Development and Production Agreement For Active Pharmaceutical Ingredients

Exhibit 10.20

[********] 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 406 of the Securities Act of 1933, as amended.

Development and Production Agreement

For

Active Pharmaceutical Ingredients

Between

SIEGFRIED LTD.

Untere Brühlstrasse 4

4800 Zofingen SWITZERLAND

(hereinafter referred to as “SIEGFRIED”)

and

TARGACEPT, INC.

200 East First Street, Suite 300

Winston-Salem, NC 27101-4165 USA

(hereinafter referred to as “TARGACEPT”)

RECITALS

This DEVELOPMENT AND PRODUCTION Agreement (the “AGREEMENT”) is entered into as of the first (1 ^st ) day of February 2004 (the “EFFECTIVE DATE”) by and between SIEGFRIED and TARGACEPT.

WHEREAS , TARGACEPT presently owns certain patents and patent applications that disclose the composition, preparation or use of certain pharmaceutically active compounds and intermediates and formulations of such compounds (collectively, “COMPOUNDS”).

WHEREAS , SIEGFRIED has expertise and is engaged in the development and preparation of pharmaceutically active compounds and intermediates of such compounds, as well as formulations of such compounds and intermediates.

WHEREAS , TARGACEPT is interested in having SIEGFRIED perform DEVELOPMENT on and/or PRODUCTION of certain COMPOUNDS, and SIEGFRIED is willing to carry out such DEVELOPMENT and PRODUCTION on behalf of and for TARGACEPT under the terms and conditions of this AGREEMENT.

NOW, THEREFORE , in consideration of the mutual covenants and promises contained in this AGREEMENT and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, TARGACEPT and SIEGFRIED agree as follows:

For the purpose of this AGREEMENT, the following definitions shall apply:

1.1 “ACT” shall mean the United States Federal Food, Drug and Cosmetics Act and all rules and regulations promulgated thereunder, as the same may be amended from time to time.

1.2 “AFFILIATE” shall mean, with respect to a given party, any business entity controlling, controlled by, or under common control with such party. For the purpose of this definition, the term “control” shall mean the possession of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of more than fifty percent (50%) of the outstanding voting stock, by contract or otherwise.

1.3 “BATCH” shall mean the material resulting from a single manufacturing order during a specific cycle of PRODUCTION.

1.4 “COMPOUND” shall have the meaning given it in the recitals appearing above.

1.5 “CONFIDENTIAL INFORMATION” shall mean (a) in the case of TARGACEPT,

Page 2 of 24

TARGACEPT IP, NEW IP and any and all information and materials disclosed by TARGACEPT to SIEGFRIED in connection with this AGREEMENT or the activities hereunder and (b) in the case of SIEGFRIED, SIEGFRIED IP and any and all other information and materials, other than NEW IP, disclosed by SIEGFRIED to TARGACEPT in connection with this AGREEMENT or the activities hereunder. In addition, the existence and terms of this AGREEMENT shall be considered CONFIDENTIAL INFORMATION of each party.

1.6 “DEVELOPMENT” shall mean, collectively, the activities pertaining to the development of a synthetic chemical process and/or finished dosage development studies and formulation for a SELECTED COMPOUND to enable PRODUCTION of a PRODUCT (which may include, without limitation, research studies, process optimization, the scale-up of an existing process and delivery of samples of SELECTED COMPOUND) that are described as Phase I – Laboratory under Scope of Work in the mutually agreed upon sub-appendix to Appendix B applicable to that PRODUCT. A separate sequentially numbered sub-appendix (B-1, B-2 and so on) shall be prepared for each SELECTED COMPOUND for which SIEGFRIED undertakes DEVELOPMENT at TARGACEPT’s request hereunder, which sub-appendix shall include the costs chargeable to TARGACEPT for such services (based on the rates specified herein), be dated and signed by an authorized employee of each party, attached hereto and thereupon become a part hereof.

1.7 “EFFECTIVE DATE” shall have the meaning given it in the first sentence of this AGREEMENT.

