INVENTORY CONSIGNMENT AGREEMENT
This INVENTORY CONSIGNMENT AGREEMENT (this “ Agreement ”) is made as of November 7, 2007 by and between Kef Pharmaceuticals, Inc. (“ Consignor ”) and MiddleBrook Pharmaceuticals, Inc (the “ Consignee ”).
Pursuant to an Asset Purchase Agreement between Consignor and Consignee dated as of the date hereof (the “ Purchase Agreement ”), Consignor has purchased the Part 1 Assets (as defined in the Purchase Agreement) from Consignee. The Part 1 Assets include finished product inventory, as provided in the Purchase Agreement (such finished product inventory, as more specifically identified on Schedule A hereto and including the Ordered Inventory, as defined herein, the “ Consigned Merchandise ”). Consignor and Consignee desire that Consignee sell the Consigned Merchandise pursuant to a consignment arrangement, the terms of which are set forth below. All Schedules attached to this Agreement are incorporated by reference and constitute additional terms and conditions of this Agreement.
The use of the words “hereof,” “hereto” and “herein” shall refer to this Agreement, as supplemented by such Schedules. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Purchase Agreement.
Statement of Agreement
The parties hereto agree as follows:
1. Definitions .
(a) Terms Defined in Purchase Agreement . Terms defined in the Purchase Agreement and not otherwise defined by this Agreement shall have the meaning given to such terms in the Purchase Agreement.
(b) “ Consignee Locations ” has the meaning set forth in Section 3 .
(c) “ Consigned Merchandise ” has the meaning set forth in the Background Statement.
(d) “ Consignment Payment ” has the meaning set forth in Section 8 .
(e) “ Consignment Sale ” has the meaning set forth in Section 2(a)(i) .
(f) “ Extended Period ” means the period beginning upon the termination of the Initial Period and ending upon the first to occur of (i) Consignee’s purchase of all of the capital stock of Consignor pursuant to the terms of the Stock Purchase Agreement and (ii) the termination, without exercise, of the Stock Purchase Right.
(g) “ Initial Period ” means the period beginning on the date of this Agreement and ending upon the first to occur of (i) Consignee’s purchase of all of the capital stock of Consignor
pursuant to the terms of the Stock Purchase Agreement, (ii) Consignee’s payment in full of a Stock Purchase Period Extension Payment, as defined in the Stock Purchase Agreement and (iii) the termination, without exercise, of the Stock Purchase Right.
(h) “ Lex ” means Lex Pharmaceuticals, Inc.
(i) “ Minimum Consignment Payment ” has the meaning set forth in Section 8(c) .
(j) “ Net Sales ” shall mean, with respect to a Consignment Sale, the gross amount invoiced by or on behalf of Consignee for that Consignment Sale sold to third parties in bona fide , arm’s length transactions, less customary deductions, determined in accordance with Consignee’s standard accounting methods as generally and consistently applied by Consignee, to the extent included in the gross invoiced sales price of any Consignment Sale and otherwise directly paid or incurred by Consignee or distributors with respect to the sale of such a Consignment Sale, including: (i) applicable sales credits (as described below), (ii) payments or rebates incurred pursuant to federal, state and local government (or agency thereof) programs, including Medicare and Medicaid rebates, (iii) costs for transit insurance, freight, handling or other transportation billed to customers to the extent included in the invoiced price and (iv) sales, use or excise taxes included in the invoiced price. Applicable sales credits include credits or discounts deducted from the sales price for: (A) customer returns, returned goods allowances, rejected goods and damaged goods not covered by insurance, (B) cash or terms discounts, (C) direct to customer discount or customer rebate programs, including coupons, (D) third party rebates and chargebacks, (E) trade show discounts and stocking allowances, (F) price adjustments on customer inventories following price changes, (G) product recalls, (H) deductions due for discount card programs, (I) amounts credited for uncollectible amounts on previously sold products and (J) as agreed by Consignor and Consignee in writing, other specifically identifiable amounts included in gross sales of Consigned Merchandise that were or ultimately will be credited and that are substantially similar to those listed above.
(k) “ Ordered Inventory ” has the meaning set forth in Section 4 .
(l) “ Registration License ” means the Registration and Trademark License Agreement, dated as of the date hereof, between MiddleBrook and Lex.
(m) “ Related Agreements ” has the meaning set forth in the Purchase Agreement.
