Exhibit 10.1
HEADS OF AGREEMENT
Expanded Dermagraft Joint Venture
This Agreement is entered into effective as of January 14, 1998, by and
between Advanced Tissue Sciences, Inc., a Delaware corporation ("ATS"), and
Xxxxx & Nephew plc, a company organized under the laws of the United Kingdom
("S&N"), together with their respective Affiliates (ATS Dermagraft, Inc., a
California corporation, and Xxxxx & Nephew SNATS, Inc., a Delaware
corporation), with respect to the following facts:
RECITALS
A. ATS and S&N, through their Affiliates, have entered into certain
agreements, dated as of April 29, 1996, as follows:
1. Agreement of General Partnership of Dermagraft U.S., a Delaware
general partnership (the "U.S. Partnership Agreement").
2. Agreement of General Partnership of Dermagraft International, a
Delaware general partnership (the "International Partnership Agreement").
3. U.S. License Agreement (the "U.S. License Agreement").
4. International License Agreement (the "International License
Agreement").
5. U.K. License Agreement (the "U.K. License Agreement").
6. DermEquip, L.L.C. Agreements.
For convenience of reference, the above-referenced agreements collectively
shall be referred to as the "Dermagraft Agreements".
B. Certain capitalized terms used in this Agreement are defined to have
the meaning as specified on Exhibit A attached hereto and made a part hereof.
Other capitalized terms used in this Agreement are defined in the Dermagraft
Agreements.
C. The Dermagraft Agreements involve the development, manufacture,
marketing and sale of Dermagraft for the treatment of diabetic foot ulcers
(the "Subject Product").
D. As further described in this Agreement, ATS and S&N desire to expand
the scope of the Dermagraft Agreements (i) to add Subject Wound Care
Applications for Dermagraft (in
addition to diabetic foot ulcers), (ii) to include the ATS product known as
Dermagraft-TC (TM) for Subject Wound Care Applications, and (iii) to add Future
Products.
E. The parties intend this Agreement to be binding and enforceable on
the parties in accordance with the terms of this Agreement. The parties
understand and intend that amendments to or restatements of the Dermagraft
Agreements will be prepared subsequently for approval and signature by both
parties and their Affiliates, in order to further implement the parties'
agreements as set forth in this Agreement.
WHEREFORE, the parties hereto mutually agree to the following principal
terms and agreements:
1. S&N Purchase of ATS Stock.
-------------------------
a. S&N (directly or through an Affiliate) hereby agrees to
purchase from ATS, and ATS hereby agrees to sell to S&N (directly or through
an Affiliate), approximately 1,538,461 shares of ATS common stock (the
"Shares") [assuming $13.00 per share price], for an aggregate cash purchase
price of $20 million, payable in cash within three (3) business days after
the signing by both ATS and S&N of this Agreement. The exact number of the
Shares shall be determined by dividing into $20 million the average of the
last reported sale price per share of the ATS common stock on the Nasdaq
National Market for the nine trading days ending on the date of this
Agreement, using the last sale price for each of said nine days for determining
the average per share price. ATS and S&N each warrants and agrees for itself
and its Affiliates and directors and senior executives that they have not
bought, sold or otherwise traded any ATS shares since December 22, 1997 to the
date hereof, and that they have not done anything else outside the ordinary
course of business for the purpose of affecting said closing sale prices for
said nine trading days.
b. Promptly after the receipt by ATS of said $20 million cash
purchase price, ATS shall cause to be issued to S&N (or its Affiliate) a share
certificate evidencing the Shares. The Shares will not be registered with the
U.S. Securities and Exchange Commission ("SEC"), and the Shares will be
subject to applicable securities law restrictions on the transfer and sale of
the Shares.
