EXCLUSIVE LICENSE, DEVELOPMENT, AND COMMERCIALIZATION AGREEMENT

Exhibit 10.4

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EXCLUSIVE LICENSE, DEVELOPMENT, AND
COMMERCIALIZATION AGREEMENT

      This Exclusive License, Development, and Commercialization Agreement (the “Agreement” ) is entered into as of August 30, 2007 (the “Effective Date” ) by and between Aradigm Corporation , a California corporation having its principal office at 3929 Point Eden Way, Hayward, California 94545 ( “Aradigm” ), and Lung Rx, Inc. , a wholly-owned subsidiary of United Therapeutics Corporation, a Delaware corporation, having an address of 1110 Spring Street, Silver Spring, Maryland 20910 ( “Lung Rx” ). Aradigm and Lung Rx may be referred to individually as a “Party” , and collectively as the “Parties” .

Recitals

      Whereas, Aradigm possesses certain proprietary rights related to a pulmonary drug delivery technology known as AERx ^® technology, as well as expertise and know-how relating to the use and manufacture of such technology; and

      Whereas, Lung Rx possesses certain proprietary rights related to the compound known as treprostinil, as well as expertise and know-how relating to the use and manufacture of such compound;

      Whereas , Lung Rx wishes to obtain, and Aradigm is willing to grant to Lung Rx, an exclusive license throughout the universe to develop and commercialize products comprising treprostinil incorporated into the AERx pulmonary drug delivery system, and improvements thereto, including new formulations, subject to the terms and conditions set forth herein.

      Now, Therefore, in consideration of the foregoing premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE 1

Definitions

      1.1 “Affiliate” means, with respect to a Party, any company or other entity controlled by, controlling, or under common control with such Party. As used in this definition, the term “controlling” a particular entity (with correlative meanings for the terms “controlled by” and “under common control with”) means that the applicable Party owns, directly or indirectly, stock of the subject entity representing more than 50% of the voting power for electing Board (or similar management) members, or otherwise has the actual power to direct and control the management and affairs of such entity, whether by contract or otherwise.

      1.2 “Aradigm FTE Rate” means the fully burdened cost (defined as overhead, salaries, bonuses and related payroll taxes and the cost of direct benefits) to Aradigm of one full-time equivalent employee performing Development activities hereunder, which for clarity may

vary based on the duties and experience of such employee. The Aradigm FTE Rate for each position will be fixed for [*]. Thereafter the Parties will renegotiate the Aradigm FTE Rate for each position; provided however, the overhead for each position shall be no greater than [*]. Furthermore, if during any calendar year greater than [*] full-time equivalent employees are required to perform Development activities and it is anticipated to continue for more than [*] of the following year, the Parties will renegotiate the Aradigm FTE Rate for each position. If Aradigm reduces its total full-time equivalent employees such that it would impact the percentage of the total full-time equivalent employees performing Development activities, then Aradigm shall provide Lung Rx sixty (60) days advance written notice of such reduction. The methodology to be used in calculating the fully burdened cost referred to above shall be as elaborated in Exhibit A of this Agreement.

      1.3 “Aradigm Improvements” means any and all improvements to the Aradigm Technology for use in the Field, whether or not patentable, including intellectual property rights, improvements, modifications, variations, revisions, versions and derivatives, as well as all data, know-how, methods, Information, processes, machines, or compositions of matter pertaining to the Aradigm Technology, which Aradigm may conceive, discover, Develop, acquire or Commercialize at any time before or after the Effective Date of this Agreement and during the term hereof, and which Aradigm Controls.

      1.4 “Aradigm Know-How” means all Information (other than Patents and whether or not patentable) that (a) is Controlled by Aradigm or any of its Affiliates as of the Effective Date or during the Term and (b) relates directly to the manufacture, use, sale, or importation of the Product and is necessary or useful for the research, Development, regulatory approval, manufacture, or Commercialization of Products, or otherwise useful or necessary for Lung Rx to practice the Aradigm Technology.

      1.5 “Aradigm Patents” means all Patents that (a) include one or more claims that cover a Product or the manufacture, importation, use, offer for sale or sale of such Product and (b) are Controlled by Aradigm or any of its Affiliates as of the Effective Date or during the Term. The Aradigm Patents include those Patents set forth on Exhibit B of this Agreement. To the extent that any Patent or Improvement Controlled by Aradigm is necessary to practice any Patent as defined above, then such necessary Patent or Improvement will be included as Aradigm Patents.

      1.6 “Aradigm Technology” means, only if it relates to the AERx pulmonary drug delivery system and collectively, the (i) Aradigm Patents, (ii) Aradigm Know-How, (iii) Aradigm New Intellectual Property, (iv) all Information relating to the Aradigm Patents, Aradigm Know-How, and Aradigm New Intellectual Property in the course of any work conducted pursuant to this Agreement, and (v) Aradigm Improvements.

      1.7 “Commercialization” means the marketing, promotion, sale or distribution of the Product. “Commercialize” has a correlative meaning.

      1.8 “Commercially Reasonable Efforts” means, with respect to the efforts of a particular Party to complete specific tasks or obligations under this Agreement, the efforts and resources that would be used, consistent with prevailing biopharmaceutical industry standards,

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

generally by companies of similar size and profitability as such Party with respect to products or potential products at a similar stage in development or product life and of similar market potential.

      1.9 “Confidential Information” has the meaning provided in Section 10.1.