(n) “ Stock Purchase Agreement ” means that certain Stock Purchase Agreement, dated as of the date hereof, between Consignee, the stockholders of Consignor and Deerfield Management, L.P., pursuant to which Consignee has a right to purchase all of the capital stock of Consignor upon the terms and conditions set forth in such Stock Purchase Agreement.
(o) “ Stock Purchase Period ” has the meaning set forth in the Stock Purchase Agreement.
(p) “ Stock Purchase Right ” has the meaning set forth in the Stock Purchase Agreement.
(q) “ Sublicense Agreement ” means any agreement entered into between Consignor and Consignee pursuant to Section 3.4(e)(iii) of the Purchase Agreement.
(r) “ Term ” means the period beginning on the date hereof and continuing until the expiration or termination of this Agreement pursuant to the terms and conditions herein.
2. Delivery; Title to Consigned Merchandise .
(a) The following provisions of this Section 2(a) are subject in their entirety to the provisions of Section 2(b) hereof:
(i) Consignor has delivered to Consignee all of the Part 1 Assets constituting finished product inventory for sale to any third party (a “ Consignment Sale ”).
(ii) Consignor shall at all times retain title to all Consigned Merchandise, and Consignee agrees to hold the Consigned Merchandise as Consignor’s property for the sole purpose of making Consignment Sales in the ordinary course of Consignee’s business.
(iii) Consignee covenants not to assign, sell, mortgage, lease, transfer, pledge, grant a security interest in or lien upon, encumber or otherwise dispose of or abandon, or suffer or permit any of the same to occur with respect to any part or all of the Consigned Merchandise, without prior written consent of Consignor, except for Consignment Sales in the ordinary course of Consignee’s business.
(b) Consignee will continue to engage in Consignment Sales in the ordinary course of Consignee’s business as if the transactions contemplated by the Purchase Agreement had not taken place. Upon removal of any Consigned Merchandise by or on behalf of Consignee from a Consignee Location (as hereinafter defined) in anticipation of a Consignment Sale, title to the Consigned Merchandise will pass from Consignor to Consignee subject to the occurrence of a Consignment Sale in the ordinary course of Consignee’s business. All proceeds of Consignment Sales shall be the sole property of Consignee.
(c) Consignor may execute and file all such instruments, including Uniform Commercial Code financing statements, as may be necessary to confirm and to disclose Consignor’s title to the Consigned Merchandise. Consignee will cause each lender, if any, that has a security interest in any of Consignee’s inventory or equipment to provide to Consignor written confirmation that such lender has been informed of Consignor’s ownership of the Consigned Merchandise.
3. Location of Consigned Merchandise . All Consigned Merchandise will be held by Consignee at the locations set forth on Schedule B hereto (the “ Consignee Locations ”). Until such time as an article of Consigned Merchandise is sold in a Consignment Sale, Consignee will have no right to remove Consigned Merchandise from any Consignee Location without Consignor’s written consent unless reasonably in the ordinary course of Consignee’s business. Consignee will provide prompt written notice to Consignor if Consignee intends to add or discontinue the use of any Consignee Location. Consignee will store, maintain, inspect and
otherwise manage the Consigned Merchandise consistent with the ordinary course of Consignee’s business as heretofore conducted.
4. Acquisition and Maintenance of Inventory . As of the date hereof, Consignee has placed an order with Ceph International Corp., a Commonwealth of Puerto Rico corporation, to manufacture and deliver in April, 2008 the quantities of 250 mg. and 500 mg. Part 1 Assets set forth in Schedule C hereto (the “ Ordered Inventory ”). Consignee shall not cancel or modify its purchase order for the Ordered Inventory without the written consent of Consignor. Consignee shall use commercially reasonable efforts at all times during the Repurchase Period to maintain, in Consignee’s reasonable business judgment, a sufficient supply of each dose and package size of the finished products included in the Consigned Merchandise; provided , that with respect to the Ordered Inventory, Consignee’s obligation to use commercially reasonable efforts to maintain such finished products shall begin upon receipt of the Ordered Inventory. Consignee shall pay all costs incurred to replenish the Consigned Merchandise pursuant to this Section 4 .
5. Risk of Loss and Insurance . Consignee will bear all risk of loss or damage to Consigned Merchandise and will maintain (i) all-risk property insurance for the full replacement value on all Consigned Merchandise and (ii) general liability insurance under customary pharmaceutical industry forms and endorsements, providing product liability and contractual liability coverage, with per occurrence limits of not less than $10,000,000, which limits may be achieved through a combination of underlying and excess policies. The insurance policies described in the preceding sentence shall be