Distribution Agreement

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Exhibit 10.6

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DISTRIBUTION AGREEMENT

This DISTRIBUTION AGREEMENT (“Agreement”) is made this 16th day of June, 2003 (“Effective Date”), by and between Cardica, Inc., a Delaware corporation with its principal place of business located at 171 Jefferson Drive, Menlo Park, CA 94025, USA (hereinafter referred to as “COMPANY”) and Century Medical, Inc., a Japanese Corporation with its principal place of business located at 1-6-4 Ohsaki, Shinagawa-Ku, Tokyo, 141-8588, Japan (hereinafter referred to as “DISTRIBUTOR”) in consideration of the mutual covenants and conditions hereinafter stated.

1. DEFINITION OF TERMS

1.1 “Competing Products”

“Competing Products” shall mean automated anastomosis products that seal coronary artery bypass grafts to accomplish surgical anastomosis except for and excluding hemostasis products that, as of the Effective Date, DISTRIBUTOR distributes in the Territory that are manufactured by CryoLife, Inc. (BioGlue™), which shall not be considered Competing Products or other anastomosis devices that create a surgical anastomosis outside the coronary area of the body.

1.2 “Contract Year”

“Contract Year” shall mean a twelve (12) month period commencing on, and thereafter beginning on the anniversary of, the first day of the first full month following the date of First Commercial Sale in the Territory of any Product.

1.3 “First Commercial Sale”

“First Commercial Sale” shall mean the first sale of any Product with the intended maximum shelf life of twelve (12) months or more by DISTRIBUTOR to a third party in the Territory with all medical device approvals required to market and sell such Product (“Shonin” or “Lui Betsu Kyoka”) from The Japanese Ministry of Health, Labour and Welfare (“MHLW”) and all import permits from the appropriate government authorities (“Hinmoku Kyoka”). COMPANY hereby represents and warrants that, as of the Effective Date, COMPANY has obtained conditional CE Mark approval for the “Proximal Device” Product and the Proximal Device Product is a commercially available Product to DISTRIBUTOR to begin the device approval process stated above.

1.4 “Initial Term”

“Initial Term” shall mean the five (5) year period beginning on the date of expiration of the Premarketing Term.

1.5 “Party” or “Parties”

“Party” or “Parties” shall mean COMPANY or DISTRIBUTOR, individually and collectively.

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1.6 “Premarketing Term”

“Premarketing Term” shall mean the period beginning on the Effective Date and ending on the first day of the first full month following the date of First Commercial Sale of all Products.

1.7 “Products”

“Products” shall mean those Products specifically listed in Schedule 1 , whether manufactured by or for COMPANY or its affiliates, including any improvements or modifications thereto, as such schedule may be amended from time to time. As used herein, “affiliate” means a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified person or entity, where “control” means (a) fifty percent (50%) or more common equity ownership, or (b) the ability to direct the management or policies of a person or entity, whether by contract or otherwise.

1.8 “Territory”

“Territory” shall mean Japan.

2. APPOINTMENT OF DISTRIBUTOR

2.1 Appointment as DISTRIBUTOR by COMPANY.

COMPANY hereby appoints DISTRIBUTOR as its exclusive importer and distributor of COMPANY’s Products for the Territory in consideration of COMPANY’s issuance of a promissory note (the “Note”), concurrent with the execution of that certain Subordinated Convertible Note Agreement in the amount of three million U.S. dollars ($3,000,000.00), and DISTRIBUTOR hereby accepts such appointment on the terms and conditions set forth in this Agreement. Under no circumstances shall DISTRIBUTOR have authority to sell or distribute any Products outside the Territory. COMPANY shall also grant to DISTRIBUTOR a right of first negotiation for the import and distribution in the Territory of all new and future products with all line extensions, modifications and improvements thereto, manufactured and sold by COMPANY or products acquired by COMPANY or its affiliates for distribution by COMPANY. Such distribution shall be in accordance with the terms and conditions of this Agreement, with a per unit purchase price and minimum purchase levels (“MPL”) mutually agreeable to COMPANY and DISTRIBUTOR. If within thirty (30) days of COMPANY’s first written proposal to DISTRIBUTOR, COMPANY and DISTRIBUTOR cannot agree upon a per unit purchase price and MPL for such new products or if DISTRIBUTOR declines to distribute such products, then COMPANY will be permitted to distribute or cause to distribute by alternate means only such products as were first offered to DISTRIBUTOR for distribution in the Territory; provided , however , that COMPANY’s distribution of said products by alternate means shall be upon terms and conditions (including the per unit purchase price and MPL) to such alternate distributor no more favorable than the terms and conditions under which such products were last offered to DISTRIBUTOR for distribution.