      1.10 “Control” means, with respect to any Improvements, Information, Patent, know-how or other intellectual property right, that the applicable Party exclusively owns or has a license to such Information or intellectual property right and has the ability to grant to the other Party access to and a license (or sublicense, as applicable) to same without violating the terms of any agreement with a Third Party.

      1.11 “Development” means all activities that relate to (a) obtaining, maintaining or expanding a Regulatory Approval for the Product or (b) developing the ability to manufacture clinical and commercial quantities of the Product. “Develop” has a correlative meaning.

      1.12 “Development Plan” has the meaning set forth in Section 4.2(a).

      1.13 “Development Timeline” has the meaning set forth in Section 4.2(a).

      1.14 “FDA” means the U.S. Food and Drug Administration, or any successor agency thereto.

      1.15 “Field” means pulmonary delivery of prostacyclin drugs for the treatment of pulmonary arterial hypertension and any and all other therapeutic indications and uses other than control of glucose levels in humans.

      1.16 “ First Commercial Sale” means, with respect to any Product, the first sale for use or consumption by the general public of such Product following Regulatory Approval on a country by country basis. A transfer of the Product by Lung Rx, its Affiliates or its sublicensees (i) for research and Development purposes, or (ii) prior to Lung Rx’s receipt of Regulatory Approval for use of such Product in humans, shall not be considered a First Commercial Sale.

      1.17 “IND” means an Investigational New Drug Application filed with the FDA, or the equivalent application or filing filed with any equivalent agency or governmental authority outside the U.S. (including any supra-national agency such as in the European Union) necessary to commence human clinical trials in such jurisdiction.

      1.18 “Information” means all tangible and intangible (a) techniques, technology, practices, procedures, methods, processes, protocols, formulations, formulae, knowledge, trade secrets, inventions (whether patentable or not), methods, knowledge, ideas, concepts, know-how, skill, experience, test data and results of any type whatsoever (including pharmacological, biological, toxicological, clinical and pre-clinical test data and results), analytical and quality control data, specifications, results or descriptions, reports, analyses, software and algorithms and the like, (b) compositions of matter, cells, cell lines, assays, animal models and physical, biological or chemical material and results of experimentation, (c) the Regulatory Dossier related

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

to the Aradigm Technology, and (d) all intellectual property rights in those items described in (a) through (c) of this Section 1.18.

      1.19 “Licensed Molecule” means the compound known as treprostinil, having the structure set forth in Exhibit C of the Agreement, or any of its pharmaceutically acceptable salts or stereoisomers.

      1.20 “Lung Rx Know-How” means all Information (other than Patents and whether or not patentable) that (a) is Controlled by Lung Rx or any of its Affiliates as of the Effective Date or during the Term and (b) relates directly to the manufacture, use, sale, or importation of the Licensed Molecule or the Product and is necessary or useful for the research, Development, regulatory approval, manufacture, or Commercialization of the Product, or otherwise useful or necessary for Aradigm to fulfill its obligations for the Development of the Product.

      1.21 “Lung Rx Patents” means all Patents that (a) include one or more claims that cover the Licensed Molecule or the Product or the manufacture, importation, use, offer for sale or sale of Licensed Molecule or the Product and (b) are Controlled by Lung Rx or any of its Affiliates as of the Effective Date or during the Term. To the extent that any Patent or Improvement Controlled by Lung Rx is necessary to practice any Patent as defined above, then such necessary Patent or Improvement will be included as Lung Rx Patents.

      1.22 “Lung Rx Technology” means, collectively, the (i) Licensed Molecule, (ii) Lung Rx Patents, (iii) Lung Rx Know-How, (iv) Lung Rx New Intellectual Property, (v) all Information relating to the Lung Rx Patents, Lung Rx Know-How, and Lung Rx New Intellectual Property in the course of any work conducted pursuant to this Agreement, and (vi) Lung Rx Improvements.

      1.23 “NDA” means a New Drug Application filed with the FDA, or the equivalent application or filing filed with any equivalent agency or governmental authority outside the U.S. (including any supra-national agency such as in the European Union) necessary to market pharmaceutical products in such jurisdiction.

      1.24 “Net Sales” means the gross amounts invoiced by Lung Rx, its Affiliates and their respective sublicensees for sales of all Products to Third Parties that are not Affiliates or sublicensees of Lung Rx (unless such Affiliate or sublicensee is the end user of such Products, in which case the amount billed therefor shall be deemed to be the amount that would be billed to a Third Party purchaser in an arm’s length transaction) following First Commercial Sale of a Product in any country in the Territory, less the following items, to the extent actually allowed or incurred with respect to sales of, and allocable to, such Products: (i) trade, cash, or quantity discounts off of the invoiced price (including cash, governmental (e.g., Medicare/Medicaid and other insurance rebates and managed care rebates), and hospitals or other buying group chargebacks; (ii) credits, allowances discounts, rebates and other price reductions, chargebacks, and adjustments, granted upon returns, rejections, or recalls; (iii) freight, insurance, exportation, importation and transportation charges; (iv) taxes, duties or other governmental tariffs or charges (other than income taxes); and (vi) bad debts or uncollectible accounts.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

      1.25 “New Intellectual Property” means (i) any and all Information specific to the Development and/or Commercialization of Aradigm Technology or Lung Rx Technology solely conceived, reduced to practice, made, Developed, discovered or created by or on behalf of one Party or jointly developed by or on behalf of the Parties and all intellectual property rights therein, including any Patents and Improvements to the extent claiming such Information, and (ii) any and all other Information solely invented by or on behalf of one Party or jointly developed by or on behalf of the Parties pursuant to this Agreement and all intellectual property rights therein, including any Patents and Improvements claiming such Information .

