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 This Royalty Agreement involves

EMISPHERE TECHNOLOGIES INC | EMISPHERE TECHNOLOGIES, INC | Master Account, Capital Partners (100), Institutional Partners II and Institutional Partners | MHR Advisors LLC | MHR Capital Partners (100) LP | MHR Capital Partners Master Account LP | MHR Fund Management LLC | MHR Institutional Advisors II LLC | MHR Institutional Partners II LP | MHR Institutional Partners IIA LP | MHR Notes, Institutional Partners

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Title: ROYALTY AGREEMENT
Governing Law: New York     Date: 11/14/2014
Industry: Biotechnology and Drugs     Law Firm: O'Melveny Myers;Lowenstein Sandler     Sector: Healthcare

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Exhibit 10.1

EXECUTION VERSION

ROYALTY AGREEMENT

THIS AGREEMENT (“ Agreement ”) effective as of August 20, 2014, between EMISPHERE TECHNOLOGIES, INC., a corporation organized and existing under the laws of the State of Delaware (“ Company ”) and (i) MHR Capital Partners Master Account LP, a limited partnership organized in Anguilla, British West Indies (“ Master Account ”), (ii) MHR Capital Partners (100) LP, a Delaware limited partnership (“ Capital Partners (100) ”), (iii) MHR Institutional Partners II LP, a Delaware limited partnership (“ Institutional Partners II ”) and (iv) MHR Institutional Partners IIA LP, a Delaware limited partnership (“ Institutional Partners IIA ”). Each of Master Account, Capital Partners (100), Institutional Partners II and Institutional Partners IIA shall be referred to herein as a “ MHR Fund ” and collectively as the “ MHR Funds ”.

BACKGROUND:

WHEREAS, Company has rights to certain IP Rights (as hereinafter defined);

WHEREAS, the MHR Funds and Company have entered into that certain senior secured loan agreement (the “ Facility ”) as of the date hereof to, among other things, finance the development, manufacturing, marketing and sales of Eligen ® B12 and related products;

WHEREAS, in connection with the entry into the Facility, the MHR Funds and the Company have amended and restated the 13% senior secured convertible notes (as so amended and restated, the “ Convertible Notes ”), the 13% senior secured promissory bridge notes (as so amended and restated, the “ Bridge Notes ”) and the promissory reimbursement notes (as so amended and restated, the “ Reimbursement Notes ” and, together with the Convertible Notes and Bridge Notes, the “ MHR Notes ”);

WHEREAS, in connection with the entry into the Facility and the amendment and restatement of the MHR Notes, Institutional Partners IIA and the Company have amended that certain Pledge and Security Agreement, dated September 26, 2005, as amended, by and between the Company and Institutional Partners IIA (as so amended, the “ Security Agreement ”) to among other things, secure the Reimbursement Notes as well as the payments due under this Agreement;

WHEREAS, it is a condition to the MHR Funds entering into the Facility and amending and restating the MHR Notes that the Company enter into the Security Agreement and this Agreement providing for the payment by the Company to the MHR Funds of certain royalties on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 As used in this Agreement, the following terms, whether used in the singular or plural, shall have the respective meanings set forth below:


(a) “ Affiliate ” means, with respect to any Person hereto, any corporation or other business entity which directly or indirectly through stock ownership or through any other arrangement either controls, is controlled by or is under common control with, such Person. The term “control” shall mean the power to direct the affairs of such Person by reason of ownership of voting stock or other equity interests, by contract or otherwise.

(b) “ Balance Sheet ” means the consolidated balance sheet of the Company.

(c) “ Business Day ” shall mean any day that is not a Saturday, Sunday or other day on which banking institutions in New York, New York are not required to be open.

(d) “ Cash Equivalents ” means (i) Dollars, (ii) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than 6 months from the date of acquisition, (iii) certificates of deposit and eurodollar time deposits with maturities of 6 months or less from the date of acquisition, bankers’ acceptances with maturities not exceeding 6 months and overnight bank deposits, in each case with any domestic commercial bank having capital and surplus in excess of $500,000,000 and a Thompson Bank Watch Rating of “B” or better, (iv) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clauses (ii) and (iii) above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having the highest rating obtainable from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and in each case maturing within 6 months after the date of acquisition and (vi) money market funds at least 95% of the assets of which constitute Cash Equivalents of the kinds described in clauses (i)—(v) of this definition.

