AMENDMENT NO. 3 TO XYREM SUPPLY AGREEMENT

EXHIBIT 10.40

AMENDMENT NO. 3

TO

XYREM SUPPLY AGREEMENT

THIS AMENDMENT NO. 3 dated this 21st day of March, 2005 (this “Amendment”) to Xyrem Supply Agreement dated June 30, 2000 by and between Orphan Medical, Inc., a Delaware corporation (“ORPHAN”), and DSM Pharmaceuticals, Inc. (formerly, Catalytica Pharmaceuticals, Inc.), a Delaware corporation (“DSM”):

W I T N E S S:

WHEREAS, ORPHAN and DSM have previously executed the Xyrem Supply Agreement, dated June 30, 2000, as amended by Amendment No. 1 dated November 9, 2000, and Amendment No. 2 dated August 19, 2002 (collectively, the “Agreement”); and

WHEREAS, DSM and ORPHAN desire to amend the Agreement as set forth in this Amendment;

NOW, THEREFORE, for and in consideration of the premises, the respective commitments and undertakings of ORPHAN and DSM set forth in this Amendment, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, ORPHAN and DSM hereby agree as follows:

1. Unless otherwise defined in this Amendment, capitalized terms used in this Amendment shall have the meanings ascribed to them in the Agreement.

2. Effective as of the date of this Amendment, the Product Price and package configurations shall be as set forth in Appendix D to this Amendment, which Appendix D shall supersede Appendix D to the Agreement, and Appendix D to Amendment No. 2 to the Agreement, in all respects.

3. Section 4.2 of the Agreement shall be amended to read, in its entirety, as follows:

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4.2 Manufacture and Supply

During each Contract Year of this Agreement, and subject to the provisions of Section 7.2 hereof as well as other provisions herein, ORPHAN agrees to purchase all of its requirements for the Product in the Territory from DSM, but no less than the minimum quantities of Product indicated below:

Year		ORPHAN’s Minimum Purchase Quantity
2006		120,000 bottles
2007		120,000 bottles
2008		80,000 bottles

DSM shall manufacture the Product in accordance with the Specifications and applicable cGMP requirements, and shall package, label, and/or otherwise prepare the Product for bulk delivery to an ORPHAN-designated distribution site.

4. Section 5.1, “Forecasts”, of the Agreement shall be amended in its entirety and shall hereafter read as follows:

5.1 Forecasts.

5.1.1 Long Term Forecast. Within thirty (30) days after the Effective Date, of this Amendment, ORPHAN shall deliver to DSM a non-binding three (3) year forecast of Orphan’s quantity requirements for each Commercial Product and for each Contract Year during the Term (the “Long Term Forecast”). The Long Term Forecast shall thereafter be updated every six (6) months (as of June 1 and December 1) during the Term of this Agreement. If DSM is unable to accommodate any portion of the Long Term Forecast, it shall notify ORPHAN and the Parties shall agree on any revisions to the forecast.

5.1.2 Monthly Forecast. ORPHAN shall submit to DSM a written non-binding estimate of its monthly requirements for each Product for each of the next succeeding eighteen (18) months (the “Monthly Forecast”). The Monthly Forecast shall be updated monthly on the third (3rd) business day of the month, on an eighteen (18) month rolling basis. If DSM is unable to accept (i) quantities stated for any new month in the Monthly Forecast, or (ii) quantities in excess of previously forecasted quantities (collectively, the quantities in (i) and (ii) referred to as “Additional Quantities”), then DSM shall notify ORPHAN in writing within five (5) calendar days after receipt of the Monthly Forecast; otherwise such Additional Quantities shall

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be deemed to have been approved and accepted by DSM. The Parties shall negotiate in good faith to resolve any issues in respect of the Additional Quantities, which DSM is unable to accept for any month(s) stated in the Monthly forecast, according to DSM’s available capacity.

