of Collaboration Products, except that CTI shall retain the right to conduct manufacturing, Pre-Marketing Activities, Commercialization and related activities to the extent specifically provided for in this Agreement. CTI covenants and agrees not to grant any license to any Third Party to use CTI Know-how for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products. SECTION 6.06. Exclusive Know-how License to CTI. Subject to Article --------------------------------- X, ORTHO grants CTI a paid-up, exclusive license in the Co-Promotion Territory, with a right to sublicense as described in Section 6.07, to use ORTHO Know-how solely for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products in the Co-Promotion Territory. CTI covenants and agrees not to develop, make, have made, use, sell, offer for sale, have sold or import any product using the ORTHO Know-how other than with respect to activities expressly contemplated hereby. ORTHO covenants and agrees not to grant any license to any Third Party to use ORTHO Know-how for the purposes of developing, manufacturing, having manufactured, using, selling, offering for sale and importing Collaboration Products. SECTION 6.07. Sublicensing. Neither Party may grant sublicenses ------------ under Sections 6.01 through 6.06 except with the express prior written approval of the Party that owns or Controls the subject Patents or Know-how (which consent will not be unreasonably withheld or delayed); provided, however, that -------- ------- (i) ORTHO may sublicense a Third Party to sell or have sold Collaboration Product in the Royalty Bearing Territory, (ii) ORTHO may proceed with distribution and sale of a Collaboration Product in the Royalty Bearing Territory through its usual and customary distributors performing their usual and customary distribution activities for ORTHO without CTI's prior written approval of any necessary sublicenses in connection therewith, and (iii) with respect to Independent Products, the Party having a license with respect to such Independent Products shall have a right to sublicense 36 under such license with respect to such Independent Products without approval of the other Party. SECTION 6.08. Third Party Technology. ---------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) The licenses granted under Sections 6.01 through 6.06 include sublicenses of Third Party technology to the extent that such sublicenses can be so licensed. Any royalties payable to Third Parties in connection with sales of Collaboration Products shall be considered an Allowable Expense with respect to the sale of Collaboration Products in the Co-Promotion Territory, and deducted from Royalty Percentages with respect to the sale of Royalty Bearing Products and Independent Products, as provided under Section 8.04(b), but not below *****. (b) The licenses granted under Section 6.01 through 6.06, to the extent they include sublicenses of Third Party technology, shall be subject to the terms and conditions of the license agreement pursuant to which the sublicense is granted. As of the Effective Date hereof there are no such agreements in place. ORTHO shall not agree to any sublicense, settlement or other arrangement with any Third Party with respect to Third Party intellectual property rights that would reduce the royalty otherwise payable to CTI under Section 8.04(b) or would include any payment to such Third Party as an Allowable Expense hereunder without CTI's prior written consent. If CTI does not grant such consent and Ortho believes that the conduct of the business contemplated hereby in the Co-Promotion Territory and in the Royalty Bearing Territory may result in liability by virtue of such Third Party having a "dominant" or "blocking" right, ORTHO and CTI shall promptly submit the issue to resolution by one outside patent attorney mutually agreeable to the Parties. If such attorney concludes that there is a material risk of infringement, then ORTHO may proceed with such sublicense, settlement or arrangement, with the amount and terms thereof being agreed to by the Parties. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 6.09. Development Milestones for the Royalty Bearing ---------------------------------------------- Territory. Unless the Parties shall otherwise agree in writing, all of ORTHO's - --------- rights as to the Royalty Bearing Territory with respect to any Collaboration Product under this Agreement shall, at CTI's option, be converted to a non- exclusive license if ORTHO or its Affiliates or sublicensees fail to file a Drug Approval Application for such Collaboration Product in at least one Major Market Country within ***** ***** of the filing of a Drug Approval Application for such Collaboration Product in the Co-Promotion Territory that the FDA has accepted for filing; provided, however, that, if ORTHO demonstrates that such -------- -------- regulatory authority requires a substantially different data package than that submitted to the FDA with such Drug Approval Application, or if ORTHO demonstrates that its failure to file a Drug Approval Application as set forth above is entirely due to events or circumstances that are not reasonably within ORTHO's control, the Parties will discuss in good faith an extension to such deadline. 37 SECTION 6.10. Covenant Not to Sue by Affiliates. ORTHO, on behalf of --------------------------------- itself and its Affiliates, covenants and agrees that during the term hereof neither it nor any of its Affiliates will take any action against CTI or any CTI Affiliate related to the Collaboration Compounds or Collaboration Products based upon CTI or its Affiliates allegedly being in violation or infringement of any ORTHO or ORTHO Affiliate patent, know-how or other intellectual property right. ARTICLE VII COMMERCIALIZATION ----------------- SECTION 7.01. Responsibilities of JCC. ----------------------- (a) The purpose of the JCC shall be to (i) oversee the Commercialization of Collaboration Products in the Co-Promotion Territory, including the annual budgeting and forecasting, commercial manufacturing, pre- marketing, medical affairs, Phase IIIB Clinical Trials, Phase IV Clinical Trials, Post Launch Product R&D, liaison, marketing, sales and distribution of Collaboration Products, (ii) monitor, review and comment on costs incurred by the Parties in the commercial manufacture, marketing, sale and distribution of Collaboration Products in the Co-Promotion Territory (including, without limitation, Cost of Goods Sold), (iii) review and comment on the Commercialization Plans and Launch Plans and the selection of trademarks for Collaboration Products in the Co-Promotion Territory, (iv) receive and provide to the Parties all sales, pricing, and financial reports pertaining to Pre- Marketing and Commercialization of Collaboration Products in the Co-Promotion Territory, (v) review the principal indications and delivery routes recommended by JDC for all Collaboration Products in the Co-Promotion Territory, (vi) review and comment on ORTHO's pricing recommendations in the Co-Promotion Territory, and (vii) facilitate the flow of Information with respect to the Commercialization of each Collaboration Product in the Co-Promotion Territory. Subject to the provisions of Section 7.01(b) regarding Excepted Commercialization Matters, ORTHO shall make the final decision on all matters relating to the Commercialization of any Collaboration Product including all day-to-day decisions. Each party will disclose to the other proposed agenda items reasonably in advance of each meeting of the JCC. Each party shall bear its own costs for participation in the JCC. (b) Decisions shall be reached by the JCC by consensus after an open discussion of the matters as to which decisions are being made. If the JCC fails to reach consensus as to any matter involving Commercialization, the decision of ORTHO will be final and determinative, so long as such decision does not contradict or modify the terms of this Agreement, except with regard to (i) a decision to recall a Collaboration Product, which shall be decided pursuant to Section 7.12, (ii) a dispute related to pricing of a Collaboration Product in the Co-Promotion Territory, which shall be referred to the executive officers of the Parties pursuant to Section 7.11, or (iii) increasing a Commercialization Budget in any 38 material respect ("Excepted Commercialization Matters"). If CTI committee members believe that a JCC decision is seriously detrimental to Collaboration Product Development or Commercialization or to CTI's interests, they may present this viewpoint in written form simultaneously to ORTHO's JCC members and to the Steering Committee for review. If the Steering Committee does not unanimously agree with CTI's view, ORTHO's view shall prevail and be followed. (c) The JCC will have the power to form subcommittees with appropriate representation from CTI, ORTHO and appropriate Third Parties. (d) During clinical trials for any Collaboration Products, the JCC in full collaboration with the JDC shall coordinate activities to assure a smooth transition from Development to Commercialization. (e) The JCC shall not be involved with the commercialization of (i) Independent Products or (ii) Royalty Bearing Products in the Royalty Bearing Territory. SECTION 7.02. ORTHO as Lead Marketing Party. ----------------------------- (a) ORTHO will be the lead marketing Party with respect to all Collaboration Products in the Co-Promotion Territory, and as a result, shall be obligated and responsible for carrying out Commercialization in the Co-Promotion Territory pursuant to each Commercialization Plan. ORTHO will assemble its product team and commence reporting to the JCC within sixty (60) days following the Effective Date. CTI agrees to carry out the Commercialization responsibilities referred to in Section 7.02(b) and such other Commercialization responsibilities reasonably requested by the JCC. (b) It is recognized that the Parties bring particular strengths to the ongoing Commercialization of Collaboration Products, and CTI and ORTHO will co-participate in the sale of all Collaboration Products in the Co-Promotion Territory. ORTHO will assign to CTI a role in Commercialization functions and activities, both during Development and following Collaboration Product launch, as described below: (i) It is expected that from the Effective Date throughout the marketing of Collaboration Products, CTI will provide personnel for the ORTHO product teams, participating in the development of all strategies and performing assigned activities relating to the following marketing functions as part of the Commercialization Plans and Launch Plans in the Co-Promotion Territory: 39 . Medical Symposia . Scientific Exhibits . Opinion Leader Program Development . Medical Education Program Development (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (ii) In preparation for the launch of a Collaboration Product for a BMT Indication in the Co-Promotion Territory, CTI will field a dedicated field sales force of ***** experienced, scientifically competent "Medical Science Liaisons" and *****. The Medical Science Liaisons will be responsible for conducting the following activities in local or regional territories under ORTHO's direction and control: . Opinion Leader Liaison . Collaboration on ORTHO's Phase IV Clinical Trials . Speaker Program Coordination . Medical Education . Regional Symposia Coordination . Staffing Scientific Exhibits . Technical Assistance to ORTHO's Sales Force (iii) The CTI dedicated field sales force shall be under ORTHO's direction and control and shall be compensated by CTI, but on the same scale and cash basis as like employees of ORTHO involved in the launch and sale of a Collaboration Product for a BMT Indication. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (iv) In connection with the launch and Commercialization of Collaboration Products for all Development Indications other than the BMT Indication, and for all Additional Indications, the JCC shall allocate personnel to marketing and selling efforts from each Party. In connection with the Commercialization of a Collaboration Product for an AML Indication, CTI shall have the right to initially contribute up to ***** persons (including the ***** Medical Science Liaisons referred to in subclause (ii) above) to participate in marketing and sales efforts under the direction of the JCC. Thereafter, in connection with the Commercialization of all Collaboration Products (excluding the BMT Indication but including the AML Indication), CTI shall have the right to have ***** of the field force by year ***** after the launch of the first such Collaboration Product. Such personnel will be added over that ***** year period subject to the approval of the JCC. (v) CTI activities will be performed in accordance with each approved Commercialization Plan and Commercialization Budget and each approved Launch Plan and Launch Budget. All marketing activities that have not been assigned to CTI will be the responsibility of ORTHO unless determined otherwise by the JCC. 40 The hiring by CTI of field force personnel for carrying out a Commercialization Plan shall be subject to the approval of the JCC. SECTION 7.03. Commercialization Efforts. With respect to the Co- ------------------------- Promotion Territory, ORTHO agrees to use commercially reasonable and diligent efforts to prepare the Commercialization Plans, Commercialization Budgets, Launch Plans and Launch Budgets hereunder. Such commercially reasonable and diligent efforts shall be consistent with the efforts used by ORTHO in preparing commercialization plans and budgets and commercializing their own pharmaceutical products. Each Party agrees to exert the efforts necessary and reasonable to execute and substantially carry out the Commercialization Plans and Launch Plans within the Commercialization Budgets and Launch Budgets and to cooperate diligently with each other in carrying out the Commercialization Plans. In addition, with regard to the determination of all pricing, sampling and discount strategies for Collaboration Products, ORTHO shall use a similar and no less rigorous approach than that used in determining such strategies for its own pharmaceutical products. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.04. Commercialization Plan and Budget. ORTHO, after taking --------------------------------- into consideration CTI's comments, shall develop and the JCC shall review, to the extent reasonably practical given the stage of development of each Collaboration Product and consistent with ORTHO's reasonable business practice, a commercialization plan ("Commercialization Plan") for each Collaboration Product for the Co-Promotion Territory, which shall include but not be limited to (i) market dynamics, market strategies, estimated launch dates in the Co- Promotion Territory, a sales and expense forecast (including at least ***** of estimated sales and expenses) in the Co-Promotion Territory, manufacturing plans and expected product profile based upon the Development Plan, (ii) a market plan (including Advertising forecasts and pricing strategies pertaining to discounts, samples and nominal price sales) for the Co-Promotion Territory; it being understood that such market plan will evolve over time and shall be similar to existing market plans developed at such time by ORTHO within the Co-Promotion Territory, (iii) a commercialization budget ("Commercialization Budget") for each Collaboration Product, initially for the Development Indications, for the Co-Promotion Territory, including the Third Parties to be utilized and the arrangements with them that have been or are proposed to be agreed upon. Each Commercialization Budget shall include a budget of the expenses expected to be incurred in connection with performing the Commercialization Plan, including Pre-Marketing Expenses and Allowable Operating Expenses in the Co-Promotion Territory. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) The first Commercialization Plan shall be in the form of an initial outline and the first Commercialization Budget shall be in the form of an estimated budget. ORTHO shall submit such outline of the first Commercialization Plan and an estimated Commercialization Budget for a Collaboration Product for a BMT Indication to the JCC for review and approval by a date to be established by the JCC taking into account ORTHO's and CTI's annual budget planning calendars. It is understood that such outlines may contain open issues and identify areas wherein more information is needed to complete the outlines 41 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) and estimated Commercialization Budgets and to prepare a more complete Commercialization Plan and Budget for Collaboration Products for such Development Indications. Thereafter, by ***** of each subsequent year, ORTHO, after taking into consideration CTI's comments, including CTI's notice regarding its contribution to the dedicated field force, will prepare a more complete Commercialization Plan and Commercialization Budget for submission to the JCC for its review and approval. The Commercialization Plan and Commercialization Budget shall be approved by the JCC no later than ***** of each year. It is understood that each Commercialization Plan and Commercialization Budget will become more comprehensive as the project evolves. For any subsequent Collaboration Products, ORTHO shall prepare and submit to the JCC an outline of an initial Commercialization Plan and an estimated Commercialization Budget for the Co-Promotion Territory for each such Collaboration Product for review and approval. Such Commercialization Plan and Commercialization Budget shall be updated and refined on each subsequent ***** as described above in connection with Collaboration Products for a BMT Indication. ORTHO shall make all final decisions with respect to Commercialization Plans and Budgets except as is provided in Section 7.01(b). Any significant change in a Commercialization Plan or Commercialization Budget during the course of the year will be communicated promptly to the JCC. In addition, ORTHO shall provide an update on each Commercialization Plan and Commercialization Budget to the JCC in a manner consistent (with respect to timing and content) with such updates as are reported internally by ORTHO on its existing products at such time. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.05. Launch Plan. Each Commercialization Plan shall be ----------- updated, in advance of the launch of the applicable Collaboration Product in the Co-Promotion Territory, to include a launch plan ("Launch Plan") and launch budget ("Launch Budget") for such launch, the period *****, if practicable, before said launch, and the ***** period following the launch date. Each such Launch Plan and Launch Budget shall be developed by ORTHO, after taking into consideration CTI's comments, and presented to the JCC for Launch Plan and Launch Budget review and approval, with ORTHO having the final decision at the JCC as described in Section 2.04. The JCC shall have sixty (60) days to review and approve such Budget. Each calendar year after its preparation, if not yet executed, each Launch Plan and Launch Budget for each Collaboration Product in the Co-Promotion Territory shall be updated by ORTHO and the updated Launch Budget submitted to the JCC for approval. It is understood that determining a date for Regulatory Approval and thus a launch date is difficult. The failure to accurately estimate the launch date shall not constitute a breach hereunder. 42 Each Launch Plan shall include (i) updated market and sales forecasts in units and estimated revenues of Collaboration Product, (ii) estimated resource requirements and (iii) such other matters deemed appropriate by ORTHO. SECTION 7.06. Commercialization in Royalty Bearing Territory. ---------------------------------------------- (a) Subject to Sections 6.09, 13.02 and 13.03, the commercialization of Royalty Bearing Products in the Royalty Bearing Territory shall be conducted independently by ORTHO and/or its Affiliates. On an annual basis, ORTHO shall report to the JCC regarding its planned commercialization activities with respect to each Royalty Bearing Product in each Major Market Country and Japan and the status of such commercialization activities. (b) ORTHO may at any time by delivery of written notice to CTI elect to abandon its commercialization activities with respect to any country in the Royalty Bearing Territory. Upon such abandonment, (i) all licenses granted by CTI to ORTHO with respect to such country shall terminate, (ii) ORTHO shall grant to CTI a fully paid-up, royalty-free, exclusive (even as to ORTHO) license, with a right to sublicense, under the ORTHO Patents to conduct manufacturing, Pre-Marketing Activities, Commercialization and related activities with respect to Collaboration Products in such country, and (iii) ORTHO shall have no further obligation to conduct Commercialization activities in such country. Any abandonment pursuant to this Section 7.06(b) shall not constitute a Material Breach under this Agreement. (c) In the event that ORTHO decides not to market in any country in the Royalty Bearing Territory, ORTHO shall have the right, but not the obligation, to license such rights to a Third Party. ORTHO shall report all sales made by a sublicensee as if such sublicensee's sales were ORTHO sales in the Royalty Bearing Territory and shall pay to CTI royalties on such sales in accordance with the provisions of Article VIII of this Agreement. SECTION 7.07. Control Over Advertising. ------------------------ (a) Neither Party shall engage in any Tangible Advertising or use any label, package, literature or other written material directly related to a Collaboration Product in the Co-Promotion Territory unless the specific form and content thereof is approved by the JCC. With respect to Tangible Advertising directly related to a Collaboration Product, to the extent such materials identify or otherwise make reference to either of the Parties, CTI and ORTHO shall both be presented and described with equal prominence, as permitted by the applicable laws and regulations of the Co-Promotion Territory. All product labeling, documentary information, promotional material and oral presentations (where practical) regarding the detailing and promoting of Collaboration Products shall display the names and logos of CTI and ORTHO with equal prominence. 43 (b) General Public Relations on the part of either Party need not be approved by the JCC, but all representations and statements pertaining to Collaboration Products which appear in General Public Relations of CTI or ORTHO shall be subject to the approval of the JCC. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.08. Allowable Expenses and Allowable Operating Expenses. --------------------------------------------------- CTI shall be responsible for ***** of all Allowable Expenses and Allowable Operating Expenses in the Co-Promotion Territory, and ORTHO shall be responsible for ***** of all Allowable Expenses and Allowable Operating Expenses in the Co-Promotion Territory. An accounting of Allowable Expenses and Allowable Operating Expenses incurred by CTI and ORTHO within a Commercialization Plan and Commercialization Budget shall be submitted by CTI to ORTHO, and ORTHO to CTI, within ***** of the end of each calender quarter and within ***** of the end of each calender year in which such expenses were incurred. ORTHO shall repay CTI within ***** of its receipt of such report, if any sum is due to CTI, and shall be paid by CTI within the same time period if any sum is due from CTI. SECTION 7.09. Sales Efforts in the Co-Promotion Territory. As part ------------------------------------------- of the Commercialization Plan for the Co-Promotion Territory for each year, the JCC shall determine the targeted level of gross sales and estimated Net Sales of the applicable Collaboration Product for the calendar year covered by such Commercialization Plan. SECTION 7.10. Training Program. ORTHO will ensure that adequate ---------------- training programs are developed for personnel involved in the Commercialization of Collaboration Products in the Co-Promotion Territory. CTI shall play an appropriate role, as determined by the JCC, in the preparation of such training materials and conduct of training. ORTHO shall submit to the JCC all training materials to be utilized in the Commercialization of Collaboration Products in the Co-Promotion Territory. The Parties agree to utilize such training programs on an ongoing basis to assure a consistent, focused promotional strategy. Training shall be carried out at a time to be determined by the JCC. The costs of transporting, housing and maintaining a Party's personnel to be trained shall be borne by such Party exclusively. The costs of designing and implementing such training program shall be considered Pre-Marketing Expenses or Marketing Expenses, as the case may be. All reasonable direct costs associated with a national launch meeting specifically called for a Collaboration Product shall be considered Allowable Operating Expenses. SECTION 7.11. Pricing, Pricing Approvals and Product Distribution. --------------------------------------------------- If CTI does not agree with the recommended prices proposed by ORTHO in the Co- Promotion Territory with respect to a Collaboration Product, it may prepare its own analysis of the market potential and recommended price for such Collaboration Product and present such analysis and recommendation to the Steering Committee. If following the submissions from both Parties the Parties are unable to agree on the prices for such Collaboration Product, the analyses and recommendations of both Parties will be referred to a joint executive review 44 panel composed of the Chief Executive Officer of CTI and an appropriate ORTHO executive representative. If the joint executive review panel is unable to agree on a price after reviewing the submissions from CTI and ORTHO, then the representative from ORTHO referenced in the preceding sentence shall set the applicable prices, which shall not be lower than the prices initially proposed by ORTHO. The above described mechanism shall be the sole method for resolving disputes as to price(s), and shall not be subject to Sections 16.02 and 16.03. ORTHO shall obtain for Collaboration Products pricing approvals as may be required and shall be responsible for distribution of each Collaboration Product in the Co-Promotion Territory. SECTION 7.12. Product Recalls. As an exception to the general --------------- authority of ORTHO under this Article VII, if ORTHO commences an internal product quality investigation, it shall promptly notify and consult with CTI regarding such investigation. Further, if either Party believes that a recall of a Collaboration Product is necessary, such Party shall notify and consult with the other Party within one working day of its determination, and both Parties shall cooperate to allow such recall to occur under the direction of the Steering Committee. In the event of a dispute about whether to recall a Collaboration Product, the decision of ORTHO shall prevail. SECTION 7.13. Tax Considerations. Either Party may take advantage of ------------------ tax considerations which benefit it and not the other Party. In the event that a Party takes advantage of a tax consideration in connection with a Collaboration Product in the Co-Promotion Territory which benefits it and not the other Party, no compensation to the other Party shall be required. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.14. Discounted Sales. *****. SECTION 7.15. Co-Promotion Mechanism. ---------------------- (a) Sales by ORTHO. All sales of Collaboration Products in the Co- -------------- Promotion Territory shall be booked by ORTHO. If, during the term of this Agreement, 45 CTI receives orders from customers for a Collaboration Product, it shall refer such orders to ORTHO. (b) Processing of Orders for Collaboration Products. (i) All ----------------------------------------------- orders for Collaboration Products received and accepted by ORTHO during the term of this Agreement shall be executed by ORTHO in a reasonably timely manner consistent with the general practices applied by it in executing orders for other pharmaceutical products sold by it. (ii) ORTHO shall have the discretion to reject any order received by it for a Collaboration Product; provided, however, that ORTHO shall not reject such orders on an arbitrary basis, but only with reasonable justification and consistent with the general policies applied by it with respect to orders for other pharmaceutical products sold by it. (iii) ORTHO shall comply with all laws applicable to the sale of a Collaboration Product. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 7.16. ***** ARTICLE VIII PROFIT SHARING AND ROYALTIES ---------------------------- SECTION 8.01. Share of Operating Profits or Losses. CTI and ORTHO ------------------------------------ shall share equally in Operating Profits or Losses from sales of Collaboration Products in the Co-Promotion Territory. 46 SECTION 8.02. Co-Promotion Reports and Payments. Within thirty (30) --------------------------------- days of the end of each calendar quarter and sixty (60) days of the end of the fourth quarter of each full calendar year following the launch of each Collaboration Product in the Co-Promotion Territory, each Party shall report to ORTHO and the JCC as outlined in Exhibit B its revenues and individual Allowable Expense items (with appropriate supporting information) involved in the computation of Operating Profits or Losses and recognized during such quarter with respect to each such Collaboration Product. Within fifteen (15) days after receipt of such reports, ORTHO shall provide for each Collaboration Product one Financial Statement for the Co-Promotion Territory to the JCC, and the JCC shall promptly direct the payment of an Equalization Payment between the Parties with respect to each Collaboration Product. The reports and Equalization Payments for each of the first three quarters of each fiscal year may be based on estimated operating profits and losses for such quarters to the extent such estimates are included in such Party's books and records. The reports and Equalization Payments for the fourth quarter of each fiscal year may include reconciliations and year-end adjustments with respect to previous quarters. The payment required by this Section 8.02 shall be made in any event within forty- five (45) days of the due date of the receipt described in the first sentence of this paragraph. The Financial Statements required hereunder shall be in the format shown on Exhibit B attached hereto. SECTION 8.03. Term. The Parties shall share Operating Profits or ---- Losses hereunder with respect to each Collaboration Product in the Co-Promotion Territory until each such Collaboration Product is permanently withdrawn from and is no longer being sold in the Co-Promotion Territory. SECTION 8.04. Royalty Bearing Products. ------------------------ (a) ORTHO shall pay to CTI a royalty equal to the applicable Royalty Percentage set forth below on all Royalty Bearing Products in the Royalty Bearing Territory. (b) Royalties shall be equal to the percentage of annual Royalty Bearing Sales set forth below (the "Royalty Percentage"): (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Annual Royalty Bearing Sales Royalty Percentage ---------------------------- ------------------ ***** (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (c) In the event that Collaboration Products are sold in the form of Combination Products containing one or more active ingredients, other than the Collaboration Product, Net Sales or Royalty Bearing Sales for such Combination Products will be calculated by multiplying actual Net Sales or Royalty Bearing Sales of such Combination Products by *****. If on a country-by-country basis the other active component or components in the Combination Product are not sold separately in said country by ORTHO or an Affiliate, Net Sales or Royalty Bearing Sales, for the purpose of determining royalties on the Combination Product shall be calculated by multiplying actual Net Sales or Royalty 47 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Bearing Sales of such Combination Product by the fraction *****. If on a country-by-country basis neither the Collaboration Product nor a product containing the other active ingredient is sold separately in said country by ORTHO or an Affiliate, Net Sales or Royalty Bearing Sales for purposes of determining royalties on the Combination Products shall be calculated as above, except that *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (d) Except where expressly provided otherwise in this Agreement, all royalties to a Party shall be paid, on a country-by-country basis, from the date of the first commercial sale of each Royalty Bearing Product and Independent Product in a particular country until the later of (i) ***** from the first commercial sale in such country and (ii) the last to expire of any valid and enforceable (A) CTI Patents and (B) ORTHO Patents or Joint Patents, as applicable, which covers the use or sale of the Royalty Bearing Product or Independent Product in such country, subject to the following: (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) If a Royalty Bearing Product is sold in any country in which CTI does not have valid patent coverage which would prevent the sale of a generic form of such Royalty Bearing Product, the royalty obligation set forth in Section 8.04(a) above with respect to Royalty Bearing Sales attributable to the sale of such Royalty Bearing Product in such country shall be reduced by ***** of the royalty that would otherwise be payable with respect to Royalty Bearing Sales attributable to the sale of such Royalty Bearing Product in such country, until CTI is granted such valid and enforceable patent coverage of such Royalty Bearing Product in such country. If a Royalty Bearing Product is being sold in any country with respect to which a Third Party is entitled to receive royalties pursuant to Section 6.08 hereof, then the royalty obligation set forth in Section 8.04(a) above with ---- respect to Royalty Bearing Sales attributable to the sale of such Royalty Bearing Products in such country shall be reduced by the amount of the royalty payable to such Third Party, but not below ***** of the amount of the royalty that would, absent such payment, be otherwise payable under Section 8.04(a). (e) Subject to Section 9.11, ORTHO may discontinue commercialization of a Royalty Bearing Product or ORTHO or CTI may discontinue Commercialization of an Independent Product at any time. (f) Upon expiration of the royalty term for a Royalty Bearing Product in a country as described above, ORTHO shall thereafter have an exclusive, paid- up license to make, have made, use, sell, offer for sale, have sold and import that Royalty Bearing Product in that country. SECTION 8.05. Sales by Sublicensees. In the event either Party, --------------------- subject to the provisions of this Agreement, grants licenses or sublicenses to others to make or sell Royalty Bearing Products or Independent Products, such licenses or sublicenses shall include an obligation for the licensee or the sublicensee to account for and report its Royalty Bearing 48 Sales of such Royalty Bearing Products or Independent Products on the same basis as if such sales were Royalty Bearing Sales by the Party, and such Party shall pay royalties to the other Party as if the Royalty Bearing Sales of the sublicensee were Royalty Bearing Sales of the Party granting the license or sublicense. SECTION 8.06. Royalty Reports and Payments. A report summarizing the ---------------------------- Royalty Bearing Sales of any Royalty Bearing Products and/or Independent Products during the relevant quarter on a country-by-country basis shall be delivered to the receiving Party within sixty (60) days following the end of each calendar quarter and sixty (60) days following the end of each calendar year for which royalties are due from the selling Party. Such royalty report shall be in the format shown on Exhibit E attached hereto and the royalty payment due therewith shall be remitted concurrently with said report. SECTION 8.07. Payments. Any payments due under this Agreement shall -------- be made by check sent to the address of the receiving party set forth in Section 17.08 or by wire transfer to a designated bank account of the receiving Party. SECTION 8.08. Taxes. The Party receiving royalties shall pay any and ----- all taxes levied on account of royalties it receives under this Agreement. If laws or regulations require that taxes be withheld, the selling Party will (i) deduct those taxes from the remittable royalty, (ii) timely pay the taxes to the proper taxing authority, and (iii) send proof of payment to the other Party within thirty (30) days of receipt of confirmation of payment from the relevant taxing authority. The selling Party agrees to take all lawful and reasonable efforts to minimize such taxes to the other Party. SECTION 8.09. Foreign Exchange. For the purpose of computing Royalty ---------------- Bearing Sales for Products sold in a currency other than United States Dollars, such currency shall be converted into United States Dollars in accordance with the Party's customary and usual translation procedures consistently applied. SECTION 8.10. Payments to or Reports by Affiliates. Any payment ------------------------------------ required under any provision of this Agreement to be made to either Party or any report required to be made by any Party shall be made to or by an Affiliate of that Party if designated by that Party as the appropriate recipient or reporting entity. SECTION 8.11. No Overlapping Royalties. Notwithstanding any other ------------------------ provision of this Agreement, in no event shall any royalty provided for under any Section of this Agreement be paid with respect to any sale of a Collaboration Product, Independent Product or Royalty-Bearing Product to the extent a royalty has been paid pursuant to any other Section of this Agreement with respect to such sale. 49 ARTICLE IX MANUFACTURE AND SUPPLY ---------------------- SECTION 9.01. Manufacture and Supply. For a three (3) year period ---------------------- from the Effective Date of this Agreement, CTI will manufacture, or arrange for manufacture of, Collaboration Compounds in bulk form for use during the Development of Collaboration Products as provided for in Article IV and, if required for Commercialization of Collaboration Products, under Article VII hereof. Payments to Third Party manufacturers for such and directly related costs will be a Development Expense. SECTION 9.02. Process Development, Manufacturing Approvals. CTI will -------------------------------------------- use commercially reasonable and diligent efforts to develop a process for the manufacture of Collaboration Compounds and to scale up that process to a scale sufficient to manufacture and supply the anticipated demand for Collaboration Compounds. The continued development of the process for the manufacture of Collaboration Compounds as well as the scale up of that process and all material issues incident to the development to produce Collaboration Compounds for commercial purposes in sufficient quantity and in a timely manner will be within the purview of the JDC. The costs associated with the development and scale up of a process to manufacture Collaboration Compounds will be a Development Expense. Subject to ORTHO's rights and obligations under Section 4.07(b), CTI will use commercially reasonable and diligent efforts to make necessary filings to obtain, or to cause a Third Party manufacturer of Collaboration Compounds to make necessary filings to obtain Regulatory Approval for the manufacture of Collaboration Compounds as part of the approval of a Drug Approval Application for each Collaboration Product in the Co-Promotion Territory. Such filings shall include the filing of a Drug Master File in the United States and the equivalent thereof in the Major Market Countries. Once such filings are made, no changes to the process for the manufacture of Collaboration Compounds shall be made without the prior written approval of ORTHO. SECTION 9.03. Quality Testing. CTI shall perform quality control --------------- tests and assays on all Collaboration Compounds in accordance with the specifications. Furthermore, CTI shall provide ORTHO with a Certificate of Analysis and a Certificate of Compliance for each batch of Collaboration Compound delivered to ORTHO. The Certificate of Compliance shall certify that each batch was reviewed and meets all regulatory requirements. The Certificate of Analysis shall certify that each batch was tested and meets all specifications. CTI shall permit ORTHO's designated representatives to inspect and visit from time to time the facilities at which Collaboration Compounds are manufactured, stored or tested for the purpose of determining compliance with this Agreement, as well as all pertinent regulatory requirements. Such inspections shall occur during regular business hours upon reasonable notice. 50 SECTION 9.04. Shipment of Collaboration Compound. Collaboration ---------------------------------- Compounds will be shipped to location(s) designated by ORTHO. CTI shall use reasonable efforts to deliver Collaboration Compounds on the dates specified by ORTHO. SECTION 9.05. Warranties. Each Party with respect to Collaboration ---------- Compounds and/or Collaboration Products ("Materials") it manufactures and/or --------- ships hereby represents and warrants that (a) Materials manufactured and supplied hereunder will, on the date of shipment, comply with the specifications as then in effect; (b) it shall manufacture, store and ship Materials in compliance with all applicable Federal, state and local laws and governmental regulations, including, without limitation, the current good manufacturing practices regulations of the FDA; and (c) when shipped, Materials will not be adulterated or misbranded within the meaning of the Federal Food, Drug & Cosmetic Act and the regulations promulgated thereunder. Upon receipt of a shipment of Materials, the receiving Party may determine whether such shipment meets the specifications and applicable regulatory requirements. The receiving Party shall notify the other Party in writing promptly if any Materials fails to meet said specifications and requirements. If the supplying Party has not received such written notice within ninety (90) days after any Material has been received, then such shall be deemed to have met the specifications. Upon receipt of any such written notice of non-conformance, the supplying Party shall either acknowledge that the subject Material does not meet the specifications or resample the lot or batch in question and have said samples tested by an independent laboratory agreeable to the receiving Party. If such samples fail to meet the specifications, then the supplying Party shall at the receiving Party's option either replace the non-conforming Material at no additional cost as soon as reasonably possible or refund the receiving Party's payments for said non-conforming Materials. SECTION 9.06. Manufacture and Supply After Initial Three Year Period. ------------------------------------------------------ (a) After the period three (3) years from the Effective Date of this Agreement, ORTHO shall be responsible for the manufacture and supply of Collaboration Compounds for Development and Commercialization of Collaborative Products. ORTHO shall use commercially reasonable and diligent efforts to manufacture or have manufactured Collaborative Compounds in sufficient quantity to permit the manufacture of Collaboration Products for Development and Commercialization. ORTHO also agrees to supply in a timely manner to CTI, Collaboration Compounds in a quantity sufficient to satisfy CTI's obligations to BioChem Pharma pursuant to the Collaboration Agreement referred to in Section 4.10 hereof and the existing Supply Agreement, dated as of March 7, 1995, between CTI and BioChem Pharma. (b) Notwithstanding anything set forth in Section 9.01(a) to the contrary, ORTHO may at any time by delivery of written notice to CTI elect to become the Manufacturing Party of Collaboration Compounds hereunder. Such election shall become effective on the date specified in such notice. In the event that ORTHO shall elect to become the Manufacturing Party prior to the third anniversary of the Effective Date of this 51 Agreement, ORTHO shall indemnify and hold CTI harmless against any costs, expenses or fees that CTI may become subject to as a result of the termination of any supply agreements existing as of the Effective Date between CTI and any Third Party manufacturer of any Collaboration Compound. SECTION 9.07. Manufacture and Supply of Collaboration Products. ------------------------------------------------ (a) Within ninety (90) days from the Effective Date of this Agreement, ORTHO shall assume responsibility for the manufacture and supply of Collaboration Products for use in Development and Commercialization in accordance with the provisions of this Agreement. ORTHO will use commercially reasonable and diligent efforts to develop processes and procedures to manufacture Collaboration Products and to scale up said processes and procedures to a scale sufficient to supply the anticipated demand for Collaboration Products in the Co-Promotion Territory and the Royalty Bearing Territory. Within the ninety (90) day period from the Effective Date of this Agreement, all clinical supplies of Collaboration Product shall be supplied by CTI at its actual cost. (b) The costs associated with the scale-up of processes and procedures to manufacture Collaboration Products for the Co-Promotional Territory will be a Commercialization expense. SECTION 9.08. Specifications. The Parties agree that the manufacture -------------- of Collaboration Compounds and Collaboration Products must be in full compliance with all aspects of then current GMPs for bulk product and final vial production and shall be subject to a joint audit by CTI and ORTHO (whether together or through a designee) of bulk drug substance manufacture, final drug product manufacture including aseptic filling operations and analytical testing and the data resulting therefrom. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 9.09. Transfer Pricing. With respect to Collaboration ---------------- Compounds it supplies, CTI shall be entitled to charge *****. With respect to Collaboration Products it supplies for sale or use in the Co-Promotion Territory, ORTHO shall be entitled to charge its *****. With respect to Collaboration Compounds to be supplied by ORTHO pursuant to the last sentence of Section 9.06(a), ORTHO shall be entitled to charge *****. Each party will use reasonable efforts, consistent with GMPs, its obligations hereunder and applicable laws, to minimize ***** over the term of this Agreement. SECTION 9.10. Inventory; Shortage of Supply; Coordination with Third ------------------------------------------------------ Party Manufacturers. - ------------------- (a) The JCC will decide on an appropriate level of inventory for each Collaboration Product prior to the launch of such Collaboration Product. 52 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) In the event that ORTHO is unable to manufacture sufficient quantities of Collaboration Products for use in the Co-Promotion Territory, the Non-Manufacturing Party shall have the right to offer to produce itself a sufficient quantity of such Collaboration Products as the JCC shall determine appropriate. If the Non-Manufacturing Party does not exercise its right to so produce such Collaboration Products, the Parties shall negotiate in good faith an allocation between the Co-Promotion Territory and the Royalty Bearing Territory of the available Collaboration Product and Royalty Bearing Product as well as that to be subsequently manufactured. SECTION 9.11. Termination of Participation. If the Manufacturing ---------------------------- Party with respect to any Collaboration Product elects to terminate its participation in the Development and Commercialization of such Collaboration Product pursuant to Section 4.09 or 5.07, it shall immediately provide to the Non-Manufacturing Party, if such Party so requests, all process and manufacturing technology, material and data and provide access to regulatory filings sufficient to enable the Non-Manufacturing Party concurrently to produce and supply such Non-Manufacturing Party's requirements of such Collaboration Product. Until the earlier of (i) the date the Non-Manufacturing Party is able to manufacture and supply its own requirements of such Collaboration Product and (ii) *****, the obligation of the Manufacturing Party to manufacture and supply such Collaboration Product shall remain in effect, but the Manufacturing Party shall be paid by the Non-Manufacturing Party the applicable transfer price for supply of such Collaboration Product determined in accordance with Section 9.09. The Manufacturing Party shall provide reasonable assistance to the Non- Manufacturing Party with respect to such transfer so as to permit the Non- Manufacturing Party to begin manufacturing and supplying its requirements as soon as possible to minimize any disruption in the continuity of supply. In addition, the Manufacturing Party shall provide a right of reference and access to the Non-Manufacturing Party to all of the Manufacturing Party's appropriate regulatory filings for the manufacture of such Collaboration Product. ARTICLE X CONFIDENTIALITY --------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 10.01. Confidentiality; Exceptions. Except to the extent --------------------------- expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the term of this Agreement and for ***** thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose or use for any purpose other than as provided for in this Agreement any Information and other information and materials furnished to it by the other Party pursuant to this Agreement or any Information developed during the course of the collaboration hereunder, or any provisions of this Agreement that are the subject of an effective order of the Securities Exchange Commission granting confidential treatment pursuant to the Securities Act of 1934, as amended (collectively, 53 "Confidential Information"), except to the extent that it can be established by ------------------------ the receiving Party that such Confidential Information: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; or (d) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the disclosing Party not to disclose such information to others. SECTION 10.02. Authorized Disclosure. Each Party may disclose --------------------- Confidential Information hereunder to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or conducting pre-clinical or clinical trials, provided that if a Party is required by law or regulation to make any such disclosures of the other Party's Confidential Information it will, except where impracticable for necessary disclosures, for example in the event of medical emergency, give reasonable advance notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed. In addition, and with prior notice to the other Party of each Third Party with whom a confidential disclosure agreement is being entered into, each Party shall be entitled to disclose, under a binder of confidentiality containing provisions as protective as those of this Article X, Confidential Information to any Third Party for the purpose of carrying out the purposes of this Agreement. Nothing in this Article X shall restrict any Party from using for any purpose any Confidential Information independently developed by it during the course of the collaboration hereunder, or from using Confidential Information that is specifically derived from pre-clinical or clinical trials to carry out marketing, sales or professional services support functions as is customary in the pharmaceutical industry. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 10.03. Survival. This Article X shall survive the -------- termination or expiration of this Agreement for a period of ***** (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 10.04. Termination of Prior Agreement. This Agreement ------------------------------ supersedes the Confidentiality Agreement between CTI and ORTHO dated as of October 1, 1992. All Information exchanged between the Parties under that Agreement shall be deemed 54 Confidential Information and shall be subject to the terms of this Article X, and shall be included within the definitions of CTI Know-how and ORTHO Know-how. SECTION 10.05. Publications. Prior to the launch of any ------------ Collaboration Product in the Co-Promotion Territory, the JDC, and after launch, the JCC, will determine the overall strategy for publication in support of such Collaboration Products in the Co-Promotion Territory. Each Party shall provide to the other the opportunity to review any proposed publications or presentations which relate to Collaboration Compounds within the Field or Collaboration Products as early as reasonably practical, but at least forty-five (45) days prior to their intended submission for publication (except with the consent of the other party). The reviewing Party will provide the publishing Party with its response to the publishing Party's request within thirty (30) days of receipt of such request. The failure of the reviewing Party to respond to such a request within such thirty (30) day period shall be deemed to be an approval of such request and the publishing Party shall then be free to proceed with said publication. SECTION 10.06. Publicity Review. Subject to the further provisions ---------------- of this Section, no Party shall originate any written publicity, news release, or other announcement or statement relating to this Agreement or to performance hereunder or the existence of an arrangement between the Parties (collectively, "Written Disclosure"), without the prior prompt review and written approval of ------------------ the other, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing provisions of this Section 10.06, any Party may make any public Written Disclosure it believes in good faith based upon the advice of counsel is required by applicable law or any listing or trading agreement concerning its publicly traded securities, provided that prior to making such Written Disclosure, the disclosing Party shall provide the other Party with a copy of the materials proposed to be disclosed and provide the receiving Party with an opportunity to promptly review the proposed Written Disclosure. To the extent that the receiving Party reasonably requests that any information in the materials proposed to be disclosed be deleted, the disclosing Party shall request confidential treatment of such information pursuant to Rule 406 of the Securities Act of 1933 or Rule 26b-2 of the Securities Exchange Act of 1934, as applicable (or any other applicable regulation relating to the confidential treatment of information), so that there be omitted from the materials that are publicly filed any information that the receiving Party reasonably requests to be deleted. The terms of this Agreement may also be disclosed to (i) government agencies where required by law, or (ii) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed, so long as such disclosure is made under a binder of confidentiality and so long as highly sensitive terms and conditions such as financial terms are extracted from the Agreement or not disclosed upon the request of the other Party. All Written Disclosures shall be factual and as brief as is reasonable under the circumstances. Upon request by either Party, the Parties agree to prepare a mutually agreed press release and question and answer document with respect to this Agreement. Each Party agrees that 55 all Written Disclosures and oral statements relating hereto shall be consistent with the answers specified in such question and answer document. ARTICLE XI OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS ---------------------------------------------------- SECTION 11.01. Ownership. Each Party shall solely own, and it alone --------- shall have the right to apply for, Patents within and outside of the United States for any inventions made solely by that Party's employees or consultants in the course of performing work under this Agreement. Inventions made jointly by employees or consultants of CTI and ORTHO shall be owned jointly by CTI and ORTHO, and each Party shall retain full joint ownership under any Patents resulting therefrom, with full joint ownership rights in any field and, to the extent not inconsistent with Article VI and the other terms of this Agreement, the right to sublicense without the consent of the other Party, without accounting. The law of joint ownership of inventions of the United States shall apply to any joint ownership of Patents outside the United States claiming joint inventions of the Parties. SECTION 11.02. Disclosure of Patentable Inventions. In addition to ----------------------------------- the disclosures required under Article XIII, each Party shall provide to the other any invention disclosure submitted in the normal course and disclosing an invention within the Field arising in the course of the collaboration during the term of this Agreement. Such invention disclosures shall be provided to the other Party promptly after submission and in no event later than ten (10) days after the end of the calendar quarter in which the disclosure was submitted. SECTION 11.03. Patent Filings. -------------- (a) Each Party, at its sole discretion and responsibility, shall prepare, file, prosecute and maintain Patents to cover discoveries and inventions made solely by its own employees or consultants relating to any Product and use reasonable efforts to file initially all such applications in the United States or the appropriate forum under the circumstances. The JDC will determine which Party shall file, prosecute and maintain Patents to cover inventions relating to the discovery, evaluation, manufacture, use or sale of Collaboration Compounds within the Field or Collaboration Products that are made jointly by personnel of CTI and ORTHO in the course of the collaboration (herein referred to as "Joint Patents"). The determination of the countries in the Royalty Bearing Territory in which to file Joint Patents shall be made by ORTHO. ORTHO shall have the right to direct and control all material actions relating to the prosecution or maintenance of Joint Patents in the Royalty Bearing Territory, including conflict proceedings, reexaminations, reissuance, oppositions and revocation proceedings. 56 (b) The Party which is responsible for filing a Joint Patent will be termed the "filing Party." The filing Party shall keep the other Party apprised of the status of each Joint Patent and shall seek the advice of the other Party with respect to patent strategy and draft applications and shall give reasonable consideration to any suggestions or recommendations of the other Party concerning the preparation, filing, prosecution, maintenance and defense thereof. The Parties shall cooperate reasonably in the prosecution of all Joint Patents and Patents covering Collaboration Products and shall share all material information relating thereto, including all material communications from patent offices, promptly after receipt of such information. If the Parties are unable to agree as to who is the filing Party or as to any aspect of patent prosecution of a Joint Patent or a Patent covering a Collaboration Product, each Party shall be free to take whatever action it deems appropriate to protect the joint invention or Collaboration Product, including the filing of patent applications subject to prior notification of the other Party. If, during the term of this Agreement, the filing Party intends to allow any Patent covering a Collaboration Product to lapse or become abandoned without having first filed a substitute, the filing Party shall, whenever practicable, notify the other Party of such intention at least sixty (60) days prior to the date upon which such Patent shall lapse or become abandoned, and the other Party shall thereupon have the right, but not the obligation, to assume responsibility for the prosecution, maintenance and defense thereof. (c) The Parties agree to use reasonable efforts to ensure that any Patent filed outside of the United States prior to a filing in the United States will be in a form sufficient to establish the date of original filing as a priority date for the purposes of a subsequent filing in the United States. SECTION 11.04. Third Party Patent Rights. Except as expressly ------------------------- provided in Section 12.01, neither Party makes any warranty with respect to the validity, perfection or dominance of any Patent or other proprietary right or with respect to the absence of rights in Third Parties which may be infringed by the manufacture or sale of any Product. Each Party agrees to bring to the attention of the other Party any Patent or Patent application it discovers, or has discovered, and which relates to the subject matter of this Agreement. SECTION 11.05. Enforcement Rights. ------------------ (a) Notification of Infringement. If either Party learns of any ---------------------------- infringement or threatened infringement by a Third Party of the CTI Patents, ORTHO Patents, or Joint Patents, such Party shall promptly notify the other Party and shall provide such other Party with all available evidence of such infringement. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) Enforcement in the Co-Promotion Territory. The Steering ----------------------------------------- Committee will determine the appropriate course of action to pursue with respect to infringement of any CTI Patents, ORTHO Patents or Joint Patents covering the manufacture, use, importation, sale or offer for sale of Collaboration Products being developed or marketed in the 57 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Co-Promotion Territory. Costs of patent enforcement and related recoveries with respect to infringement in the Co-Promotion Territory shall be charged to the collaboration as Allowable Operating Expenses. If the Steering Committee is unable to decide on a joint action with respect to any infringement, each Party may proceed in such manner as the law permits. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff, if necessary, to prosecute the action or proceeding and to give the first Party reasonable assistance. Each Party shall bear its own expenses, with any recovery allocated *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (c) Enforcement in the Royalty Bearing Territory. ORTHO shall have -------------------------------------------- the right, but not the obligation, to institute, prosecute and control at its own expense any action or proceeding with respect to infringement of any CTI Patents, ORTHO Patents or Joint Patents covering the manufacture, use, importation, sale or offer for sale of Collaboration Products being developed or marketed in the Royalty Bearing Territory, by counsel of its own choice. CTI shall have the right, at its own expense, to be represented in any action by counsel of its own choice. If ORTHO fails to bring an action or proceeding or otherwise take appropriate action to abate such infringement within a period of ***** of notice by CTI to ORTHO requesting action, CTI will have the right to bring and control any such action or proceeding relating to CTI Patents by counsel of its own choice and ORTHO will have the right to be represented in any such action by counsel of its own choice and at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action or proceeding and to give the first Party reasonable assistance and authority to file and prosecute the suit. Any damages or other monetary awards recovered pursuant to this Section 11.05(c) shall be allocated *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (d) Enforcement with Respect to Independent Products. The Party ------------------------------------------------ developing or marketing an Independent Product shall have the right, but not the obligation, to institute, prosecute and control at its own expense any action or proceeding with respect to infringement of any CTI Patents, ORTHO Patents or Joint Patents covering the manufacture, use, importation, sale or offer for sale of an Independent Product being developed or marketed by such Party, by counsel of its own choice. The other Party shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If the Party marketing such Independent Product fails to bring an action or proceeding within a period of ***** of notice from the other Party requesting action, the other Party will have the right to bring and control any such action or proceeding relating to that Party's Patents (but not the Patents of the Party developing or marketing such Independent Product) by counsel of its own choice and the Party marketing the Independent Product will have the right to be represented in any such action by counsel of its own choice and at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action or proceeding and to give the first Party reasonable assistance and authority to file and prosecute the suit. The 58 Party bringing such action shall be entitled to retain any damages or other monetary awards recovered pursuant to this Section 11.05(d). (e) Settlement with a Third Party. The Party that controls the ----------------------------- prosecution of a given action shall also have the right to control settlement of such action; provided, however, that if one Party controls, no settlement shall -------- ------- be entered into without the written consent of the other Party if such settlement would materially and adversely affect the interests of such other Party. If the other Party shall refuse to grant such consent, then the dispute will be resolved pursuant to Article XVI. (f) Exclusivity. Notwithstanding the provisions of Sections 11.05(b), ----------- (c) and (d), neither Party shall file and prosecute an action for infringement of a Patent in any country for which the other Party has the primary responsibility to file and prosecute such action, and pursuant to which that other Party having primary responsibility has commenced and is prosecuting at least one such action for infringement of said Patent in the same country, without the agreement of that other Party, which agreement shall not be unreasonably withheld or delayed. SECTION 11.06. Defense and Settlement of Third Party Claims. -------------------------------------------- (a) Defense in the Co-Promotion Territory. If a Third Party asserts ------------------------------------- that a patent, trademark or other intangible right owned by it is infringed by any Collaboration Product in the Co-Promotion Territory, the Steering Committee shall establish a plan for a common defense and select the Party responsible for managing such plan. The costs of any such action incurred by one or both of the Parties at the direction of the Steering Committee (including the costs of any judgment, award, decree or settlement) will be chargeable to the collaboration as an Allowable Operating Expense. (b) Defense in the Royalty Bearing Territory. If a Third Party ---------------------------------------- asserts that a patent, trademark or other intangible right owned by it is infringed by any Royalty Bearing Product in the Royalty Bearing Territory, ORTHO will be solely responsible for defending against any such assertions at its cost and expense, but no settlement may be entered into without the written consent of CTI if such settlement would materially and adversely affect CTI's interests. The costs of any such action incurred by ORTHO (including the costs of any judgment, award, decree or settlement) will be charged against Royalty Bearing Sales. (c) Defense with Respect to Independent Products. If a Third Party -------------------------------------------- asserts that a patent, trademark or other intangible right owned by it is infringed by any Independent Product, the Party marketing such Independent Product will be solely responsible for defending against any such assertions at its cost and expense, but no settlement may be entered into without the written consent of the other Party if such settlement would materially and adversely affect its interests. The costs of any such action incurred by the Party 59 marketing such Independent Product (including the costs of any judgment, award, decree or settlement) will be charged against Royalty Bearing Sales. (d) Settlement with a Third Party. The entity that controls the ----------------------------- defense of a given claim with respect to a Collaboration Product shall also have the right to control settlement of such claim; provided, however, that other -------- ------- than as provided in Section 11.06(b), no settlement shall be entered into without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed. If there is no agreement between the Parties as to any proposed settlement, then the dispute shall be decided by the Steering Committee, and, if the Steering Committee is unable to decide the dispute, the matter will be resolved pursuant to Article XIV. SECTION 11.07. Patent and Trademark Expenses. ----------------------------- (a) From the Effective Date of this Agreement, prior to the first commercial sale of a Collaboration Product, all worldwide Patent and Trademark Expenses will be treated as Development Expenses. (b) Following the first commercial sale of a Collaboration Product, Patent and Trademark Expenses arising in the Co-Promotion Territory will be treated as an Allowable Operating Expense. (c) On a country-by-country basis, following the first commercial sale of a Collaboration Product, Patent and Trademark Expenses arising in the Royalty Bearing Territory shall be borne by ORTHO, unless incurred without ORTHO's prior approval or in respect of a country in the Royalty Bearing Territory where ORTHO shall have abandoned commercialization pursuant to Section 7.06(b) hereof; provided, however, that ORTHO shall be entitled to deduct from Royalty Bearing - -------- ------- Sales an amount equal to the aggregate amount of the Patent and Trademark Expenses arising in the Royalty Bearing Territory that it pays that relate to the filing and maintenance of Patents and trademarks, including in such amount the costs of conflict, re-examination, reissue, opposition, nullification and revocation proceedings. If any such Patent and Trademark Expenses are initially paid by CTI, ORTHO shall promptly reimburse CTI for such Patent and Trademark Expenses upon delivery of invoices. SECTION 11.08. Assignment of Joint Patents. Neither Party may assign --------------------------- its rights under any Joint Patent except with the prior written consent of the other Party; provided, however, that either Party may assign such rights without -------- ------- consent to an Affiliate or other permitted assignee under this Agreement in connection with a merger or similar reorganization or the sale of all or substantially all of its assets, as provided for in Section 17.01(b). 60 SECTION 11.09. Trademarks. ORTHO shall be responsible for the ---------- selection, registration and maintenance of all trademarks which it employs in connection with Collaboration Products and shall own and control such trademarks. ORTHO shall keep the JDC and the JCC informed of proposed trademark development and related expenses. CTI recognizes the exclusive ownership by ORTHO of any proprietary ORTHO name, logotype or trademark furnished by ORTHO (including ORTHO's Affiliates) for use exclusively in connection with Collaboration Products. CTI shall not, either while this Agreement is in effect, or at any time thereafter, register, use or attempt to obtain any right in or to any such name, logotype or trademark or in and to any name, logotype or trademark confusingly similar thereto. In the event that this Agreement is terminated by CTI pursuant to Section 14.02, then, at CTI's option, ORTHO shall license to CTI on a royalty-free basis, any trademark specifically developed for Collaboration Products. ARTICLE XII REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY ------------------------------ ----------- SECTION 12.01. Representations and Warranties. ------------------------------ (a) Each of the Parties hereby represents and warrants to the other Party as follows: (i) This Agreement is a legal and valid obligation binding upon such Party and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. (ii) Such Party has not, and during the term of the Agreement will not, grant any right to any Third Party relating to its respective Patents and Know-how in the Field which would conflict with the rights granted to the other Party hereunder. (iii) To the best of its knowledge neither Party is obligated under any agreement as of the Effective Date to pay any Third Party royalties with respect to the Collaboration Products. As of the Effective Date there are no such agreements in place. (b) CTI hereby represents and warrants to ORTHO as follows: (i) It has given ORTHO access to all clinical records which describe all adverse event reports related to Collaboration Products that have been filed with the FDA prior to the Effective Date. 61 (ii) As of the Effective Date, except as it may have previously disclosed to ORTHO in writing, it has not received any notices of infringement or any written communications relating in any way to a possible infringement with respect to Lisofylline, and that it is not aware that the manufacture, use or sale of Lisofylline infringes any Third Party patent rights. SECTION 12.02. Performance by Affiliates. The Parties recognize that ------------------------- each Party may perform some or all of its obligations under this Agreement through Affiliates, provided, however, that each Party shall remain responsible -------- ------- for and be a guarantor of the performance by its Affiliates and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. SECTION 12.03. Exclusivity. This Agreement shall be the exclusive ----------- mechanism by which the Parties will commercialize Collaboration Compounds within the Field during the term of this Agreement. CTI agrees that it will not, without ORTHO's prior written consent, commercialize or sell or license to any Third Party any compound discovered in the Sponsored Research Program if the commercialization thereof would, or could reasonably be expected to, compete with a Collaboration Product. ARTICLE XIII INFORMATION AND REPORTS ----------------------- SECTION 13.01. Information and Reports During Development and ---------------------------------------------- Commercialization. ORTHO and CTI will disclose and make available to each other - ----------------- without charge (other than reasonable duplicating, postage and related out-of- pocket costs) all preclinical, clinical, regulatory, commercial, marketing, promotion, pricing, sales and other Information, including copies of all preclinical and clinical reports, known by ORTHO or CTI directly concerning Collaboration Compounds within the Field or Collaboration Products at any time during the term of this Agreement. Each Party will use commercially reasonable and diligent efforts to disclose to the other Party all significant information promptly after it is learned or its significance is appreciated. Each Party shall own and maintain its own database of clinical trial data accumulated from all clinical trials of Collaboration Products for which it was responsible and of adverse drug event information for all Collaboration Products. At the option of the requesting Party, such data shall be provided in a computer readable format by the providing Party, to the extent available, which shall also assist in the transfer and validation of such data to the receiving Party. Without limitation of the foregoing, each Party shall supply to the other the Information required by the other Party and requested by it (either as a routine practice or as a specific request) for purposes of compliance with regulatory requirements. 