c. S&N (or its Affiliate) represents that it is purchasing the
Shares for its own investment account. S&N (or its Affiliate) agrees that it
will not sell the Shares prior to the "Permitted Sale Date", which shall be
the earlier of (i) a Material Default by ATS or its Affiliates under the
Dermagraft Agreements, (ii) thirty (30) months after the date hereof, or
(iii) the occurrence of one or more of the specific material changes
specified on Exhibit B attached hereto, and then only after dissemination to
the public of information regarding such occurrence(s). After the Permitted
Sale Date, S&N (or its Affiliate) will be entitled to sell on the public market
any or all of the Shares only after the Shares have been registered with the
SEC, provided that after the Permitted Sale Date, and after two business days
prior written notice to ATS, the Shares may be sold by S&N (or its Affiliate)
pursuant to SEC Rule 144, in lieu of
-2-
being sold pursuant to a registration statement. S&N (or its Affiliate) shall
have one customary "demand registration right" pursuant to which ATS shall use
diligent efforts to register the Shares and keep the registration statement
effective until the Shares have been sold by S&N (or its Affiliate), and S&N
(or its Affiliate) shall have customary "piggy back registration rights",
subject to the customary underwriter's cut-back provision based upon market
demands for ATS Shares. At such time as S&N (or its Affiliate) is permitted
to sell some of the Shares, S&N (or its Affiliate) shall coordinate any
public market sale through an underwriting firm which is reasonably
acceptable to ATS.
d. S&N hereby acknowledges (i) that it is an "accredited
investor" within the meaning of Regulation D under the Securities Act of 1933,
and (ii) that it has such knowledge and experience in financial and business
matters that it is capable of evaluating, and that it has had the opportunity
to evaluate, the merits and risks of its investment in the Shares.
e. ATS hereby represents and warrants that its most recent
Annual Report on Form 10-K and most recent Quarterly Report on Form 10-Q as
filed with the SEC do not, as of their respective filing dates, contain any
untrue statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. S&N acknowledges receipt of a copy of ATS' most recent annual
report and quarterly report filed by ATS with the SEC.
f. ATS and S&N will enter into a customary Stock Purchase
Agreement to evidence this sale and purchase of the Shares.
2. Expanded Field of Use. The Dermagraft Agreements shall be
---------------------
modified to accomplish an expansion of the field of use for the ATS Technology
to include uses for the treatment of the Subject Wound Care Applications.
3. Expanded Products.
-----------------
a. The Dermagraft Agreements shall be modified to accomplish an
expansion of the products covered by the Dermagraft Agreements (to expand
beyond the Dermagraft product) to include the Dermagraft-TC product for use
for treatment of the Subject Wound Care Applications. The product name for
the Dermagraft-TC product shall be changed worldwide by mutual agreement to a
different name (e.g., "TransCyte").
b. Additionally, the Dermagraft Agreements shall be modified to
accomplish an expansion of the products covered by the Dermagraft Agreements
to include all Future Products for which the U.S. Partnership (and/or the
International Partnership) pays all of the future costs to develop, and ATS
shall not be entitled to receive any additional milestone payments for the
addition of such Future Products. The U.S. Partnership and the International
Partnership shall have the first priority right to develop and commercially
exploit each proposed Future Product.
-3-
c. With respect to any Excluded Product for which ATS pays the
costs of development, ATS shall be entitled to receive additional milestone
payments if such Excluded Product is later added to the Dermagraft Agreements.
Additionally, ATS (and its Affiliates) shall comply with the provisions in
Section 8.6.2(c) of the U.S. Partnership Agreement if the Excluded Product is
also a Competitive Product.
4. Marketing and Sales.
-------------------
a. Pursuant to the Dermagraft Agreements, and as part of the
business of the U.S. Partnership and the International Partnership,
Affiliates of S&N have exclusive responsibilities and rights for marketing and
selling the Subject Product (Dermagraft used for diabetic foot ulcers) on a
worldwide basis. The same shall be true for the expanded fields of use for
Dermagraft as set forth in Section 2 hereof for the Subject Wound Care
Applications, and for the Future Products which are added to the Dermagraft
Agreements. The same shall also be true for the Dermagraft-TC product which
is being added to the Dermagraft Agreements pursuant to Section 3 hereof, for
the Subject Wound Care Applications, except as specified in Section 4b
hereof. All of such marketing and selling activities shall be conducted in
accordance with, and subject to, the terms of the Dermagraft Agreements, as
amended.