(e) “ Contract ” means any agreement, lease, contract, note, mortgage, indenture, arrangement or other obligation.

(f) “ Designated Product(s) ” means an oral product for human use that includes SNAC and Vitamin B12 (in any and all dosages and forms), any Related Products, and/or any line extension of any of the foregoing.

(g) “ Dietary Supplement ” shall have the meaning as currently set forth in the federal Food, Drug, and Cosmetic Act, at 21 U.S.C. § 321(ff).

(h) “ Effective Date ” means the date first set forth above.

(i) “ Fiscal Quarter ” means the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31.

(j) “ Fiscal Year ” means each successive period of twelve (12) months commencing on January 1 and ending on December 31.

(k) “ Governmental Authority ” means any government, court, arbitrator, regulatory or administrative agency, commission or authority or other governmental instrumentality, federal, state or local, domestic, foreign or multinational.

 

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(l) “ Income Statement ” means the consolidated statements of operations of the Company.

(m) “ IP Rights ” means any and all Patent Rights and all Know-How.

(n) “ Know-How ” means all scientific and technical information and know-how, trade secrets, data and technology, including inventions (whether patentable or not), discoveries, trade secrets, specifications, instructions, processes, formulae, materials, expertise and other technology applicable to compounds, formulations, compositions, products or to their manufacture, development, registration, use or commercialization or methods of assaying or testing them or processes for their manufacture, formulations containing them, compositions incorporating or comprising them and including all biological, chemical, pharmacological, biochemical, toxicological, pharmaceutical, physical and analytical, safety, quality control, manufacturing, preclinical and clinical data, instructions, processes, formulae, expertise and information, regulatory filings and copies thereof, that relate to or are directed to (i) SNAC, any other similar agent for improved or different bioavailability, (ii) the Company’s proprietary Eligen ® technology or any other technology owned or licensed by the Company or any of its Affiliates, (iii) the Designated Product or (iv) the manufacture and/or use of any of the foregoing. Know-How does not include Patent Rights or inventions claimed thereby.

(o) “ Lien ” means any mortgage or deed of trust, pledge, hypothecation, assignment, security deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever.

(p) “ Mandatory Redemption ” shall have the meaning set forth in the Convertible Notes.

(q) “ Medical Food ” shall have the meaning as currently set forth in the federal Food, Drug, and Cosmetic Act, at 21 U.S.C. § 360ee(b)(4).

(r) “ MHR Approved Products ” means those products or business opportunities of the Company as the MHR Funds may approve from time to time in writing in its sole discretion, provided that any such written approval shall specifically reference this Agreement and indicate that such product or business opportunity shall be included as a MHR Approved Product hereunder.

(s) “ Net Sales ” means, for any period, Revenues, plus any gross sales by any non-consolidated Affiliate or sub-licensee, distributor or partner during such period, in each case with respect to all sales, transfers or other dispositions of Designated Products (whether to end-users, distributors or otherwise), less the following deductions, to the extent reasonable and customary, not already deducted from Revenues or gross sales, as applicable, and incurred with respect to the applicable sale, transfer or other disposition of the Designated Product: (i) import, export, excise and sales taxes (including duties or other governmental charges levied on, absorbed or otherwise imposed on the sale of Designated Product including, without limitation, value added taxes or other governmental charges otherwise measured by the billing amount, when included in billing), (ii) custom duties, (iii) credits or allowances granted on returns of Designated Products actually sold, (iv) bad debt deductions actually written off during such period, and (v) trade, cash and quantity discounts, allowances and credits. For purposes of calculating Net Sales under this Agreement, and subject to Section 2.3(e) hereof, all sales, transfers or other dispositions of Designated Product hereunder, whether made for cash or otherwise, shall be deemed to be made for cash, at the applicable fair market value of the Designated Product.