1.8 “EXCLUSION CONDITIONS” shall mean: (i) with respect to any particular SELECTED COMPOUND or PRODUCT, TARGACEPT (A) licenses or otherwise conveys to a third party the right to manufacture, or to control manufacturing of, such SELECTED COMPOUND or PRODUCT (except where TARGACEPT merely outsources the manufacturing function for such SELECTED COMPOUND OR PRODUCT on a contract basis for its own benefit), (B) enters into a strategic collaboration or partnership, however structured, pursuant to which its collaborator or partner assumes responsibility for, or control of, manufacturing such SELECTED COMPOUND or PRODUCT, or (C) determines, in the exercise of its good faith discretion, that SIEGFRIED’s performance hereunder is sub-standard or otherwise unsatisfactory; or (ii) with respect to any particular task, TARGACEPT determines that SIEGFRIED does not possess the experience, expertise or capability required to perform such task.

1.9 “FDA” shall mean the United States Food and Drug Administration.

1.10 “FULL TIME EQUIVALENT (FTE)” is defined as [********] per year of project work as provided by a chemist, pharmaceutical scientist, analytical chemist or regulatory specialist. FTE cost is fully loaded and, without limiting the generality of the foregoing, includes administrative overhead and quality support.

1.11 “GMP” shall mean those practices in the manufacture of pharmaceutical products that are recognized from time to time as the current good manufacturing practices in accordance with FDA regulations, guidelines and other administrative interpretations and rulings in connection therewith, including, but not limited to those regulations cited in 21 C.F.R. §§ 210 and 211 and the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use, Guidance for Industry Q7A Good Manufacturing Practice Guidance for Active Pharmaceutical Ingredients, August 2001.

Page 3 of 24

1.12 “KNOW-HOW” shall mean information and materials, including, without limitation, ideas, concepts, discoveries, inventions, developments, improvements, know-how, expertise, trade secrets, designs, devices, equipment, process conditions, specifications, algorithms, notation systems, works of authorship, computer programs, technologies, formulas, techniques, methods, procedures, assay systems, applications, experimental results, data (including, without limitation, analytical, toxicological, pharmacological, clinical, bioequivalence and stability data), documentation, reports, enzymes, reagents, proteins, peptides, organisms, formulations, chemical compounds and products, whether patentable or otherwise.

1.13 “MASTER PRODUCTION RECORD” shall mean, with respect to any particular PRODUCT, the formal set of instructions for PRODUCTION of such PRODUCT.

1.14 “NEW IP” shall mean all NEW KNOW-HOW and all patents, patent applications, copyrights, trade secrets and other intellectual property rights pertaining to NEW KNOW-HOW.

1.15 “NEW KNOW-HOW” shall mean all KNOW-HOW that pertains solely to one or more SELECTED COMPOUNDS, the DEVELOPMENT of one or more SELECTED COMPOUNDS or the PRODUCTION of one or more SELECTED COMPOUNDS into one or more PRODUCTS that is conceived, developed, made and/or reduced to practice by SIEGFRIED during the TERM. NEW KNOW-HOW shall not include or constitute SIEGFRIED KNOW-HOW.

1.16 “PRODUCT” shall mean a SELECTED COMPOUND with particular SPECIFICATIONS.

1.17 “PRODUCTION” shall mean, collectively, the activities pertaining to the pre-commercial production of PRODUCT (which may include, without limitation, the manufacture, storage and supply of quantities of PRODUCT) that are described as Phase II – Kilo Lab or Pilot Production under Scope of Work in the mutually agreed upon sub-appendix to Appendix B applicable to the particular PRODUCT. A separate sequentially numbered sub-appendix (B-1, B-2 and so on) shall be prepared for each PRODUCT for which SIEGFRIED undertakes PRODUCTION at TARGACEPT’s request, which sub-appendix shall include the costs chargeable to TARGACEPT for such services (based on the rates specified herein), be dated and signed by an authorized employee of each party, attached hereto and thereupon become a part hereof.

1.18 “REGULATORY AUTHORITIES” shall mean those agencies or authorities responsible for marketing approval or regulation of any PRODUCT in the United States (including, without limitation, the FDA) or any foreign jurisdiction.

1.19 “SELECTED COMPOUND” shall mean a COMPOUND (or finished dosage form(s) of a COMPOUND) for which TARGACEPT engages SIEGFRIED to perform DEVELOPMENT or PRODUCTION as specified from time to time in a sub-appendix to Appendix A . A separate sequentially numbered sub-appendix (A-1, A-2 and so on) shall be prepared for each SELECTED COMPOUND, which sub-appendix shall be dated and signed by an authorized employee of each party, attached hereto and thereupon become a part hereof.

1.20 “SIEGFRIED IP” shall mean all SIEGFRIED KNOW-HOW and all patents, patent applications, copyrights, trade secrets and other intellectual property rights controlled by SIEGFRIED pertaining to the SIEGFRIED KNOW-HOW.