b. ATS (or its designated Affiliates) shall retain the exclusive
right to market and distribute the Dermagraft-TC product for partial and full
thickness xxxxx in the United States. Until changes are made pursuant to
Section 10 hereof, the Dermagraft-TC product shall be manufactured by ATS (or
its Affiliate) and then sold and supplied to the International Partnership
and/or the U.S. Partnership, at a transfer price that reflects the full cost
of manufacture. Once changes are made pursuant to Section 10 hereof for the
U.S. Partnership (and/or the International Partnership) to acquire
manufacturing equipment and facilities from ATS, then the U.S. Partnership
(and/or the International Partnership) shall manufacture the Dermagraft-TC
product, and other fibroblast-based products, to be sold and supplied to ATS
(or its Affiliates) at a transfer price that reflects, at a minimum, the full
cost of manufacture.
5. Milestones. S&N (or an Affiliate of S&N) will pay or cause to be
----------
paid to ATS (or an Affiliate of ATS if so designated by ATS) either directly
or through the Dermagraft Partnerships created by the U.S. Partnership
Agreement and the International Partnership Agreement, the following milestone
payments:
a. $15 million cash on the earlier of (i) January 4, 1999, or
(ii) within five days after S&N receives documentary confirmation from ATS
that a PMA approval has been granted for selling Dermagraft for diabetic foot
ulcers in the United States.
b. $3 million cash within five days after S&N receives
documentary confirmation from ATS that a PMA approval has been granted for
selling Dermagraft for venous ulcers in the United States.
c. $3 million cash within five days after S&N receives
documentary confirmation from ATS of Medicare Coverage for the use of
Dermagraft for venous ulcers.
-4-
d. $5 million cash within five days after S&N receives
documentary confirmation from ATS that a PMA approval has been granted for
selling Dermagraft for pressure ulcers consistent with the patient population
covered by the protocol of the clinical trial (which shall include a majority
of patients with full thickness, stage III pressure ulcers).
e. $5 million cash within five days after S&N receives
documentary confirmation from ATS of Medicare Coverage for the use of
Dermagraft for pressure ulcers.
f. $10 million cash within thirty days after S&N receives
documentary confirmation from ATS that the net sales of Dermagraft-TC for
pressure ulcers for any consecutive twelve-month period has reached $50
million.
g. The existing milestone payments schedule set forth in the
Dermagraft Agreements provide, in general, for a $10 million milestone
payment when worldwide annual sales within any consecutive twelve-month period
(a "12-Month Period") of the Subject Product reach $100 million, and for an
additional $10 million milestone payment each time such sales for a 12-Month
Period are increased by another $100 million, for up to $50 million of
milestone payments when $500 million of worldwide sales for a 12-Month Period
are achieved. Said milestone payment schedule shall be modified to provide
that when the worldwide sales for a 12-Month Period for the Subject Product
and the Expanded Products reach $50 million, then a $5 million milestone
payment shall be made, with an additional $5 million milestone payment each
time worldwide sales for a 12-Month Period are increased by another $50
million for the Subject Product and the Expanded Products, up to a maximum of
$100 million of milestone payments when the worldwide sales for a 12-Month
Period of the Subject Product and the Expanded Products have reached $1
billion. The calculation of said worldwide sales for a 12-Month Period shall
include the aggregate, combined total Net Sales (as defined in the Dermagraft
Agreements) of the aggregate of the Subject Product and the Expanded
Products, made worldwide to third parties and/or to end users, by the U.S.
Partnership, the International Partnership, S&N and their Affiliates and
sublicensees, during any twelve consecutive months, but excluding ATS sales
in the United States for Dermagraft-TC as specified in Section 4(b) hereof.
At the election of S&N, the required milestone payments may be allocated and
paid by S&N (and its Affiliates) via the U.S. Partnership and the
International Partnership.
h. The existing milestone payments in the Dermagraft Agreements
(i) for $5 million for a PMA approval for Dermagraft for diabetic foot
ulcers, and (ii) for $5 million for Medicare Coverage for Dermagraft for
diabetic foot ulcers, shall remain in effect and be payable as stated in the
Dermagraft Agreements.
