FALL 2010

Th e L i f e S c i e n c e s R e p o rt
In This Issue
FDA Issues Proposed Reforms of the 510(k) Process...................Page 1, 2-3 Crafting Effective Compensation and Incentive Programs in a Difficult Environment..................................Page 1, 5-7 Life Science Venture Financings for WSGR Clients .............................Page 3-4 Overtime Meter Running While Pharma Sales Reps Hit the Road.................Page 8-9 Recent Life Sciences Highlights ......................................Page 10-11 Life Sciences Events ........................Page 12 Continued on page 2...

FDA Issues Proposed Reforms of the 510(k) Process

By Jon Nygaard, Attorney, and David Hoffmeister, Partner (Palo Alto Office) In early August, an internal U.S. Food and Drug Administration (FDA) committee issued its long-awaited proposal to amend various aspects of the 510(k) clearance process. Its report was released in conjunction with a separate report, The Utilization of Science in the Regulatory Process, containing broad recommendations on how FDAs device division, the Center for Devices and Radiological Health (CDRH), could make better use of science in its regulatory decision making. Since its establishment in 1976, the 510(k) program has undergone a number of changes, as CDRH has attempted to adapt to new technological innovations and the evolving medical device landscape. At its core, the 510(k) process aims to further two important goals: making available devices that are safe and effective, and fostering innovation in the medical device industry. In recent years, concern has arisen both within and outside FDA about whether the 510(k) process is meeting these goals. The 510(k) Working Group was convened in September 2009, charged with evaluating the 510(k) process and making recommendations to improve it within its existing statutory structure. The Institute of Medicine currently is conducting another assessment as part of a two-pronged evaluation of the 510(k) program. Its report is expected in the summer of 2011.

Crafting Effective Compensation and Incentive Programs in a Difficult Environment

By Scott McCall, Partner, David Thomas, Partner, and Adrian Matthew Rich, Associate (Palo Alto Office) The mantra that venture investors invest in teams and technology highlights the importance of the employees of venturebacked companies to the success of the endeavor. Even in todays economic environment, key employees and consultants always have other alternatives and must be properly compensated and incentivized to be recruited and retained. But two other mantras that are developing in response to the environmentcash is king and investors ruleseverely constrain compensation programs, as efforts to restrain burn rates put pressure on cash compensation and financing terms with low valuations and more aggressive liquidation preferences raise the bar that must be met for employees and consultants to achieve measurable returns from their equity compensation. All the while, the risks associated with being employed by a venture-backed company have increased with the difficulties of attracting capital for the next round, longer times to liquidity (either through an acquisition or an IPO), and an uncertain regulatory environment. Many companies are finding themselves in a situation where they are raising additional capital without an increase in the enterprise value of the company. This often leads to a situation in which significant liquidation preferences will result in the common stock of the company having little or no value. Because the compensation of employees at private technology and life sciences companies is
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FDA Issues Proposed Reforms of the 510(k) Process

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The 510(k) Working Groups report proposes some fairly substantial changes to a program that provides entry to about 90 percent of the medical devices in the U.S. market. Among the more far-reaching proposals are splitting up the Class II device category into a and b subsets, defining the circumstances under which CDRH might rescind a 510(k) or modify the scope of a previous clearance, reforming the de novo classification process for novel, moderate-risk devices, and clarifying CDRHs authority to determine that certain products should no longer be used as predicates for safety and effectiveness reasons. We note that the report states the recommendations are preliminary, and that public comments are being collected and reviewed before any changes are implemented. However, we

manufacturing, and, potentially, postmarket information. Defining which devices should be Class IIb will require further deliberation, but the report suggests that potential candidates for this subset might include implantable, lifesustaining, and life-supporting devices, which present greater risks than other Class II devices. It is interesting to note that these terms generally describe Class III devices, which are subject to premarket approval, or PMA approval. Furthermore, PMA applications generally require submission of clinical data, manufacturing information, and post-approval requirements. It therefore appears that there will be little distinction between Class IIb and III devices if this recommendation is implemented. The report found that there is often confusion about what constitutes the same versus a new intended use. As a partial remedy to avoid some of the confusion, it recommended consolidating the concepts of indications for use and intended use into a single term, intended use. Going a step further, it recommended that CDRH explore amending the Federal Food, Drug, and Cosmetic Act (FDCA) to provide FDA with express authority to consider an off-label use of the device when determining its intended use. The intent of this proposal is to ensure that the manufacturer of the device does not seek clearance for a use that is not the actual use for which the device is intended to be marketed. Since the passage of the Food and Drug Administration Modernization Act of 1997 (FDAMA), FDA has been required to accept the manufacturers characterization of its intended use. This proposal would change that. One finding of the 510(k) Working Group targets the use of split predicates, which refers to those submissions where the manufacturer uses one predicate to claim intended use and another predicate to claim technological characteristics. The report notes that no actual predicate device exists for the subject of that submission and therefore no real-world information about its risks and benefits can be examined. It recommends that the use of split predicates be disallowed

and the proper use of multiple predicates clarified. However, the report does not analyze the effect of banning split predicates on device innovation. We believe that banning split predicates will have a significant impact