62 SECTION 13.02. Complaints. Each Party shall maintain a record of all ---------- complaints it receives with respect to any Collaboration Product. Each Party shall notify the other Party of any complaint with regulatory implications received by it in sufficient detail and within five (5) business days after the event, and in any event in sufficient time to allow the responsible Party to comply with any and all regulatory requirements imposed upon it in any country; provided, however, that notice of any complaint involving a field alert report - -------- ------- shall be transmitted within one business day. SECTION 13.03. Adverse Drug Experiences. The Parties recognize that ------------------------ the holder of a Drug Approval Application may be required to submit information and file reports to various governmental agencies on Collaboration Products under clinical investigation, Collaboration Products proposed for marketing, or marketed Collaboration Products. Information must be submitted at the time of initial filing for investigational use in humans and at the time of a request for market approval of a new Collaboration Product. In addition, supplemental information must be provided on Collaboration Products at periodic intervals and adverse drug experiences must be reported at more frequent intervals depending on the severity of the experience and whether or not the event is unexpected. Consequently, each Party agrees to: (a) Provide to the other for initial and/or periodic submission to government agencies significant information on the Collaboration Product from preclinical laboratory, animal toxicology and pharmacology studies, as well as adverse drug experience reports from clinical trials and commercial experiences with the Collaboration Product; (b) In connection with investigational Collaboration Products, report to the other within three (3) days of the initial receipt of a report of any unexpected or serious experience with the drug, if required for either Party to comply with regulatory requirements; and (c) In connection with marketed Collaboration Products, report to the other within five (5) business days of the initial receipt of a report of any adverse experience with the drug that is serious and unexpected or sooner if required for either Party to comply with regulatory requirements. Serious adverse experience means any experience that suggests a significant hazard, contraindication, side effect or precaution, or any experience that is fatal or life threatening, is permanently disabling, requires or prolongs inpatient hospitalization, or is a congenital anomaly, cancer, or overdose. An unexpected adverse experience is one not identified in nature, specificity, severity or frequency in the current investigator brochure or the U.S. labeling for the drug. Each Party also agrees that if it contracts with a Third Party for research to be performed by such Third Party on the drug, that Party agrees to require such Third Party to report to the contracting Party the information set forth in subparagraphs (a), (b), and (c) above. The Parties agree that at all times after the approval of any Drug Approval 63 Application or equivalent thereof, ORTHO shall be responsible for collecting, collating and reporting to the appropriate regulatory authority all adverse drug experiences. SECTION 13.04. Records of Revenues and Expenses. -------------------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) Each Party will maintain complete and accurate records which are relevant to revenues, costs, expenses and payments under this Agreement and such records shall be open during reasonable business hours for a period of three (3) years from creation of individual records for examination at the other Party's expense and not more often than once each year by a certified public accountant selected by the other Party for the sole purpose of verifying for the inspecting Party the correctness of calculations and classifications of such revenues, costs, expenses or payments made under this Agreement. In the absence of material discrepancies ***** of Operating Profits or Losses) in any request for reimbursement resulting from such audit, the accounting expense shall be paid by the Party requesting the audit. If material discrepancies do result, the audited Party shall bear the accounting expense. In any case, the audited Party shall pay the discrepancy. Any records or accounting information received from the other Party shall be Confidential Information for purposes of Article X. Results of any such audit shall be provided to both Parties, subject to Article X. (b) If there is a dispute between the Parties following any audit performed pursuant to Section 13.04(a), either Party may refer the issue (an "Audit Disagreement") to an independent certified public accountant for resolution. In the event an Audit Disagreement is submitted for resolution by either Party, the Parties shall comply with the following procedures: (i) The Party submitting the Audit Disagreement for resolution shall provide written notice to the other Party that it is invoking the procedures of this Section 13.04(b). (ii) Within thirty (30) business days of the giving of such notice, the Parties shall jointly select a recognized international accounting firm to act as an independent expert to resolve such Audit Disagreement. (iii) The Audit Disagreement submitted for resolution shall be described by the Parties to the independent expert, which description may be in written or oral form, within ten (10) business days of the selection of such independent expert. (iv) The independent expert shall render a decision on the matter as soon as practicable. (v) The decision of the independent expert shall be final and binding and shall not be subject to Sections 16.02 and 16.03 hereof, unless such Audit Disagreement 64 involves alleged fraud, breach of this Agreement or construction or interpretation of any of the terms and conditions hereof. (vi) All fees and expenses of the independent expert, including any third party support staff or other costs incurred with respect to carrying out the procedures specified at the direction of the independent expert in connection with such Audit Disagreement, shall be borne by the losing Party. ARTICLE XIV TERM AND TERMINATION -------------------- SECTION 14.01. Term. This Agreement shall commence as of the ---- Effective Date and, unless sooner terminated as provided herein and except as provided in Section 14.05, (a) the remaining provisions of this Agreement relating to activities in the Co-Promotion Territory shall continue in effect until the date on which the Parties are no longer entitled to receive a share of Operating Profits or Losses on any Product and (b) the remaining provisions of this Agreement relating to Royalty Bearing Products and Independent Products shall continue in effect until the date on which neither party is paying a royalty to the other Party on Royalty Bearing Sales of Royalty Bearing Products or Independent Products. Those provisions shall govern the term of the rights and obligations specifically covered thereby. SECTION 14.02. Termination for Material Breach. ------------------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) Subject to the provisions of this Section 14.02, if either Party (the "Breaching Party") shall have committed a Material Breach and such Material Breach shall remain uncured and shall be continuing for a period of ***** following receipt of notice thereof by the other Party (the "Non-Breaching Party"), then, in addition to any and all other rights and remedies that may be available, the Non-Breaching Party shall have the right to terminate this Agreement effective upon the expiration of such ***** period. Any such notice of alleged Material Breach by the Non-Breaching Party shall include a reasonably detailed description of all relevant facts and circumstances demonstrating, supporting and/or relating to each such alleged Material Breach by the Breaching Party. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) If the Breaching Party, upon written notice delivered to the Non-Breaching Party prior to the expiration of such ***** period, shall assert in good faith that any such alleged Material Breach described in the Non- Breaching Party's notice, whether in payment of moneys or otherwise, was not a Material Breach, or was excused by reason of material failure of performance by the other Party or Third Parties or by reason of Force Majeure (as defined in Section 17.05), or shall otherwise in good faith 65 dispute such alleged Material Breach, then the Parties shall continue to perform under this Agreement, subject to all of its terms and conditions, and the matter shall be resolved pursuant to the provisions of Sections 16.02 and 16.03. In such event, the Non-Breaching Party shall not be entitled to terminate this Agreement pursuant to this Section 14.02 unless and until (i) it shall be determined pursuant to Sections 16.02 and 16.03 that the Breaching Party has committed a Material Breach and (ii) such Material Breach has not been cured prior to such determination pursuant to Sections 16.02 and 16.03. To the extent that it is determined pursuant to a final and non-appealable decision under Sections 16.02 and 16.03 that the Breaching Party did commit a Material Breach and failed to cure the same within the period provided for in clause (ii) above, then the Non-Breaching Party may immediately terminate this Agreement and, in addition to all damages determined pursuant to the provisions of Sections 16.02 and 16.03 to be due and owing from the Breaching Party to the Non-Breaching Party under this Agreement, the Breaching Party shall be liable for the Non-Breaching Party's reasonable attorneys' fees incurred in connection with resolving such matter pursuant to Sections 16.02 and 16.03. (c) If the Non-Breaching Party terminates this Agreement pursuant to the provisions of this Section 14.02(a) and (b), then the following provisions shall apply: (i) The Non-Breaching Party shall receive a paid-up, exclusive (even as to the Breaching Party but subject to rights of Third Parties that are not Affiliates of the Breaching Party that pre-existed or accrued prior to such termination), worldwide right and license, with the right to grant sublicenses, to all Patents of the Breaching Party and all of the Breaching Party's interest in jointly owned trademarks pursuant to Section 11.09(a), to make, have made, import, use, sell, offer for sale and have sold Collaboration Products, Royalty Bearing Products and Independent Products and shall have the exclusive right (but not the obligation) to enforce the Patents against competitive product infringement (in the manner contemplated under the terms of Section 11.05 applicable to Patents of the Breaching Party in the event that the Breaching Party does not or will not so enforce the Patents) and the exclusive right (but not the obligation) to enforce the trademark rights against infringers. (ii) all licenses and rights to the Non-Breaching Party's patents granted to the Breaching Party hereunder shall terminate: (iii) all Confidential Information supplied by the Non-Breaching Party to the Breaching Party shall be returned to the Non-Breaching Party except the Breaching Party may retain one copy of such information solely for legal archive purposes; (iv) the Breaching Party shall cooperate in the transfer of all INDs, Drug Approval Applications and Regulatory Approvals related to Collaboration Compounds within the Field, Collaboration Products and Independent Products to the Non-Breaching Party, and shall take such other actions and execute such other instruments, assignments and documents 66 as may be necessary to effect the transfer of rights hereunder to the Non- Breaching Party; and (v) the Breaching Party shall assign all of its rights in and to all Joint Patents and all jointly owned trademarks (and all registrations and applications for registration therefor) to the Non-Breaching Party. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission). (d) In the event of termination of this Agreement pursuant to this Section 14.02 where the Breaching Party is the Manufacturing Party with respect to one or more Collaboration Products hereunder, the Manufacturing Party shall continue to provide for manufacture of such Collaboration Products to the extent provided prior to notice of such termination, from the effective date of such termination until such time as the Non-Manufacturing Party is able to secure an equivalent alternative commercial manufacturing source, as requested by the Non- Manufacturing Party, provided, however, that said period shall cease after -------- ------- ***** from the effective date of the termination. To this end, as of the effective date of such termination, all Third Party manufacturing contracts shall be assigned to the Non-Manufacturing Party, and the cost charged to the Non-Manufacturing Party by the Manufacturing Party for any of the internal manufacturing activities to be continued by the Manufacturing Party pursuant to this Section 14.02 for the production of Collaboration Products shall be the same as the Manufacturing Party's cost was while this Agreement was in effect. Further, upon the request of the Non-Manufacturing Party, the Manufacturing Party shall provide such technical assistance and know-how licenses on a royalty-free basis as may reasonably be requested to transfer such technology as is needed by the Non-Manufacturing Party to commence or continue commercial manufacture of Collaboration Products. Such technical assistance shall be provided at the Manufacturing Party's cost, which cost shall be reimbursed within thirty (30) days upon receipt of an invoice from the Manufacturing Party by the Non-Manufacturing Party or its designee. In the event that any technology as is needed by the Non-Manufacturing Party to commence or continue commercial manufacture of Collaboration Products is covered by one or more Patents owned or Controlled by the Manufacturing Party, the Non-Manufacturing Party shall receive a fully paid-up, royalty-free, non-exclusive worldwide license to practice any and all such Patents for the purposes contemplated in this Section 14.02 with the right to grant sublicenses. (e) Except where expressly provided for otherwise in this Agreement, termination of this Agreement shall not relieve the Parties hereto of any liability, including any obligation to make payments hereunder, which accrued hereunder prior to the effective date of such termination, nor preclude any Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement nor prejudice any Party's right to obtain performance of any obligation. (f) For purposes of this Agreement, "Material Breach" shall mean the breach of or failure to perform, in a material respect, a Party's material obligations under 67 this Agreement. Without limiting the foregoing and by way of example only, the term "Material Breach" shall be deemed to include the failure of any Party in a material respect to meet such Party's payment obligations under Articles III, IV, V, VII and VIII, the failure of any Party in any material respect to meet its non-compete obligations under Section 12.03, and the unlicensed development or commercialization of a Collaboration Compound for any indication. In no event shall an inadvertent failure to comply with the provisions of Section 10.06 or the failure to gain Regulatory Approval for a Collaboration Product or to meet timelines or budgets specified in any Development Plan, Development Budget, Commercialization Plan, Commercialization Budget, Launch Plan or Launch Budget, in and of itself, be deemed to constitute a Material Breach, unless such failure is a result of acts and events or conduct that is otherwise a Material Breach. The Parties acknowledge and agree that failure to exercise any right or option with respect to any Product or to take any action expressly within the discretion of a Party hereunder shall not be deemed to constitute a Material Breach hereunder. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (g) Notwithstanding anything in this Section 14.02 to the contrary, any breach of or failure to perform, in a material respect, any of CTI's material obligations under Article IV or Article VII hereof, including under any Commercialization Plan or Launch Plan approved by the JCC (a "Shortfall Event"), shall not constitute a Material Breach under this Agreement, and ORTHO's sole remedy upon the occurrence of a Shortfall Event shall be as provided in this Section 14.02(g). If a Shortfall Event shall have occurred with respect to a Collaboration Product and shall be uncured and shall be continuing for a period of ***** following receipt of notice from ORTHO, then the JDC or JCC may, after taking into account CTI's comments, terminate CTI's Co-Promotion rights hereunder with respect to all Collaboration Products effective at the beginning of the quarter following the quarter during which the JDC or JCC shall have given CTI notice of such termination. Upon effectiveness of such termination, the development commercialization of all Collaboration Products shall be conducted independently by ORTHO, and ORTHO shall pay to CTI a royalty on all Net Sales of such Collaboration Products as if such Collaboration Products were Royalty Bearing Products hereunder as follows: Net Annual Sales Royalty Percentage ---------------- ------------------ ***** For purposes of calculating the royalties due on Net Sales of such Collaboration Products, ORTHO shall be entitled to deduct from royalties due to CTI any amounts owed by CTI to ORTHO under any Development Plan, Commercialization Plan or Launch Plan as of the effective date of such termination, together with an amount equal to any costs reasonably incurred by ORTHO in connection with transitioning its sales and marketing forces. (h) The provisions of this Section 14.02 shall survive termination of this Agreement. 68 SECTION 14.03. Termination by ORTHO. -------------------- (a) ORTHO shall have the right to terminate this Agreement upon thirty (30) days advance written notice to CTI (i) in the event that after the Effective Date issues regarding the Safety of Lisofylline arise during the Development of a Collaboration Product which are materially and adversely different from the Safety profile of Lisofylline existing as of the Effective Date or (ii) clinical data obtained after the Effective Date reveal a materially and adversely different Tolerability profile for Lisofylline from such profile as it existed as of the Effective Date. (b) ORTHO shall have the right to terminate this Agreement for any reason upon six (6) months' prior written notice of its election to terminate this Agreement pursuant to this Section 14.03(b) given at any time after the first anniversary of the Effective Date; provided, however, that such -------- ------- termination shall not become effective until the expiration of such six (6) month period. SECTION 14.04. Effect of Termination by ORTHO Pursuant to Section -------------------------------------------------- 14.03. If ORTHO terminates this Agreement pursuant to Section 14.03, it shall - ----- continue to be obligated during the termination notice period to perform all of its obligations under this Agreement, including its obligation to pay Development Expenses; provided, however, that ORTHO shall have no obligation to -------- ------- make any milestone payments pursuant to Section 3.02 with respect to any milestone achieved during the termination notice period. In addition, as a result of such termination: (a) CTI shall receive an exclusive (even as to ORTHO but subject to rights of Third Parties that are not Affiliates of ORTHO that pre-existed or accrued prior to such termination) worldwide right and license, with the right to grant sublicenses, to all ORTHO Patents, to make, have made, import, use, sell, offer for sale and have sold Collaboration Products and Independent Products, subject to the applicable royalty obligations set forth in this Agreement, and shall have the right (but not the obligation) to enforce the ORTHO Patents against competitive product infringement (in the manner contemplated under and pursuant to the terms of Section 11.05 applicable to ORTHO Patents in the event that ORTHO does not or will not so enforce the Patents) and the exclusive right (but not the obligation) to enforce the trademark rights against infringers; (b) all licenses and rights to CTI Patents and CTI Know-how granted to ORTHO hereunder shall terminate; (c) all Confidential Information supplied by CTI to ORTHO shall be returned to CTI except ORTHO may retain one copy of such information solely for legal archive purposes; 69 (d) ORTHO shall be obligated to CTI under Section 9.07 to the extent provided therein; provided, however, that said obligation shall follow the -------- ------- procedures set forth in Section 14.02; (e) ORTHO shall cooperate in the transfer of all INDs, Drug Approval Applications and Regulatory Approvals related to Collaboration Compounds, Collaboration Products and Independent Products to CTI, and shall take such other actions and execute such other instruments, assignments and documents as may be necessary to effect the transfer of rights hereunder to CTI; and (f) ORTHO shall assign all of its rights in and to all Joint Patents to CTI. SECTION 14.05. Surviving Rights. The rights and obligations set ---------------- forth in this Agreement shall extend beyond the term or termination of the Agreement only to the extent expressly provided for herein, or the extent that the survival of such rights or obligations are necessary to permit their complete fulfillment or discharge. Without limiting the foregoing, the Parties have identified various rights and obligations which are understood to survive, as follows: (a) In the event of expiration of this Agreement pursuant to Section 14.01, the following provisions shall survive: Article I (to the extent applicable to the interpretation of other surviving clauses), Sections 6.05, 6.06, 10.01-10.06, 11.02 (for one year following expiration), 11.03 (to the extent necessary to permit patent filings with respect to the inventions disclosed under Section 11.02), 12.02, 13.04, 14.05 and 14.06 and Articles XV, XVI and XVII. (b) In the event of termination of this Agreement pursuant to Section 14.02, the following provisions shall survive: Article I (to the extent applicable to the interpretation of other surviving clauses), Sections 6.05, 6.06, 6.08(a) and (b), 8.04(b), 8.05-8.09, 10.01-10.06, 11.02 (only as applicable to the Breaching Party and for one year following the effective date of termination), 11.03 (to the extent necessary to permit patent filings with respect to the inventions disclosed under Section 11.02), 11.08, 12.02, 13.02- 13.04, 14.02, 14.05, 14.06, 15.01, 15.02 (solely with respect to acts or events occurring prior to such termination for which indemnity may be sought thereunder) and 15.03 and Articles XVI and XVII. (c) In the event of termination of this Agreement pursuant to Section 14.03, the following provisions shall survive: Article I (to the extent applicable to the interpretation of other surviving clauses), Sections 6.05, 6.06, 9.03, 10.01-10.06, 11.02 (for one year following the effective date of termination), 11.03 (to the extent necessary to permit patent filings with respect to the inventions disclosed under Sections 11.02), 11.08, 12.02, 13.02- 13.04, 14.04-14.06, 15.01, 15.02 (solely with respect to acts or events occurring prior 70 to such termination for which indemnity may be sought thereunder) and 15.03 and Articles XVI and XVII. SECTION 14.06. Accrued Rights, Surviving Obligations. Termination, ------------------------------------- relinquishment or expiration of the Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party prior to such termination, relinquishment or expiration, including damages arising from any breach hereunder. Such termination, relinquishment or expiration shall not relieve either Party from obligations which are expressly indicated to survive termination or expiration of the Agreement. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 14.07. Change of Control. ----------------- ***** 71 ARTICLE XV INDEMNIFICATION --------------- SECTION 15.01. Indemnification for Royalty Bearing Products. With -------------------------------------------- respect to Royalty Bearing Products (determined on a country-by-country basis): (a) ORTHO hereby agrees to save, defend and hold CTI and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or losses, including reasonable legal expenses and attorneys' fees (collectively, "Losses"), resulting directly from ------ the manufacture, use, handling, storage, sale or other disposition of Royalty Bearing Products by ORTHO, its agents or sublicensees, except to the extent such Losses result from the negligence or willful misconduct of CTI, in which case CTI hereby agrees to save, defend and hold ORTHO and its agents and employees harmless from any and all such Losses. (b) In the event that a Party is seeking indemnification under Section 15.01(a), it shall inform the other Party of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the indemnifying Party to assume direction 72 and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of the indemnifying Party) in the defense of the claim. SECTION 15.02. Indemnification For Collaboration Products. With ------------------------------------------ respect to Collaboration Products: (a) Each Party hereby agrees to save, defend and hold the other Party and its agents and employees harmless from and against any and all Losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of Collaboration Products sold or used in the Co- Promotion Territory by the indemnifying Party, its agents or sublicensees, but only to the extent such Losses result from the negligence or willful misconduct of the indemnifying Party or its employees and agents and do not also result from the negligence of willful misconduct of the Party seeking indemnification. Any other Losses from claims resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of Collaboration Products in the Co-Promotion Territory shall be included as an Allowable Operating Expense of either Party at the time such claim is finally determined, whether by judgment, award, decree or settlement. (b) In the event that either Party receives notice of a claim with respect to Collaboration Product in the Co-Promotion Territory, such Party shall inform the other Party as soon as reasonably practicable. The Parties shall confer how to respond to the claim and how to handle the claim in an efficient manner. SECTION 15.03. Indemnification For Independent Products. With ---------------------------------------- respect to Independent Products: (a) Each Party commercializing an Independent Product hereby agrees to save, defend and hold the other Party and its agents and employees harmless from and against any and all Losses resulting directly or indirectly from the manufacture, use, handling, storage, sale or other disposition of Independent Products by the indemnifying Party, its agents or sublicensees, but only to the extent such Losses do not (i) result from the negligence or willful misconduct of the Party seeking indemnification or (ii) result from a breach of manufacturing representations or warranties by the Party seeking indemnification. (b) In the event that either Party receives notice of a claim with respect to an Independent Product, such Party shall inform the other Party as soon as reasonably practicable. The Parties shall confer how to respond to the claim and how to handle the claim in an efficient manner. In the event that a Party is seeking indemnification under Section 15.03(a), it shall inform the other Party of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for 73 monetary consideration), and shall cooperate as requested (at the expense of the indemnifying Party) in the defense of the claim. ARTICLE XVI DISPUTE RESOLUTION ------------------ SECTION 16.01. Disputes. The Parties recognize that disputes as to -------- certain matters may from time to time arise during the term of this Agreement which relate to either Party's rights and/or obligations hereunder or thereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article XVI if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among members of the JDC or JCC relating to the collaboration shall be first referred to the Steering Committee by either Party at any time after such dispute has arisen and such Party believes that there has been sufficient discussion of the matter at the JDC or JCC level, as the case may be. If the Steering Committee is unable to resolve such a dispute within thirty (30) days of being requested by a Party to resolve a JDC or JCC dispute, any Party may, by written notice to the other, have such dispute referred to their respective executive officers designated below or their successors, for attempted resolution by good faith negotiations within fourteen (14) days after such notice is received. Said designated officers are as follows: For ORTHO: Disputes arising under the JDC: Chairman, R.W. Johnson Pharmaceutical Research Institute Disputes arising under the JCC: President, Ortho Biotech Inc. For CTI: Chief Executive Officer In the event the designated executive officers are not able to resolve such dispute, other than those disputes which may be expressly prohibited from being resolved by this mechanism such as the Excepted Development Matters and the Excepted Commercialization Matters referred to in Section 2.04 hereof, either Party may at any time after the fourteen (14) day 74 period seek to resolve the dispute through other means as provided in Sections 16.02 and 16.03. SECTION 16.02 Alternative Dispute Resolution. Any dispute ------------------------------ controversy or claim arising out of or relating to the validity, construction, enforceability or performance of this Agreement, including disputes relating to an alleged breach or to termination of this Agreement, but excluding (i) any dispute, controversy or claim arising out of or relating to the validity, enforceability, or infringement of any CTI Patent or any ORTHO Patent and (ii) other than disputes which are expressly prohibited herein from being resolved by this mechanism, shall be settled by binding Alternative Dispute Resolution ("ADR") in the manner described below: (a) If a Party intends to begin an ADR to resolve a dispute, such Party shall provide written notice (the "ADR Request") to counsel for the other ----------- Party informing such other Party of such intention and the issues to be resolved. From the date of the ADR Request and until such time as any matter has been finally settled by ADR, the running of the time periods contained in Section 14.02 as to which a Party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. (b) Within fifteen (15) business days after receipt of the ADR Request, the other Party may, by written notice to counsel for the Party initiating ADR, add additional issues to be resolved. SECTION 16.03. Arbitration Procedures. An ADR initiated under this ---------------------- Agreement will proceed in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, insofar as such rules are not inconsistent with the provisions expressly set forth in this Agreement, unless the Parties mutually agree otherwise, and pursuant to the following procedures: (a) Notice of the demand for arbitration will be filed in writing with the other Party and with the American Arbitration Association. The arbitration panel shall consist of one (1) arbitrator mutually agreed to by the Parties and the decision shall be final and binding on the Parties and their legal successors. (b) The arbitrator may, at his discretion, provide for discovery by the Parties, not to exceed four (4) months from the date of filing of the Notice of Arbitration. (c) Any arbitration hearing under this Section 16.03 shall be conducted in New York, New York. The governing law will be as specified in Section 17.12. The arbitrator will have authority to award both legal and equitable relief but not to award punitive damages. 