Simultaneously with the tender offer by Ciba (see Section V.E), Ciba and Chiron entered into the following agreements:
a) Investment Agreement;
b) Governance Agreement;
c) Subscription Agreement;
d) Cooperation and Collaboration Agreement;
e) Market Price Agreement;
f) Registration Agreement; and
g) Confidentiality Agreement [not filed with the SEC].
So long as Ciba owns at least 30% of Chiron's voting stock, Chiron and Ciba shall be the preferred partners of each other in the areas of Modern Health Care Products and related techniques and shall encourage programs to strengthen each other's scientific strengths and capabilities. Initially, the parties shall negotiate in good faith regarding a strategic research and development collaboration in the field of combinatorial chemistry for the purpose of discovering new pharmaceutically active compounds and/or significant pharmaceutical uses for existing compounds (see also Section I.W).
"Modern Health Care Products" shall mean (i) biopharmaceuticals, (ii) other pharmaceutical products discovered, developed, acquired or manufactured using biotechnology processes, medical chemistry and/or new biologies and (iii) any other products which fall within Chiron's Strategic Mission, but shall not include ophthalmic surgical device products (see Section I.W).
B. Research Period:
5 years (see Section I.C.)
C. Cost Sharing & Reimbursement Basis:
The parties shall negotiate the definitive terms of a Research and Development Support Agreement (collectively the "R&D Venture") including the following terms:
i) during the period from 1/1/95 to 12/31/99, Chiron shall be entitled to present from time to time proposals for research and development programs ("R&D Programs");
ii) Ciba will fund its share of all development costs of R&D Programs, which shall be 100%, or such lessor amount as the parties may agree, subject to the following limitations:
a) in no event shall Ciba be obligated to provide funding in any calendar year in an amount in excess of (x) $75 million in 1995 and (y) for calendar years thereafter, in equal annual portions of the remaining unexpended aggregate amount under (b) below; and
b) in no event shall (x) the aggregate amount of funding provided by Ciba less (y) the aggregate amount of any payments to or profits paid or earned by Ciba in connection with any product(s) developed in the R&D Venture at any time during the Funding Period exceed $250 million; provided, however, that such amount may be increased up to $300 million in consideration of a reduction in the Maximum Borrowing Amount at the rate of $1.00 of increased research and development funding for each $1.50 reduction of the Credit Facility (see Section I.K).
[In 9/95, the parties entered into a Research Support and Marketing Agreement to implement such R&D Venture through a newly organized corporation (Newco) relating to all Adult Vaccines in North America and such other projects as may be agreed by the parties--see separate analysis.]
[See also Section IV.F with respect to Chiron's right to buyout the R&D Venture.]
[In 12/99, the parties entered into an amendment to increase the aggregate maximum amount of funding provided by Novartis from $250 million to $265 million.]
D. Upfront Payment:
Equity only (see Section V.A).
E. Benchmark Amounts:
NA
F. Technology Acquisition Fees:
NA
G. Payment Schedule:
See Section I.H.
H. Budgets:
Based upon the annual budgets prepared by Chiron (which budgets shall be subject to periodic review and adjustment by Chiron in consultation with Ciba) for the R&D Venture, Ciba shall make monthly payments on the first day of each month for its portion of Development Costs estimated to be incurred by Chiron.
Within 30 days after the end of each calendar quarter, Chiron shall prepare and deliver to Ciba a summary of the actual Development Costs incurred by Chiron and a reconciliation with the estimated monthly payments by Ciba during the calendar quarter.
I. Reimbursement Start Date:
NA
J. Regulatory Filings:
NA
K. Special Capital Requirements
Ciba shall issue to a bank selected by Ciba a guarantee for Chiron whereby Ciba shall guarantee the obligations of Chiron under a revolving credit facility (the "Credit Facility"). The principal amount that may be outstanding at any time is $425 million (the "Maximum Borrowing Amount"), except that the Maximum Borrowing Amount shall be reduced by $1.50 for each $1.00 in additional funding (up to $50 million in such additional funding) requested by Chiron under the Research and Development Agreement (see Section I.C).