Page 4 of 24

1.21 “SIEGFRIED KNOW-HOW” shall mean all KNOW-HOW: (a) not in the public domain and in the possession of SIEGFRIED as of the Effective Date; (b) conceived, developed, acquired, made and/or reduced to practice by SIEGFRIED during the TERM that pertains to development or production technologies applicable to the development or preparation of active pharmaceutical compounds and intermediates (but not any SELECTED COMPOUND or PRODUCT) or of formulations of such compounds and intermediates; or (c) conceived, developed, acquired, made and/or reduced to practice by SIEGFRIED during the TERM that pertains to development and production technologies generally applicable to the development or preparation of a variety of active pharmaceutical compounds and intermediates (at least one of which, but not all of which, is a SELECTED COMPOUND or PRODUCT) or of formulations of such compounds and intermediates. SIEGFRIED KNOW-HOW shall not include or constitute NEW KNOW-HOW.

1.22 “SPECIFICATIONS” shall mean the specifications for particular Product set forth in the applicable sub-appendix to Appendix A , as the same may be amended in accordance with the terms of this AGREEMENT.

1.23 “TARGACEPT IP” shall mean all TARGACEPT KNOW-HOW and all patents, patent applications, copyrights, trade secrets and other intellectual property rights controlled by TARGACEPT pertaining to the TARGACEPT KNOW-HOW.

1.24 “TARGACEPT KNOW-HOW” shall mean all KNOW-HOW not in the public domain and in the possession of TARGACEPT as of the Effective Date, or conceived, developed, acquired, made or reduced to practice by TARGACEPT during the TERM, that pertains to one or more SELECTED COMPOUNDS or PRODUCTS or the DEVELOPMENT or PRODUCTION of one or more SELECTED COMPOUNDS or PRODUCTS. TARGACEPT KNOW-HOW shall not include or constitute NEW KNOW-HOW.

1.25 “TERM” shall have the meaning ascribed to it in Section 9.1.

2.1 TARGACEPT hereby engages SIEGFRIED to undertake DEVELOPMENT and/or PRODUCTION as set forth in sub-appendices to this AGREEMENT from time to time, upon the terms and conditions set forth in this AGREEMENT, and SIEGFRIED hereby accepts such engagement.

2.2 With respect to each SELECTED COMPOUND for which TARGACEPT engages SIEGFRIED to undertake DEVELOPMENT, SIEGFRIED shall use all commercially reasonable efforts to complete such DEVELOPMENT in accordance with the Scope of Work set forth as Phase I – Laboratory in the applicable sub-appendix to Appendix B so as to meet the timeline and budget for the completion of such DEVELOPMENT set forth in such sub-appendix.

2.3 With respect to each PRODUCT for which TARGACEPT engages SIEGFRIED to undertake PRODUCTION, SIEGFRIED shall use all commercially reasonable efforts to undertake PRODUCTION in accordance with the Scope of Work set forth as Phase II – Pilot Production in the applicable sub-appendix to Appendix B so as to meet the timeline and budget for the completion of PRODUCTION and the delivery of the quantities of PRODUCT set forth in such sub-appendix.

Page 5 of 24

2.4 TARGACEPT shall evaluate the samples of each SELECTED COMPOUND delivered as part of its DEVELOPMENT and shall evaluate the SPECIFICATIONS and MASTER PRODUCTION RECORD prepared by SIEGFRIED for the PRODUCTION of each PRODUCT. In the event that TARGACEPT is not satisfied with the samples of a SELECTED COMPOUND or the SPECIFICATIONS or the MASTER PRODUCTION RECORD for PRODUCTION of a PRODUCT, SIEGFRIED shall continue to consult with TARGACEPT on the process for the PRODUCTION of such PRODUCT. SIEGFRIED shall not initiate PRODUCTION of any PRODUCT unless and until it shall have received written approval from TARGACEPT of the PRODUCT’s SPECIFICATIONS (such approved SPECIFICATIONS to be reflected in a duly executed amendment to the sub-appendix to Appendix A applicable to such PRODUCT) and MASTER PRODUCTION RECORD and, once approved by TARGACEPT, shall not change the PRODUCT’s SPECIFICATIONS or MASTER PRODUCTION RECORD without TARGACEPT’s prior written approval.