75 (d) All costs and fees of the arbitration, other than each Party's legal fees and expenses, will be allocated by the arbitrators. Subject to subsection (c), each Party shall bear its own legal fees and expenses. (e) A final written decision by the arbitrator will be rendered not later than thirty (30) days following the completion of the hearing. (f) The ADR proceeding shall be confidential and the arbitrator shall issue appropriate protective orders to safeguard each Party's Confidential Information. Except as required by law, no Party shall make (or instruct the arbitrator to make) any public announcement with respect to the proceedings or decision of the arbitrator without prior written consent of each other Party. The existence of any dispute submitted to ADR, and the award, shall be kept in confidence by the Parties and the arbitrator, except as required in connection with the enforcement of such award or as otherwise required by applicable law. SECTION 16.04. Survivability. Any duty to arbitrate under this ------------- Agreement shall remain in effect and enforceable after termination of this Agreement for any reason. SECTION 16.05. Jurisdiction. For the purposes of this Article XVI, ------------ each Party agrees to abide by the award rendered in any arbitration, and the Parties agree to accept the jurisdiction of any court having jurisdiction over the Parties for the purposes of enforcing awards entered pursuant to this Article and for enforcing the agreements reflected in this Article. ARTICLE XVII MISCELLANEOUS ------------- SECTION 17.01. Assignment. ---------- (a) Either Party may assign any of its rights or obligations under this Agreement in any country to any Affiliates and may delegate its obligations under this Agreement in any country to any of its Affiliates; provided, however, -------- ------- that such assignment or delegation shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. (b) Except as provided in Section 11.08 hereof, neither Party may assign its rights or obligations under this Agreement to a non-Affiliate without the prior written consent of the other Party, except under the provisions of Section 6.07 or subject to Section 14.07, in connection with a merger or similar reorganization or the sale of all or substantially all of its assets. This Agreement shall survive any such merger or reorganization of either Party with or into, or such sale of assets to, another party and no consent for such merger, 76 reorganization or sale shall be needed, and no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder; provided, that in the event of such merger, reorganization or sale, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder. (c) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void. SECTION 17.02. Retained Rights. Nothing in this Agreement shall --------------- limit in any respect the right of either Party to conduct research and development and to market products using such Party's technology other than as herein expressly provided. SECTION 17.03. Research and Development Entities. Either Party may --------------------------------- assign its rights and obligations under this Agreement to an entity or entities (e.g., partnership or corporation) that are specifically formed for financial purposes and that finance research and development performed by such Party; provided, however, that such assignment shall not relieve the assigning Party of - -------- ------- responsibility for performance of its obligations under this Agreement. SECTION 17.04. Consents Not Unreasonably Withheld or Delayed. --------------------------------------------- Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that consent or approval shall not unreasonably be withheld or delayed, even when not so expressly stated, and whenever in this Agreement provision is made for one Party to object to or disapprove a matter, such objection or disapproval shall not unreasonably be exercised, even when not so expressly stated. SECTION 17.05. Force Majeure. Neither Party shall lose any rights ------------- hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other cause beyond the control of the defaulting Party, provided -------- that the Party claiming force majeure has extended all reasonable efforts to avoid or remedy such force majeure and has given the other Party prompt notice describing such event, the effect thereof and the actions being taken to avoid or remedy such force majeure; provided, however, that in no event shall a Party -------- ------- be required to settle any labor dispute or disturbance. SECTION 17.06. Further Actions. Each Party agrees to execute, --------------- acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. SECTION 17.07. No Trademark Rights. Except as otherwise provided ------------------- herein, no right, express or implied, is granted by the Agreement to use in any manner the 77 name "Cell Therapeutics, Inc.," "CTI," "ORTHO Biotech Inc.," "R. W. Johnson Pharmaceutical Research Institute", "PRI," or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. SECTION 17.08. Notices. All notices hereunder shall be in writing ------- and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), telexed, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided that notices of a change of address -------- shall be effective only upon receipt thereof). (a) If to CTI: Cell Therapeutics, Inc. 201 Elliott Avenue West, Suite 400 Seattle, Washington 98119 Attention: James A. Bianco, M.D. President and Chief Executive Officer Telephone: (206) 282-7100 Telecopy: (206) 284-6114 With a copy to: Shearman & Sterling 555 California Street, Suite 2000 San Francisco, California 94104 Attention: Michael J. Kennedy, Esq. Telephone: (415) 615-1100 Telecopy: (415) 616-1199 (b) If to ORTHO: Ortho Biotech Inc. Attention: President 700 U.S. Route 202 South Raritan, New Jersey 08869 Telephone: (908) 704-5232 Telecopy: (908) 526-4365 With copies to: R. W. Johnson Pharmaceutical Research Institute Attention: Chairman U.S. Route 202 South Raritan, NJ 08869 78 Telephone: (908) 704-4210 Telecopy: (908) 707-1895 and Office of General Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, NJ 08933 Telephone: (908) 524-2485 Telecopy: (908) 524-2788 SECTION 17.09. Waiver. Except as specifically provided for herein, ------ the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or any other of such Party's rights or remedies provided in this Agreement. SECTION 17.10. Severability. If any term, covenant or condition of ------------ this Agreement or the application thereof to any Party or circumstances shall, to any extent or in any country, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated. SECTION 17.11. Ambiguities. Ambiguities, if any, in this Agreement ----------- shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. SECTION 17.12. Governing Law. This Agreement shall be governed by ------------- and interpreted under the laws of the State of New York as applied to contracts entered into and performed entirely in New York by New York residents. SECTION 17.13. Headings. The sections and paragraph headings -------- contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said sections or paragraphs. 79 SECTION 17.14. Counterparts. This Agreement may be executed in one ------------ or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 17.15. Entire Agreement; Amendments. This Agreement, ---------------- ---------- including all Exhibits attached hereto and thereto, and all documents delivered concurrently herewith and therewith, set forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersede and terminate all prior agreements and understandings between the Parties. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. This Agreement, including without limitation the exhibits, schedules and attachments thereto, are intended to define the full extent of the legally enforceable undertakings of the Parties hereto, and no promise or representation, written or oral, which is not set forth explicitly is intended by either party to be legally binding. Both Parties acknowledge that in deciding to enter into the Agreement and to consummate the transaction contemplated thereby neither has relied upon any statement or representations, written or oral, other than those explicitly set forth therein. SECTION 17.16. Independent Contractors. The status of the Parties ----------------------- under this Agreement shall be that of independent contractors. Neither Party shall have the right to enter into any agreements on behalf of the other Party, nor shall it represent to any person that it has any such right or authority. Nothing in this Agreement shall be construed as establishing a partnership or joint venture relationship between the Parties. IN WITNESS WHEREOF, CTI and ORTHO have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. CELL THERAPEUTICS, INC. By:_______________________________________ Name: James A. Bianco, M.D. Title: President and Chief Executive Officer ORTHO BIOTECH INC. 80 By:_______________________________________ Name: Title: R. W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE, a division of ORTHO PHARMACEUTICAL CORPORATION By: ORTHO PHARMACEUTICAL -------------------- CORPORATION ----------- By:__________________________________ Name: Title: 81 EXHIBIT A DETERMINATION OF CERTAIN ACCOUNTING TERMS ----------------------------------------- As a supplement to the definitions provided in Article I of the Collaboration Agreement (this "Agreement"), dated as of November 7, 1996, between Cell Therapeutics, Inc. and Ortho Biotech Inc. and The R. W. Johnson Pharmaceutical Research Institute (collectively "ORTHO"), the following accounting terms shall be further specified as follows: 1. Cost of Goods Sold ------------------ Cost of Goods Sold shall be equal to the sum of Material Costs, Direct Labor costs and Indirect Costs. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) A. "Material Costs" shall mean *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) B. "Direct Labor Costs" shall mean *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) C. "Indirect Costs" shall mean other costs associated with the operating unit(s) manufacturing a Collaboration Product; provided, however, that such -------- ------- Indirect Costs shall exclude *****. 2. Marketing Expenses ------------------ (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Marketing Expenses shall be equal to the sum of ***** A-2 3. Distribution Expenses --------------------- Distribution Expenses shall be equal to the sum of Stock and Shipping Expenses and Transportation Expenses, each as specified below. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) A. "Stock and Shipping" shall include *****. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) B. "Transportation Expenses" shall include *****. 4. Post-Launch Product R&D Expenses -------------------------------- A-3 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Post-Launch Product R&D Expenses shall include *****. 5. Direct Administrative Expenses. ------------------------------ (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Direct Administration Expenses shall be equal to ***** 6. Uncollectible Accounts ---------------------- Uncollectible Accounts shall be determined in accordance with generally accepted accounting procedures consistently applied. EXHIBIT B FINANCIAL STATEMENT FORMAT --------------------------
Product Product Total % Net Sales ------- ------- ----- ----------- Gross Sales Less: Discounts Credits & Allowances Taxes & Duties Rebates Net Sales Net Sublicense Revenues Cost of Goods Sold Pre-Marketing Expenses (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Marketing Expenses: ***** Total Marketing Expenses Distribution Expenses: Stock & Shipping Transportation Total Distribution Expenses (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Post-Launch Product R&D Expenses: ***** Total Post-Launch Product R&D Expenses (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Direct Administrative Expenses ***** Total Direct Administrative Expenses
B-2 Patent and Trademark Expenses (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Cost of Capital Allowance ***** Total Cost of Capital Allowance Provision for Uncollectible Accounts Operating Profits (Losses) Equalization Receipt (Payment) Balance After Equalization
(The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) EXHIBIT C LISOFYLLINE PRODUCT GENUS ------------------------- ***** (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) EXHIBIT D-1 CTI PATENTS ----------- ***** EXHIBIT D-2 ORTHO PATENTS ------------- [NONE] EXHIBIT E FORM OF ROYALTY REPORT ---------------------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Product Royalty Rate Country Currency US$ Exchange Rate
Product Product Total ------- ------- ----- Gross Sales ***** Royalty Bearing Sales Local currency US$ equivalent US$ Royalty Payable

 
 
                                                                   EXHIBIT 10.27

                                                                  EXECUTION COPY
                                                                  --------------

                                                        Portions of this Exhibit
                                                        have been omitted
                                                        pursuant to a request
                                                        for confidential
                                                        treatment. The omitted
                                                        portions are marked
                                                        ***** and have been
                                                        filed separately with
                                                        the Commission.

                           STOCK PURCHASE AGREEMENT

                         dated as of November 8, 1996

                                by and between

                            CELL THERAPEUTICS, INC.

                                      and

                   JOHNSON & JOHNSON DEVELOPMENT CORPORATION



(The information below marked by ***** has been
omitted by a request for confidential treatment.
The omitted portion has been separately filed
with the Commission.)




 
                               TABLE OF CONTENTS

Page ARTICLE I SALE OF PREFERRED STOCK AT THE FIRST CLOSING -------------------------------------------- SECTION 1.01. Sale...................................................... 1 SECTION 1.02. First Closing............................................. 2 ARTICLE II SUBSEQUENT SALES OF COMMON STOCK -------------------------------- SECTION 2.01. Side-By-Side Put Option................................... 2 SECTION 2.02. BMT Milestone Put Option.................................. 3 SECTION 2.03. AML Milestone Put Option.................................. 4 SECTION 2.04. Limitation of Obligation to Purchase Excess Put Shares.... 5 ARTICLE III STANDSTILL ---------- SECTION 3.01. Standstill by JJDC........................................ 7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CTI ------------------------------------- SECTION 4.01. Organization and Corporate Power.......................... 9 SECTION 4.02. Subsidiaries.............................................. 9 SECTION 4.03. Authorization............................................. 9 SECTION 4.04. Validity of the Shares.................................... 9 SECTION 4.05. Enforceability............................................ 10 SECTION 4.06. Capitalization............................................ 10 SECTION 4.07. Securities Act Compliance................................. 10 SECTION 4.08. Obligations to Issue Securities........................... 10 SECTION 4.09. SEC Reports............................................... 10
....................................................... SECTION 4.10. Absence of Certain Developments........................... 11 SECTION 4.11. No Undisclosed Liabilities................................ 12 SECTION 4.12. Approvals................................................. 12 SECTION 4.13. Title to Properties....................................... 12 SECTION 4.14. Intellectual Property..................................... 12 SECTION 4.15. Litigation................................................ 13 SECTION 4.16. Taxes..................................................... 13 SECTION 4.17. Compliance With Laws...................................... 13 SECTION 4.18. Labor Matters............................................. 14 SECTION 4.19. Insurance................................................. 14 SECTION 4.20. Leases.................................................... 15 SECTION 4.21. Personal Property......................................... 15 SECTION 4.22. Environmental............................................. 15 SECTION 4.23. Improper Payments......................................... 16 SECTION 4.24. Securities Laws........................................... 16 SECTION 4.25. Brokerage................................................. 16 SECTION 4.26. Disclosure................................................ 16 ARTICLE V REPRESENTATIONS AND WARRANTIES OF JJDC -------------------------------------- SECTION 5.01. Legal Power............................................... 17 SECTION 5.02. Due Execution............................................. 17 SECTION 5.03. Investment Representations................................ 17 ARTICLE VI CONDITIONS TO CLOSING --------------------- SECTION 6.01. Condition to JJDC's Obligations at First Closing.......... 19 SECTION 6.02. Condition to JJDC's Obligations at Subsequent Closings.... 19 SECTION 6.03. Conditions to CTI's Obligations at Each Closing........... 20 ARTICLE VII REGISTRATION OF COMMON STOCK; COVENANTS OF CTI ---------------------------------------------- SECTION 7.01. Definitions............................................... 21 SECTION 7.02. Registration Rights....................................... 22 SECTION 7.03. Registration Expenses..................................... 23
ii ....................................................... SECTION 7.04. Registration Procedures................................... 24 SECTION 7.05. Indemnification........................................... 26 SECTION 7.06. Reports Under Exchange Act................................ 28 SECTION 7.07. Transferability........................................... 28 SECTION 7.08. Termination of Registration Rights........................ 29 SECTION 7.09. Limitations on Subsequent Registration Rights............. 29 ARTICLE VIII LOCKUP; REPURCHASE RIGHT ------------------------ SECTION 8.01. Lockup.................................................... 29 ARTICLE IX MISCELLANEOUS ------------- SECTION 9.01. Publicity................................................. 30 SECTION 9.02. Successors and Assigns.................................... 30 SECTION 9.03. Entire Agreement.......................................... 30 SECTION 9.04. Separability.............................................. 30 SECTION 9.05. Amendment and Waiver...................................... 31 SECTION 9.06. Notices................................................... 31 SECTION 9.07. Fees and Expenses......................................... 32 SECTION 9.08. Hart-Scott-Rodino Filings................................. 32 SECTION 9.09. Titles and Subtitles...................................... 32 SECTION 9.10. Counterparts.............................................. 32 SECTION 9.11. Incorporation by Reference................................ 32 SECTION 9.12. Survival.................................................. 32 EXHIBITS Exhibit A Opinion of Counsel Exhibit B Articles of Amendment to Restated Articles of Incorporation
iii EXECUTION COPY -------------- STOCK PURCHASE AGREEMENT ------------------------ THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of November --------- 8, 1996, by and between CELL THERAPEUTICS, INC., a Washington corporation with its principal office at 201 Elliott Avenue West, Suite 400, Seattle, Washington 98119 ("CTI"), and JOHNSON & JOHNSON DEVELOPMENT CORPORATION, a New Jersey --- corporation having its principal place of business at One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933 ("JJDC"). ---- W I T N E S S E T H: - - - - - - - - - - WHEREAS, CTI and Ortho Biotech Inc. ("Ortho") and a wholly-owned ----- subsidiary of Johnson & Johnson, a New Jersey corporation ("J&J"), have entered --- into that certain Collaboration Agreement (the "Collaboration Agreement") of ----------------------- even date herewith (capitalized terms not otherwise defined herein being used herein as therein defined); and WHEREAS, in connection with the Collaboration Agreement, CTI desires to sell to JJDC, and JJDC desires to purchase from CTI, shares of CTI's Series B Convertible Preferred Stock, without par value ("Series B Preferred"), and ------------------ shares of CTI's common stock, without par value ("Common Stock"), in each case ------------ on the terms and subject to the conditions set forth in this Agreement. The shares of Series B Preferred purchased by JJDC hereunder are referred to herein as the "Series B Shares," and the shares of Common Stock purchased by JJDC --------------- hereunder are referred to herein as the "Common Shares." The Series B Shares ------------- and the Common Shares are referred to herein collectively as the "Shares." ------ NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE I SALE OF PREFERRED STOCK AT THE FIRST CLOSING -------------------------------------------- SECTION 1.01. Sale. Subject to the terms of this Agreement, at the ---- First Closing (as defined below), CTI agrees to sell to JJDC, and JJDC agrees to purchase from CTI, 14,925.373 shares of Series B Preferred (the "First Closing ------------- Shares") at a price per share equal to $335.00, for an aggregate purchase price - ------ of $5,000,000. The price paid by JJDC for the purchase of the First Closing Shares at the First Closing is hereinafter referred to as "First Closing Purchase Price." ---------------------------- SECTION 1.02. First Closing. (a) The closing of the sale and ------------- purchase of the First Closing Shares pursuant to Section 1.01 (the "First ----- Closing") shall be held at 10:00 a.m. (California time) at the offices of - ------- Shearman & Sterling, 555 California Street, Suite 2000, San Francisco, California 94104, on the date hereof or at such other time within five (5) business days of the Effective Date or at such other place as CTI and JJDC may agree (the "First Closing Date"). ------------------ (b) At the First Closing, subject to the terms and conditions of this Agreement, CTI shall deliver to JJDC a certificate registered in JJDC's name representing the First Closing Shares purchased at the First Closing, and JJDC shall deliver the First Closing Purchase Price to CTI by certified check payable to CTI or by wire transfer of immediately available funds to an account specified by CTI. ARTICLE II SUBSEQUENT SALES OF COMMON STOCK -------------------------------- SECTION 2.01. Side-By-Side Put Option. (a) Subject to the terms of ----------------------- this Agreement, upon the initial closing of a firm commitment underwritten public offering of Common Stock (the "IPO Closing") for the account of CTI ----------- pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), CTI shall have the option (the "Side- -------------- ---- By-Side Put Option") to sell to JJDC a number of shares of Common Stock equal to - ------------------ not more than ten percent (10%) of the number of shares of Common Stock sold by CTI in the IPO Closing (the "Side-By-Side Shares"), at a price per share equal ------------------- to the price per share at which the Common Stock was sold to the public at the IPO Closing. The number of shares shall be rounded downward to the nearest whole integer. The aggregate price paid by JJDC for the purchase of the Side- By-Side Shares concurrent with the IPO Closing is hereinafter referred to as the "Side-By-Side Purchase Price." --------------------------- (b) CTI shall provide at least three (3) business days advance written notice to JJDC of CTI's election to exercise the Side-By-Side Put Option, which notice shall specify