JOINT VENTURE WITH NOVEL
In December 2006, we entered into a joint venture with VGS Pharma, LLC ("VGS") and created Novel Laboratories, Inc ("Novel"), a separate privately-held company specializing in pharmaceutical research, development, manufacturing, licensing, acquisition and marketing of specialty generic pharmaceuticals.
We acquired 49% and VGS acquired 51% of Novel's Class A Voting Common Stock for $9,800 and $10,200 respectively. We initially contributed $2,000,000 to Novel and have agreed to provide additional contributions upon the achievement of certain performance milestones of Novel to be mutually agreed to by Elite and VGS.
In March 2007, Dr. Veerappan Subramanian, Novel's CEO, provided Elite with Novel's initial business plan which identified 22 generic drug products to be developed by Novel and the proposed funding milestones for Elite's remaining contributions to Novel. Pursuant to the agreed upon plan, Elite contributed $2,000,000 on May 15, 2007 and $3,000,000 on June 15, 2007. The remaining contributions to be made by Elite shall be funded in the amounts and upon the occurrence of the following milestones: (i) $10,000,000 upon the submission to the FDA of three ANDAs related to three different prospective products developed by Novel and (ii) $10,000,000 upon the submission to the FDA of three ANDAs related to at least three additional different prospective products developed by Novel; provided that the aggregate contributions to be made by Elite shall not exceed (i) $15,000,000 prior to November 1, 2007 or (ii) $25,000,000 prior to May 1, 2008. The remaining contributions of Elite are not monetary
obligations but rather conditions that must be met in order for Elite to maintain its current equity interest in Novel.
In the event that (i) Elite defers for more than 90 days the payment of a contribution installment due to Novel's failure to achieve a performance milestone, (ii) Elite fails to make a requisite contribution following Novel's achieving a performance milestone or (iii) Novel requires additional financing beyond amounts provided in the business plan or Elite's agreed upon additional contributions, Novel may seek such financing through a subscription offering to its Class A Stockholders and, to the extent not fully subscribed, from third parties.
As long as each of Elite and VGS owns at least 10% of the shares of Class A Voting Common Stock of Novel, each shall designate one of the two directors to constitute the Novel Board of Directors, with the VGS designee to be Dr. Subramanian, unless otherwise approved by Elite. Novel is prohibited from taking of certain actions without approval of the two designees, including, but not limited to, amendments of charter, by-laws and other governance agreements, spin-offs or public offerings of equity securities, a liquidation or dissolution, dividends, authorization or issuance of additional securities or options, bankruptcy, a material change of the business or a business plan, approval of a business plan and the yearly operating budget, creation of a security interest, capital expenditures in excess of 110% of the amount provided in the business plan, investments in excess of the amounts approved in the Business Plan, an increase or decrease of the Board; and any investments by Dr. Subramanian in any competitive company or its affiliate.
In the event Elite fails to make its remaining contributions after the occurrence of the relevant milestones event, VGS has the right to purchase at the original purchase price from Elite that proportion of its original shares of Novel Class A Common Stock equal to the proportion of the required additional contributions not made by Elite.
In the event of Dr. Subramanian's resignation from Novel for other than good reason or his termination by Novel for cause or his death or disability as defined in the employment agreement between Novel and Dr. Subramanian, Elite has the corresponding right to acquire up to 75% of VGS's original shares of Class A Common Stock of Novel at the original purchase price; such percentage to be reduced to 50% and 25% and 0% upon the first, second and third anniversary of the Stockholders' Agreement, with a pro rata portion of such reduction to be effected upon the death or disability of Dr. Subramanian during the applicable period. Each of Elite and VGS has a right to acquire at the then fair value, Elite's or VGS's shares of Novel upon the bankruptcy, dissolution or liquidation, a change of control of the other or, if as a result of the purchases at the original purchase price, the percentage of Novel owned by such party is less than 10% of Novel.
On June 5, 2007, the board of directors of Novel agreed to approve a stock option plan (the "NOVEL PLAN") for Novel's key employees. The Novel Plan reserves for granting under the Novel Plan 26,582 shares of Novel's Class B non-voting common stock.
On June 5, 2007, Novel granted 8,861 options to purchase Class B non-voting common shares to Veerappan Suramanian, its CEO, at an exercise price of $22.50 per share. The options vest and become exercisable at the rate of (i) 1,266 option shares on the date of each submission to the FDA of an ANDA for the first six new prospective products developed by Novel which is not the subject of any prior ANDA submitted to the FDA by Novel and (ii) 1,265 option shares on the date of approval by the FDA of a drug product that is the subject of an ANDA related to a prospective product developed by Novel which has not been previously approved by the FDA for Novel.
On June 5, 2007, Novel granted Muthusamy Shanmugam, its Head of Technical Operations, 8,861 options to purchase Novel's Class B non-voting common shares at an exercise price of $22.50. The options vest and become exercisable at the rate of 2,953 on the first, 2,954 on each of the second and third anniversary of the grant date. Novel also entered into an employment agreement with Mr. Shanmugam on June 5, 2007 to act as Novel's Head of Technical Operations. The employment agreement provides for an initial base salary of $170,000 per annum, subject to annual increases at the discretion of Novel's Board of Directors. The initial term of the agreement is three years. Novel shall have the right to terminate the agreement for cause (as defined) or for disability. If Novel elects to terminate the agreement without cause, Mr. Shanmugam shall be entitled to receive, in full satisfaction of all remaining obligations of Novel under the agreement, an aggregate amount equal to the lesser of (i) twelve months of salary or (ii) the salary for the remainder of the actual term.
Novel's business strategy is to focus on its core strength in identifying and timely executing niche business opportunities in the generic pharmaceutical area. As of June 15, Novel has 30 employees.
As of June 15, 2007, Novel has identified 22 generic product opportunities and is actively developing 11 generic products. It is Novel's general policy not to disclose the specific products in its development pipeline or the status of such products until a product reaches a stage that we determine, for competitive reasons, in our discretion, to be appropriate for disclosure.