Chiron may not borrow or reborrow any amounts under the Credit Facility after the 5th anniversary of the Closing unless the parties otherwise agree. All principal and interest shall be repaid in equal quarterly installments between the 5th and 8th anniversaries of the Closing. Ciba's guarantee shall terminate on the 8th anniversary or earlier if Chiron's debt shall be rated "Investment Grade."
On 1/1/95, Ciba Corning Diagnostics (CCD ) and Ciba executed a promissory note in the amount of $56,084,000 whereby CCD shall loan such amount to Ciba, due on 1/1/2000 (Note). The interest rate per annum on the outstanding balance of this Note shall be (i) the weighted average interest rate for all outstanding loans to Chiron under the Credit Facility or (ii) a floating rate of LIBOR plus 0.20% if there are no loans outstanding.
On 3/24/95, Ciba and Chiron entered into (i) a Revolving Credit Agreement [not filed with the SEC] and (ii) a Reimbursement Agreement whereby Chiron agrees to reimburse Ciba for all reasonable out-of-pocket costs incurred by Ciba in connection with the guarantee.
L. Patent Ownership:
Chiron shall own any new inventions developed solely by it in connection with the R&D Venture.
M. Patent Filing Costs:
NA
N. Patent Defense Costs:
NA
O. 3rd-Party Patents:
NA
P. Non-Compete Provisions:
In no event shall either party enter into any material research and development collaboration related to Chiron's Strategic Mission with any third party if such third party's only material contribution to the collaboration is expected to be funding, unless such party has first offered the other party the opportunity to enter into such collaboration on the same terms as such third party. The restrictions shall not apply to collaborations with non-commercial sources of funding, including grants; nor shall it apply to financing arrangements with third parties in which the consideration to the third party is the return on financing, e.g., SWORD financing.
Chiron's Strategic Mission is to become a world-leading, fully-integrated, technology-based health care company using biotechnology and other emerging technologies (including medicinal chemistry, combinatorial libraries, ophthalmic medications, devices and treatments).
[See also Section I.W.]
Q. Publications:
No provision
R. Core Technology:
Each owns its own.
So long as Ciba owns at least 30% of Chiron's Voting Stock, in the event that either party reasonably requests the assistance of the other party in connection with a project, then the other party shall provide such assistance. If the parties agree, such assistance may include access to intellectual property of the other party upon commercially reasonable terms.
S. Cancellation Amounts:
Chiron shall pay to Ciba a fee of $5 million, payable as partial reimbursement of Ciba's out-of-pocket expenses:
i) if the Investment Agreement is terminated pursuant to b) in Section I.T; or
ii) if (x) at any time on or after the date of the Investment Agreement until one year following any termination of the Investment Agreement, any person other than Ciba shall have acquired Chiron, all or substantially all its assets or more than 33-1/3% of the shares then outstanding, and (y) (a) on or after the date of the Investment Agreement and prior to the expiration of the Offer, any person shall have made a takeover proposal, (b) the Offer shall have remained open until the scheduled expiration date immediately following the date such takeover proposal was first publicly announced and (c) the Agreement shall have been terminated.
Chiron shall pay an additional $50 million concurrently with the consummation of (i) any transaction pursuant to an agreement entered in accordance with a takeover proposal by a third party, (ii) any other transaction within the definition of a "takeover proposal" that is consummated at any time on or after the date of the Investment Agreement until one year following any termination of the Agreement or (iii) any other transaction with respect to which the $5 million fee is paid.
T. Termination:
The Investment Agreement may be terminated at any time prior to the Closing as follows:
a) by mutual written consent of the parties;
b) by either party if as a result of the failure of any of the conditions to the Offer;
c) by Ciba if any of the conditions to the obligations of Ciba with respect to the Closing shall have become incapable of fulfillment, and shall not have been waived by Ciba;
d) by Chiron if any of the conditions to the obligations of Chiron with respect to the Closing shall have become incapable of fulfillment; or
e) by Chiron in connection with entering into a definitive agreement of a takeover proposal made by a third party.