If FDA could revise the de novo process, making it a timely and viable option, perhaps a prohibition against split predicates would seem more acceptable
on device innovation, resulting in many devices being placed in Class III, requiring submission and approval of a PMA. Another finding recognizes the inefficiency of the de novo classification process. The Agency has averaged only about four per year since 1997. The FDCA requires a full 510(k) review prior to initiating the process, even though it is clear that no predicate device exists. Also, FDA creates device-specific guidance to serve as special controls for each device reclassified into Class II through the de novo process. Each step is very time- and resource-consuming. If FDA could revise the de novo process, making it a timely and viable option, perhaps a prohibition against split predicates would seem more acceptable. The Ideal of Well-Informed Decision Making It is challenging for CDRH to obtain, in an efficient and predictable manner, the information it needs to make well-supported premarket decisions and to ensure that each new or modified 510(k) device is substantially equivalent to a valid predicate. The report recommends that CDRH look into requiring each submission to include detailed photographs and schematics of the device
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The report proposes some fairly substantial changes to a program that provides entry to about 90 percent of the medical devices in the U.S. market
know of several instances in which many of the reports recommendations currently are being implemented by Office of Device Evaluation Staff. Striving for a Consistently Interpreted Review Standard FDA acknowledges that 510(k) review times have lengthened in recent years, in part because new technologies require reviewers to request additional data from manufacturers. The report suggests that better defining FDAs evidence requirements could help speed up review times, particularly in the small subset of devices for which the staff requests clinical data. It goes on to recommend splitting up Class II into Class IIa and Class IIb, where the latter would typically require clinical,

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under review. This would provide review staff with more information, and non-proprietary photos could be part of an enhanced 510(k) database, as described below. CDRH also should explore requiring each submitter to make at least one device available for CDRH to access upon request. The report recommends that firms be required to submit a list and brief description of all scientific information regarding the safety and effectiveness of a new device that is known or should be known to the submitter. Such summaries currently are required for PMAs. The report recommends improving the 510(k) database by adding photos and schematics, up-to-date labeling, and verified summaries conforming to a standardized electronic template. This would benefit both reviewers and device developers, as well as the general public. Better Utilization of Science In the report on better utilization of science accompanying the 510(k) report, a task force makes 17 specific recommendations. A major topic concerns interpretation of the least burdensome provisions of the law and regulations. FDA is seeking to rein in

industrys interpretation of these provisions, which govern how much data regulators may ask for in premarket reviews. The provisions are meant to eliminate unjustified burdens on industry, but instead have created a culture in which it is difficult for premarket reviewers to obtain a sufficient level of evidence to consistently provide reasonable assurance of a devices safety and effectiveness, according to the report. FDA charges that industry has interpreted the provisions too broadly, hindering reviewers ability to access the information they need to clear or approve products. The report states that FDA must balance the burden of industrys obligations against the Agencys need for relevant information. Other recommendations of the task force include facilitating the development of device registries, improving the quality of clinical trial data in PMAs, and assessing staff needs. To quickly communicate changes in premarket requirements, the report recommends that FDA issue a standardized notice to industry letter. Such letters could be used as de facto guidance with an opportunity for public comment, and could later be followed with an actual guidance document.

60-Day Public Comment Period Open through October 4 Both reports cover more topics than those highlighted above. In fact, there are about 70 recommendations set forth in the reports. The Agency is accepting comments through October 4. Once the Agency has assessed public input and completed other necessary reviews, it will announce which improvements it intends to formally implement, as well as projected timelines for implementation. Please contact David Hoffmeister, Jon Nygaard, Farah Gerdes, or Kristen Harrer in Wilson Sonsini Goodrich & Rosatis Life Sciences/FDA and Healthcare practice with any questions involving the 510(k) reform process.

Jon Nygaard (650) 849-3112 jnygaard@wsgr.com

David Hoffmeister (650) 354-4246 dhoffmeister@wsgr.com

Life Science Venture Financings for WSGR Clients

By Scott Murano, Associate (Palo Alto Office) The table on the following page includes data from life science transactions in which Wilson Sonsini Goodrich & Rosati clients have participated during the first half of 2010. Specifically, the table comparesby industry segmentthe number of closings, the total amount raised, and the average amount raised during the first and second quarters of 2010. The data generally demonstrates that venture financing activity increased during the second quarter of 2010 compared to the first quarter of 2010. Specifically, the total number of financing closings completed across all industry segments during the second quarter increased by approximately 19 percent compared to the first quarter, and the number of closings in most industry segments during the second quarter increased or remained the same relative to the first quarter. More significantly, the total amount of money raised across all industry segments during the second quarter increased by over 161 percent compared to the first quarter, while the average amount of money raised by industry segment generally increased during the second quarter as wellmost notably in medical devices and equipment, which increased by more than 96 percent compared to the first quarter, and diagnostics, which increased by more than 66 percent. Other data from our recent transactions suggests that of all the financings completed for our clients in the life sciences industry in 2009 and the first half of 2010, including equity financings, bridge financings, recapitalizations, and other non-traditional types of financings, the percentage of Series A equity financings remained roughly the same,
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Life Science Venture Financings for WSGR Clients

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with only a very slight decrease from 24.2 percent in 2009 to 24 percent in the first half of 2010. Meanwhile, the percentage of Series B equity financings increased from 15.2 percent in 2009 to 18.7 percent in the first half of 2010, and the percentage of Series C (and later) equity financings increased from 20.6 percent in 2009 to 26.7 percent in the first half of 2010. The percentage increase in Series B (and later) equity financings was offset by a decrease in the percentage of bridge financings, recapitalizations, and other nontraditional types of financings during the same periods, suggesting that traditional mid- to later-stage equity financings may be on the risea positive sign for many companies that have been forced to postpone or delay the next round of equity financing in favor of bridge financings, recapitalizations, and other non-traditional types of financings. In addition, those companies that are successfully completing Series C (and later) equity financings may be doing so at improved premoney valuations. Recent data from our transactions indicates that the median and average premoney