6. Funding Expenses for Clinical Trials. With respect to the
------------------------------------
expenses for conducting clinical trials and related regulatory support for the
use of Dermagraft and/or Dermagraft-TC, for the treatment of venous ulcers and
pressure ulcers indications, ATS (or its Affiliates) shall provide the cash
funds and bear the expense to pay the first $6 million of these expenses
incurred from and after January 1, 1998. Said $6 million of expenses shall be
specially allocated to ATS as an expense for accounting and tax reporting
purposes. In calculating said expenses, all reasonable and preagreed direct
and indirect costs shall be included and aggregated,
-5-
including general overhead costs reasonably and appropriately allocated for
conducting and supporting said clinical trials and related regulatory
support. All additional such expenses beyond the initial $6 million for
conducting said clinical trials shall be borne by the U.S. Partnership and
the International Partnership, with the Affiliates of ATS and S&N each bearing
a one-half share through said partnerships.
7. First Negotiation Rights.
------------------------
a. The parties acknowledge that gene therapy/delivery
applications for the Dermagraft product and/or the Dermagraft-TC product
constitute Excluded Applications and are not covered by this Agreement or the
Dermagraft Agreements. ATS hereby grants to S&N a first right of negotiation
with respect to any commercial or technical exploitation (including a sale,
partial sale, or partnering arrangement) which ATS (or its Affiliates or
sublicensees) may develop or pursue with respect to gene therapy/delivery
applications for the ATS Technology applicable for any Wound Care Applications
(except for Excluded Products). S&N shall have a ninety-day right of first
negotiation with respect thereto, commencing upon S&N receiving a written
notice (the "First Rights Notice") from ATS specifying in general terms (i)
the nature of the transaction, (ii) the structure of transaction and (iii)
the financial terms which ATS is willing to consider. This first right of
negotiation shall be for S&N to negotiate to pursue said gene
therapy/delivery applications in a venture with ATS (and not independent of
ATS) in a manner similar to the Dermagraft Agreements, or in such other
manner as may be mutually approved by both parties.
b. ATS shall not enter into any such commercial or technical
exploitation agreement with a third party for gene therapy/delivery
applications for the ATS Technology applicable for any Wound Care Applications
(except for Excluded Products) on terms more favorable to the third party than
were the terms specified by ATS in the most recent First Rights Notice given
to S&N.
c. ATS shall not give the First Rights Notice to S&N and ATS shall
not enter into any third party agreement as referenced in Section 7(b) hereof
until after thirty (30) months following the date hereof.
8. Competitive Products. The definition of "Competitive Product" in
--------------------
the Dermagraft Agreements (e.g., at Section 8.6.2(c) of the U.S. and
International Partnership Agreements) and this Agreement shall be revised to
read as follows with respect to the Expanded Products only (the definition
with respect to the Subject Product shall not change):
"Competitive product" for Expanded Products shall mean a
product (excluding Existing S&N Products) which is likely
to be in competition with the Expanded Products, and
"competition" for this purpose shall mean a biologically
active product, excluding growth factors, growth factor
substitutes, cytokines, enzymes, enzyme inhibitors, agents
for gene therapy, established or new synthetic chemical
entities, bio-materials and bio-material composites, and
also excluding any "Updated Existing S&N
-6-
Products" (as defined on Exhibit A-1 attached hereto), used
in the treatment of the Subject Wound Care Applications
(excluding diabetic foot ulcers)."
9. Failure to Commercialize. In addition to any other rights of ATS
------------------------
under any of the Dermagraft Agreements, in the event that S&N (or its
Affiliates) fails to use commercially reasonable efforts to pursue the
material components of the Business Plan for the U.S. Partnership and the
International Partnership, and such failure materially adversely affects the
business of the Partnerships, and which failure shall continue for a period of
six (6) months after written notice thereof from ATS, then ATS and S&N shall
mutually implement a cessation of the U.S. Partnership and the International
Partnership in accordance with Section 12.4.4 of the respective partnership
agreements (Mutual Cessation of Operations).