U. Product Reversion:
NA
V. Change in Control:
Shall not be assignable without the prior written consent of the other party, except to any of its wholly owned subsidiaries.
W. Options/Other:
So long as Ciba owns at least 30% of Chiron's voting stock, if at any time either party ("Proposing Party") desires to pursue a collaboration regarding a research and/or development project with the other party ("Non-Proposing Party"), then the parties shall negotiate exclusively with each other regarding the terms of proposed collaboration for a period of 90 days, subject to the following:
a) If Non-Proposing Party concludes that the proposal is overly-broad such that it interferes with the ability of the Non-Proposing Party to pursue a newly discovered opportunity, then the Non-Proposing Party shall so inform the Proposing Party and the two shall reasonably narrow the scope of the proposal.
b) The Non-Proposing Party shall have the right to decline immediately and terminate the collaboration negotiation period if the proposal would infringe any obligations of the Non-Proposing Party to any third party.
c) In the event that, prior to receipt of the proposal, the Non-Proposing Party has commenced and is continuing negotiations with a third party with respect to matters which would be covered by the proposal, the Non-Proposing Party agrees to consider the proposal in good faith, but shall not have any obligation to delay the third party negotiations.
d) The negotiation period shall be extended for an additional 90 days as the parties shall mutually determine.
After the expiration of such negotiation period, neither party shall be restricted from discussing or negotiating with any person, or entering into any agreement, regarding the applicable collaboration which was the subject of such collaboration negotiation period.
At Chiron's request, Ciba shall negotiate with Chiron in good faith regarding the terms on which Ciba shall provide Chiron with access to Ciba's biotechnology and pharmaceutical development compounds, excluding those (i) that are currently under active development by Ciba, (ii) that Ciba has determined in good faith to reserve for development on its own, or (iii) with respect to which Ciba is contractually restricted from providing access to Chiron.
2. Product License(s)
A. License Holder/Type:
So long as Ciba owns at least 30% of Chiron's voting stock, with respect to each Modern Health Care Product (see Section I.A), the Non-Developing Party (see Section I.W) will be the preferred, and if the parties agree, the exclusive marketing and distribution channel for any Market Category (territory, disease category, customer group, etc.) in which the Developing Party determines not to market such Modern Health Care Product by itself, unless a third party has a contractual right to market and distribute such Modern Health Care Product in such Market Category or the Non-Developing Party is not competent to market and distribute such Modern Health Care Product in such Market Category.
Chiron will be the preferred marketing channel for hospital-based marketing and distribution, particularly for critical care and oncology products, provided that the parties understand and agree that Ciba will conduct and/or develop its own marketing and distribution activities in these areas.
If a Developing Party decides to have a third party market, or assist in marketing, a product of the Developing Party or to which the Developing Party has access within one or more Market Categories, the Developing Party shall negotiate exclusively with the Non-Developing Party for 90 days on the terms under which the Developing Party desires that such Modern Health Care Product be marketed in a Market Category.
B. Product Field of Use:
All uses.
C. Territory Splits:
Worldwide
D. Royalty Rate:
In consideration of the R&D funding provided by Ciba (see Section I.C), Chiron shall offer Ciba the opportunity to share in the market opportunities with respect to the product(s) resulting from the R&D Venture in accordance with the following principles:
a) Chiron may offer Ciba the right to receive a stated percentage of pre-tax profits and losses from the sale of all product(s) developed, manufactured and marketed by Chiron pursuant to such R&D Program in return for an upfront cash payment to Chiron in an amount to be mutually agreed between the parties. Profits would be calculated by deducting from net sales the fully burdened cost of manufacturing, royalties to third parties and/or to one of the parties, marketing, distribution and promotion costs.
b) Chiron may grant to Ciba the right to receive a royalty on net sales of product(s) developed and sold by Chiron pursuant to such R&D Program. The royalty rate shall be as mutually agreed to by the parties and shall represent a commercially reasonable rate.
c) Chiron may grant to Ciba the right to participate in the marketing and/or selling of product(s) in selected markets. In such event, the parties would agree upon a supply agreement under which Chiron would manufacture products for sale through Ciba under commercially reasonable terms.