valuations of Series C (and later) equity financings have increased from $31.6 million and $24.9 million, respectively, in the first quarter of 2010 to $56.4 million and $88.3 million, respectively, in the second quarter of 2010. One reason why the premoney valuations of later-stage equity financings may be improving is the increased presence of corporate strategic investors, who may be less valuation sensitive than traditional venture capital investors. Recent data from our transactions also suggests that the presence of corporate strategic investors as the lead investor in later-stage equity financings has increased from 15.4 percent in the first quarter to 22.2 percent in the second quarter. Overall, the data suggests that access to venture capital for life science companies improved in the second quarter of 2010 compared to the first quarter. However, what lies ahead for life science companies for the remainder of 2010 remains uncertain. Our historical data suggests that the life sciences is an attractive industry for investment when compared to competing industries such as software, semiconductors, electronics and

computer hardware, communications and networking, medical and information systems, and clean technology. However, while life science companies may have experienced a disproportionate surge of venture financing activity during 2009, more recent data compiled from our transactions shows that such companies experienced a disproportionate decline in venture financing activity in the first half of 2010. Moreover, while life sciences remained the most attractive industry for investment during the second quarter of 2010 in terms of total number of financing closings, other industries are starting to catch up in financing activity most notably software and clean technology, both of which experienced an increased number of closings during the second quarter compared to the first quarter. Scott Murano (650) 849-3316 smurano@wsgr.com

Life Sciences Industry Segment Biopharmaceuticals Diagnostics Health Care Services Medical Devices & Equipment Medical Information Systems Miscellaneous Total

Q1 2010 Number of Closings 7 2 0 24 2 2 37

Q1 2010 Total Amount Raised ($M) $56.48 $5.50 $0.00 $90.23 $6.88 $4.48 $163.57

Q1 2010 Average Amount Raised ($M) $8.07 $2.75 $0.00 $3.76 $3.44 $2.24

Q2 2010 Number of Closings 15 6 0 20 0 3 44

Q2 2010 Total Amount Raised ($M) $143.21 $27.44 $0.00 $147.66 $0.00 $109.18* $427.49

Q2 2010 Average Amount Raised ($M) $9.55 $4.57 $0.00 $7.38 $0.00 N/A

* This includes one large transaction, with an amount raised in excess of $100 million.

Crafting Effective Compensation and Incentive Programs . . .

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made up, in large part, of equity compensation (principally stock options), a decrease in the potential value of that equity compensation will make it difficult to attract new employees or retain current employees. The problem is clear: The current market both increases the risk that employees face in joining and remaining employed by venturebacked companies and reduces the value of equity ownership as a means for compensating employees for taking that risk. These concerns are never more present than in the distressed company situation where the continued participation of key employees is critical to maximizing the value (and sometimes obtaining any value) from the enterprise. It is little surprise then that the tools that have been established for incentivizing employees in distressed companies are currently being implemented more broadly to compensate and incentivize employees in companies that are not yet distressed. This article seeks to discuss the various constructs currently being used by boards and compensation committees to incentivize their employees in these challenging times. Management Carve-Out Plans The solution for many companies is the adoption of a plan that sets aside a portion of the proceeds from a change of control to be shared among a pool of employees. These are often referred to as carve-out plans or change-in-control retention plans. We are outlining a basic framework for structuring these types of plans, but there are many complex legal and tax issues that must be considered when doing so and such considerations are beyond the scope of this article. How Much Money to Share? Because the money being paid to participants in a carve-out plan comes out of the pockets of the holders of preferred stock, it is a subject of much discussion and often some conflict between management and the investors. The

amount of the carve-out pool is generally established as: 1) a straight percentage of net sales proceeds; 2) a percentage of net sales proceeds over a certain dollar threshold (e.g., if there is a sale for more than $20 million, the pool will be 10 percent of the excess); or 3) a staggered scale with the percentage changing as the aggregate net sales proceeds increase. The right size of the carve-out pool varies depending on the company in question, the

on the theory that all employees in the organization are important to the future success of the company. Once eligibility is determined, many factors are considered in allocating the bonus pool, including considerations relating to the employees position, time of service, current equity holdings, or similar metrics. Regardless of how the bonus pool is allocated, the amounts involved need to be sufficient to incentivize the employees to remain with the company and to work to increase its value. For this reason, it is common to weight distribution of the bonus pool to the most critical positions in the company, such as the CEO. In addition, the board may set aside some of the bonus pool for future issuances (e.g., to allocate to new hires). When Does it Get Paid? As important as how much will be paid is the question of when payments will be made. The structure of the transaction will often dictate the timing of the payment of the bonus. For example, few holders of preferred stock would be pleased if a portion of their proceeds were put into escrow to satisfy any indemnification claims that the acquirer may have while the members of management take their entire bonus payment upon the closing of the transaction. Even more so in instances where the amounts to be paid are subject to earnouts, the holders of preferred stock would likely expect that the bonus be paid over time, so as to incentivize employees to stay and maximize the potential value of the transaction. Similarly, acquirers may appreciate that a payment timeline creates incentives for employees to remain with the organization for a period of time following the closing of the transaction. Care must be taken, however, to structure payments and timing so as to avoid running afoul of the regulations under Section 409A of the Internal Revenue Code, which has strict rules regarding the timing of payments of bonuses and could result in significant tax liability for the employee if the rules arent followed.