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2.2 Subdistributors.

DISTRIBUTOR may appoint subdistributors to make sales of Products within the Territory on such terms and conditions as DISTRIBUTOR determines to be necessary to fulfill its obligations under this Agreement; provided that no such appointment or delegation shall relieve DISTRIBUTOR from any obligations hereunder. COMPANY acknowledges and agrees that DISTRIBUTOR will use subdistributors in the sale of Products, the use of said subdistributors being a normal business custom in the Territory.

3. TERM OF DISTRIBUTORSHIP

This Agreement and the rights conferred on DISTRIBUTOR hereunder shall come into effect on the Effective Date and shall remain in effect until the expiration of the Initial Term. At the end of the Initial Term, this Agreement shall automatically renew for an additional five (5) years (the “Renewal Period”) subject to DISTRIBUTOR having met the MPL for each Contract Year during the Initial Term as required under Section 8.6 below.

4. DUTIES OF DISTRIBUTOR

4.1 Duties of DISTRIBUTOR.

DISTRIBUTOR covenants and agrees to do each of the following:

                (i) DISTRIBUTOR shall use commercially reasonable efforts to promote and sell the Products in the Territory;

                (ii) DISTRIBUTOR shall send one person from its sales and marketing organization to COMPANY for training prior to the First Commercial Sale of the Products in the Territory for a period of time mutually agreed upon by the Parties;

                (iii) DISTRIBUTOR shall maintain a commercially reasonable stock of the Products in order to promote the Products in the Territory;

                (iv) DISTRIBUTOR shall exhibit Products at industry meetings in the Territory;

                (v) DISTRIBUTOR shall create and develop a training program for end-user physician customers in the Territory in cooperation with COMPANY; DISTRIBUTOR shall not sell Products to any end-users who have not been trained in the use of the Products.

                (vi) DISTRIBUTOR shall confer with COMPANY, from time to time, upon the written request of COMPANY, on matters relating to the marketing and promotion of the Products in the Territory;

                (vii) DISTRIBUTOR shall keep COMPANY informed regarding regulatory requirements in the Territory and shall, from time to time, provide COMPANY with updated amendments to Schedule 2 attached hereto;

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                (viii) DISTRIBUTOR shall not solicit the sale of, promote the sale of, sell, exhibit for sale, distribute or manufacture any Competing Products in the Territory;

                (ix) DISTRIBUTOR shall translate Product literature into the Japanese language when necessary; and

                (x) during the term of this Agreement, and for a period of [*] years from the expiration or termination of this Agreement, DISTRIBUTOR, its affiliates, successors and assigns shall not directly solicit or indirectly solicit for employment or hire in any capacity any personnel employed by COMPANY or any affiliate of COMPANY.