2.5 Laboratory studies conducted as part of any DEVELOPMENT may, but need not, be performed in compliance with GMP; provided that all DEVELOPMENT and PRODUCTION associated with the manufacture or storage of any PRODUCT shall be performed in compliance with GMP, SIEGFRIED’S standard operating procedures (SOPs) for the manufacture, storage and delivery of material in compliance with GMP and all applicable laws, regulations, rules and regulatory guidance (including, without limitation, the ACT). Further, each PRODUCT manufactured hereunder shall meet its SPECIFICATIONS, all PRODUCTION of a PRODUCT shall be in accordance with its MASTER PRODUCTION RECORD and SIEGFRIED warrants compliance with the foregoing to TARGACEPT. Without limiting the generality of the foregoing, SIEGFRIED: (i) shall take all steps necessary to ensure that each PRODUCT that it manufactures pursuant to this AGREEMENT is free of cross-contamination from any other manufacturing or similar activities; (ii) shall complete qualified cleaning procedures approved by TARGACEPT after review of SIEGFRIED’s applicable SOPs and carry out product changeover according to SIEGFRIED’s applicable SOPs prior to manufacturing any PRODUCT for TARGACEPT; (iii) shall not rework any BATCH without TARGACEPT’s prior written consent; and (iv) represents and warrants to TARGACEPT that its standard operating procedures for the manufacture, storage and delivery of material in compliance with GMP conform with best industry practices for the manufacture, storage and delivery of such material for use in human clinical trials.

2.6 SIEGFRIED shall perform all DEVELOPMENT and PRODUCTION at its facility located in Zofingen, Switzerland. SIEGFRIED shall commit the personnel, and shall reserve the development and pilot plant capacity, necessary to carry out its obligations pursuant to each sub-appendix to this AGREEMENT. Each project manager or other employee or personnel assigned by SIEGFRIED to the performance of its obligations hereunder shall be appropriately qualified, trained and experienced for the tasks he or she is to perform. SIEGFRIED’s project manager and other technical personnel shall make themselves available to meet with TARGACEPT (in person in Zofingen, Switzerland or by telephone) at such times and at such frequency as TARGACEPT shall reasonably request.

2.7 PRODUCT shall be used by TARGACEPT for stability, preclinical, clinical and other pre-commercial purposes.

Page 6 of 24

3.1 TARGACEPT shall be responsible for providing SIEGFRIED with such TARGACEPT KNOW-HOW as is reasonably necessary for SIEGFRIED to conduct the DEVELOPMENT of a particular SELECTED COMPOUND or PRODUCTION of a particular PRODUCT called for by any sub-appendix to this AGREEMENT (including, without limitation, any laboratory-scale process or analytical methods).

3.2 SIEGFRIED shall be responsible (subject to the provisions of Section 10.3) for the procurement of all raw materials as are required for SIEGFRIED to conduct the DEVELOPMENT or PRODUCTION called for by any sub-appendix to this AGREEMENT.

3.3 Upon any expiration of the TERM or termination of this AGREEMENT, for whatever reason, SIEGFRIED shall forward to TARGACEPT, upon TARGACEPT’s request, all quantities of raw material supplied by TARGACEPT or purchased by SIEGFRIED pursuant to this AGREEMENT, all quantities of each SELECTED COMPOUND or PRODUCT, and all quantities of any other material produced pursuant to this AGREEMENT (including, without limitation, materials constituting works-in-progress) within sixty (60) days. Notwithstanding the foregoing, SIEGFRIED shall be entitled to retain such samples of the foregoing as are required by law or as are required in order for SIEGFRIED to comply with its SOPs.

4.1 SIEGFRIED shall perform all DEVELOPMENT and PRODUCTION in collaboration with TARGACEPT and shall keep TARGACEPT regularly informed with respect to the status of all DEVELOPMENT and PRODUCTION. Without limiting the generality of the foregoing, SIEGFRIED shall provide TARGACEPT with monthly written reports summarizing the progress of the work performed or to be performed in accordance with each outstanding sub-appendix to Appendix B .

4.2 At no cost to TARGACEPT, SIEGFRIED shall assign a project manager reasonably acceptable to TARGACEPT to coordinate and monitor all technical aspects of DEVELOPMENT and PRODUCTION of all SELECTED COMPOUNDS.