 

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(t) “ Patent Rights ” means any and all patents and patent applications (which for the purposes of this Agreement shall be deemed to include certificates of invention and applications for certificates of invention) which during the term of this Agreement are owned by the Company or any of its Affiliates or to which the Company or any of its Affiliates through license or otherwise acquires rights, which: (i) have claims covering (x) SNAC, any other similar agent for improved or different bioavailability, the Company’s proprietary Eligen ® technology or any other technology owned or licensed by the Company or any of its Affiliates, or (y) the Designated Product or (z) the manufacture and/or use of any of the foregoing; or (ii) are divisions, continuations, continuations-in-part, patents of addition, reissues, renewals, extensions, registrations, confirmations, re-examinations, any provisional applications, supplementary protection certificates or the like of any such patents and patent applications and foreign equivalents thereof.

(u) “ Person ” means any corporation, limited liability company, natural person, firm, joint venture, partnership, trust, unincorporated association or Governmental Authority, or any political subdivision, department or agency of any Governmental Authority.

(v) “ Pro Forma Cash Balance ” means the amount of cash and Cash Equivalents set forth on the Balance Sheet as of any determination date, plus all cash expenditures made and cash expenses incurred during the rolling twelve month period preceding such determination date, in each case other than those cash expenditures and cash expenses relating to the Designated Products, the Company’s general overhead expenses or any MHR Approved Products.

(w) “ Related Product ” shall mean any Dietary Supplement, Medical Food or drug, whether available over-the-counter or by prescription, in any dosage form, strength or route or mode of administration, containing Vitamin B12, whether in combination with any other vitamin, mineral, nutrient, Dietary Supplement, Medical Food, drug or active or inactive pharmaceutical ingredient or otherwise, and including SNAC or any other similar agent for improved or different bioavailability using the Company’s proprietary Eligen ® technology or any other technology owned or licensed by the Company or any of its Affiliates.

(x) “ Revenues ” means the amount ascribed to “Revenues” in the Income Statement for the relevant period.

(y) “ SNAC ” means the Company’s proprietary Eligen ® technology carrier as set forth on Exhibit A .

(z) “ Special Committee ” means the special committee of independent directors of the Company, formed for the purpose of considering, negotiating and evaluating this Agreement, the Facility, the amendment and restatement of the Existing Notes (as such term is defined in the Facility), the amendment of the Security Agreement and the transactions contemplated hereby and thereby.

 

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(aa) “ Territory ” means all of the countries in the world.

(bb) “ Third Party Payments ” means any fee, lump-sum, milestone or other payment or consideration, received by Company or its Affiliates in connection with the license, distribution or partnering of Designated Product or the IP Rights for the purpose of making, using, selling or distributing Designated Products, but excluding any payments that would constitute Net Sales hereunder.

(cc) “ Valid Patent Claim ” means a claim of a patent application or an issued and unexpired patent included within the Patent Rights, which has not been revoked or held unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.

ARTICLE II

ROYALTIES AND REPORTS

2.1 Royalties on Net Sales . In partial consideration for the MHR Funds entering into the Facility and the MHR Notes, the Company shall pay to the MHR Funds, subject to the terms and conditions of this Agreement, royalties in perpetuity, commencing as of the Effective Date, in an amount equal to: twenty percent (20%) of all Net Sales during any Fiscal Year; provided that, from and after October 1, 2015, if no amount of indebtedness is outstanding under the Facility (including indebtedness outstanding as a result of the principal amount of indebtedness being increased pursuant to Section 2.3(c) below) as a result of such indebtedness being repaid in accordance with the terms of the Facility (the “ Indebtedness Repayment Condition ”), such amount shall be reduced to (i) five percent (5%) of all Net Sales (other than Net Sales described in subclause (ii) below) commencing with the first Fiscal Quarter immediately following the Fiscal Quarter in which the Indebtedness Repayment Condition is satisfied, or (ii) two and one half percent (2.5%) of all Net Sales commencing with the first Fiscal Quarter immediately following the Fiscal Quarter in which the Indebtedness Repayment Condition is satisfied, but only with respect to the Net Sales made in any country in which there was not a Valid Patent Claim and where generic entry of a competitive product not by the Company or its Affiliates that does not infringe a Valid Patent Claim in such country has occurred, in each case as of the last day of such Fiscal Quarter. Once the royalty rate set forth in this Section 2.1 has been reduced to 5%, the rate shall not be reinstated to 20% even if additional indebtedness is added to the Facility as a result of the penultimate sentence of Section 2.3(c) hereof.