4.2 Product Approvals.

DISTRIBUTOR shall use its commercially reasonable efforts to obtain, at its own expense (except as otherwise provided herein), all “Lui Betsu Kyoka,” “Me-too” or “Kairyo Iryoyogu” Shonin (as defined below) from the MHLW needed to market the Products in the Territory. DISTRIBUTOR shall be under no obligation to conduct or perform any clinical trial for purposes of obtaining any Shonin or marketing the Products in the Territory. For the purposes of this section, “Lui Betsu Kyoka,” “Me-too” and “Kairyo Iryoyogu” Shonin shall mean those Shonins approved without conducting any clinical trials in the Territory. Lui Betsu Kyoka approval is not expected to exceed six (6) months from the Effective Date, subject to DISTRIBUTOR’s receipt of all necessary information from COMPANY required to prepare and file for the Lui Betsu Kyoka. COMPANY and DISTRIBUTOR recognize that competitive devices already on the market in the Territory have been classified as Lui Betsu Kyoka qualified devices; the easiest category to register a Product in the Territory. In the event that the MHLW requires a more formal Shonin application, either a “Me-too” or “Kairyo Iryoyogu” Shonin or “Shin Iryoyogu,” COMPANY and DISTRIBUTOR will diligently and in good faith apply for a Shonin in the appropriate category. “Shin Iryoyogu” shall mean the Shonin approved based on clinical trials or utilizing foreign clinical study data obtained for the purpose of seeking regulatory approval. In the event that the Parties agree to conduct any clinical trials in the Territory with a reasonable number of clinical cases for obtaining Shonin approval, COMPANY shall, at no charge to DISTRIBUTOR, supply DISTRIBUTOR with all necessary Products. All other costs associated with any clinical trials conducted in the Territory shall be borne by DISTRIBUTOR. COMPANY shall support any clinical trial activity in the Territory with all information available at its disposal. COMPANY reserves the right to approve any study design (protocol) related to clinical trials in the Territory, which approval shall not be unreasonably withheld.

In the event that DISTRIBUTOR is unable, within five (5) years of the Effective Date of this Agreement, to obtain First Commercial Sale, COMPANY shall have the sole and exclusive right to terminate this Agreement with immediate effect.

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5. DUTIES OF COMPANY

5.1 Duties of COMPANY.

COMPANY covenants and agrees to do each of the following:

                (i) COMPANY shall use its commercially reasonable efforts to research and respond to Product improvement needs of end-users in the Territory;

                (ii) COMPANY shall not, (a) appoint any other distributor or importer of the Products in the Territory during the term of this Agreement or (b) make sales, directly or indirectly, of any of the Products to any person in the Territory other than DISTRIBUTOR or to any customer outside the Territory who is known to COMPANY, or who COMPANY should reasonably know, intends to introduce, directly or indirectly, the Products into the Territory. Further, subject to Section 2.1, COMPANY shall not, directly or indirectly, import, manufacture, sell, market or otherwise distribute in the Territory (except pursuant to this Agreement) the Products or any products directly competitive with the Products;

                (iii) COMPANY shall provide DISTRIBUTOR with all materials necessary to obtain and maintain Shonin or Lui Betsu Kyoka for the import and sale of Products within the Territory by promptly furnishing to DISTRIBUTOR, at COMPANY’s cost, such technical descriptions, specifications, data, drawings, information, service manuals, quality control audits, facility inspection reports issued by governmental regulators or international quality control auditors, and so forth regarding the Products, in the English language, as DISTRIBUTOR may reasonably request;

                (iv) COMPANY shall provide DISTRIBUTOR, at no cost, all Products necessary for DISTRIBUTOR to fulfill its obligations under Section 4.2 however, the number of Products supplied at no charge to DISTRIBUTOR shall not exceed ten (10) units of sterile Products per non Shin Iryoyogu Shonin application. The number of units of sterile Products necessary for a Shin Iryoyogu Shonin shall be determined by the number of patients required by the clinical protocol;

                (v) COMPANY shall provide DISTRIBUTOR with the information, documentation, data and certificates listed in Schedule 2 , as amended from time to time, necessary for DISTRIBUTOR to remain in compliance with the Good Manufacturing Practices for Importers laws and regulations of the Territory;

                (vi) COMPANY shall inform DISTRIBUTOR, from time to time, of technical and other developments regarding the Products as they may occur;

                (vii) COMPANY shall furnish to DISTRIBUTOR on an on-going basis, at COMPANY’s cost, with a reasonable quantity of such technical, advertising and selling information and other promotional literature in the English language regarding the Products;

                (viii) COMPANY shall provide Product training to personnel of DISTRIBUTOR at times and places mutually agreed upon by both Parties, with each Party bearing its own expenses for attending such training;