Regardless of how the bonus pool is allocated, the amounts involved need to be sufficient to incentivize employees to remain with the company and work to increase its value
number of covered employees, the timeline to payment, and the potential range of transaction values. Carve-out plans vary greatly, although they often center in the range of 10 to 15 percent of aggregate net sales proceeds. Who to Share it With? Determining who is eligible to participate is a critical aspect of the carve-out plan. Often the payments are concentrated among the most critical employees in the organization, on the theory that those individuals who contribute most are essential to preserving and increasing the value of the company and/or its assets. Other times the benefits are more broadly distributed among the employee base,

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What Is Paid? The form of consideration paid by the buyer generally is not known until after the carve-out plan has been adopted. Consequently, the consideration to be paid by the buyer may be made up of cash, publicly traded or privately held securities, or some other consideration depending on the nature of the buyer and the deal terms. This can present unique problems because the receipt of the amounts due under the carve-out plan is taxable as income to the employee. Thus, receiving only privately held securities could result in the employees being subject to taxation without having the corresponding cash to pay the taxesa suboptimal result. Companies must therefore consider whether they need to be prepared to

service) may be included in the vesting provisions of carve-out plans. Some plans, seeking to incentivize employees to stay until the very end of the process, will implement a last man standing provision whereby employees who leave before the transaction is completed (or some other milestone) will lose their allocation under the pool, with the participants remaining at the time of the transaction sharing in the entire bonus pool. What Tax Considerations Are There? Often the tax considerations involved in carveout plans are driving structure. First, there may be an additional 20 percent excise tax under Internal Revenue Code Section 280G due on certain payments made in connection with a change in control (the golden parachute tax). Because carve-out plan amounts are considered parachute payments potentially subject to the tax, companies should consider provisions that seek to minimize the impact of the provisions. For example, plans may provide that amounts to be paid under the carve-out plan will be reduced to the extent necessary to avoid triggering the excise tax, meaning that although participants receive less on a before-tax basis, they would actually receive more on an after-tax basis. It is important to note that if 75 percent of a private companys shareholders at the time of the change-incontrol transaction approve the payments at the time of that transaction, the tax will not apply. In addition to Internal Revenue Code Section 280G, Section 409A constrains a companys ability to structure carve-out payments without careful analysis of when amounts can be paid. If the plan provides for anything other than payment of the carve-out amounts at the time of closing to people who are employed at closing, it warrants consulting an expert to avoid inadvertently triggering a 20 percent federal penalty tax and a separate 20 percent state penalty tax (note that these are taxes owed in addition to the golden parachute tax and the ordinary state and federal income taxes associated with any compensatory payments). It is clear that the taxation of

employee benefits has become increasingly complex and it is important to involve a qualified expert to ensure that the bonus program is structured in the most effective manner. What Approvals Are Necessary? The implementation of carve-out plans can result in substantial liabilities for the company, so they should be carefully reviewed by the board of directors and only approved if the amounts allocated are in the best interests of the company and its stockholders. Care should be taken to recognize the conflicts that members of management who are also members of the board of directors may have, and proper corporate governance with respect to obtaining approvals should be followed. Also, as the carve-out plan may affect the payment of liquidation preferences to which the holders of preferred stock might otherwise be entitled, it is important to review the companys organization documents and contracts to determine if stockholder approval is required. Other Alternatives In addition to establishing management carveout plans, some companies have relied on other tools to recruit, retain, and reward employeesalways with an emphasis on the bottom-line cost to the company. Severance Arrangements In addition to the use of a carve-out plan, or as an alternative, some companies implement individual severance arrangements to provide for payments to employees whose employment is terminated by the company for reasons other than cause. Severance provides employees with a safety net because it is paid solely based on the termination of employment and not on any other factor (e.g., the company need not be sold). Although the payment of severance at private companies outside of the change-of-control context is atypical, when severance is provided, typical arrangements include continuation of salary for a specified period of time and continuation of health insurance benefits. Severance terms
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In todays environment, a combination program of severance arrangements and management carveout plans may be needed to adequately recruit and retain employees
pay the bonus in cash or tradable securities in an amount at least sufficient for the employees to be able to pay the resultant taxes. What Tools Are Available to Maximize the Incentive? Much as with stock options, carve-out bonus programs may have vesting provisions that require the employee to stay with the company for a specified period of time (usually based at least in part on a reasonable estimate of the time to an exit). Generally speaking, the same considerations that are present with stock-option vesting (including acceleration in certain circumstances and termination of vesting upon termination of

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are typically based on the duration of employment and the employees position in the company. In situations when severance protection is provided, terms of 12 months are not uncommon for chief executive officers of private companies, while much shorter durations are offered to other key employees. Because severance is treated as wages owed to an employee and thus a liability of the company for which directors may be personally liable, there has been downward pressure on the amount of severance offered. It is important when considering severance plans and when operating companies on a lean budget that directors be aware of the aggregate, ongoing cost of the severance arrangements that they put in place. In todays environment, a combination program of severance arrangements and management carve-out plans may be needed to adequately recruit and retain employees. When compared to severance arrangements, which are paid at the termination of employment irrespective of the outcome to the investors, management carve-out plans align the interests of the employees and the investors to achieve the best possible outcome for the company. If one is to compare carveout plans to severance arrangements, a benefit of carve-out plans is that they are contingent liabilities that need only be paid if there are proceeds to the company from a transaction; severance arrangements are existing contractual obligations that require sufficient cash on hand in order to satisfy, which often is not the case for distressed companies. Note that there can be significant liability to the company and its directors for failing to pay owed severance, so care must be taken to always ensure that severance liabilities can be satisfied. However, unlike severance, management carve-out plans do not always offer a safety net that provides employees with the time necessary to find their next employment because employees may wind up with no income and no payout. Consequently, a balancing of interests and implementation of both types of programs potentially with reduced benefits than might have been offered if only one were