      1.26 “Patents” means (a) patents, including any and all re-examinations, reissues, renewals, revalidations, extensions, confirmations, registrations, term restorations, and supplementary patent certificates, (b) patent applications, including provisional applications, additions, continuations, continuations-in-part, divisional and substitute applications, and inventors’ certificates, and (c) any international counterparts of the forgoing.

      1.27 “POC Study” means the proof-of-concept study described in the Development Plan, all expenses of conducting the study being the sole responsibility of Aradigm.

      1.28 “Product” means any product, use, application, administration, method of administration or treatment for use in the Field consisting of a Licensed Molecule (including any formulations thereof) incorporated into the AERx pulmonary drug delivery system and any future improvements to the AERx pulmonary drug delivery system made during the Term.

      1.29 “PSC” means the Product Steering Committee that has the meaning set forth in Section 3.1.

      1.30 “Regulatory Approval” means any and all approvals (including price and reimbursement approvals, if required), licenses, registrations, or authorizations of a Regulatory Authority that are necessary to market and sell the Product in the Field in the applicable country or regulatory jurisdiction.

      1.31 “Regulatory Authority” means any supra-national, national ( e.g. , the FDA), state, provincial or local regulatory agency, department, bureau, commission, council or other governmental entity involved in or responsible for regulation of the manufacture, promotion and/or sale of medicinal products in the Field that are intended for human use in the applicable country or regulatory jurisdiction.

      1.32 “Regulatory Dossier” means (a) all INDs, NDAs and equivalent foreign applications or registrations for authority to conduct clinical trials on the Product or for Regulatory Approval, anywhere in the Territory; (b) all Regulatory Approvals and any other technical, medical and scientific registrations, authorizations and approvals (including approvals of NDAs or foreign equivalents, supplements and amendments, pre- and post- approvals, pricing and Third Party reimbursement approvals, and labeling approvals) of any Regulatory Authority necessary for or applicable to the Development (including the conduct of clinical trials), Commercialization, manufacture, distribution, marketing, promotion, offer for sale, use, import, reimbursement, export or sale of a Product in any regulatory jurisdiction in the Territory, together with all related correspondence to or from any Regulatory Authority and all documents

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

referenced in the complete regulatory chronology for each NDA or foreign equivalent, including the drug master file (if any) or device master file (if any), IND, NDA and supplemental NDA, or foreign equivalents; and (c) all data and other Information contained in either (a) or (b) above.

      1.33 “Senior Executive” means, with respect to a particular Party, the Chief Executive Officer of such Party, or the representative designated by such individual (provided that such representative is a senior executive officer of such Party with authority to settle the applicable issue or dispute submitted for resolution under Section 13.2).

      1.34 “Successful” means, with respect to the POC Study, that the results thereof satisfy the criteria set forth in Exhibit D .

      1.35 “Term” means the term of this Agreement, as provided in Section 11.1.

      1.36 “Territory” means the entire universe.

      1.37 “Third Party” means any entity other than Aradigm or Lung Rx or an Affiliate of Aradigm or Lung Rx.

      1.38 “U.S.” means the United States of America.

      1.39 “Valid Claim” means an unexpired claim of an issued Patent within the Aradigm Patents or New Intellectual Property which has not been canceled or otherwise found to be unpatentable, invalid or unenforceable by a court or other authority in the subject country, from which decision no appeal is taken or can be taken, has been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise, or been abandoned.

ARTICLE 2

Licenses and Options

      2.1 Licenses to Lung Rx.

           (a) Subject to the terms and conditions of this Agreement, and solely upon satisfaction of Lung Rx’s payment and investment obligations set forth in Section 6.2, Aradigm hereby grants to Lung Rx a royalty-bearing, exclusive (even as to Aradigm) license for the Aradigm Technology in the Territory to research, Develop, Commercialize, use, import, register, sell, have sold, and distribute Products in the Field within the Territory. The license granted in this Section 2.1(a) shall be sublicensable by Lung Rx solely to the extent necessary to exercise Lung Rx’s rights under this Agreement.

          ( b) Subject to the terms and conditions of this Agreement, and solely upon satisfaction of Lung Rx’s payment and investment obligations set forth in Section 6.2, Aradigm hereby grants to Lung Rx a royalty-bearing, non-exclusive license for the Aradigm Technology in the Territory to make and have made Products in the Field in the Territory. The license granted in this Section 2.1(b) shall not be sublicensable without Aradigm’s prior written consent,

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

which consent may be withheld in good faith and, if Aradigm does not consent, Aradigm shall identify the basis for its objection to Lung Rx in writing within 10 days; provided, however that Lung Rx may, without such consent but with prior written notice to Aradigm, engage one or more bona fide subcontractors to manufacture Products on Lung Rx’s behalf.

      2.2 License to Aradigm. Subject to the terms and conditions of this Agreement, Lung Rx hereby grants to Aradigm a non-exclusive, royalty-free license for the Lung Rx Technology solely to the extent necessary to conduct its obligations under this Agreement, including those Development responsibilities assigned to Aradigm under the Development Plan, and for no other use. The license granted in this Section 2.2 shall be sublicensable by Aradigm solely to subcontractors approved by Lung Rx and solely to the extent necessary to fulfill Aradigm’s obligations under this Agreement.