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                (ix) COMPANY shall provide DISTRIBUTOR a reasonable amount of non-sterile functional Products for demonstration purposes at [*] percent ([*]%) of the sterile Products price. The total number of non-sterile functional Products sold to DISTRIBUTOR at the discounted price shall be determined at COMPANY’s sole discretion. The total number of non-sterile non-functional Products given to DISTRIBUTOR at no charge shall initially be twenty (20) units and any additional quantities shall be provided at COMPANY’s sole discretion. All such non-sterile Products shall be used for demonstration purposes only and may not be used for any other commercial activity (e.g., sale; lease; loaner; etc.) or implanted; and

                (x) during the term of this Agreement and for a period of [*] ([*]) years from the expiration or termination of this Agreement, COMPANY, its affiliates, successors and assigns shall not directly solicit or indirectly solicit for employment or hire in any capacity any personnel employed by DISTRIBUTOR or any affiliate of DISTRIBUTOR.

6. EXPENSES

6.1 DISTRIBUTOR’s Expenses.

Except as otherwise specifically provided herein, DISTRIBUTOR shall be responsible for all expenses incurred by it in connection with the implementation of this Agreement, including without limitation salaries, office and travel expenses of its employees, advertising and trade shows within the Territory and any and all taxes which may be imposed on DISTRIBUTOR within the Territory. COMPANY shall bear only such of these expenses as to which it has given prior written approval.

6.2 COMPANY’s Expenses.

Except as otherwise specifically provided herein, COMPANY shall be responsible for payment of all expenses incurred by it including any taxes imposed on it and shall also pay those expenses incurred in connection with the implementation of this Agreement for which it has given prior written approval.

7. RECORDS and REPORTS

7.1 Records and Reports.

Subject at all times to Section 11.2, DISTRIBUTOR shall maintain complete and accurate records of aggregate purchases and resales of the Products. DISTRIBUTOR shall provide to COMPANY, by the thirtieth (30th) day of the first month following the end of each quarter during the term of this Agreement, a quarterly report summarizing DISTRIBUTOR’S sales activities under this Agreement for the prior calendar quarter and containing such other information as COMPANY may reasonably request, including without limitation a description of and the amount of all Products in DISTRIBUTOR’s inventory as of the first day of each calendar month.

DISTRIBUTOR and COMPANY each shall, for tracking purposes, maintain accurate delivery, receiving and shipping records including model and lot numbers of the Products.

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7.2 Adverse Experience Reporting.

COMPANY and DISTRIBUTOR shall follow the guidelines contained in Schedule 3 regarding adverse events associated with the Products.

7.3 Updating/Revising Agreement.

The Parties shall amend this Agreement from time to time to the extent necessary to incorporate changes to Schedule 3 reflecting changes in the regulatory requirements applicable to adverse events within their respective territories.

7.4 Recall.

If either Party believes or is notified that a recall in the Territory of any Product is desirable or required by law, it will notify the other Party within twenty-four (24) hours of any such notice. The Parties will then discuss reasonably, expediently and in good faith whether such recall is appropriate or required and the manner in which any mutually agreed recall shall be handled. The Party whose mistake, negligence or gross negligence results in such recall shall bear the expenses incurred in connection with such recall. In addition, if COMPANY is the responsible Party, COMPANY shall reimburse DISTRIBUTOR for the price paid hereunder for such Products as may be recalled, plus all freight and related travel costs incurred by DISTRIBUTOR in connection with such recalled Products, including any costs incurred in disposing of or returning such recalled Products to COMPANY at COMPANY’s instruction. The Parties will mutually agree upon the methods of disposal consistent with applicable laws in the Territory.