implementedmay lead to the best outcome for the investors and employees. More Favorable Vesting Provisions The Silicon Valley standard for vesting is that options vest over four years from the initial vesting commencement date, often with no shares vesting until the first anniversary of the vesting commencement date. This approach may be less than ideal for the purpose of incentivizing continuing employees in the current economic climate and, more frequently than in the past, companies are using different, more employee-favorable option vesting periods. More favorable option vesting periods (e.g., 12-24 month vesting) help to reduce the risk to the employee that they will not receive the full benefit of their stock-option grant if their employment ceases (whether by the companys action or their own). Some companies have implemented option bonus programs where options are granted and become vested based on performance criteria at the time that corporate milestones are achieved (much as cash bonuses were paid in the past). Longer Exercise Periods As the duration to exit extends, the likelihood that an employee will not remain with the company at the time of a liquidity event increases. Most stock-option plans require that options be exercised within a relatively short period of time following termination of services (most typically within three months). In other words, the policy is use it or lose it. However, the extended time to an exit increases the time that an employee must hold what is otherwise an illiquid security and remain at risk for the amount invested. It is not uncommon for the top officers of a company to ask for extended stock-option exercise periods to mitigate the financial risk inherent in exercising private company securities. Dilution Protection Whether by virtue of employment agreements or company policy, many companies are beginning to seek to offset the harm to

employees caused by the low valuations of current financings. Most typically, following a financing, companies are seeking to refresh employee options to increase percentage ownership. In those companies where the employees have performed and the market dynamics are the primary cause of the low valuation, percentage ownership is often fully restored. In other companies where employees have not met all objectives, the percentage ownership is partially restored. Also, companies seeking to recruit top talent are often facing employment terms that require the company to maintain the employees ownership percentage through a predetermined amount of additional financing. By picking and choosing among these alternatives, boards can craft plans that recruit, retain, and incentivize employees while managing risk, expense, and cash burn. As a final note, if the downturn continues we can expect to see more creativity in compensation plans. Boards seeking to implement compensation programs using the tools identified above or others to be developed would be well advised to consult counsel early and often, as the alternatives are limited by laws and regulations, including the much dreaded Internal Revenue Code Section 409A. Failure to comply with these complicated tax rules, even in a good-faith effort to protect and incentivize employees, can lead to disastrous outcomes for a company and its employees.

Scott McCall (650) 320-4547 smccall@wsgr.com

David Thomas (650) 849-3261 dthomas@wsgr.com

Adrian Matthew Rich (650) 849-3367 arich@wsgr.com

Overtime Meter Running While Pharma Sales Reps Hit the Road
By Kristen Garcia Dumont, Partner (San Francisco Office), Alicia J. Farquhar, Of Counsel, and Jayne Lady, Associate (Palo Alto Office) Major pharmaceutical companies throughout the nation have been hit with large class actions alleging that pharmaceutical sales representatives are non-exempt and therefore entitled to overtime and subject to other nonexempt requirements. In July 2010, a decision against Novartis became the latest of several recent court rulings to cast doubt on the industry standard of treating pharmaceutical sales representatives as exempt employees. The rulings suggest that pharmaceutical companies that do not treat pharmaceutical sales representatives as non-exempt, including paying them overtime, risk liability for unpaid wages under the Fair Labor Standards Act (FLSA) and similar state labor laws. Unpaid Overtime Litigation Heating Up In nearly every industry, classes of disgruntled employees who feel insufficiently compensated have brought suit for unpaid overtime, alleging that they should not have been classified as exempt employees. State and federal minimum wage requirements mandate that non-exempt employees be paid an hourly rate for each hour that they work. These employees must be paid a premium rate for every hour they work beyond 40 hours in a single week. In California, employees also must be paid a premium for every hour in excess of eight hours per day. In addition, in many states employers must give these employees daily meal and rest breaks. However, an employer has no obligation to track hours, pay overtime, or give rest breaks to those higher-level employees who meet statutory exemption standards. Such exempt employees are instead paid on a salary basis. Rather than punching in each day from nine to five, exempt employees have a more independent schedule and often work more than 40 hours per week. Employers sometimes rely on an outdated sense of white-collar professionalism when classifying employees as exempt from overtime requirements. Indeed, many employees may prefer to be classified as exempt, as they resent being classified as hourly and thus forced to account for each minute of their workday. However, the statutory exemption standards are narrower than many employers and employees understand them to be. Regardless of any mutually agreeable arrangements between workers and employers, if the employee does not meet the relevant standard, he or she must be classified as non-exempt. Under the federal Fair Labor Standards Act, employees are only exempt if they qualify as learned professionals, executives, administrative employees, or outside wages, as well as any federal or state penalty payments for violations of waiting-time rules and wage-statement requirements. Is a Sales Rep a Sales Rep? Pharmaceutical sales representatives (or drug reps) make visits to physicians, hospital personnel, and other medical professionals to promote pharmaceutical products like prescription drugs or medical devices. Rather than directly selling products to the doctor, the representative instead touts the benefits of the product and attempts to persuade the physician to prescribe it more frequently to his or her patients. Usually representatives have limited time with busy doctors, and must make a compelling pitch for their product in just a few minutes. At the conclusion of the pitch, the representative asks for the doctors nonbinding commitment to prescribe the product. A significant portion of a sales representatives compensation may be tied to how much product is purchased by consumers in their assigned territory. Pharmaceutical sales representatives have brought class actions for unpaid overtime in courts nationwide. Although Schering-Plough and Boehringer Ingelheim have been victorious in the courtroom, companies like King, Johnson & Johnson, and AstraZeneca all have lost unpaid overtime disputes. When making a claim for unpaid overtime, the pharmaceutical representatives usually dispute the contention that they actually make sales. They allege that, far from being autonomous salespeople who use their own hustle and initiative to close sales, they instead must follow highly detailed dictates from their superiors to promotebut not selltheir pharmaceutical products. In order to qualify for the outside sales exemption, an employee must spend most of his or her time outside the office, making sales or performing tasks related to the sale. The litigating pharmaceutical representatives argue that they cannot be making sales, because they are only marketing the product