      2.3 Aradigm Retained Rights. Notwithstanding anything in this Agreement to the contrary, Aradigm shall retain the right under the Aradigm Technology to conduct its obligations under this Agreement, including those Development responsibilities assigned to Aradigm under the Development Plan.

      2.4 Third Party Licenses.

           (a) Lung Rx shall be solely responsible for obtaining, at its sole expense (subject to Section 6.5), any licenses from Third Parties that Lung Rx determines, in its sole discretion, are required in order to lawfully research, Develop, manufacture, and Commercialize Products in the Field in the Territory.

           (b) Aradigm shall promptly notify Lung Rx in writing of any license agreement entered into by Aradigm after the Effective Date pursuant to which Aradigm obtains a license to enhance Aradigm Technology from a Third Party, which license was not obtained in order to avoid infringing such Third Party Patent or other intellectual property, as more fully discussed in Section 6.5(b). Notwithstanding anything to the contrary herein other than Section 6.5(b), such subsequently in-licensed Aradigm Technology shall be excluded from the licenses granted to Lung Rx in Section 2.1. Lung Rx shall have a right of first option to negotiate for any enhancement to the Aradigm Technology in the Field that Aradigm obtains from a Third Party . At Aradigm’s sole discretion and to the extent practical, Lung Rx shall have the opportunity to participate in the negotiation of such license agreements in conjunction with Aradigm.

      2.5 No Non-Permitted Use.

           (a) Lung Rx hereby covenants that it shall not, nor shall it cause or permit any Affiliate or sublicensee to, use or practice any Aradigm Technology for any purposes other than those expressly permitted in Section 2.1; provided, however, Lung Rx does not have a duty to enforce any breach.

           (b) Aradigm hereby covenants that it shall not, nor shall it cause or permit any Affiliate or sublicensee to, use or practice any Lung Rx Technology for any purposes other than

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

those expressly permitted in Section 2.2; provided, however, Aradigm does not have a duty to enforce any breach.

      2.6 No Other Licenses. Nothing in this Agreement shall be interpreted to grant either Party any rights under any Patents or Information of the other Party that are not expressly granted herein.

      2.7 Covenant Not to Sue .

           (a) Aradigm agrees that it will not assert nor cause to be asserted against Lung Rx, its Affiliates or its sublicensees any existing invention, Information, patent or know-how not included in the Aradigm Technology that is or might be infringed by reason of Lung Rx, its Affiliates or its sublicensees’ exercise of rights granted to Lung Rx under Section 2.1.

           (b) Lung Rx agrees that it will not assert nor cause to be asserted against Aradigm, its Affiliates or its sublicensees any existing invention, Information, patent or know-how not included in the Lung Rx Technology that is or might be infringed by reason of Lung Rx, its Affiliates or its sublicensees’ exercise of rights granted to Aradigm under Section 2.2.

      2.8 Right of First Option to Alternate Technology Subject to the terms and conditions of this Agreement, and solely upon satisfaction of Lung Rx’s payment and investment obligations set forth in Section 6.2, Aradigm hereby grants, subject to any limitations it may have to Third Parties, to Lung Rx an exclusive right of first option to negotiate a license agreement for any alternate superior technology in the Field to the AERx pulmonary drug delivery system (“Alternate Technology”) Controlled by Aradigm on or after the Effective Date. If the Parties do not reach an agreement for an Alternate Technology within sixty (60) days after Aradigm gives Lung Rx detailed written notice of an Alternate Technology, the right of first option shall expire for such Alternate Technology and Aradigm may exploit each such Alternate Technology as described in the notice to Lung Rx in any manner whatsoever.

ARTICLE 3

Governance

      3.1 PSC; Meetings. Aradigm and Lung Rx shall form a product steering committee (the “PSC” ) consisting of two (2) representatives from Aradigm and two (2) representatives from Lung Rx, all such representatives having an appropriate level of skill, experience and familiarity with the Development Plan.

           (a) The initial representatives for Aradigm shall be Igor Gonda and Tunde Otulana. The initial representatives for Lung Rx shall be [*] and [*]. Each Party may replace its PSC representatives at any time upon prior written notice to the other Party.

           (b) Unless otherwise agreed to by the Parties, the PSC shall meet not less than twice every calendar year, on such dates and at such times as agreed to by Lung Rx and

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Aradigm, with all scheduled in-person meetings to alternate between the offices of the Parties, or at such other locations as mutually agreed upon by the Parties. Meetings may be held by audio or video conference at the request of either Party, provided that at least one (1) meeting per calendar year shall be held in person. Visitors may attend meetings of the PSC upon the consent of the Parties. Each Party shall be responsible for its own expenses for participating in the PSC, including the fully burdened cost of its personnel.

           (c) Meetings of the PSC shall be effective only if at least one representative of each Party is present or participating. The members of the PSC will designate one (1) representative at each meeting to serve as secretary for such meeting, who will promptly prepare and distribute to the Parties written minutes summarizing the matters discussed and actions taken, if any, at such meeting. The meeting minutes will be approved by each of Lung Rx and Aradigm promptly following the applicable PSC meeting and will reflect any agreement or disagreement of the Parties with regard to the matters therein.