8. SALES OF PRODUCT TO DISTRIBUTOR

8.1 Purchase Prices and Terms.

COMPANY shall sell the Products to DISTRIBUTOR at the prices set forth in Schedule 1 . Payments on purchase orders shall be due at the end of the month immediately following the month of shipment of the Products to DISTRIBUTOR. Payment shall be made by wire transfer in U.S. funds to an account designated in writing by COMPANY. All shipments of Products shall be billed to DISTRIBUTOR at the price in effect for each Product in accordance with this Section 8.1 and Schedule 1 , on the date of DISTRIBUTOR’s purchase order for such Products. COMPANY shall have the right to change the prices of the Products no more than [*] each Contract Year consistent with prices charged to third-party international distributors of the Products, taking into consideration such factors as exchange rates, device-specific reimbursement rates for the Products in the Territory, if any, competition, and the like, by notifying DISTRIBUTOR in writing of any such change at least ninety (90) days prior to the effective date of any such change. Notwithstanding the foregoing, in no event shall any price increase exceed [*]% of the then current price for such Product. Further, DISTRIBUTOR shall have the right to request a change in price, taking into consideration such factors as exchange rates, device-specific reimbursement rates for the Products in the Territory, if any, competition, and the like, by notifying COMPANY in writing of any such request and the reason for such request which request COMPANY shall consider in good faith.

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8.2 Risk of Loss, Deliveries.

DISTRIBUTOR shall purchase the Products from COMPANY FCA (as defined under Incoterms 2000 of the International Chamber of Commerce) place of manufacture with risk of loss passing to DISTRIBUTOR upon delivery of the Products to the carrier. DISTRIBUTOR shall be responsible for taxes (other than any taxes on COMPANY’s income) and import duties imposed in the Territory and for shipping fees. COMPANY shall deliver accepted orders within the acknowledged time of shipment stated in COMPANY’s acceptance of the order. All Products shall be packed for shipment and storage in accordance with COMPANY’s standard commercial practices, unless DISTRIBUTOR notifies COMPANY of special packaging requirements, in which event COMPANY shall be entitled to charge DISTRIBUTOR for any additional costs approved in advance by DISTRIBUTOR.

8.3 Acceptance and Cancellation of Orders.

All orders for Products by DISTRIBUTOR shall be initiated by DISTRIBUTOR’s issuance of a written purchase order sent via facsimile or mail to COMPANY or such other place as designated by COMPANY. Such orders shall state unit quantities, unit descriptions, requested delivery dates, and shipping instructions. The acceptance by COMPANY of an order shall be indicated by written acknowledgment thereof by COMPANY within [*] business days following receipt of each order. This Agreement shall control orders of Products by DISTRIBUTOR. Any conflicting or different or additional terms or conditions contained in DISTRIBUTOR’s purchase order, COMPANY’s acknowledgment or other similar document shall not add to or modify the terms of this Agreement. COMPANY shall have the right to cancel any order placed by DISTRIBUTOR or to refuse or delay the shipment thereof to the extent that DISTRIBUTOR is in default of any payment obligations hereunder. DISTRIBUTOR may cancel an order, or any part thereof, for standard Products normally kept in COMPANY’s inventory which COMPANY has accepted only by providing written notice to COMPANY prior to the shipment of such Products and by paying such reasonable cancellation charge as requested by COMPANY. DISTRIBUTOR may not cancel an order for non-inventory Products or custom made Products which COMPANY has accepted unless confirmed in writing by COMPANY and by paying such reasonable cancellation charge as requested by COMPANY, which cancellation charge may include, without limitation reasonable tooling and works-in-progress expenses requested by COMPANY.

8.4 Product Specifications.

COMPANY shall be obligated to deliver Products of the specifications and quality standards in effect at the time and made known to DISTRIBUTOR and which contain a minimum shelf life of the greater of [*] months or [*] percent ([*]%) of the intended maximum shelf life for such Product at the time COMPANY delivers an order. COMPANY shall use reasonable efforts to extend the intended maximum shelf life of Products to [*] months or more by December 31, 2003 and [*] months or more for such Products during 2004. COMPANY reserves the right to change the design or specifications of any of the Products at any time with ninety (90) days prior written notice to DISTRIBUTOR. COMPANY also reserves the right to discontinue the manufacture and distribution of any of the Products at any time, with ninety (90) days prior written notice to DISTRIBUTOR and, without substitution, in COMPANY’s sole discretion;