the expected number of Side-By-Side Shares to be sold and the expected date of such Side-By-Side Closing (as hereinafter defined), which date shall be no later than five (5) business days after the occurrence of the IPO Closing after which time the Side-by-Side Put Option shall expire if not theretofore exercised. If such notice is given prior to the IPO Closing, such notice shall be contingent upon the occurrence of the IPO Closing. (c) The closing of the sale and purchase of the Side-By-Side Shares pursuant to Section 2.01(a) (the "Side-By-Side Closing") shall be held at the -------------------- offices of Shearman & Sterling, 555 California Street, Suite 2000, San Francisco, California 94104, 2 concurrently with the IPO Closing or at such other time and place as CTI and JJDC may agree (the "Side-By-Side Closing Date"). ------------------------- (d) At the Side-By-Side Closing, subject to the terms and conditions of this Agreement, CTI shall deliver to JJDC a certificate registered in JJDC's name representing the Side-By-Side Shares purchased at the Side-By-Side Closing, and JJDC shall deliver the Side-By-Side Purchase Price to CTI by certified check payable to CTI or by wire transfer of immediately available funds to an account specified by CTI. SECTION 2.02. BMT Milestone Put Option. (a) Subject to the terms of ------------------------ this Agreement, upon approval by the FDA or the relevant regulatory agency or authority of the first Drug Approval Application for a Collaboration Product for a BMT Indication in the United States or a Major Market County (the "BMT --- Milestone"), CTI shall have the option (the "BMT Milestone Put Option") to sell - --------- ------------------------ to JJDC the BMT Milestone Put Shares (as hereinafter defined) at a price per share equal to the then applicable Current Market Price (as hereinafter defined), for an aggregate purchase price of $2,000,000. (b) CTI shall provide at least five (5) business days advance written notice (the "BMT Milestone Put Notice") to JJDC of CTI's election to exercise ------------------------ the BMT Milestone Put Option, which notice shall specify the expected number of BMT Milestone Put Shares to be sold and the date of such BMT Milestone Put Share Closing (as hereinafter defined), which date shall be no later than ten (10) business days after the occurrence of the BMT Milestone after which time the BMT Milestone Put Option will expire if not theretofore exercised. (c) (i) For purposes of this Section 2.02 the "BMT Milestone Put ----------------- Shares" shall mean the number of shares of Common Stock, rounded downward ------ to the nearest whole integer, equal to $2,000,000 divided by the Current Market Price per share of the Common Stock as of the fifth business day prior to the date of the BMT Milestone Put Share Closing. (ii) The "Current Market Price" per share of the Common Stock shall be -------------------- defined as the arithmetic average of the closing prices of the Common Stock for the thirty (30) Trading Day (as defined below) period ending as of the Trading Day immediately prior to the date as of which such Current Market Price is being determined. The closing price for each day shall be, if the Common Stock is listed and admitted to trading on a national securities exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the Nasdaq National Market of the Nasdaq Stock Market, Inc., or such other system then in use, or, if on any such date the Common Stock is not quoted by 3 any such organization, the average of the closing bid and asked prices as furnished by the professional market maker making a market in the Common Stock having the greatest number of actual trades during the relevant period. If the Common Stock is not publicly held or not so listed or traded, the "Current Market Price" per share shall mean the fair value per share of Common Stock as agreed to by CTI and JJDC prior to the expiration of the periods specified in section 2.02(b) and Section 2.03(b), or, if no such agreement is reached, the last price at which CTI sold one or more shares of Common Stock (which shall include sales of preferred stock convertible into Common Stock at the as converted price on the day of sale) to a third party (not a corporate partner of CTI) in a bona fide arm's- ---- ---- length transaction. The term "Trading Day" shall mean, if the Common Stock ----------- is listed or admitted to trading on any national securities exchange, a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business and a day on which at least one share of Common Stock is traded or, if the Common Stock is not so listed or admitted, a business day. (d) The closing of the sale and purchase of the BMT Milestone Put Shares ("BMT Milestone Put Share Closing") shall be held at 10:00 a.m. ------------------------------- (California time) at the offices of Shearman & Sterling, 555 California Street, Suite 2000, San Francisco, California 94104, on the date specified in the BMT Milestone Put Notice, or at such other time and place as CTI and JJDC may agree. (e) At the BMT Milestone Put Share Closing, subject to the terms and conditions hereof, CTI shall deliver to JJDC a certificate registered in JJDC's name representing the BMT Milestone Put Shares purchased at the BMT Milestone Put Share Closing, and JJDC shall deliver the purchase price therefor in the amount of $2,000,000 to CTI by certified check payable to CTI or wire transfer of immediately available funds to an account specified by CTI. SECTION 2.03. AML Milestone Put Option. (a) Subject to the terms of ------------------------ this Agreement, upon the approval by the FDA or the relevant regulatory agency or authority of the First Drug Approval Application for a Collaboration Product for an AML Indication in the United States or a Major Market Country (the "AML --- Milestone"), CTI shall have the option (the "AML Milestone Put Option") to sell - --------- ------------------------ to JJDC the AML Milestone Put Shares (as hereinafter defined) at a price per share equal to the then applicable Current Market Price, for an aggregate purchase price of $6,000,000. (b) CTI shall provide at least five (5) business days advance written notice (the "AML Milestone Put Notice") to JJDC of CTI's election to exercise ------------------------ the AML Milestone Put Option, which notice shall specify the expected number of AML Milestone Put Shares to be sold and the date of such AML Milestone Put Share Closing (as hereinafter defined), which date shall be no later than ten (10) business days after the occurrence of the AML Milestone after which time the AML Milestone Put Option shall expire if not theretofore exercised. 4 (c) For purposes of this Section 2.03, the "AML Milestone Put Shares" ------------------------ shall mean the number of shares of Common Stock, rounded downward to the nearest whole integer, equal to $6,000,000 divided by the Current Market Price per share of the Common Stock as of the fifth business day prior to the date of the AML Milestone Put Share Closing. (d) The closing of the sale and purchase of the AML Milestone Put Shares ("AML Milestone Put Share Closing") shall be held at 10:00 a.m. ------------------------------- (California time) at the offices of Shearman & Sterling, 555 California Street, Suite 2000, San Francisco, California 94104, on the date specified in the AML Milestone Put Notice, or at such other time and place as CTI and JJDC may agree. (e) At the AML Milestone Put Share Closing, subject to the terms and conditions hereof, CTI shall deliver to JJDC a certificate registered in JJDC's name representing the AML Milestone Put Shares purchased at the AML Milestone Put Share Closing, and JJDC shall deliver the purchase price therefor in the amount of $6,000,000 to CTI by certified check payable to CTI or wire transfer of immediately available funds to an account specified by CTI. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 2.04. Limitation of Obligation to Purchase Excess Put Shares. ------------------------------------------------------ (a) Notwithstanding any other provision of this Agreement to the contrary, upon written notice to CTI by JJDC delivered at any time prior to any closing provided for in Sections 2.01, 2.02, 2.03 or this Section 2.04 (each, a "Closing" and, collectively, the "Closings"), JJDC's obligation to purchase ------- -------- Excess Put Shares (as hereinafter defined) shall be suspended and JJDC shall not be obligated to pay to CTI the Excess Put Share Amount (as hereinafter defined) until such time as the payment by JJDC of the Excess Put Share Amount in connection with the purchase by JJDC of the shares of Common Stock represented by such amount, at a price per share calculated at the time of purchase pursuant to the second sentence of Section 2.04(c) hereof (the "Additional Shares"), when ----------------- aggregated with all other shares of Common Stock (including shares of Common Stock issuable upon conversion of any shares of Series B Preferred held by JJDC) then owned of record by JJDC which were purchased pursuant to this Agreement, would not constitute more than ***** of the voting power of the then outstanding capital stock of CTI. In calculating its ownership interest in CTI, JJDC shall be entitled to rely upon the number of outstanding shares of CTI reported in CTI's most recently filed report on Form 10-Q, 10-K or 8-K, as the case may be, filed pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), most ------------ recently filed Registration Statement pursuant to the Securities Act, or the most recently issued press release or other information delivered to JJDC by CTI for the purpose of calculating such ownership. The failure by JJDC to deliver the written notice specified above in this paragraph with respect to any Excess Put Shares shall not bar JJDC from subsequently delivering such notice with respect to any subsequent Excess Put Shares and shall not effect the applicability of this Section 2.04 with respect to such subsequent shares, even if at the time of such subsequent delivery, JJDC owns of record more than ***** of the voting power of the then outstanding capital stock of CTI. 5 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (b) In the event of any change in the number of outstanding shares of CTI voting securities such that any or all Additional Shares, when purchased pursuant to this Agreement and aggregated with all other shares of Common Stock (including shares of Common Stock issuable upon conversion of any shares of Series B Preferred held by JJDC) then owned of record by JJDC which were purchased pursuant to this Agreement, would not constitute more than ***** of the voting power of the then outstanding capital stock of CTI, then CTI shall have the right to sell such Additional Shares to JJDC upon fifteen (15) calendar days' advance written notice to JJDC at any time in one or more separate closings (but not more than two (2) separate closings in any twelve (12) month period) until all of such Additional Shares have been sold hereunder. Such notice shall include a certificate executed on behalf of CTI by an executive officer of CTI certifying that the conditions set forth above in this Section 2.04(b) have been met. JJDC shall promptly (but in any event within ten (10) calendar days) notify CTI of any disposition of shares purchased pursuant to this Agreement or other event of which it becomes aware which would cause CTI's right to sell Additional Shares to be reinstated hereunder. (c) The closing of each sale of Additional Shares pursuant to Section 2.04(b) shall be held at the time and place specified in CTI's notice delivered pursuant to Section 2.04(b). Any Additional Shares purchased by JJDC hereunder shall be purchased by JJDC at a price equal to the Current Market Price in effect on the date of CTI's notice regarding the sale of such Additional Shares. (d) The respective time periods during which CTI shall have the right to exercise its BMT Milestone Put Right and AML Milestone Put Right, to the extent that any such exercise resulted in Excess Put Shares, shall be tolled and extended until all such Excess Put Shares are purchased pursuant to this Section 2.04. (e) For purposes of this Section 2.04, the following terms shall have the following meanings: (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (i) "Excess Put Shares" shall mean any shares of Common Stock ----------------- otherwise issuable to JJDC pursuant to Sections 2.01, 2.02, 2.03 or this Section 2.04 which, if purchased by JJDC at the time otherwise provided for under this Agreement and when considered together with all other shares of Common Stock purchased by JJDC pursuant to this Agreement and then owed of record by JJDC or its Affiliates (including shares of Common Stock issuable upon conversion of any shares of Series B Preferred held by JJDC), would constitute more than ***** of the voting power of the then outstanding capital stock of CTI. Securities of CTI acquired by JJDC other than pursuant to this Agreement shall be specifically excluded for purposes of this Section 2.04 in determining whether or not JJDC is the record holder of more than ***** of the voting power of the then outstanding capital stock of CTI. For purposes of this Section 2.04, "JJDC" shall be deemed to include JJDC and its Affiliates (as defined in the Collaboration Agreement), including Ortho and J&J. 6 (ii) "Excess Put Share Amount" shall mean the aggregate amount of the ----------------------- purchase price that would have been paid by JJDC pursuant to this Agreement for the purchase of any Excess Put Shares, but for the delivery by JJDC of the notice(s) specified in Section 2.04(a). ARTICLE III STANDSTILL ---------- (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 3.01. Standstill by JJDC. Subject to the terms of this ------------------ Section 3.01, JJDC agrees that, upon execution of this Agreement until the earlier of (i) ***** from the date hereof, or (ii) ***** following the effective date of termination of the Collaboration Agreement by Ortho, it will not, nor will it permit any of its Affiliates (including Ortho and J&J) to, without the prior written consent of CTI: (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (a) (i) acquire, directly or indirectly, by purchase or otherwise, of record or beneficially, other than by the transactions set forth in Articles I and II of this Agreement, any securities of CTI or rights or options to acquire any securities from any holder of such securities if after such acquisition (and giving effect to the exercise of any such rights or options) JJDC and its Affiliates, including Ortho and J&J, would own capital stock of CTI having ***** or more of the voting power of the outstanding capital stock of CTI; provided, however, that neither (1) the -------- ------- purchase of the Shares pursuant to Articles I and II of this Agreement nor (2) subsequent reductions in the number of shares of outstanding capital stock of CTI (or rights or options therefor) shall be deemed to have caused a violation of this Section 3.01(a)(i); (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) (ii) to the extent JJDC and/or its Affiliates (including Ortho and J&J) own(s), beneficially or of record, securities of CTI constituting ***** or more of the voting power of the outstanding capital stock of CTI and such securities include securities of CTI other than those purchased pursuant to Articles I and II, JJDC and/or its Affiliates (including Ortho and J&J) shall be deemed to own "Prohibited Securities." JJDC agrees that --------------------- neither it nor any of its Affiliates (including Ortho and J&J) shall (and neither it nor any of its Affiliates (including Ortho and J&J) shall be entitled to) vote any Prohibited Securities with respect to any matter subject to the vote or written consent of CTI's stockholders (provided, -------- however, that the foregoing shall not be deemed to limit CTI's remedies in ------- the event that the Prohibited Securities were acquired in violation of this Section 3.01); and (iii) JJDC hereby covenants and agrees that during the term provided for in Section 3.01(a)(i), it will provide written notice to CTI of any purchase, sale or other acquisition or disposition, on the open market or in private transactions, by JJDC or any of its Affiliates (including Ortho and J&J) of any securities of CTI (or if JJDC or such Affiliates shall direct any third party to take any such actions on behalf of JJDC 7 or such Affiliates). Such notice shall be transmitted to CTI by facsimile (with telephonic notice) within three (3) business days after any such transaction on the open market or within ten (10) business days after any such private transaction and shall specify the person or entity effecting the transaction, the date of such transaction, the number of securities and the price per security with respect to such transaction; (b) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A of the Exchange Act to vote, or seek to advise or influence any person with respect to the voting of, any securities of CTI, or become a "participant" in any "election contest" (as such terms are used or defined in Regulation 14A of the Exchange Act) relating to the election of directors of CTI; deposit any securities of CTI in a voting trust or subject them to a voting agreement or other agreement of similar effect (other than a revocable proxy); (c) deposit any securities of CTI in a voting trust or subject them to a voting agreement or other agreement of similar effect (other than a revocable proxy); (d) initiate, propose or otherwise solicit any stockholder for the approval of one or more stockholder proposals at any time, or induce or attempt to induce any other person to initiate any stockholder proposal; (e) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) or otherwise act in concert with any person for the purpose of acquiring, holding, voting or disposing of any securities of CTI; (f) request CTI (or its directors, officers, employees or agents), directly or indirectly, to amend or waive any of the provisions contained in this Section 3.01; or (g) take any action individually or jointly with any partnership, limited partnership, syndicate, or other group or assist any other person, corporation, entity or group in taking any action it could not take individually under the terms of this Section 3.01. (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) Notwithstanding the foregoing, if a third party makes a tender offer or exchange offer for ***** or more of CTI's outstanding voting securities, or CTI publicly announces a transaction pursuant to which a third party not a shareholder of CTI on the date hereof is or will acquire, whether through merger, tender offer or exchange offer, ***** or more of CTI's voting securities or all or substantially all of CTI's assets, then the restrictions set forth in this Section 3.01 shall lapse until such time, if any, as such transaction or transactions are withdrawn or abandoned, at which time such restrictions shall be reinstated. Any reinstatement of such restrictions shall not affect JJDC's ability to continue to pursue ant transaction it announced prior to such reinstatement; provided, -------- that, such announcement did not violate this Section 3.01, and provided further -------- ------- that such transaction is completed within six (6) months from the date of announcement. 8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CTI ------------------------------------- SECTION 4.01. Organization and Corporate Power. CTI is a corporation -------------------------------- duly incorporated and validly existing under the laws of the State of Washington and is duly licensed or qualified as a foreign corporation in each other jurisdiction where the nature of business transacted by it makes such licensing or qualification necessary. CTI has, and will have at each Closing, the corporate power and authority, and the legal right, to own and operate its properties and to carry on its business as currently conducted, to execute, deliver, and perform this Agreement, to issue, sell and deliver the Shares, to issue and deliver the shares of Common Stock issuable upon conversion of the Series B Shares (the "Conversion Shares") and in all other respects to ----------------- consummate the transactions contemplated hereby and thereby. True and complete copies of the Articles of Incorporation and By-laws of CTI, as amended to date, have been made available to JJDC by CTI. SECTION 4.02. Subsidiaries. CTI does not own any shares of any ------------ corporation or have any ownership or other investment interest, either of record, beneficially or equitably, in any association, partnership, joint venture or other legal entity other than wholly-owned subsidiaries which, as of the date hereof, have conducted no business operations. SECTION 4.03. Authorization. The execution and delivery by CTI of ------------- this Agreement, the performance by CTI of its obligations hereunder, and the issuance, sale and delivery by CTI of the Shares at each Closing pursuant hereto and the issuance and delivery of the Conversion Shares upon conversion of the Series B Shares, have been duly authorized by all requisite corporate action, including without limitation all requisite action on the part of CTI's shareholders, and will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation or By-laws of CTI, any judgment award or decree or any provision of any indenture, agreement or other instrument, to which CTI is a party, or by which it, or any of its properties or assets, is bound or affected, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of CTI, or result in any suspension, revocation, impairment, forfeiture or nonrenewal of any Governmental Permit (as hereinafter defined). SECTION 4.04. Validity of the Shares. The Shares have been duly ---------------------- authorized by CTI and, when paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Common Stock or Series B Preferred, as the case may be. The Conversion Shares have been duly reserved for issuance upon conversion of the Series B Shares and, when so issued, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock. Neither the issuance, sale and delivery of the Shares nor the issuance and delivery of the Conversion Shares are subject to any 9 preemptive rights of shareholders of CTI or to any right of first refusal or other similar right in favor of any person. SECTION 4.05. Enforceability. This Agreement has been duly executed -------------- and delivered by CTI and, subject to due execution by JJDC, constitutes the legal, valid and binding obligation of CTI, enforceable against CTI in accordance with its terms. SECTION 4.06. Capitalization. As of the date hereof, the authorized -------------- capital stock of CTI consists of 100,000,000 shares of Common Stock, of which 17,300,574 shares are issued and outstanding as of the date hereof, and 10,000,000 shares of preferred stock, no par value, ("Existing Preferred ------------------ Stock"), of which 146,193.272 shares of have been designated as Series A - ----- Convertible Preferred Stock ("Series A Preferred"), of which 146,193.272 shares ------------------ are issued and outstanding as of the date hereof, and of which 14,925.373 shares have been designated as Series B Preferred, none of which are issued and outstanding as of the date hereof. All shares of capital stock outstanding as of the date hereof have been duly authorized and validly issued, and are fully paid and nonassessable. 15,000,000 shares of Common Stock have been reserved for issuance upon conversion of the Series A Preferred, and 1,492,538 shares of Common Stock have been reserved for issuance upon conversion of the Series B Preferred. The designations, preferences, limitations and relative rights of the Series A Preferred and Series B Preferred are set forth in the Articles of Amendment to the Restated Articles of Incorporation of CTI, as set forth in Exhibit B annexed hereto (the "Articles of Amendment"). --------------------- SECTION 4.07. Securities Act Compliance. Assuming that JJDC's ------------------------- representations and warranties contained in Article V of this Agreement are true and correct, the Shares and Conversion Shares to be issued and delivered to JJDC pursuant to this Agreement shall be offered, issued and sold in compliance with the Securities Act and any other applicable United States federal or state securities laws. SECTION 4.08. Obligations to Issue Securities. Except (a) for the ------------------------------- obligations of CTI to JJDC under this Agreement, (b) as otherwise set forth in the SEC Reports (as defined herein), and (c) for stock options granted to employees, officers and consultants of CTI subsequent to the date of the SEC Reports pursuant to CTI's 1994 Equity Incentive Plan, (i) no subscription, warrant, option, convertible security or other right (contingent or other) to purchase or acquire any shares of any class of capital stock of CTI is authorized or outstanding, (ii) there is not any commitment of CTI to issue any shares, warrants, options or other such rights or to distribute to holders of any class of its capital stock any evidences of indebtedness or assets, and (iii) CTI has no obligation (contingent or other) to purchase, redeem or otherwise acquire any shares of the capital stock of CTI or any interest therein or to pay any dividend or make any other distribution in respect thereof. SECTION 4.09. SEC Reports. (a) CTI has filed all forms, reports and ----------- documents required to be filed with the Securities and Exchange Commission (the "SEC") since April 29, 1996 and has made available to JJDC (i) its Registration --- Statement on Form 10 10, as amended by Amendment No. 2 thereto filed with the SEC on June 28, 1996; (ii) its Quarterly Report on Form 10-Q for the period ended June 30, 1996; (iii) all other reports or registration statements filed by CTI with the SEC since June 28, 1996; and (iv) all amendments and supplements to all such reports and registration statements filed by CTI with the SEC (the forms, reports and documents made available by CTI to JJDC being collectively referred to herein as the "SEC Reports"). The SEC Reports (i) were prepared in accordance with the ----------- requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such amending or superseding filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the financial statements (including, in each case, any related notes thereto) contained in the SEC Reports was prepared in accordance with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated therein or in the notes thereto) and each fairly presented the financial position of CTI as at the respective dates thereof and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year- end adjustments which were not or are not expected to be material in amount. SECTION 4.10. Absence of Certain Developments. Except as set forth ------------------------------- in the SEC Reports, since June 30, 1996, CTI has conducted its business in the ordinary course and there has not occurred: (i) any change or effect that is or is reasonably likely to be materially adverse to the business, assets (including intangible assets), financial condition or results of operations of CTI taken as a whole; (ii) any amendments or changes in the Articles of Incorporation or By- laws of CTI, other than an amendment to CTI's By-laws adopted on July 16, 1996; (iii) any change by CTI in its accounting methods, principles or practices; (iv) any revaluation by CTI of any of its assets; (v) any sale of a material amount of property of CTI; (vi) any discharge or satisfaction by CTI of any material lien, security interest, charge or other encumbrance or any payment by CTI of any material obligation or liability (fixed or contingent), other than in the ordinary course of business and consistent with past practice; (vii) any investment by CTI of a capital nature, whether by purchase of stock or securities, contributions to capital, property transfers or otherwise, in any other partnership, corporation or other entity, or any purchase by CTI of any material property or assets; (viii) any cancellation or compromise by CTI of any debt or claim other than in the ordinary course of business consistent with past practice; (ix) any waiver or release by CTI of any rights of material value, including, without limitation, any Intangible Rights (as hereinafter defined); (x) any material wage or salary increase by CTI applicable to any group or classification of employees generally, or any material employment contract with, loan to, or material transaction of any other nature with, any officer or employee of CTI; or (xi) any establishment by CTI of any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974. 