10. Business Reorganization. In order to more efficiently operate
-----------------------
and manage the expanded business of the International Partnership and the U.S.
Partnership with respect to the Expanded Products, as contemplated by this
Agreement, the parties shall pursue good faith discussions and analysis for
establishing revised organizational, operational, management, and facilities
structures, with a goal of having the business operations of the U.S.
Partnership and the International Partnership become closer to a "free
standing" business unit by no later than July 1, 1999. In this regard, the
parties shall consider transferring for value the facilities and equipment
used for the manufacture of the Dermagraft product and the Dermagraft-TC
product into said free standing business unit.
11. Press Release. Promptly following the execution of this Agreement
-------------
by the parties, ATS and S&N shall each issue a press release substantially
in the form as approved by both ATS and S&N.
12. Implementing Documents. The parties will pursue good faith
----------------------
negotiations and analysis to enter into amendments to the existing Dermagraft
Agreements, in order to implement and to carry out the purposes and intentions
of this Agreement. In the meantime, any conflict or inconsistencies between
the terms of this Agreement and the terms of the Dermagraft Agreements shall
be controlled by the terms of this Agreement.
13. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Delaware.
14. Arbitration. Any disputes arising with respect to this Agreement
-----------
shall be resolved through binding arbitration by a single, qualified
arbitrator selected from a list of three candidates furnished by the President
of the Health Industry Manufacturing Association ("HIMA"). If the President
of HIMA is unwilling or unable to provide a list of candidates, the candidates
shall be proposed by the American Arbitration Association ("AAA"), Chicago,
Illinois, from its Complex Dispute Panel. The arbitration proceedings shall
be conducted in accordance with the then current Commercial Rules of
Arbitration of the AAA, or in accordance with such other rules or procedures
as the arbitrator may specify. If the parties do not promptly select an
arbitrator, the
-7-
arbitrator shall be selected by AAA. The arbitration shall take place in
Chicago, Illinois, U.S.A. Each party shall bear all of its own arbitration
expenses, plus one-half of the arbitrator's fee.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date set forth above.
ADVANCED TISSUE SCIENCES, INC.
By: ____________________________________
XXXXX & NEPHEW plc
By: ____________________________________
ATS DERMAGRAFT, INC.
By: ____________________________________
XXXXX & NEPHEW SNATS, INC.
By: ____________________________________
-8-
EXHIBIT A
Definitions
"12-Month Period" means a period of any twelve consecutive months.
"Affiliate" means (i) any entity directly or indirectly controlling,
controlled by, or under common control with another entity, (ii) any person
or entity owning or controlling 50% or more of the outstanding voting
securities of an entity, or (iii) any officer, director or partner of an
entity. "Control" means the possession of the power to direct or cause the
direction of the management and the policies of an entity, whether through
the ownership of a majority of the outstanding voting securities or by contract
or otherwise.
"ATS Technology" means ATS patented technology and related technology,
know-how, methods, procedures and licenses for developing and selling cell
based and/or tissue engineered, three-dimensional tissues on biocompatible
matrices, to the extent said technology is useful for the Subject Wound Care
Applications. The patent rights from which the ATS Technology is derived are
listed on Exhibit B attached to the U.S. License Agreement. The ATS
Technology shall include all U.S. divisions, continuations, reissues and
extensions which are derived from the patents and patent applications
pertaining to the technology, patents and applications listed on said Exhibit
B. The ATS Technology available for use pursuant to this Agreement is limited
to the Subject Wound Care Applications.
"Dermagraft(R)" means the ATS dermal tissue replacement product which is
formulated through the ATS Technology.
"Dermagraft Agreements" means the agreements described in Recital A above.
"Dermagraft-TC(TM)" means the ATS human fibroblast-derived temporary skin
substitute product which is formulated through the ATS Technology.