      3.2 Responsibilities of the PSC. The PSC shall have the responsibility and authority to:

           (a) review each of the Parties’ Development activities conducted in connection with the Development Plan;

           (b) propose amendments or updates to the Development Plan to the Parties;

           (c) review and discuss draft amendments or updates to the Development Plan;

           (d) monitor progress toward achieving goals set forth in the Development Plan;

           (e) address and attempt to resolve conflicts or disputes between the Parties that may arise during the course of performing the Development Plan;

           (f) serve as a forum for communication between the Parties for the activities performed pursuant to the Development Plan;

           (g) monitor all regulatory, manufacturing, and commercial activities involving the Product that are conducted by a Party, its Affiliates, or their respective licensees; and

           (h) perform such other functions as the Parties may agree in writing.

      3.3 Limitation on PSC’s Authority . The PSC shall have no authority other than that expressly set forth in Section 3.2 and, specifically, shall have no authority to amend this Agreement, determine whether a Party has complied with its obligations under this Agreement, or enter into subsequent agreements on behalf of either Party.

      3.4 PSC Decisions .

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

           (a) Consensus; Good Faith; Action Without Meeting. Subject to Section 3.4(b), the PSC shall decide all matters by consensus, with each Party having one collective vote. The members of the PSC shall act reasonably and in good faith to cooperate with one another and to reach agreement with respect to issues to be decided by the PSC. Action that may be taken at a meeting of the PSC also may be taken without a meeting if a written consent setting forth the action so taken is signed by all members of the PSC.

           (b) Failure to Reach Consensus. If the members of the PSC cannot reach consensus with respect to any matter over which the PSC has authority and responsibility, then the Senior Executive of Lung Rx shall have the right to decide such matter in his or her sole discretion, provided that (i) such Senior Executive takes into consideration the reasonable commercial interests of Aradigm among all other factors bearing on the decision, and (ii) such decision is consistent with Lung Rx’s obligations under Section 4.11. Notwithstanding the foregoing, Aradigm’s approval shall be necessary prior to the amendment of the Development Plan in a manner that materially increases Aradigm’s obligations under such Development Plan or narrows the patient population as specified in such Development Plan. If Aradigm does not agree to a material increase in its obligations, but Lung Rx nevertheless deems such activity necessary, Lung Rx may arrange for the services or activities to be provided otherwise.

ARTICLE 4

Development and Commercialization

      4.1 Development — Overview.

           (a) Promptly following the Effective Date, Aradigm shall use Commercially Reasonable Efforts to perform the POC Study at its sole cost and expense in close consultation with Lung Rx, with the complete final report describing the results of the POC Study to be delivered to Lung Rx within a commercially reasonable period of time.

           (b) Following Lung Rx’s satisfaction of its payment and investment obligations set forth in Section 6.2, Lung Rx shall be primarily responsible for the Development of the Product in the Field in the Territory and shall bear all costs associated with Development of the Product in the Field in the Territory, as set forth in more detail in Section 4.6 below.

           (c) With respect to those Development activities assigned to a Party, such Party shall perform such Development activities using its Commercially Reasonable Efforts in accordance with the Development Plan. In addition, the Parties shall closely cooperate on all matters involved in and arising from the Development and Commercialization process of Products and the AERx pulmonary drug delivery system (and its future improvements, successors and alternatives) that may materially affect the other Party’s efforts to obtain Regulatory Approvals.

      4.2 Development Plan.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

           (a) Scope. The Development of each Product under this Agreement shall be governed by a worldwide development plan (each, a “Development Plan” ). Each Development Plan shall be created (and updated from time to time) in good faith with the overall objective of reasonably optimizing the commercial potential of the Product. The Development Plan shall describe the proposed overall program of Development for the Product in the Territory, including preclinical studies, toxicology, formulation, process development, clinical studies, regulatory plans and other elements of obtaining Regulatory Approval(s) in major markets, as well as an overall timeline of the estimated target dates for completing the various development tasks described within the Development Plan (the “Development Timeline” ). A pro forma budget for one year with a non-binding three year look-ahead shall be created by the Parties no later than [*] days following completion of the POC study, based on the assumptions and particulars of the Development Plan. Thereafter, the Parties shall prepare pro forma budgets showing twelve-month projected estimated Development expenses for each subsequent twelve-month period. In the event of any inconsistency between the Development Plan and this Agreement, the terms of this Agreement shall prevail.

           (b) Initial Development Plan. The Parties have agreed on the form of the initial Development Plan, a copy of which is attached hereto as Exhibit E .

           (c) Updates to the Development Plans and Additional Development Plans. The Parties will work together to evaluate from time to time in light of then-current circumstances the status of implementing a Development Plan and progress compared to the Development Timeline. The PSC, Lung Rx or Aradigm may propose modifications to the Development Plan and new Development Plans, which will be discussed in good faith by the Parties or the PSC and shall become effective solely upon written approval of Lung Rx in its sole discretion. The PSC also will review any modifications to any Development Plan suggested or required by any Regulatory Authority, and Lung Rx will be responsible for amending such Development Plan as necessary to incorporate feedback from any Regulatory Authority about Development of such Product and to comply with any legal requirement or formal action imposed or suggested by any Regulatory Authority. In addition, and without limiting the generality of the foregoing, Lung Rx shall, as early as necessary in each calendar year, prepare a revision of each Development Plan for the following calendar year to take into account completion, commencement or cessation of Development activities not contemplated by each then-current Development Plan, and submit such proposed revised Development Plan to the PSC no later than October 15 of such year for review. Notwithstanding anything to the contrary herein, written approval of both Lung Rx and Aradigm shall only be necessary prior to the amendment of the Development Plan in a manner that materially increases Aradigm’s financial obligations under such Development Plan or narrows the patient population as specified in such Development Plan.