Misclassifying employees as exempt from overtime can have substantial consequences for the employeroften with a steep price tag
salespeople. These employees must earn a minimum salary and perform specified types of high-level duties. Many states, such as California, have their own labor regulations that define the exemptions even more narrowly than federal standards. Misclassifying employees as exempt from overtime can have substantial consequences for the employeroften with a steep price tag. If the employees are found to be nonexempt from overtime requirements, the employer will be on the hook for the unpaid

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during their time with the physician. The physician may prescribe their product to a patient, who then buys it from a pharmacy. Due to federal regulation of sales of prescription drugs, pharmaceutical companies are forbidden from selling drugs directly to an end-user. Instead, pharmacies and suppliers purchase the products in bulk from the company, and in turn sell them to patients who have authorization in the form of a

pitching their product. Yet the representatives who have sued for overtime have argued that rather than being trusted to use their own independent judgment, they are forbidden from deviating from prepared marketing materials, or even answering any questions that are not pre-scripted by the pharmaceutical company. Class Actions across the Nation Federal courts in different judicial districts have tackled the issue of overtime exemptions for pharmaceutical representatives, with vastly different outcomes. In re Novartis Wage and Hour Litigation, New York: In the Second Circuit, the Court of Appeals ruled that sales representatives are not exempt under either the outside sales exemption or the administrative sales exemption, and thus were entitled to overtime pay. The lower court had held that the sales representatives were the functional equivalent of salespeople. Smith v. Johnson & Johnson, New Jersey: In the Third Circuit, the Court of Appeals found that sales representatives are exempt under the administrative exemption and therefore not entitled to overtime pay. Jackson v. Alpharma, New Jersey: Following the decision in Smith v. Johnson & Johnson, a district court ruled that representatives are exempt under the administrative exemption. Jirak v. Abbott Laboratories, Illinois: In the Sixth Circuit, a district court ruled in favor of overtime pay for sales representatives, finding that neither the outside sales nor administrative sales exemptions applied. Class actions for unpaid overtime still are pending against SmithKline Beecham, Boehringer Ingelheim, Amgen, and Serono.

Plaintiffs attorneys are eager to organize sales representatives who are working long hours on the road without overtime compensation in hopes of large unpaid-overtime judgments
prescription from a doctor. Without an actual sale, the representatives argue, there can be no exempt salesperson. The pharmaceutical companies counter that under the FLSA rules, such promotional activity is the equivalent of making sales. Pharmaceutical companies also have argued that even if pharmaceutical representatives are not exempt from overtime requirements under the outside sales exemption, they still can be exempt from overtime under the administrative sales exemption. In order to qualify for the administrative sales exemption, an employee must exercise discretion and independent judgment in the course of his or her job duties. Pharmaceutical companies argue that, like all successful salespeople, pharmaceutical representatives must rely on their own talent, drive, and judgment when

The recent blockbuster $250 million verdict against Novartis for sex discrimination has intensified plaintiffs attorneys interest in the pharmaceutical industry. With the current state of the law in flux, plaintiffs attorneys are eager to organize current or former sales representatives who are working long hours on the road without overtime compensation in hopes of large unpaid-overtime judgments. Liability for unpaid overtime extends back for at least three years, which can amount to a huge cash payout for successful plaintiffs. Until the exempt status of pharmaceutical sales representatives is more clearly established, pharmaceutical employers should carefully evaluate how sales representatives are classified and compensated, and consult with counsel. Wage and Hour Counsel Available Clients with questions about properly classifying employees or avoiding liability under wage and hour regulations should contact a member of Wilson Sonsini Goodrich & Rosatis employment law practice.

Kristen Garcia Dumont (415) 947-2053 kdumont@wsgr.com Alicia J. Farquhar (650) 320-4859 afarquhar@wsgr.com