11 SECTION 4.11. No Undisclosed Liabilities. Except as and to the -------------------------- extent (i) reflected in the financial statements contained in the SEC Reports or (ii) incurred since June 30, 1996 in the ordinary course of business and consistent with past practice, CTI has no lia bilities or obligations of any kind or nature, whether secured or unsecured (whether absolute, accrued, contingent or otherwise, and whether due or to become due), including without limitation any tax liabilities due or to become due, or whether incurred in respect of or measured by the assets, sales, income or receipts of CTI for any period, which liabilities or obligations would be required to be reflected on a balance sheet of CTI as of December 31, 1995, prepared in accordance with generally accepted accounting principles. SECTION 4.12. Approvals. Based in part on the representations made --------- by JJDC in Article V of this Agreement, no order, authorization, approval or consent from, or filing with, any federal or state governmental or public body or other authority having jurisdiction over CTI is required for the valid execution (where called for), delivery and performance of this Agreement by CTI, the issuance, sale and delivery of the Shares, or upon conversion of the Series B Shares, the issuance and delivery of the Conversion Shares, or is required in order that the business of CTI can be conducted immediately following the date of the applicable Closing substantially in the same manner as heretofore conducted, except for (i) those that have been made and obtained, (ii) those filings under state "blue sky" laws which are now not required to be made or obtained, and (iii) applicable obligations under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the rules and regulations thereunder (the "HSR --- Act"). - --- SECTION 4.13. Title to Properties. Except as set forth in the SEC ------------------- Reports, CTI has good and valid title to all its assets and properties, in each case free and clear of all liens, charges, security interests or other encumbrances of any nature whatsoever, other than (x) liens for taxes not yet due, (y) mechanic's, materialman's and similar statutory liens arising in the ordinary course of business and which, in the aggregate, would not have a material adverse effect on the business, properties or condition (financial or other) of CTI, or (z) security interests securing indebtedness not in default for the purchase price of or lease rental payments on property purchased or leased under capital lease arrangements in the ordinary course of business. SECTION 4.14. Intellectual Property. Except as is set forth in the --------------------- SEC Reports, CTI complies with its contractual obligations relating to the protection of such of the patents, trademarks and trade names, trademark and trade name registrations, logos, servicemark registrations, copyright registrations, all applications pending on the date hereof for patent or for trademark, trade name, servicemark or copyright registrations, and all other material proprietary rights (collectively "Intangible Rights") used by it ----------------- pursuant to licenses or other contracts, CTI has the right to use its Intangible Rights for the purposes intended thereby, and to conduct its business as heretofore conducted, and the consummation of the transactions contemplated hereby will not alter or impair any such Intangible Rights, and, to the knowledge of CTI, all such Intangible Rights that are capable of being enforced are valid, enforceable and in good standing, and no claims have been asserted with respect to the 12 ownership by CTI of any of the Intangible Rights or otherwise. To the knowledge of CTI, except as is set forth in the SEC Reports, (i) no person is infringing an Intangible Right owned by CTI and (ii) CTI is not infringing any valid patent, copyright or trademark owned by any third party. SECTION 4.15. Litigation. Except as set forth in the SEC Reports, ---------- there are no material claims, actions, suits, proceedings or investigations pending or, to the knowledge of CTI, threatened by or against CTI or any of its properties, assets, rights or businesses. No such pending or threatened claims, actions, suits, proceedings or investigations, if ad versely determined, would, individually or in the aggregate, have a material adverse effect on the business, properties or condition (financial or other) of CTI. Except as set forth in the SEC Reports, CTI knows of no basis for any other such claim, action, suit, proceeding or investigation which, if adversely decided, would have such a material adverse effect. Except as set forth in the SEC Reports, there are no actions, suits, proceedings or claims pending before or by any court, arbitrator, regulatory authority or government agency against or affecting CTI that might enjoin or prevent the consummation of the transactions contem plated by this Agreement. SECTION 4.16. Taxes. CTI has duly and timely filed or caused to be ----- filed (or obtained valid, currently effective extensions for filing) all federal, state, local and foreign income, franchise, excise, payroll, sales and use, property, withholding and other tax returns, reports, estimates and information and other statements or returns (collectively "Tax Returns") ----------- required to be filed by or on behalf of it pursuant to any applicable federal, state, local or foreign tax laws for all years and periods for which such Tax Returns have become due. All such Tax Returns were correct as filed and correctly reflect the federal, state, local and foreign income, franchise, excise, payroll, sales and use, property, withholding and other taxes, duties, imposts and governmental charges (and charges in lieu of any thereof), together with interest, any additions to tax and penalties (collectively "Taxes") ----- required to be paid or collected by (or allocable to) CTI. CTI (i) has paid or caused to be paid all Taxes as shown on Tax Returns filed by it or on any assessment received by it and (ii) has properly and fully accrued on its audited and interim unaudited financial statements all Taxes for any period from the date of the last reporting period covered by such Tax Returns. There is no audit pending or threatened in writing, and, to the knowledge of CTI, there is no dispute or claim being threatened by any relevant taxing authority concerning any Tax Return or liabili ty for Taxes. Without limiting the foregoing, CTI has withheld or collected from each payment made to each of its employees (or has otherwise paid or made provision for) the amount of all Taxes (including, but not limited to, federal income taxes, federal Insurance Contribution Act taxes, state and local income and wage taxes, payroll taxes, worker's compensation and unemployment compensation taxes) required to be withheld or collected therefrom, and CTI has paid (or caused to be paid) the same in respect of its employees when due. SECTION 4.17. Compliance With Laws. (a) CTI has all material govern -------------------- mental licenses, franchises and permits ("Governmental Permits") required under -------------------- applicable 13 law for the conduct of its business as currently conducted, including, without limitation, all such licenses, franchises and permits as are required for laboratory use, manufacturing, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances. (b) The business of CTI is being conducted in material compliance with all applicable laws, ordinances, rules and regulations of all governmental authorities relating to CTI's properties or applicable to its business, including, without limitation, the terms of all Governmental Permits, federal securities laws, and laws relating to safe working conditions, laboratory and manufacturing practices (including current Good Manufacturing Practices prescribed by the U.S. Food and Drug Administration ("FDA")), the experimental --- use of animals and the use and disposal of hazardous or potentially hazardous substances (including, without limitation, radioactive compounds and solvents). CTI has not received any notice from any third party of any alleged violation of any of the foregoing. (c) Neither CTI nor any of its properties, operations or businesses is subject to any order, judgment, injunction or decree. To the knowledge of CTI, no action has been taken or recommended by any governmental or regulatory official, body or authority, either to revoke, withdraw or suspend any certificate of need or any license to operate CTI. SECTION 4.18. Labor Matters. (a) No collective bargaining agreement ------------- is applicable to any employees of CTI. There are no disputes between CTI and any such employees that might reasonably be expected to materially adversely affect the conduct of its business or any unresolved labor union grievances or unfair labor practice or labor arbitra tion proceedings pending, or to the knowledge of CTI, threatened, relating to the business of CTI. To the knowledge of CTI, there are no organizational efforts presently being made or threatened involving any of such employees. CTI has not received notice of any claim that CTI has failed to comply with any laws relating to employment, including any provisions thereof relating to wages, hours, collective bargaining, the payment of social security and other payroll or similar taxes, equal employment opportunity, employment discrimination and employment safety, or that CTI is liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing except for routine non-material grievances. (b) There are no proceedings pending or, to the knowledge of CTI, threat ened before the National Labor Relations Board with respect to any employees of CTI. There are no discrimination charges (relating to sex, age, religion, race, national origin, ethnicity, handicap or veteran status) pending before any Federal or state agency or authority against CTI. SECTION 4.19. Insurance. CTI is a named insured under all policies --------- of fire, liability, workers' compensation, malpractice and professional liability and other forms of insurance providing insurance coverage to or for CTI. All premiums with respect to such policies covering all periods have been paid. No notice of cancellation or termination has 14 been received with respect to any such policy. All such policies are in full force and effect and will remain in full force and effect to and including the later to occur of the BMT Milestone Put Share Closing or the AML Milestone Put Share Closing, and coverage thereunder will continue to be in effect, without limit as to time, for occurrences prior to such closings. SECTION 4.20. Leases. All real property leased by CTI is used and ------ operated by CTI in material compliance and conformity with all applicable leases. CTI has not received notice of any material violation of any applicable zoning or building regulation, ordinance or other law, order, regulation or requirement relating to the respective real estate assets of CTI and, to the knowledge of CTI, there are no such material violations. SECTION 4.21. Personal Property. All tangible personal property, ----------------- fixtures and equipment comprising the assets of CTI are in a good state of repair (ordinary wear and tear excepted) and operating condition, in all material respects, and are sufficient and adequate to conduct its business on the date hereof. SECTION 4.22. Environmental. For the purposes of this Section 4.22, ------------- the following terms shall have the following meanings: "Environmental Law" means any federal, state, provincial or local ----------------- statute, law, ordinance, rule or regulation of the United States and any other jurisdiction within the United States now effective and any order, to which CTI is a party or is otherwise directly bound, of the United States or other jurisdiction within the United States now effective relating to: (a) pollution or protection of the environment, including natural resources; or (b) exposure of persons, including employees, to Hazardous Substances. "Hazardous Substances" means any substance, whether liquid, solid or -------------------- gas (a) listed, identified or designated as hazardous or toxic under any Environmental Law, (b) which, applying criteria specified in any Environmental Law, is hazardous or toxic, or (c) the use or disposal of which is regulated under Environmental Law. (a) No Hazardous Substances have been, or have been threatened to be, discharged, released or emitted into the air, water, surface water, ground water, land surface or subsurface strata or transported to or from the property of CTI except in accordance with Environmental Law and except for incidental release of Hazardous Substances in amounts or concentrations which would not reasonably be expected to give rise to any claims or liabili ties against CTI under Environmental Law. (b) CTI has not received any notification from a governmental agency that there is any material violation of any Environmental Law with respect to the business and properties of CTI and CTI has not received any notification from a governmental agency pursuant to Section 104, 106 or 107 of the Comprehensive Environmental Response 15 Compensation and Liability Act, as amended. SECTION 4.23. Improper Payments. (a) Neither CTI nor, to the ----------------- knowledge of CTI, any officer, director, employee or agent of CTI, nor any other person or entity acting on behalf of CTI, acting alone or together, has (i) received, directly or indirectly, any rebates, payments, commissions, promotional allowances or any other economic benefits, regardless of their nature or type, from any customer, governmental employee or other person or entity with whom CTI has conducted business activities directly or indirectly, or (ii) directly or indirectly, given or agreed to give any gift or similar benefit to any customer, governmental employee or other person or entity who is or may be in a position to help or hinder the business of CTI (or assist CTI in connection with any actual or proposed transac tion) which, under current law, in the case of either clause (i) or clause (ii) above, would reasonably be expected to subject CTI to any damage or penalty in any civil, criminal or governmental litigation or proceeding. (b) To the knowledge of CTI, no employee, officer or director of CTI, has been debarred under (S)306(a) or (S)306(b) of the Federal Food, Drug and Cosmetic Act or has, within the last five years, been convicted of (x) a criminal offense relating to the development or approval process of any drug product, or (y) a felony involving bribery, payment of illegal gratuities, fraud, perjury, false statements, racketeering, blackmail, extortion, falsification or destruction of records, or interference with, obstruction of an investigation into, or prosecution of, any criminal offense or a conspiracy to commit, aid or abet such felony. SECTION 4.24. Securities Laws. No person authorized by CTI as agent, --------------- broker, dealer or otherwise in connection with the offering or sale of the Shares, or any similar securities, has taken or will take any action (including, without limitation, any offer or sale of any securities under circumstances which would require the integration of such securities with the Shares being issued and sold hereunder under the Securities Act or the rules and regulations of the SEC thereunder), which would subject such offer and sale to the registration provisions of the Securities Act. SECTION 4.25. Brokerage. All negotiations relative to this --------- Agreement, and the transactions contemplated hereby, have been carried out by CTI directly with JJDC, without the intervention of any person on behalf of CTI in such manner as to give rise to any claim by any person against JJDC for a finder's fee, brokerage commission or similar pay ment. SECTION 4.26. Disclosure. This Agreement, and any other exhibits or ---------- schedules delivered in connection herewith or therewith do not contain any untrue statement of a material fact by CTI or omit to state a material fact necessary to the make the statements herein or therein by CTI in view of the circumstances under which they were made not misleading. 16 ARTICLE V REPRESENTATIONS AND WARRANTIES OF JJDC -------------------------------------- JJDC hereby represents and warrants to CTI as follows: SECTION 5.01. Legal Power. JJDC has, and will have at each Closing, ----------- the requisite corporate power and authority to execute and deliver into this Agreement, and to carry out and perform its obligations under the terms of this Agreement. SECTION 5.02. Due Execution. This Agreement has been duly ------------- authorized, executed and delivered by JJDC, and, upon due execution and delivery by CTI, this Agreement will be a valid and binding agreement of JJDC, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. SECTION 5.03. Investment Representations. -------------------------- (a) JJDC is acquiring the Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. (b) JJDC understands that (i) the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and, that such securities may not be sold, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (ii) each certificate representing the Shares will be endorsed with the following legends: A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT." B) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS, 17 INCLUDING RESTRICTIONS ON TRANSFERABILITY, OF THAT CERTAIN STOCK PURCHASE AGREEMENT, DATED AS OF NOVEMBER 7, 1996. A COPY OF SUCH STOCK PURCHASE AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO CELL THERAPEUTICS, INC. AT ITS PRINCIPAL PLACE OF BUSINESS"; and C) Any legend required to be placed thereon by CTI's By-laws or under applicable state securities laws; and (iii) CTI will instruct any transfer agent not to register the transfer of Shares (or any portion thereof) unless the conditions specified in the foregoing legends are satisfied. (c) JJDC has been furnished with such materials and has been given access to such information relating to CTI as it has requested, and JJDC has been afforded the opportunity to ask such questions of, and to receive answers from, CTI with respect to CTI and the Shares as it has found necessary to make an informed investment decision, and has determined that the Shares are a suitable investment. (d) JJDC is an investor in securities of companies in the development stage and acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. (e) JJDC recognizes that CTI has incurred substantial accumulated net losses to date and expects to continue to incur operating losses. JJDC also recognizes that an investment in CTI involves substantial risk and could afford a complete loss of such investment. (f) JJDC is not subscribing for the Shares as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or meeting. (g) JJDC is an "accredited investor" as such term is defined in Rule 501 of the General Rules and Regulations prescribed by the Commission pursuant to the Securities Act and was not formed for the specific purpose of acquiring the Shares. (h) JJDC acknowledges that CTI is entering into this Agreement in reliance upon JJDC's representations and warranties in this Agreement, including, without limitation, those set forth in this Section 5.03. 18 ARTICLE VI CONDITIONS TO CLOSING --------------------- SECTION 6.01. Condition to JJDC's Obligations at First Closing. The ------------------------------------------------ obligation of JJDC to purchase the Shares at the First Closing is subject to the fulfillment to JJDC's satisfaction on or before the First Closing of each of the following conditions: (a) Representations and Warranties. The representations and ------------------------------ warranties made by CTI in Article IV hereof shall be true and correct in all material respects (except for those qualified by materiality which shall be true and correct in all respects) on and as of the First Closing Date with the same force and effect as though such representations and warranties had been made on and as of the First Closing Date. (b) Performance. CTI shall have performed and complied in all ----------- respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the First Closing. (c) Qualifications. All authorizations, approvals, or permits, if -------------- any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares to JJDC pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the First Closing, and the sale and issuance of such Shares at the First Closing shall be legally permitted by all laws and regulations to which JJDC and CTI are subject. (d) Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated at the First Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to JJDC and JJDC's counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. (e) Collaboration Agreement. The Collaboration Agreement shall have ----------------------- been executed and delivered by CTI and shall be in full force and effect. (f) Opinion of Company Counsel. JJDC shall have received from counsel -------------------------- for CTI reasonably acceptable to JJDC an opinion or opinions addressed to JJDC in substantially the form attached hereto as Exhibit A dated the date of the First Closing. (g) Compliance Certificate. The Chief Executive Officer of CTI shall ---------------------- deliver to JJDC at the First Closing a certificate certifying on behalf of CTI that the conditions specified in Sections 6.01(a), (b) and (c) hereof have been fulfilled. SECTION 6.02. Condition to JJDC's Obligations at Subsequent Closings. ------------------------------------------------------ The obligation of JJDC to purchase the Shares at each Closing subsequent to the First 19 Closing is subject to the fulfillment to JJDC's satisfaction on or before such Closing of each of the following conditions. (a) Qualifications. All authorizations, approvals, or permits, if -------------- any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares to JJDC pursuant to this Agreement shall have been duly obtained and shall be effective on and as of such Closing, and the sale and issuance of such Shares at such Closing shall be legally permitted by all laws and regulations to which JJDC and CTI are subject. (b) Collaboration Agreement. The Collaboration Agreement shall be in ----------------------- full force and effect; provided, however, that in no event shall JJDC be -------- ------- obligated to purchase Shares hereunder with respect to which CTI's put rights pursuant to Sections 2.01, 2.02, or 2.03 shall not have been effective on or before the date of delivery by Ortho of notice of termination of the Collaboration Agreement pursuant to Article XIV thereof. (c) HSR Act. All waiting periods applicable to such Closing under the ------- HSR Act (including any extension thereof by reason of a request for additional information) shall have expired or been terminated and no action shall have been instituted, or shall be threatened or pending, by the United States Justice Department or the Federal Trade Commission (the "FTC") challenging or seeking to --- enjoin the consummation of the transactions contemplated at such Closing, which action shall not have been withdrawn or terminated. (d) Representations and Warranties. The representations and ------------------------------ warranties made by CTI in Section 4.01, 4.09 and 4.24 of Article IV hereof shall be true and correct in all material respects (except for those qualified by materiality which shall be true and correct in all respects) on and as of the date of such subsequent closing date with the same force and effect as though such representations and warranties had been made on and as of such date. (e) Performance. CTI shall have performed and complied with all ----------- agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the date of such closing. (f) Compliance Certificate. The Chief Executive Officer of CTI shall ---------------------- deliver to JJDC at such closing a certificate certifying on behalf of CTI that the conditions specified in Section 6.02(a) through (e) hereof have been fulfilled. (g) Opinion of Company Counsel. JJDC shall have received a bring-down -------------------------- to the Closing date of opinion number 8 specified on Exhibit A, from counsel for CTI reasonably acceptable to JJDC. SECTION 6.03. Conditions to CTI's Obligations at Each Closing. CTI's ----------------------------------------------- obligation to issue and sell the Shares at each Closing is subject to the fulfillment to CTI's 20 satisfaction on or prior to the date of such Closing of each of the following conditions, any of which may be waived by CTI: (a) Representations and Warranties True. The representations and ----------------------------------- warranties made by JJDC in Article V hereof shall be true and correct in all material respects on and as of the date of such Closing with the same force and effect as though such representations and warranties had been made on and as of the date of such Closing. (b) Qualifications, Legal Investment. All authorizations, approvals, -------------------------------- and permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Shares at such Closing pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the date of such Closing, and the sale and issuance of the Shares at such Closing shall be legally permitted by all laws and regulations to which JJDC and CTI are subject. (c) HSR Act. All waiting periods applicable to such Closing under the ------- HSR Act (including any extension thereof by reason of a request for additional information) shall have expired or been terminated and no action shall have been instituted, or shall be threatened or pending, by the United States Justice Department or the FTC challenging or seeking to enjoin the consummation of the transactions contemplated at such Closing, which action shall not have been withdrawn or terminated, provided that this condition shall not be applicable to -------- the First Closing. ARTICLE VII REGISTRATION OF COMMON STOCK; COVENANTS OF CTI ---------------------------------------------- SECTION 7.01. Definitions. Unless the context otherwise requires, ----------- the terms defined in this Article VII shall have the meanings herein specified for all purposes of this Agreement, applicable to both singular and plural forms of any of the terms herein defined. "Holder" of any security means the record or beneficial owner of such ------ security or any permitted assignee thereof. The terms "register," "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration for ordering of the effectiveness of such registration statement by the Commission. "Registrable Securities" means (i) the Shares (including, regardless ---------------------- of whether issued, all of the Shares to be issued under Article II, unless both CTI and JJDC otherwise agree), (ii) the Conversion Shares, and (iii) any Common Stock issued or issuable with 21 respect to the Shares by way of a stock dividend or stock split or in connection with a combination of shares, reclassification, recapitalization, merger or consolidation or reorganization, provided, however, that such shares of Common -------- ------- Stock shall no longer be treated as "Registrable Securities" if (A) they have been sold by a Holder in a transaction in which its registration rights under this Agreement are not assigned, (B) a registration statement with respect to the sale of such Registrable Securities shall have become effective under the Securities Act and such Registrable Securities shall have been disposed of in accordance with such registration statement, (C) such Registrable Securities shall have been sold to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (D) such Registrable Securities shall be eligible for sale by the holder thereof in a single transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Rule 144 thereunder, without compliance with any of the restrictions set forth in paragraphs (c), (e), (f) and (h) of Rule 144 (or any successor provision), (E) such Registrable Securities shall have been otherwise transferred, new certificates for such Registrable Securities not bearing a legend restricting further transfer shall have been delivered by CTI and subsequent disposition of such Registrable Securities shall not be subject to registration or qualification under the Securities Act or any state securities or blue sky law then in force, or (F) such Registrable Securities shall have ceased to be outstanding. SECTION 7.02. Registration Rights. (a) Subject to the provisions of ------------------- this Agreement, not later than the first to occur of (i) twelve (12) months after the final closing date of an initial public offering of the Common Stock of CTI to the general public covered by a registration statement under the Securities Act (the "IPO Closing Date"), (ii) September 30, 1998 and (iii) ---------------- concurrently with the registration of any Conversion Shares into which the Series A Preferred is convertible, CTI shall use its best efforts to effect the registration under the Securities Act of all Registrable Securities pursuant to one or more registration statements which may be required from time to time hereunder to effect the registration of all Registrable Securities; provided, -------- however, that a Holder may inform CTI in writing that it wishes to exclude all - ------- or a portion of its Registrable Securities from such registration. (b) Subject to the provisions of this Agreement (including but not limited to Sections 7.02(c) and (d)), but without limitation of CTI's obligation under 7.02(a) above, each time subsequent to the twelfth (12th) month after the IPO Closing Date that CTI shall determine to file a registration statement under the Securities Act (other than pursuant to Section 7.02(a) or (b) hereof and other than on Form S-4, S-8, or a registration statement on Form S-1 covering solely any employee benefit plan) in connection with the proposed offer and sale for money of any of its securities either for its own account, or on behalf of any other security holder, CTI agrees to give written notice of its determination to all Holders of Registrable Securities. Upon the written request of a Holder of any shares of Registrable Securities given within twenty (20) days after the receipt of such written notice from CTI, CTI agrees to cause all such Registrable Securities, the Holders of which have so requested registration hereof, to be included in such registration statement and to use its best efforts to cause such registration statement to become effective under the Securities Act, all to the 22 extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Securities to be so registered. (c) If the registration of which CTI gives written notice pursuant to Section 7.02(b) is for a public offering involving an underwriting, CTI agrees to so advise the Holders as a part of its written notice. In such event the right of any Holder to registration pursuant to Section 7.02(b) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting agree to enter into (together with CTI and the other Holders distributing their securities through such underwriting) an underwriting agreement with the underwriter or underwriters selected for such underwriting by CTI. (d) Notwithstanding any other provision of this Section 7.02, if the managing underwriter referred to in Section 7.02(c) advises CTI and the Holders of the Registrable Securities requesting participation in such registration in writing that in its good faith judgment the number of shares of Registrable Securities and the other securities requested to be registered under Section 7.02(b) exceeds the number of shares of Registrable Securities and other securities which can be sold in such offering, then (i) the number of shares of Registrable Securities so requested to be included in the offering shall be reduced to that number of shares which in the good faith judgment of the managing underwriter can be sold in such offering (provided, that in no event -------- shall the number of shares to be issued or sold by CTI or any other security holder of CTI participating in such offering pursuant to demand or "piggyback" registration rights entered into prior to the date hereof be reduced, which shares shall have priority over the Registrable Securities), and (ii) such reduced number of shares shall be allocated among all participating Holders of Registrable Securities sought to be included in such underwriting in proportion, as nearly as practicable, to the respective number of shares of Registrable Securities held by such Holders at the time of filing the registration statement, provided that any such exclusion or "cut back" of the Registrable -------- Securities sought to be included in such underwriting shall be made pro rata based on the proportion of the Registrable Securities requested to be included to the total shares of stock to be included in the registration (excluding shares to be issued or sold directly by CTI or any other security holder of CTI participating in such offering pursuant to demand or "piggyback" registration rights entered into prior to the date hereof which grant such holders priority over the Registerable Securities). SECTION 7.03. Registration Expenses. CTI shall pay all reasonable --------------------- registration expenses incurred in effecting the registration of Registrable Securities pursuant to this Article VII including, without limitation, all federal and state registration, qualification and filing fees, printing expenses, fees and disbursements of outside counsel for CTI, blue sky fees and expenses, and the reasonable expense of any special audits incident to or required by any such registration, but not including underwriting discounts, commissions and expenses, and not including fees and disbursements of outside counsel for the participating Holders. 23 SECTION 7.04. Registration Procedures. If and whenever CTI is ----------------------- required by the provisions of this Article VII to effect the registration of Registrable Securities under the Securities Act, CTI will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement which includes all Registrable Securities, other than any Registrable Securities excluded by holders pursuant to Section 7.02(a) or (b), and use its best efforts to cause such registration statement to become and remain effective until the distribution described in the registration statement has been completed (CTI agrees to provide each Holder with draft copies of such registration statement in advance of such filing); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective with respect to all Registrable Securities for the longer of (i) one hundred twenty (120) days after the date of the actual purchase of Registrable Securities by JJDC (ii) one hundred twenty (120) days after the expiration of the lock-up referred to in Section 8.01 of this Agreement and (iii) any period during which CTI shall keep any registration statement effective pursuant to any registration rights agreement to which CTI is a party as of the date hereof, and to comply with the provisions of the Securities Act with respect to the sale or other disposition of Registrable Securities covered by such registration statement whenever a Holder shall desire to sell or otherwise dispose of the same; (c) furnish to each participating Holder (and to each underwriter, if any, of Registrable Securities) such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under such state securities or blue sky laws of such jurisdiction as each participating Holder shall reasonably request and do any and all other acts and things which may be necessary under such securities or blue sky laws to enable such Holder to consummate the public sale or other disposition of the Registrable Securities in such jurisdictions, except that CTI shall not for any purpose be required to consent generally to service of process or qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) in the event that a registration involves an underwriting, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offer; (f) notify the participating Holders at any time when a prospectus relating to any Registrable Securities covered by such registration statement is required to be delivered under the Securities Act, of the happening of any event as a result of which the 24 prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and promptly file such amendments and supplements as may be necessary so that, as thereafter delivered to such Holders of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and use its best efforts to cause each such amendment and supplement to become effective; (g) notify the Holders of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose. CTI will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time; (h) furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Article VII, on the date such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Article VII, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing CTI for the purpose of such registration, in form and substance as is customarily given by counsel to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of CTI, in form and substance as is customarily given by independent certified public accountants to underwriters in any underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration for Registrable Securities; (i) use its best efforts to cause all such Registrable Securities to be listed on the principal securities exchange or market, if any, on which the Common Stock is then listed; and (j) make generally available to its security holders as soon as practicable. but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve (12) month period beginning not later than the first day of CTI's fiscal quarter next following the effective date of the Registration Statement. It shall be a condition precedent to the obligations of CTI to take any action pursuant to this Agreement with respect to each Holder that such Holder shall furnish to CTI such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of the 25 Registrable Securities and shall execute such documents in connection with such registration as CTI may reasonably request. SECTION 7.05. Indemnification. In the event Registrable Securities --------------- are registered pursuant to this Article VII. (a) To the extent permitted by law, CTI will indemnify and hold harmless each Holder of Registrable Securities which are included in a registration statement pursuant to the provisions of this Agreement and any underwriter (within the meaning of the Securities Act) with respect to the Registrable Securities, and each officer, director, employee and agent thereof and each person, if any, who otherwise controls such Holder or underwriter (within the meaning of the Securities Act), against any losses or claims, damages, expenses or liabilities, joint or several, to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or allegedly untrue statement of any material fact contained in the registration statement for the Registrable Securities, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or any document incident to the registration or qualification of any Registrable Securities, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading or any violation or alleged violation by CTI of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and, subject to Section 7.05(c), will reimburse such Holder, any underwriter, officer, director, employee, agent or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, -------- ------- that the indemnity agreement contained in this Section 7.05(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, expense, liability or action if such settlement is effected without the written consent of CTI, nor shall CTI be liable under this Section 7.05(a) to such Holder, such underwriter, officer, director, employee, agent or controlling person for any such loss, claim, damage, expense, liability or action to the extent that it arises out of, or is based upon, an untrue statement or allegedly untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and conformity with information furnished in writing expressly for use in connection with such registration by such Holder, such underwriter, officer, director, employee, agent or such controlling person. (b) To the extent permitted by law, each Holder of Registrable Securities which are included in a registration statement pursuant to the provisions of this Agreement will indemnify and hold harmless CTI, each of its employees, agents, directors and officers, each person, if any, who controls CTI within the meaning of the Securities Act, and any underwriter (within the meaning of the Securities Act) against any losses, claims, damages, or liabilities to which CTI or any such person or underwriter may become subject, under the 26 Securities Act, the Exchange Act or other federal or state law or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) arise out of, or are based upon any untrue or allegedly untrue statement of any material fact contained in a registration statement for the Registrable Securities, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or any document incident to the registration or qualification of any Registrable Securities, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or allegedly necessary to make the statements therein not misleading; in each case to the extent that such untrue statement or allegedly untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, or amendments or supplements thereto, in reliance upon and in conformity with information furnished in writing by such Holder expressly for use in connection with such registration; provided, however, that the indemnity agreement contained in this -------- ------- Section 7.05(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, expense, liability or action if such settlement is effected without the written consent of such Holder; and, subject to Section 7.05(c), such Holder will reimburse CTI or any such person or underwriter for any legal or other expenses reasonably incurred by CTI or any such person or underwriter in connection with investigating or defending such loss, claim, damage, liability, expense or action. (c) Promptly after receipt by an indemnified party under this Section 7.05 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 7.05, notify the indemnifying party in writing of the commencement thereof and generally summarize such action. The indemnifying party shall have the right to participate in and to assume the defense thereof and shall not be responsible for legal fees or costs incurred by any indemnified person thereafter; provided that an indemnifying party shall not have the right to -------- direct the defense of such an action on behalf of an indemnified party if such indemnified party has reasonably concluded that there may be defenses available to it that are different from or additional to those available to the indemnifying party and, in such event, the indemnifying party shall bear the fees and expenses of only one (1) separate counsel for all indemnified parties. The failure to notify an indemnifying party promptly of the commencement of any such action if prejudicial to the ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7.05, but the omission so to notify the indemnifying party will not relieve such party of any liability that such party may have to any indemnified party otherwise than under this Section 7.05. (d) To the extent permitted by law, the indemnification provided for under this Section 7.05, will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person (within the meaning of the Securities Act) of such indemnified party and will survive the transfer of any securities. 27 (e) If for any reason the foregoing indemnity is unavailable to an indemnified party, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expense (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other or (ii) if the allocation provided by claim (i) above is not permitted by applicable law, or provides a lesser sum to the indemnified party than the amount hereinafter calculated, in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. Notwithstanding the foregoing, no underwriter, if any shall be required to contribute any amount in excess of the amount by which the total price at which the securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. SECTION 7.06. Reports Under Exchange Act. With a view to making -------------------------- available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the Commission that may at any time permit a Holder to sell Registrable Securities to the public without registration, and with a view to making it possible for any such Holder to register the Registrable Securities pursuant to a registration on Form S-3, CTI agrees, at all times after the IPO Closing Date to: (a) make and keep public information available at all times, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of CTI under the Securities Act and the Exchange Act; and (c) furnish to a Holder owning any Registrable Securities upon request (i) a written statement by CTI that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, or that it qualifies as a registrant whose Registrable Securities may be resold pursuant to Form S-3 if it so qualifies, (ii) a copy of the most recent annual or quarterly report of any CTI and such other reports and documents filed by CTI with the Commission and (iii) any other information reasonably requested by such Holder to permit such Holder to sell shares of Registrable Securities pursuant to Rule 144 or any other rule or regulation under the Securities Act which permits the sale of securities without registration. SECTION 7.07. Transferability. The right to cause CTI to register --------------- Registrable Securities granted by CTI to the Holders under this Agreement may be assigned 28 by any Holder to a transferee or assignee of at least 25% of the outstanding Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, reclassification and consolidations), provided that CTI must -------- receive written notice prior to or at the time of said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such rights are being assigned. The limitations set forth in this Article VII with respect to registration rights shall apply to all transferees or assignees of Registrable Securities. SECTION 7.08. Termination of Registration Rights. The provisions of ---------------------------------- this Article VII (other than Section 7.05) shall terminate (i) upon the tenth anniversary of the date hereof or (ii) if earlier as to any Registrable Securities held by an individual Holder, at such time as all Registrable Securities held by such Holder can be sold in a single transaction, without compliance with the registration and prospectus delivery requirement of the Securities Act, pursuant to Rule 144 thereunder, without any restrictions as set forth in paragraphs (c), (e), (f) and (h) of Rule 144. SECTION 7.09. Limitations on Subsequent Registration Rights. From --------------------------------------------- and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 7.02(a) hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of the Registrable Securities of the Holder which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the date set forth in Section 7.02(a) or within 120 days of the effective date of any registration effected pursuant to Section 7.02(a). ARTICLE VIII LOCKUP; REPURCHASE RIGHT ------------------------ (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) SECTION 8.01. Lockup. JJDC agrees that during the time period ------ commencing as of the date hereof and ending on the earliest of ***** neither it nor any of its Affiliates (including Ortho and J&J) shall, directly or indirectly, sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to Affiliates who agree in writing to be similarly bound) any of the shares of Common Stock purchased by JJDC pursuant to this Agreement and owned beneficially or of record during such periods by JJDC or its Affiliates. In order to enforce the foregoing restrictions, CTI may impose stop- transfer instructions with respect to 29 (The information below marked by ***** has been omitted by a request for confidential treatment. The omitted portion has been separately filed with the Commission.) such shares during such periods. Nothing in this Section 8.01 shall limit JJDC's ability to sell any of its shares of CTI Common Stock pursuant to an effective registration statement covering the same or to tender or sell its shares of CTI Common Stock to a non-Affiliate third party in connection with a tender offer or any other transaction or series of related transactions in which a third party (including a "group" within the meaning of Section 13(d)(3) of the Exchange Act, but excluding any Affiliate of JJDC, including Ortho and J&J) acquires or becomes the beneficial owner of (i) more than ***** of the outstanding voting securities of CTI or the surviving entity, whether by merger, consolidation, reorganization, or other similar means, or (ii) all or substantially all of the assets of CTI; provided that in the case of any such -------- tender or sale, JJDC or one of its Affiliates shall contact CTI's Chief Executive Officer, President, Chief Financial Officer or Executive Vice President, Finance and Administration, by telephone a reasonable time (but not less than five (5) days in advance) of such tender or sale by JJDC or its Affiliates). JJDC will give CTI five days written notice of its first sale (or first sale order placed, regardless of whether executed) after a termination under clause (iii) above. ARTICLE IX MISCELLANEOUS ------------- SECTION 9.01. Publicity. The provisions of Section 10.06 of the --------- Collaboration Agreement with respect to publicity shall apply equally to this Agreement. SECTION 9.02. Successors and Assigns. Except as otherwise expressly ---------------------- provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. SECTION 9.03. Entire Agreement. This Agreement, the Collaboration ---------------- Agreement, any other agreements delivered concurrently herewith and the exhibits hereto and thereto, and the other documents delivered pursuant hereto and thereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. SECTION 9.04. Separability. In the event any provision of this ------------ Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 30 SECTION 9.05. Amendment and Waiver. Except as otherwise provided -------------------- herein, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of CTI and JJDC. Any amendment or waiver effected in accordance with this Section 9.05 shall be binding upon any holder of any securities purchased under this Agreement (including securities into which such securities have been converted), each future holder of all such securities, and CTI. SECTION 9.06. Notices. All notices hereunder shall be in writing and -------