           (d) Diligence. In addition to the specific diligence obligations of Lung Rx pursuant to Section 4.11, each of Aradigm and Lung Rx will use Commercially Reasonable Efforts to carry out the activities set forth in a Development Plan for which such Party is responsible in accordance with the Development Timeline.

      4.3 Development Reports and Records.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

           (a) Each Party will keep the PSC fully informed regarding the progress and results of such Party’s Development activities and those of its Affiliates, licensees, and Third Party contractors. Within thirty (30) days after the end of each calendar quarter, each Party shall provide the PSC with a written report that summarizes, in reasonable detail, all Development activities performed by such Party and its Affiliates, licensees, and Third Party contractors during such quarter, and compares such performance with the goals and Development Timeline set forth in the Development Plan. Each Party shall also promptly provide the PSC or the other Party with any additional information regarding its Development of the Product reasonably requested thereby. Subject to its confidentiality obligations to Third Parties and to the degree it is able, Aradigm shall provide the PSC with semi-annual written progress reports, summarizing in detail Aradigm’s Development and Commercialization activities relating to the AERx pulmonary drug delivery system (and its future improvements, successors and alternatives) other than in connection with the Licensed Molecule, and shall provide such other information reasonably requested by Lung Rx. Each party shall give the other prompt written notice with respect to information that would materially affect the Product. The Parties shall maintain such reports and the information disclosed therein in confidence in accordance with Article 10.

           (b) Records. Each Party shall maintain records, in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes, which shall accurately reflect all work done and results achieved in the performance of the Development Plan by such Party. Each Party shall have the right, during normal business hours and upon reasonable prior written notice, to inspect all such records of the other Party, and to obtain copies of such records to the extent reasonably needed by such Party in exercising its rights under this Agreement. Each Party shall maintain such records and the information disclosed therein in confidence in accordance with Article 10. Each Party shall have the right to arrange for its employees involved in the activities contemplated hereunder to visit the offices and laboratories of the other Party and any of its Affiliates as may reasonably be desirable during normal business hours and upon reasonable prior written notice, to discuss the Development work and its results in detail with the technical personnel and consultants of the other Party.

           (c) Disclosure of Inventions and Development Results. Each Party shall provide to the other Party a complete written disclosure for each and every invention or other discovery, whether or not patentable, first conceived or reduced to practice in the performance of a Development Plan including Improvements and New Intellectual Property, promptly after each such invention is made.

      4.4 Standards of Conduct. Each Party shall perform, and shall ensure that its Affiliates, licensees, and Third Party contractors perform, the Development activities for which it is responsible under the Development Plan in good scientific manner and in compliance with applicable laws, rules and regulations.

      4.5 Development Limitations. Neither Party may conduct or have conducted on its behalf, or enable any Third Party to conduct, any activities with respect to the Product that are not approved under the Development Plan or by the PSC, without the prior written consent of the other Party, such consent not to be unreasonably withheld or delayed.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

      4.6 Development Expenses.

           (a) To the extent that the Development Plan in Exhibit E provides that Aradigm will perform Development activities after satisfaction of Lung Rx’s payment and investment obligations set forth in Section 6.2, Lung Rx shall be responsible for all reasonable costs and expenses incurred by or on behalf of Aradigm in connection with such authorized Development activities in accordance with the Development Plan and corresponding budget that have been pre-approved by Lung Rx in writing.

                (i)  In particular, Lung Rx shall pay for such costs and expenses as follows: (a) any Aradigm personnel time will be paid for at the Aradigm FTE Rate; and (b) any out-of-pocket expenses incurred by Aradigm will be reimbursed in full, at Aradigm’s reasonable and direct cost without markup.

                (ii)  Unless the Parties agree in writing otherwise, payments for Development work to be performed by Aradigm in a particular calendar quarter shall be made in advance prior to the first day of such calendar quarter. Such payments shall be based on estimated costs and expenses for the relevant Development work, as specified in the most recent written forecast for the applicable quarter submitted by Aradigm to Lung Rx in accordance with the Development Plan and corresponding budget. Any advance payments made by Lung Rx under this Section 4.6 will be reconciled on a quarterly basis against actual costs and expenses incurred by Aradigm for the relevant Development work as reported by Aradigm in a detailed monthly statement of costs incurred, and any payments made by Lung Rx under this Section 4.6 that are not applied to actual costs and expenses during a particular quarter may be credited by Lung Rx against payments owed by Lung Rx in a subsequent quarter. In the event that the actual costs and expenses incurred by Aradigm in a particular quarter in connection with Development work exceed the advance payment made by Lung Rx for such quarter, Lung Rx shall reimburse any such undisputed excess costs and expenses no later than thirty (30) days following Lung Rx’s receipt of written accounting of such costs and expenses from Aradigm.