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provided that a discontinuation or cancellation of a Product or Product line for the purpose of transfer to a third party or to an affiliate of the COMPANY shall be deemed an assignment of the COMPANY’s rights and obligations of this Agreement with respect to such Products, and COMPANY shall ensure that such transferee shall be bound by the terms and conditions of this Agreement to the same extent as the COMPANY with respect to any such Products. COMPANY acknowledges and understands that a substantial lead time is required to obtain Shonin for Product specification changes and COMPANY will use its commercially reasonable efforts to give DISTRIBUTOR as much advance notification as possible in excess of ninety (90) days concerning Product specification changes. In the event COMPANY discontinues the manufacture or distribution of any Product or in the event of a Product specification change or in the event of COMPANY’s refusal to or failure to accept or fill any bona fide purchase orders for Products, DISTRIBUTOR’s MPL under Section 8.6 herein shall be amended and adjusted accordingly.

8.5 Taxes.

DISTRIBUTOR shall be responsible for all taxes levied and/or imposed by the Japanese government or Japanese taxing authority (other than any tax on COMPANY’s income) related to this Agreement; provided that DISTRIBUTOR may withhold from any payments to COMPANY any amounts required by Japanese law to be withheld, and shall provide to COMPANY receipts of any amounts so withheld issued by the proper authority, and such withholding taxes shall not be “grossed up”. COMPANY shall be responsible for all taxes levied and/or imposed by the United States government or any taxing authority in the United States related to this Agreement.

8.6 Purchase Levels.

DISTRIBUTOR’s right to maintain its exclusive distributorship as set forth in Section 2.1, herein, shall be subject to the following:

                (i) The MPL for Contract Years 1 through 3 shall be the following sales goals that, if not met, are non-breach, non-termination events:

               Contract Year 1 for “Distal Device” shall commence when (1) DISTRIBUTOR has obtained all necessary regulatory approvals for this Product in accordance with Section 4.2 of this Agreement and (2) COMPANY has extended the intended maximum shelf life of this Product to twelve (12) months or more in accordance with Section 8.4 of this Agreement.

                (ii) Contract Year 4 and thereafter: DISTRIBUTOR and COMPANY shall prepare and agree upon an MPL ninety (90) days prior to the anticipated beginning of the Contract Year 4 of the Initial Term and ninety (90) days prior to the beginning of each

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subsequent Contract Year thereafter during the term of this Agreement and any subsequent Renewal Periods. With respect to Product line extensions, the Parties shall make MPL adjustments as mutually agreed upon, commensurate with the expanded total available market opportunity associated with the expanded Product offerings. If after exhausting all reasonable efforts COMPANY and DISTRIBUTOR are unable to mutually agree upon an MPL ten (10) days prior to the beginning of a subsequent Contract Year, then the default MPL for the subsequent Contract Year shall be the product of the actual purchases by DISTRIBUTOR during the Contract Year immediately preceding the subsequent Contract Year times [*] for Contract Year 4 and [*] for any subsequent Contract Year after Contract Year 4.

                (iii) For thirty (30) days following the conclusion of any Contract Year of the Agreement in which DISTRIBUTOR has not purchased the MPL for that Contract Year, DISTRIBUTOR shall have the discretionary right but not the obligation to purchase additional Products from COMPANY at the then applicable purchase prices in order to satisfy DISTRIBUTOR’s MPL for the prior Contract Year. Any purchases credited towards the prior Contract Year’s MPL in accordance with the immediately preceding sentence shall not be credited towards the then current Contract Year’s MPL.

                (iv) Except as described in Section 8.6(iii) above, for purposes of this Section 8.6, a Product shall be deemed purchased during a designated Contract Year when a firm purchase order has been received and accepted by COMPANY during such Contract Year, and which order calls for delivery of Products within that Contract Year.

                (v) Notwithstanding any other provision of this Agreement to the contrary, any MPL then in effect shall be adjusted accordingly to reflect the effect of any new Products and any Product line extensions, any Product recall, any discontinuation of a Product or Product line, any change in design or specifications of any Product which has a material adverse impact on DISTRIBUTOR’s ability to market or sell such Product, any transfer to a third party or affiliate of COMPANY of any Product as described in Section 8.4 that has a material adverse impact on DISTRIBUTOR’s ability to market or sell such Product, any termination of this Agreement with respect to a Product as described in Section 12.2, any refusal or failure by COMP