4.3 Each party shall appoint one representative to be the primary point of contact for the interaction of the parties in connection with this AGREEMENT and all day-to-day communication between the parties under this AGREEMENT shall be addressed to such representatives. Any notice required under this AGREEMENT must be given in writing in accordance with the terms of this Section 4.3. Any report, approval or notice required or permitted to be given under or in connection with this AGREEMENT shall be in writing and sent by (i) certified or registered mail, return receipt requested, postage prepaid, (ii) a nationally-recognized overnight courier service, or (iii) hand delivery to the representative for such party at the address set forth below. A party may change its representative or address by written notice to the other party given in accordance with this Section 4.3. Notice shall be deemed given on the third business day after being sent in the case of delivery by mail, on the first business day after being sent in the case of delivery by overnight courier, and on the date of delivery in the case of delivery by hand or, in each case, upon actual receipt if earlier.

Page 7 of 24

The addresses of the parties and representatives are as follows:

4.4 SIEGFRIED shall, if requested by TARGACEPT: (i) maintain a complete Drug Master File (DMF) containing all information, data and documentation necessary to complete fully the Chemistry, Manufacturing and Controls (CMC) sections of an investigational new drug application (IND) and new drug application (NDA) for submission to the FDA for each SELECTED COMPOUND; (ii) submit each such DMF to the FDA (and those other REGULATORY AUTHORITIES specified by TARGACEPT) in accordance with applicable law and regulations; (iii) provide TARGACEPT with a letter of authorization to enable the FDA and any comparable REGULATORY AUTHORITY in a foreign jurisdiction to access and reference each such DMF; (iv) prepare and provide to TARGACEPT upon request a dossier that includes all validated analytical methods and stability studies for such SELECTED COMPOUND, if applicable, and for the finished dosage form of such PRODUCT, if applicable, sufficient to enable (A) a competent manufacturer of pharmaceutical products to manufacture the SELECTED COMPOUND into PRODUCT or the final dosage form of such PRODUCT, as the case may be, in commercial quantities and (B) TARGACEPT to obtain requisite FDA approval of an NDA and the requisite approval of other REGULATORY AUTHORITIES of the equivalent outside of the United States; (v) provide to TARGACEPT such other documentation and related information as it determines to be necessary, or as TARGACEPT reasonably requests, in connection with the filing of any IND, NDA or other filing or submission to, or correspondence with, the FDA or any comparable foreign REGULATORY AUTHORITY by or on behalf of TARGACEPT; and/or (vi) otherwise cooperate with TARGACEPT in all reasonable respects to assist TARGACEPT in connection with obtaining FDA approval of an IND or NDA (or the approval of the equivalent of any other REGULATORY AUTHORITY); provided that the reasonable costs actually incurred by SIEGFRIED to perform the services requested by TARGACEPT under this Section 4.4, based on actual time spent and the FTE rate set forth in Section 10.2, may be invoiced by SIEGFRIED to TARGACEPT.

Page 8 of 24

5.1 SIEGFRIED shall keep complete and accurate accounts, notes, data and records of all work that it performs under this AGREEMENT (including, without limitation, complete and accurate records pertaining to the methods and facilities used for PRODUCTION of PRODUCT). Without limiting the generality of the foregoing, with respect to each BATCH of each PRODUCT, SIEGFRIED shall maintain and submit to TARGACEPT copies of the completed batch record, deviation reports, out-of-specification records, investigation reports, in-process control raw data, analytical data, a certificate of analysis certifying that the BATCH meets the applicable SPECIFICATIONS and the MASTER PRODUCTION RECORD.

5.2 SIEGFRIED shall retain all raw data for three (3) years from the expiration of the TERM or termination of this AGREEMENT for any reason. After this period, SIEGFRIED shall, upon the timely request of TARGACEPT within sixty (60) days after notification from SIEGFRIED, forward such data to TARGACEPT. Otherwise, SIEGFRIED may destroy such raw data.

5.3 SIEGFRIED shall retain samples of PRODUCT for each BATCH for a period of four (4) years after TARGACEPT’s acceptance of such BATCH, each such sample size shall be twice the size necessary to conduct quality control testing. In addition, SIEGFRIED shall retain samples of isolated intermediates, if any, for each BATCH in accordance with SIEGFRIED’s SOPs. Upon TARGACEPT’s written request, SIEGFRIED shall provide TARGACEPT with up to one-half the original amount of any retained sample of PRODUCT or isolated intermediate at no cost to TARGACEPT.

6.1 SIEGFRIED’s quality assurance group shall closely monitor and report on the DEVELOPMENT of each SELECTED COMPOUND and the PRODUCTION of each PRODUCT, as applicable, in order to verify c