E. Right to Sublicense:
NA
F. Term/Patent Life:
NA
G. Adv/Min Royalty & Diligence Requirement
NA
H. Royalty Accounting:
NA
I. Patent-Royalty Tie-In:
NA
J. Options/Other:
So long as Ciba owns at least 30% of Chiron's voting stock, to the extent that either party decides to make any Modern Health Care intellectual property or any Modern Health Care Product generally available to third parties for licensing on a non-exclusive basis, such party shall license or grant such rights in or to such Modern Health Care intellectual property or Modern Health Care Product to such other party on terms that are no less favorable to such other party than the terms on which such Modern Health Care intellectual property or Modern Health Care Product is licensed or made available to the most favored third party.
3. Manufacturing & Supply
A. Right Holder/Type:
So long as Ciba owns at least 30% of Chiron's voting stock, with respect to each Modern Health Care Product, the Non-Developing Party will be the preferred manufacturer to the extent that the Developing Party determines not to manufacture such Modern Health Care Product by itself, unless a third party has a contractual right to manufacture such Modern Health Care Product or the Non-Developing Party is not competent to manufacture such Modern Health Care Product.
If the Developing Party desires that a Modern Health Care Product be manufactured on its behalf, then the Developing Party shall negotiate exclusively with the Non-Developing Party for 90 days on the terms under which the Developing Party desires that such Modern Health Care Product be manufactured.
B. Bulk/Dosage Form:
All forms
C. Territory:
Worldwide
D. Reimbursement Basis:
NA
E. Proc. Dev. Terms:
NA
F. Clinical Use Manufacturing:
NA
G. Shipment Terms:
NA
H. Financing:
NA
I. Escape Clause:
NA
J. Product Liability:
NA
K. Options/Other:
If Ciba so requests, the parties shall negotiate in good faith regarding the terms under which Chiron will manufacture monoclonal antibodies arising from Ciba's obligations with Tanox.
4. Collaboration Management
A. Representation:
The Board of Directors will maintain the following committees:
a) a Nominating Committee, consisting of two Independent Directors, one Managing Director and one Investor Director (see Section V.C), which shall be responsible for recommending the nomination of Directors;
b) an Audit Committee, consisting of three Investor Directors, three Independent Directors and one Management Director;
c) a Strategic Planning Committee, consisting of three Investor Directors, three Independent Directors and one Management Director;
d) a Compensation Committee; and
e) a Stock Option Plan Administration Committee.
The parties shall establish a Science Committee composed of an equal number of senior executives and scientists of the parties.
B. Quorum:
A quorum for each committee shall require the attendance of each member.
C. Basis of Actions:
By majority vote.
The Nominating Committee shall, however, conduct its activities within certain limitations, as follows:
(1) on and after the 5th anniversary, so long as Ciba's percentage interest is at least 40%, the Managing Directors of the Nominating Committee shall not vote to break any tie vote between all the Investor Directors, on the one hand, and all the Independent Directors, on the other hand; and
(2) on and after the eleventh anniversary, so long as Ciba's percentage interest is at least 49%, the Investor Director members shall have a deciding vote to break any tie vote between all the Investor Directors, on the one hand, and all the Independent Directors, on the other hand.
Management of Chiron shall propose to the Board of Directors i) a three-year Strategic Plan, beginning with the period 1996-1998, and ii) an Operating Plan for each fiscal year that is consistent with the applicable Strategic Plan.
The Operating Plan will be subject to the approval of the Board of Directors. In connection with its review, the Board of Directors also shall set and approve the measurement Standards for that fiscal year. Failure to meet such Measurement Standards taken as a whole would represent an unreasonably low rate of accretion in the overall valuation of Chiron compared to the expectations underlying the then effective Strategic Plan; it being understood that the annual rate of accretion should not be less than 7% in the absence of unusual circumstances.