2.2 Royalties on Third Party Payments . In partial consideration for the MHR Funds entering into the Facility and the MHR Notes, the Company shall pay to the MHR Funds, subject to the terms and conditions of this Agreement, royalties in perpetuity, commencing as of the Effective Date, in an amount equal to: twenty percent (20%) of all Third Party Payments received during any Fiscal Year; provided that, from and after October 1, 2015, if the Indebtedness Repayment Condition is satisfied, such amount shall be reduced to five percent (5%) of all Third Party Payments commencing with the first Fiscal Quarter immediately following the Fiscal Quarter in which the Indebtedness Repayment Condition is satisfied. Once the royalty rate set forth in this Section 2.2 has been reduced to 5%, the rate shall not be reinstated to 20% even if additional indebtedness is added to the Facility as a result of the penultimate sentence of Section 2.3(c) hereof.

 

 

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2.3 Reports; Method of Payment.

(a) Subject to Sections 2.3(b) and 2.3(c) below, within thirty (30) days following the close of each Fiscal Year, the Company shall furnish to the MHR Funds a written report for such Fiscal Year showing all Net Sales and Third Party Payments during such Fiscal Year and the royalties payable under this Agreement for such Fiscal Year (on a Fiscal Quarter by Fiscal Quarter basis). Simultaneously with the submission of the written report, the Company shall pay to the MHR Funds a sum equal to the aggregate royalty due for such Fiscal Year calculated in accordance with this Agreement.

(b) Notwithstanding anything to the contrary in Section 2.3(a) above, but subject to Section 2.3(c) below, if, during any Fiscal Quarter ending on March 31, June 30 or September 30, the aggregate amount of royalties payable under this Agreement exceeds $3 million for such Fiscal Quarter, within thirty (30) days following the close of such Fiscal Quarter, the Company shall furnish to the MHR Funds a written report for such Fiscal Quarter showing all Net Sales and Third Party Payments during such Fiscal Quarter and the royalties payable under this Agreement for such Fiscal Quarter. Simultaneously with the submission of the written report, the Company shall pay to the MHR Funds a sum equal to the aggregate royalty due for such Fiscal Quarter calculated in accordance with this Agreement (such payment, the “ Accelerated Quarterly Payment ”) and the amount of such Accelerated Quarterly Payment shall be deducted from the amount otherwise payable at the end of the Fiscal Year pursuant to Section 2.3(a) above.

(c) Notwithstanding anything to the contrary in this Agreement, the amount of any royalties payable under this Agreement in respect of any Fiscal Year (in the case of any payments due under Section 2.3(a)) or Fiscal Quarter (in the case of any payments due under Section 2.3(b)), as applicable, shall only be payable in cash to the extent that such cash payments, if deducted from the calculation of the Pro Forma Cash Balance as of the end of such Fiscal Year or Fiscal Quarter, as applicable, would not cause such Pro Forma Cash Balance to be less than $10 million (or $15 million following the Fiscal Quarter in which the Indebtedness Repayment Condition has been satisfied but in no event prior to October 1, 2015). In the event that any royalty (or portion thereof) is prohibited from being paid in cash as a result of the application of the immediately preceding sentence, such royalty shall be added to the principal amount of indebtedness outstanding under the Facility as of the date such royalty payment is due pursuant to this Agreement. This Section 2.3(c) shall terminate and have no further force and effect upon following the occurrence of either of the following: (A) (i) the MHR Funds shall have assigned this Agreement (in who


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