Jayne Lady (650) 849-3065 jlady@wsgr.com

Recent Life Sciences Highlights

Heartflow Raises $14 Million in Private Financing On August 23, 2010, Heartflow, a developer of certain technology relating to medical interventions and physiological functions, raised $14 million in a Series B financing. The amount raised is part of an offering that seeks to raise a total of $20 million. The financing was led by Capricorn Investments and included U.S. Venture Partners. Wilson Sonsini Goodrich & Rosati advised Heartflow in the financing. Roche Acquires BioImagene for $100 Million On August 23, 2010, Swiss pharmaceutical company Roche announced that it has signed an agreement under which Ventana Medical Systems, a member of the Roche Group, will acquire 100 percent of privately held BioImagene, a leading provider of digital pathology laboratory solutions, for $100 million on a debt-free basis. Wilson Sonsini Goodrich & Rosati represented BioImagene in the transaction. To read the Roche press release, please visit http://www.roche.com/ media/media_releases/med-cor-2010-0823.htm. Endocyte Files Registration Statement with SEC for Initial Public Offering On August 17, 2010, Endocyte, a biopharmaceutical company developing targeted small-molecule drug conjugates, announced that it has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to a proposed initial public offering of its common stock. The number of shares to be offered and the price range for the offering have not yet been determined. Wilson Sonsini Goodrich & Rosati is advising Endocyte in the transaction. To read the Endocyte press release, please visit http://www.endocyte. com/pdf/2010%2008-17%20Endocyte% 20IPO%20filing.pdf. Life Technologies Announces Agreement to Acquire Ion Torrent On August 17, 2010, Life Technologies Corporation announced a definitive agreement to acquire Ion Torrent, a semiconductor sequencing company, for $375 million in cash and stock. Ion Torrent is entitled to an additional consideration of $350 million in cash and stock if it achieves certain technical and time-based milestones through 2012. The transaction, which is expected to close in the fourth quarter, is subject to customary closing conditions, including regulatory approval. Wilson Sonsini Goodrich & Rosati represented Ion Torrent in the transaction. To read the Ion Torrent press release, please visit http://www.iontorrent.com/lib/images/life%2 0technologies%20press%20release.pdf. Pacific Biosciences Files for $200 Million Initial Public Offering On August 16, 2010, start-up biotechnology company Pacific Biosciences filed with the Securities and Exchange Commission to raise up to $200 million in an initial public offering of its stock. The proceeds will be used to fund research and development and expand the companys business. The filing did not disclose how many shares Pacific Biosciences planned to sell or their anticipated price. The company expects its shares to trade under the ticker PACB on the Nasdaq Global Market. Wilson Sonsini Goodrich & Rosati is representing Pacific Biosciences in the transaction. Illumina Acquires Helixis in Deal Worth Up to $105 Million On July 27, 2010, San Diego-based Illumina, a maker of genetic-analysis laboratory equipment, announced that it has acquired Carlsbad, California-based Helixis, a developer of nucleic acid analysis tools. The terms of the acquisition call for Illumina to pay $70 million in cash and up to $35 million in contingent consideration payments based on the achievement of certain revenue-based milestones through December 31, 2011. Wilson Sonsini Goodrich & Rosati represented Helixis in the transaction. Intellikine Announces Collaboration with Infinity Valued Up to $488 Million On July 8, 2010, La Jolla, California-based Intellikine, a venture-backed biotech company focused on developing small-molecule drugs, and Infinity Pharmaceuticals, a publicly traded drug discovery and development company, announced a collaboration agreement under which Infinity obtained global development and commercialization rights to Intellikines portfolio of oral PI3 kinase inhibitors. PI3 kinase is a prime target of cancer treatments and a variety of inflammatory diseases. Wilson Sonsini Goodrich & Rosati assisted Intellikine in building and commercializing its patent portfolio and represented the company in this transaction, worth up to $488 million. To read the Intellikine press release, please visit http://www.intellikine.com/pdf/ Intellikine_PressRelease_Jul08_10.pdf. SenoRx Completes Sale to C.R. Bard On July 6, 2010, medical device company SenoRx announced that its acquisition by C.R. Bard has been completed. Under the terms of the merger agreement, SenoRx stockholders will receive $11 in cash for each share held of SenoRx common stock, a premium of approximately 14 percent over the closing price of SenoRx shares on May 4, 2010, the last trading day before the public announcement of the acquisition. Wilson Sonsini Goodrich & Rosati represented SenoRx in the transaction. To read the SenoRx press release, please visit http://investor.senorx. com/releasedetail.cfm?ReleaseID=485163. Impax Laboratories and Endo Pharmaceuticals Settle Pending Litigation On June 8, 2010, Impax Laboratories announced an agreement with Endo Pharmaceuticals and Penwest Pharmaceuticals to settle pending U.S. litigation with regard to

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Recent Life Sciences Highlights

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the production and sale of generic formulations of OPANA Extended Release tablets. Under the terms of the settlement, Endo and Penwest have agreed to grant Impax a license to sell a generic version of OPANA ER on January 1, 2013, or earlier under certain circumstances. Separately, Endo and Impax have entered into a development and copromotion agreement under which Endo will pay Impax certain milestones up to $40 million related to the development of an Impaxbranded pipeline product. Wilson Sonsini Goodrich & Rosati represented Impax in the matter. To read the Impax press release, please visit http://phx.corporate-ir.net/ phoenix.zhtml?c=67240&p=irol-newsArticle &ID=1435820&highlight=. Federal Circuit Affirms Ruling in Favor of Par Pharmaceutical On June 3, 2010, the U.S. Court of Appeals for the Federal Circuit affirmed a ruling that Purdue Pharma Products patent claims for controlled-release tramadol are invalid. In the patent infringement case, Purdue Pharma, Napp, and Ortho-McNeil asserted that Par Pharmaceutical infringed two Purdue patents by seeking FDA approval to market a generic product in competition with Ultram ER, a drug marketed by Ortho-McNeil under license from Purdue. This decision affirms the August 14, 2009, decision by the U.S. District Court for the District of Delaware, in which the court found both Purdue patents invalid due to obviousness, clearing the way for Par to receive FDA approval for its generic product. Wilson Sonsini Goodrich & Rosati represented Par Pharmaceutical in the matter.