                (iii)  Aradigm shall provide Lung Rx with a detailed monthly invoice within 20 days of the end of each month listing of all costs and expenses incurred by category of the Development Plan budget. Aradigm shall provide Lung Rx with copies of all vendor invoices being passed through on the monthly invoice. The Parties agree that Aradigm shall be solely responsible for payment of any cost or expense incurred by or on behalf of Aradigm following the Effective Date that is not (i) in accordance with a Development Plan and corresponding budget approved by Lung Rx, or (ii) with the prior written approval of Lung Rx.

           (b) As between the Parties, Lung Rx shall be responsible for all costs and expenses incurred by or on behalf of Lung Rx, its Affiliates, or their respective licensees in connection with the Development of Products with the exception of all costs and expenses incurred by or on behalf of Aradigm relating to the POC Study. If the POC Study is materially changed from that described in the Development Plan and Lung Rx agrees to such changes in writing, Lung Rx shall be responsible for all the specified additional costs and expenses incurred by or on behalf of Aradigm because of such changes.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

      4.7 Regulatory Coordination.

           (a) Lung Rx shall be responsible for preparing, filing and managing all regulatory filings and efforts seeking all Regulatory Approvals in the Territory. All regulatory filings for the Product in the Territory shall be filed in the name of Lung Rx, and Lung Rx alone shall be responsible for all communications and other dealings with Regulatory Authorities relating to the Product in the Territory. As between the Parties, Lung Rx shall be the sole and exclusive legal and beneficial owner of all regulatory applications, clinical data, Regulatory Dossiers and Regulatory Approvals in the Territory. Lung Rx shall have the final authority to make all clinical and regulatory decisions with respect to the registration of Products within the Territory in its sole discretion. Lung Rx shall have the right to reference any of Aradigm’s regulatory files Controlled by Aradigm relating to the AERx pulmonary drug delivery system, in connection with regulatory filings made by or on behalf of Lung Rx and Aradigm shall reasonably cooperate with Regulatory Authorities in connection therewith.

           (b) The PSC shall develop and implement procedures for drafting and review of any applications for Regulatory Approval for the Product in the Territory, which shall provide sufficient time for Aradigm to provide substantive comments. Unless otherwise agreed upon by the Parties, Aradigm shall provide any comments it may have to Lung Rx within 20 days of its receipt of each application. Lung Rx shall consider Aradigm’s comments on any such applications in good faith; provided, however, that Lung Rx shall have the right to make all final decisions relating to the content of each such application.

           (c) Lung Rx shall promptly notify Aradigm of all regulatory filings that it submits and all communications from Regulatory Authorities that it receives relating to Products, and shall promptly provide Aradigm with a copy (which may be wholly or partly in electronic form) of such regulatory filings or communications. Lung Rx will provide Aradigm with reasonable advance notice of any scheduled meetings with any regulatory agencies relating to Development and/or any application for Regulatory Approval of the Product in the Territory, and Aradigm shall have the right to participate in any such meeting, to the extent permitted by law. Lung Rx also shall promptly furnish Aradigm with summaries of all material correspondence or material meetings with any regulatory agency relating to Development, regulatory filings and/or a Regulatory Approval in the Territory, and Lung Rx shall promptly furnish Aradigm with copies of such correspondence or copies of minutes of such meetings.

           (d) Following receipt of Regulatory Approval of the Product, Lung Rx shall retain primary responsibility for dealings with the applicable regulatory agency with respect to the Product, including filing all supplements and other documents with such agency with respect to such Regulatory Approval.

           (e) Aradigm shall promptly notify Lung Rx of all regulatory filings that it submits and all communications from Regulatory Authorities that it receives relating to Products and, shall promptly provide Lung Rx with a copy (which may be wholly or partly in electronic form) of such regulatory filings. Aradigm will provide Lung Rx with reasonable advance notice of any scheduled meetings with any regulatory agencies relating to Development and/or any application for Regulatory Approval of the Product in the Territory, and Lung Rx shall have the

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

right to participate in any such meeting, to the extent permitted by law. Aradigm also shall promptly furnish Lung Rx with summaries of all material correspondence or material meetings with any regulatory agency relating to Development, regulatory filings and/or a Regulatory Approval in the Territory, and Aradigm shall promptly furnish Lung Rx with copies of such correspondence or copies of minutes of such meetings.

           (f) Subject to its confidentiality obligations to Third Parties and to the degree it is able, Aradigm shall promptly notify Lung Rx of all regulatory filings that it submits and all communications from Regulatory Authorities that it receives relating to the AERx pulmonary drug delivery system (and its future improvements, successors and alternatives) other than Products, and, at Lung Rx’s request, shall promptly provide Lung Rx with a copy (which may be wholly or partly in electronic form) of such regulatory filings or communications. Aradigm will provide Lung Rx with reasonable advance notice of any scheduled meetings with any regulatory agencies relating to Development and/or any application for Regulatory Approval of any product incorporating the AERx pulmonary drug delivery system (and its future improvements, successors and alternatives) in the Territory. Subject to its confidentiality obligations to Third Parties and to the degree it is able, Aradigm also shall promptly furnish Lung Rx with summaries of all material correspondence or material meetings with any regulatory agency relating to Development, regulatory filings and/or a Regulatory Approval in the Territory of any product incorporating the AERx pulmonary drug delivery system (and its future improvements, successors and alternatives), and Aradigm shall, at Lung Rx’s request, promptly furnish Lung Rx with copies of such correspondence or copies of minutes of such meetings.