In the event Chiron fails to meet the Measurement Standards for two consecutive fiscal years, then thereafter until the measurement Standards for a subsequent fiscal year are fulfilled, the Strategic Planning Committee shall have the delegated power of the Board of Directors to set the compensation and terminate the employment of the executive officers. In addition, during such period Chiron shall not take any of the following actions unless approved by a 100% affirmative vote of the Board:
a) hiring of any executive officers;
b) issuance of any equity security other than x) stock options consistent with past practice and y) pursuant to exercise of a warrant or option or conversion;
c) incurrence or issuance of any indebtedness other than in the ordinary course of business; or
d) initiation of any material acquisition by Chiron or any of its subsidiaries.
So long as Ciba's percentage interest is at least 40%, the approval of Ciba shall be required for Chiron or any of its subsidiaries to effect material changes in capitalization or ownership.
D. Meetings:
The Science Committee shall meet on a periodic basis.
Each calendar year, commencing with 1995, the parties shall jointly conduct a Scientific Conference which shall be attended by key scientific personnel of each of the parties and such other persons as the parties shall determine.
E. Disagreements:
All actions and proceedings arising out of or relating to the Agreement shall be brought by the parties and heard and determined only in a Delaware state court or a federal court sitting in that State. Each party waives all right to trial by jury in any action, proceeding or counterclaim arising out of the Agreement.
F. Buyout/Windup:
Chiron shall have the right with respect to the R&D Venture (see Section I.C) to repurchase all of the rights granted to Ciba upon tender by Chiron to Ciba of payment in the amount of the Buyout Amount in effect at the time of such payment for the R&D Venture; provided that such right shall expire if such tender is not made prior to 1/1/2002. The Buyout Amount shall equal an amount equal to (i) the sum of all funding payments made by Ciba to Chiron prior to such time for the R&D Venture, plus (ii) a reasonable return on such payments which shall be agreed to by the parties upon commencement of the R&D Venture and which shall represent the time value of money, less (iv) the aggregate amount of all payments or profits received by Ciba in connection with the R&D Venture, less (iv) a reasonable return on such payments which shall represent the time value of money.
Chiron shall be entitled to make the payment of the Buyout Amount in the form of cash or Common Stock, or a combination of the two. If Chiron shall elect to employ Common Stock for purposes of making such payment, such Common Stock shall be valued at its fair market value (the average of the closing sale prices during the prior 10-day period) as of the date immediate preceding the date on which such payment shall be made.
G. Options/Other:
None
5. Equity Investment
A. Type of Security:
Ciba will own approximately 49.9% of Chiron's shares after the Closing, when combined with the approximately 1.37 million shares already held, as follows:
1) CIBA Biotech Partnership, a wholly-owned subsidiary of Ciba, shall purchase 11,860,467 shares of Chiron Common Stock through a tender offer; and
2) Chiron shall issue to Ciba 6,600,000 newly issued shares in exchange for i) all of the issued and outstanding shares of capital stock of Ciba-Geigy Biocine, Ciba's 50% equity interest in JV [see separate contract analysis], and ii) all of the issued and outstanding shares of Ciba Corning Diagnostics Corp.
With respect to the Biocine JV, Chiron shall repay in cash all amounts funded by Ciba since the 1/1/92 Amendment, which the parties agree total $30 million [Per Chirons 12/94 10-K, Ciba has funded $28.9M of Chirons share of capital contributions through 12/94.]
With respect to Ciba Diagnostics, at the Closing Ciba shall cause the Diagnostics business to have net shareholders' equity (in the determination of which pensions and other post retirement benefit liabilities will be deemed to be zero) of not less than $188,651,000 and no indebtedness except to third parties in accordance with the terms thereof, and to Ciba in a principal amount of $100 million less such third party indebtedness. Interest on the Ciba debt will accrue at the applicable cost of funds of Ciba, and all principal and accrued interest will be due on the fifth anniversary of Closing. Ciba represents the amount of NOLs available to Diagnostics for Federal income tax purposes is equal to at least $42 million.
[Chiron waives the standstill provision of the 1988 Agreement to the extent necessary to permit the purchase of the shares of Common Stock pursuant to this Agreement.]
B. Pricing:
$1.388 billion cash (@$117.00 per share), net to the sellers of the 11.86 million tendered shares.