Breathe Technologies Secures $23 Million in Series C Financing On May 18, 2010, Breathe Technologies, a manufacturer of innovative technology solutions for people with respiratory conditions, announced that it has secured $23 million in Series C financing. The financing was led by DAG Ventures and included Kleiner Perkins Caufield & Byers, Delphi Ventures, Synergy Partners International, and Johnson & Johnson Development Corporation. Wilson Sonsini Goodrich & Rosati advised Breathe Technologies in the financing. To read the Breathe Technologies press release, please visit http://www.breathetechnologies.com/ pdfs/20100518a.pdf. iRhythm Technologies Announces Close of $10 Million Round of Financing On May 13, 2010, iRhythm Technologies, a privately held provider of innovative diagnostic monitoring solutions, announced the closure of a $10 million private equity round of financing. The round was led by St. Jude Medical and included existing investors Mohr Davidow Ventures and Synergy Life Science Partners. Wilson Sonsini Goodrich & Rosati advised iRhythm Technologies in the financing. To read the iRhythm Technologies press release, please visit http://www.irhythmtech.com/ company/news-and-events/. Codexis Announces Pricing of Initial Public Offering On April 22, 2010, Codexis, a start-up that makes designer enzymes for pharmaceuticals and biofuel production, announced the pricing of its initial public offering of 6,000,000 shares

of its common stock, at $13.00 per share. All shares are being sold by the company. Codexis has granted the underwriters an option to purchase up to an additional 900,000 shares at the IPO price to cover overallotments, if any. The common stock will trade on the NASDAQ Global Market under the symbol CDXS. Credit Suisse Securities (USA) is acting as the book-running manager, with Piper Jaffray & Co., RBC Capital Markets Corporation, and Pacific Crest Securities acting as co-managers for the offering. Wilson Sonsini Goodrich & Rosati represented the underwriters in the transaction. To read the Codexis press release, please visit http://www.codexis.com/ press_releases/view/pr_1271908754. Intellipharmaceutics Settles Patent Lawsuits On March 11, 2010, Intellipharmaceutics International announced that Novartis Pharmaceuticals Corporation and Celgene Corporation have settled their patent suit in the U.S. District Court for the District of New Jersey. In addition, the company announced that Elan Pharma International has settled its patent suit in the U.S. District Court for the District of Delaware with Intellipharmaceutics Corp., a subsidiary of Intellipharmaceutics International, and its licensee, Par Pharmaceutical, over a generic version of the Attention Deficit Hyperactivity Disorder (ADHD) drug Focalin XR. Wilson Sonsini Goodrich & Rosati represented Intellipharmaceutics in the matters. To read Intellipharmaceutics press release, please visit http://www.intellipharmaceutics.com/ releasedetail.cfm?ReleaseID=451318.

Wilson Sonsini Goodrich & Rosati Ranked No. 1 in 1H 2010 Venture Financings
In Dow Jones VentureSources legal rankings for issuer-side venture financing deals in the first half of 2010, Wilson Sonsini Goodrich & Rosati ranked No. 1 in the country for the total number of rounds of equity financing raised on behalf of clients. Translated into market share, the firm holds 25.4 percent of the issuer-side venture financing market in the United States.1 Of particular interest to The Life Sciences Report, Dow Jones VentureSource ranked Wilson Sonsini Goodrich & Rosati No. 1 in the U.S. for issuerside deals in the medical device industry.
1

Based on firms with 10 or more financings over the time period.

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Life Sciences Events

Wilson Sonsini Goodrich & Rosati Hosts Successful 18th Annual Medical Device Conference On June 24, 2010, the firm hosted its 18th Annual Medical Device Conference, which was attended by more than 550 executives, entrepreneurs, investors, and in-house counsel of medical device companies. In a series of topical panels, industry CEOs, venture capitalists, industry strategists, investment bankers, and market analysts addressed such topics as evolving venture fund strategies, building successful medtech companies, commercializing in Europe, keeping up with changes at the FDA, and accessing capital. In addition, a lunch session focused on developments in balloon sinoplasty by Exploramed and Acclarent. Please visit http://www.wsgr.com/news/medicaldevice/conference-agenda.htm to view the conference agenda and access video and audio files of the various presentations.

Phoenix 2010: The Medical Device and Diagnostic Conference for CEOs October 14-17, 2010 Montage Resort Laguna Beach, California www.wsgr.com/news/phoenix Phoenix 2010 will mark the 17th annual conference for chief executive officers and senior leadership of medical device and diagnostic companies. The event will provide an opportunity for top-level executives from large healthcare and small venture-backed companies to discuss strategic alliances, financing, and other industry issues. Wilson Sonsini Goodrich & Rosatis Biotech Board of Directors Dinner January 12, 2011 San Francisco, California Wilson Sonsini Goodrich & Rosatis ninth annual Biotech Board of Directors Dinner, geared toward executives and directors of biotech companies, is an exclusive dinner and networking event that will focus on key industry issues.

rEVOLUTION March 9-11, 2011 Four Seasons Hotel Washington, D.C. http://www.wsgr.com/news/revolution/ rEVOLUTION 2011 will mark the sixth annual symposium for chief scientific officers focused on drug R&D issues. The event will examine the organization and management of R&D to uncover new models some radicalto accelerate the discovery and development of new drugs. Wilson Sonsini Goodrich & Rosatis Medical Device Conference June 2011 San Jose, California www.wsgr.com/news/medicaldevice Wilson Sonsini Goodrich & Rosatis 19th annual Medical Device Conference, aimed at professionals in the medical device industry, will feature a series of panels and discussions addressing the critical business issues facing the industry today.

Casey McGlynn, a leader of the firms life sciences practice, has editorial oversight of The Life Sciences Report and was assisted by Elton Satusky and Scott Murano. They would like to take this opportunity to thank all of the contributors to the Report, which is published on a semi-annual basis.
Casey McGlynn (650) 354-4115 cmcglynn@wsgr.com Elton Satusky (650) 565-3588 esatusky@wsgr.com Scott Murano (650) 849-3316 smurano@wsgr.com

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