5.1.3 Firm Purchase Commitment. The forecast of the most current six (6) month period from the monthly Forecast required under section 5.1.2 shall always constitute a binding firm purchase commitment (the “Firm Purchase Commitment”) which shall state in detail the quantities of Products ordered and the required delivery dates, and shall be binding on the Parties regarding Products to be purchased. The forecast for the remaining twelve (12) month period of the Monthly Forecast is for planning purposes only and shall not constitute a commitment to purchase or supply Product. In the event that ORPHAN does not ultimately purchase the forecast quantities for the Firm Purchase Commitment period, it shall be obligated to pay to DSM for any deficient quantities on the basis of the Product Price, less cost of materials which were, otherwise not utilized by DSM for production of Product as the result of Orphan’s failure to purchase the required quantities. However, if DSM is unable for any reason other than, the failure of Orphan’s designated vendors to provide API and/or Excipients, to supply the Firm Purchase Commitment to ORPHAN, ORPHAN shall not be obligated to pay for that portion of the Firm Purchase Commitment which DSM could not deliver. As of the end of each calendar year hereunder, if ORPHAN has failed to purchase the minimum annual quantity as set forth in Section 4.2, it shall likewise pay DSM for any deficient quantities on the basis set forth above in this Section 5.1.3.

5. Section 5.5 of the Agreement, Purchase Quantities, shall be amended to read, in its entirety, as follows:

5.5 Purchase Quantities. Each purchase order shall specify the quantity of units of Product being ordered. Quantities actually shipped pursuant to a given purchase order may vary from the quantities reflected in such purchase order by up to ten percent (10%) and still be deemed to be in compliance with such purchase order, provided however, that ORPHAN shall only be invoiced and required to pay for the quantities of Product which DSM actually ships to ORPHAN.

6. Section 6.2, Supply By DSM: This section is deleted in its entirety.

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7. Section 6.3, “Manufacturing Loss”: Financial liability related to API loss shall no longer be governed by Section 6.3. Financial liability shall be governed by section 10.5, as amended by this Amendment.

8. Section 7.3, “Annual Price Adjustment Notification”, as referenced in Amendment 2 and the Agreement, shall be amended and hereafter read as follows

7.3 Product Price Adjustments. The Product Price, as specified on Appendix D, shall be subject to adjustment from time to time as follows:

(a) The conversion component of the Product Price, as set forth on Appendix D, shall be adjusted as of January 1 of each calendar year beginning January 1, 2006, and shall be equal to the conversion component of the Product Price for the prior calendar year, increased by a percentage amount equal to the percentage increase in the Producer Price Index for Finished Goods, Pharmaceutical Preparations, Ethical (Prescription), series code PCU-2834 #1, issued by the Bureau of Labor Statistics, U.S. Department of Labor, or comparable successor index, during the twelve (12) month period ending with the most recent month for which published monthly statistics are available as of the first day of such new price year (“PPI”). Increases in the conversion component Product Price pursuant to this Section 7.3(a) shall become effective as of January 1 of each calendar year for all shipment of Product during each such year.

(b) The materials component of the Product Price shall also be subject to adjustment from time to time as follows:

(i) Effective as of January 1, 2006 and each calendar year thereafter, the materials component may be increased by DSM by the amount of (A) the increase in costs incurred by DSM to third party suppliers for materials incorporated into the Product over the cost of such materials to DSM in the prior Contract Year, plus (B) a margin/overhead factor equal to twenty-five percent (25%) of such cost increase. DSM shall provide ORPHAN with written notification of any increase in the materials component of the Product Price at least sixty (60) days prior to the start of the calendar year to which such increase applies. ORPHAN shall have the option, upon reasonable notice to DSM, to appoint an independent financial auditor to verify the price increase; and DSM shall make available to the auditor appropriate documentation substantiating DSM’s cost increase. The auditor shall be subject to the confidentiality requirements of Article 14 and shall only disclose to ORPHAN the auditor’s opinion as to whether or not the price increase is consistent with the documentation of increased material costs. If there is any disagreement with respect to any price increase, the dispute shall be resolved in accordance with Article 18.

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(ii) Notwithstanding the provisions of subpart (i), if, during any calendar year, DSM experiences an increase in the aggregate cost of the Materials incorporated into the Product of more than ten percent (10%) from the start of such calendar year, then DSM shall be entitled to increase the Materials component of the Purchase Price during such calendar year upon sixty (60) days prior written notification by utilizing the protocol set forth in subpart (i).”