C. Board Seat:
After the Closing, the Board of Directors of Chiron will be comprised of 11 directors. Initially the Board of Directors will include three Managing Directors (William Rutter, Edward Penhoet and Jack Schuler), five Independent Directors (Donald Glaser, Pieter Strijkert, Gilbert Amelio, Henri Schramek and Lewis Coleman) and three directors designated by Ciba ("Investor Directors"), one of whom will be Dr. Krauer.
If Ciba's percentage interest for any period is less than 30% but at least 20%, during that period Ciba will instead have the right to designate two Investor Directors, and if Ciba's percentage interest is less than 20% for any period, during that period Ciba will instead have the right to designate for nomination only one Investor Director.
Ciba has agreed to nominate Dr. Rutter, Chairman of Chiron, for election to Ciba's Board of Directors for so long as Dr. Rutter remains the Chairman or the principal executive officer of Chiron (see also Section IV.A).
D. Research Tie-Ins:
NA
E. Options & Rights:
Until the later of 1/15/2000 and the 5th anniversary of the Closing, Ciba has agreed to a standstill provision at 49.9%. Thereafter, Ciba shall not purchase any equity securities from any person other than Chiron unless (i) such acquisition is a Market Purchase and (ii) immediately after such purchase, Ciba's percentage interest would not exceed the greater of (A) 55%, (B) the highest Ciba percentage interest resulting from any acquisition by Ciba that has been approved by a majority of the Independent Directors; provided further that no such purchase shall increase Ciba's percentage interest above the greater of (C) 79.9% and (D) the highest Ciba's percentage interest immediately following any action by Chiron that increases Ciba's percentage interest.
At any time after the 6th anniversary of the Closing, Ciba may propose a tender offer, merger, or sale of substantially all of Chiron's assets or similar transaction involving Ciba or one of its affiliates and Chiron or the unaffiliated stockholders that (1) offers each unaffiliated stockholder the opportunity to dispose of all Chiron equity securities and (2) for each class of Chiron equity securities, provides the same consideration for each security within such class.
So long as Ciba's percentage interest is at least 30%, Ciba shall have the right to exercise an irrevocable option ("Option") with an exercise price at fair market value, exercisable any time, to purchase newly-issued shares of Common Stock (within the limits as provided in the foregoing standstill provision) if any of the following conditions are satisfied:
a) Ciba concludes that is in any way legally restricted from purchasing any equity securities from any person other than Chiron, including any restriction resulting from Ciba's possession of any non-public material information regarding Chiron;
b) Ciba concludes that there is insufficient liquidity in the open market to permit it to (A) purchase on the open market the amount of equity securities it desires to purchase within the time period during which it desires to make such purchases or (B) make such purchases within such time period without such purchases unduly affecting the price of any of such equity securities; or
c) Ciba's percentage interest is below 50%.
Upon request of Chiron, Ciba agrees to purchase additional Common shares for an aggregate purchase price not in excess of the Subscription Amount. "Subscription Amount" shall mean $500,000,000, and thereafter, such amount as shall be reduced by the aggregate price paid for each purchase from Chiron of any equity securities pursuant to the Option, the Governance Agreement, and/or the Subscription Agreement except for (i) purchases in connection with the Cooperation and Collaboration Agreement or (ii) equity securities issued to Ciba in accordance with the terms of the Research and Development Agreement.
Ciba has demand registration rights, exercisable once in any 12-month period. Expenses relating to the first two exercises of this demand registration right will be payable by Chiron, and expenses relating to subsequent exercises of such right will generally be payable by Ciba. Chiron shall not grant any registration rights or other similar rights if such grant would in any way limit Ciba's registration rights.
Ciba agrees to a market stand-off provision during the 180 day period following the effective date of a registration statement.
6. Signatories
A. For Drug Company:
Dr. Alex Krauer
Chairman & CEO
John M.D. Cheesmond
Head Regional Finance & Control
John J. McGraw
VP and General Counsel
B. For Biotech Company:
William J. Rutter, Ph.D.
Chairman
Key: CON Confidential Treatment granted by SEC; material omitted from public filings. UKN Unknown NA Not applicable