"Excluded Applications" means the use of ATS Technology (including
Dermagraft and/or Dermagraft-TC) for (i) injectible collagen, (ii) gene
therapy/delivery, (iii) dental applications, (iv) cosmetic surgery for the
enhancement of normal tissue (but not the treatment of skin tissue defects or
post-surgical or post-trauma skin tissue rehabilitation), and (iv) ostomy
applications.
"Excluded Products" means Future Products for which both the U.S. Partner-
ship and the International Partnership decides to decline to pay the future
costs to develop, and ATS then pays the costs to develop.
"Expanded Products" means (i) the Dermagraft product used for treatment
of all Subject Wound Care Applications, except for diabetic foot ulcers, and
(ii) the Dermagraft-TC product used for treatment of all Subject Wound Care
Applications, and (iii) Future Products.
-9-
"First Rights Notice" is defined in Section 7 hereof.
"Future Products" means all products (beyond the Dermagraft product and
the Dermagraft-TC product) developed from the ATS Technology for use in the
Subject Wound Care Applications, including products already in the course of
development as of the date hereof (other than Excluded Products).
"Medicare Coverage" means that the product is reimbursable by the United
States Medicare program, following the general concepts as specified in the
Dermagraft Agreements to the extent applicable.
"Permitted Sale Date" is defined in Section 1(c) hereof.
"PMA" means a Pre-Market Approval application submitted to the United
States Food and Drug Administration.
"SEC" is defined in Section 1(b) hereof.
"Subject Product" means Dermagraft used for the treatment of diabetic
foot ulcers.
"Subject Wound Care Applications" means all Wound Care Applications
except for the Excluded Applications and the Excluded Products.
"Wound Care Applications" means applications of the ATS Technology
(e.g., Dermagraft, Dermagraft-TC and Future Products) for the medical care and
treatment of skin tissue wounds on humans. Without limiting the generality of
the foregoing, Wound Care Applications includes diabetic ulcers, pressure
ulcers, venous ulcers, xxxxx (partial thickness and full thickness), cosmetic
surgery for skin tissue defects or post-surgical or post-trauma skin tissue
rehabilitation (but not cosmetic surgery for the enhancement of normal skin
tissue (e.g., chemical peels and laser resurfacing) and ostomy applications.
-00-
XXXXXXX X-0
(Section 8)
Updated Existing S&N Products
1. Those Existing S&N Products as defined in the U.S. Partnership
Agreement at Section 8.6.2(c).
2. Those products which S&N and its Affiliates (i) currently are selling
as of January 14, 1998, as more fully described on Schedule 1 to be delivered
to ATS within the next 30 days, or (ii) as of January 14, 1998, have been the
subject of an active research and development project, as demonstrated by
historical laboratory, clinical, developmental, financial or other records of
S&N and its Affiliates.
-11-
EXHIBIT B
Definition of Material Changes
(Section 1c)
1. ATS publicly announces a proposed merger of ATS with another company,
pursuant to which the former shareholders of ATS will own less than 75% of the
combined voting equity of the merged entity.
2. ATS sells its voting equity stock to a party such that the party (and
its Affiliates) owns more than 25% of all of the ATS voting equity stock.
3. ATS sells a component or components of the ATS business over a
rolling 12-month period for consideration in excess of 33% of the total ATS
market capitalization at the time of the public announcement of the sale. (A
licensing transaction for a strategic alliance in which ATS will continue to
be involved is not a sale for purposes of this section.)
4. The termination of either Xxxxxx X. Xxxxxxxxx or Xxxx X. Xxxxxxxx as
executives of ATS, without a mutually acceptable replacement executive being
hired by ATS, with S&N's acceptance (or disapproval) to be given based upon
S&N's good faith and reasonable discretion.
5. The share price for ATS common stock falls below $6.00 for two
consecutive days, as shown on last reported sale for the day on the Nasdaq
National Market.
6. The ATS Board of Directors decides, and makes a public announcement
of said decision, to make a fundamental change in the business of ATS such
that ATS' focus is no longer principally in the area of human tissue
engineered products.