9. Section 10.5, “Limitation of Liability and Claims, is deleted in its entirety and hereafter shall read as follow:

10.5 Limitation of Liability. Notwithstanding the foregoing warranties and representations and the further obligations of the Parties hereunder, in no event shall either Party be liable to the other Party for incidental, indirect, special, consequential or punitive damages, including without limitation any claim for damages based upon lost profits or lost business opportunity. Except for the obligations of indemnity as set forth in this Article 10 with respect to (i) claims for personal injury, illness or death resulting from use of or exposure to a Product supplied hereunder, and (ii) claims of patent infringement, which are not subject to the following limitation, aggregate damages for which either Party shall be liable to the other hereunder, including without limitation costs of API yield loss and/or rejected lots, shall not exceed, with respect to Product purchased and delivered during any Contract Year hereunder, (x) fifty percent (50%) of the aggregate revenues received from ORPHAN hereunder during such Contract Year or (y) two million dollars ($2,000,000), whichever is less. The foregoing limitations shall not apply if the damages otherwise subject to limitation result from gross negligence or willful misconduct.

10. Section 15.1 of the Agreement shall be amended in its entirety and shall hereafter read as follows:

15.1 Unless sooner terminated pursuant to Article 16 below, the initial term of this Agreement shall commence on the Effective Date and end on July 31, 2005. Thereafter, this Agreement shall continue in force and effect for an additional three (3) year term, ending on July 31, 2008 unless terminated earlier pursuant to Article 16 below.

11. Section 16.1 of the Agreement shall be amended by adding the following as a new Subsection (d):

(d) If either party, for any reason, elects to terminate this Agreement, in which case such party shall provide written notice thereof no less than twelve (12) months prior to the effective date of such termination.

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12. Section 16.3(b) of the Agreement (formerly Section 16.2(b)) shall be amended by restating the lead-in clause of section 16.3(b) to read as follows:

“Other than termination by ORPHAN pursuant to Section 16.1(a) or Section 16.2 hereof, or termination by DSM pursuant to Section 16.1(d). . .”

13. The Agreement shall otherwise continue in force and effect according to its terms as herein amended; and the Agreement is hereby ratified and confirmed in all respects by each of DSM and ORPHAN as a legally enforceable agreement between them.

{Signatures on following page}

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IN WITNESS WHEREOF, each of DSM and ORPHAN has caused this Amendment No. 3 to be executed by a fully authorized corporate officer as of the date first set forth above.

ORPHAN MEDICAL, INC.
By:		/s/ Dayton X. Xxxxxxx
		Dayton X. Xxxxxxx, Ph.D., RAC
		Vice President of Regulatory Affairs
DSM PHARMACEUTICALS, INC.
By:		/s/ Xxxxxxx X. Xxxxxx
		Xxxxxxx X. Xxxxxx
		Chief Marketing Officer

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APPENDIX D

Product Commercial Pricing

Batch Price: Domestic Bulk Packaging

Description		Price
<300,000 units per year		$	3.99

Batch Price: Export Bulk Packaging

Description		Price
<300,000 units per year		$	3.96

Assumptions for Bulk Packaging (Domestic and Export):

1. Commercial price includes manufacturing, filling, and release requirements. The price includes bottle, cap, label, shipper and shipper label only

2. Assumes quarterly campaigns.

3. Assumes a three batch campaign minimum. Each additional campaign of 1 or more batches will carry a $15,500 set up charge.

4. Price does not include API. API to be supplied by ORPHAN Medical.

Batch Price: Domestic Current Package Configuration

Description – DSM Item #611		Price
Commercial Xyrem, < 300,000 per year		$	6.60

Assumptions:

1. Currently approved package and product specifications.

2. Assumes quarterly campaigns.

3. Assumes a three-batch campaign minimum. Each additional campaign of one or more batches will carry a $15,500 set up charge.

4. DSM will not package this package configuration after July 31, 2005.

5. The terms and conditions of this Amendment and the Agreement do not apply to any request (Purchase Order and/or Forecast) for this product configuration received by DSM after May 1, 2005.

6. This price expires July 31, 2005.

Batch Price: Domestic New Terms

Description		Price
120,000 units		$	8.10

Assumptions:

1. Commercial price includes manufacturing, filling, and release requirements. The price includes all primary and secondary components except for vial 20 dram and cap 20 dram.

2. Assumes quarterly campaigns.

3. Assumes a three-batch campaign minimum. Each additional campaign of 1 or more batches will carry a $15,500 set up charge.

4. Increased cost of combined carton and inserts, not included. Pricing will be amended when carton cost is available.

5. Assumes 3-year contract, beginning August 2005