           (g) Lung Rx may, at its expense, register the exclusive license granted under this Agreement in any country, or community or association of countries within the Territory, where the use, sale or manufacture of a Product in such country would be covered by a Valid Claim. Upon request of Lung Rx, Aradigm agrees, after Aradigm reviews for accuracy, promptly to execute any “short form” licenses in a form submitted to it by Lung Rx from time to time in order to effect the foregoing registration in such country.

      4.8 Product Withdrawals and Recalls. In the event that any regulatory agency (a) threatens or initiates any action to remove the Product from the market in any country in the Territory or (b) requires Lung Rx, its Affiliates, or its sublicensees to distribute a “Dear Doctor” letter or its equivalent regarding use of the Product in the Field, Lung Rx shall notify Aradigm of such event within two (2) business days after Lung Rx becomes aware of the action, threat, or requirement (as applicable). Lung Rx shall consult with Aradigm prior to initiating a recall or withdrawal of the Product; provided, however, that the final decision as to whether to recall or withdraw the Product in the Territory shall be made by Lung Rx in its sole discretion. Lung Rx shall be responsible, at its sole expense, for conducting any recalls or taking such other necessary remedial action, unless the remedial action relates to a medical device manufactured by or on behalf of Aradigm, in which event Aradigm shall be solely responsible for all expenses in conducting any recalls or taking such other necessary remedial action.

      4.9 Adverse Event Reporting.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

           (a) Each Party shall, and shall require its respective Affiliates to:

                (i)  notify the other Party promptly of all information coming into its possession concerning any adverse events associated with clinical or commercial uses of the Product, the Licensed Molecule, or an AERx pulmonary drug delivery system device (and its future improvements, successors and alternatives) (an “Adverse Event” ), subject to any applicable confidentiality obligations to Third Parties;

                (ii)  provide to the other Party a copy of any written submission made by such Party to a Regulatory Authority regarding Adverse Events no later than five (5) days following finalization of such written submission (and, to the extent permissible under time constraints and reporting requirements, in advance of submission to the applicable Regulatory Authority); and

                (iii)  adhere to all requirements of applicable laws, rules and regulations that relate to the reporting and investigation of Adverse Events.

           (b) If a Party contracts with a Third Party for research to be performed by such Third Party on the Product, that Party shall require such Third Party to report to the contracting Party the information set forth above.

      4.10 Commercialization of Product. Subject to the terms and conditions of this Agreement (including Section 4.11 and Section 4.12), Lung Rx shall control, and be solely responsible for the costs and expenses associated with, the Commercialization of the Product in the Territory.

      4.11 Diligence Obligations.

           (a) Lung Rx shall use Commercially Reasonable Efforts to Develop, and if in Lung Rx’s opinion the results of the Development Plan so justify, to seek Regulatory Approval for, and Commercialize Products in major markets throughout the Territory as Lung Rx determines are commercially feasible in its sole discretion. The Development Plan shall include such Product Development work as Lung Rx may, in its sole discretion, consider necessary to support Regulatory Approval.

           (b) In the event that Lung Rx fails to materially comply with the diligence obligations set forth in Section 4.11(a), and Lung Rx fails to cure its material non-compliance within thirty (30) days following written notice from Aradigm providing a detailed explanation of such material non-compliance, Aradigm may, in its sole discretion, elect to convert the exclusive license granted to Lung Rx pursuant to Section 2.1(a) to a non-exclusive license with respect to a given Product, with all other terms and conditions of this Agreement remaining unchanged. Any such conversion to a non-exclusive license for a Product shall be effective upon Lung Rx’s receipt of written notice from Aradigm, but shall not affect other Products which are being Developed and/or Commercialized under this Agreement.

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

           (c) Notwithstanding the non-exclusivity conversion provision in Section 4.11(b), the diligence obligations set forth in this Section 4.11 shall not apply to the extent (i) Aradigm’s failure to perform its obligations under this Agreement in a timely manner causes a delay in Lung Rx’s Development, efforts to seek Regulatory Approval for, or Commercialization of such Product; or (ii) there exists any material regulatory action affecting such Product; or (iii) there exists any material issue relating to the toxicology, safety, bioavailability or efficacy of such Product and the absence of any impediments caused by formulation, material sourcing, manufacturing, or other technical issues related to Product; in each case that leads Lung Rx to conclude, in exercising reasonable business judgment, that Development or Commercialization of such Product should be suspended or stopped altogether. Upon the occurrence of circumstances described in either subsection (i), (ii) or (iii), the following terms shall apply: (A) Lung Rx shall notify Aradigm in writing of the existence of such circumstances, specifying the details thereof and (in the case of circumstances described in subsection (ii) or (iii) the reasons why Lung Rx concluded that Development or Commercialization of such Product should be suspended or stopped, (B) Lung Rx’s obligations to Develop or Commercialize such Product shall be suspended so long as any such circumstances exists, and (C) the obligations set forth in Section 4.11(a) shall be extended by the period of any such suspension with respect to such Product.

      4.12 Other Inhalation Devices.

           (a) If the AERx pulmonary drug delivery system is commercially viable in the reasonable opinion of the PSC, Lung Rx and its Affiliates shall not spend more in cash and/or in kind cumulatively on Developing the Licensed Molecule for a product involving an inhalation device that is handheld and able to deliver a therapeutic dose of the Licensed Molecule in less than 10 breaths, than is spends on Development activities for the product. The restriction in this Section 4.12(a) shall end upon the d