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Shareholder Representative Services LLC v. Gilead Sciences, Inc.

Court of Chancery of Delaware

March 15, 2017

SHAREHOLDER REPRESENTATIVE SERVICES LLC, in its capacity as the Stockholders' Agent for the former securityholders of Calistoga Pharmaceuticals, Inc., Plaintiff,
v.
GILEAD SCIENCES, INC. and GILEAD BIOPHARMACEUTICS IRELAND CORPORATION, Defendants. GILEAD SCIENCES, INC. and GILEAD BIOPHARMACEUTICS IRELAND UC, Counterclaimants,
v.
SHAREHOLDER REPRESENTATIVE SERVICES LLC, in its capacity as the Stockholders' Agent for the former securityholders of Calistoga Pharmaceuticals, Inc., Counterclaim-Defendant.

          Date Submitted: January 10, 2017

          Bradley D. Sorrels, Shannon E. German, and Jessica A. Montellese, WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; David S. Steuer, Steven D. Guggenheim, and Evan L. Seite, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California; Attorneys for Plaintiff.

          Brian C. Ralston and Aaron R. Sims, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Jason Sheasby, Gary N. Frischling, and Harry A. Mittleman, IRELL & MANELLA LLP, Los Angeles, California; Lisa S. Glasser, IRELL & MANELLA LLP, Newport Beach, California; Attorneys for Defendants.

          MEMORANDUM OPINION

          BOUCHARD, C.

          This post-trial decision holds that Gilead Sciences, Inc. is not required to pay a $50 million milestone payment under the terms of a merger agreement pursuant to which Gilead acquired Calistoga Pharmaceuticals, Inc. in 2011. The core of the dispute boils down to the meaning of essentially one word-"indication"-as used in an 84-page merger agreement.

         As part of the merger consideration, Gilead agreed to make three payments to the former securityholders of Calistoga if its main compound at the time-CAL-101-achieved certain milestones. In August 2014, Gilead paid $175 million in satisfaction of the first two milestones after receiving certain regulatory approvals for CAL-101 from the United States Food and Drug Administration.

         In September 2014, the European Commission approved CAL-101, in combination with another drug, as a first-line treatment for patients with chronic lymphocytic leukemia in the presence of genetic abnormality known as 17p deletion or TP53 mutation who are unsuitable for chemo-immunotherapy. The question before the Court is whether that approval satisfies the third milestone, one of the triggers for which is "the receipt of Regulatory Approval of CAL-101 in the United States or the European Union, whichever occurs first, as a first-line drug treatment (i.e., a treatment for patients that have not previously undergone systemic drug therapy therefor) for a Hematologic Cancer Indication."

         The parties agree that the term "indication" has multiple meanings in the oncology industry that are context specific. Plaintiff Shareholder Representative Services LLC contends that, as used in the merger agreement, "indication" means "the approved use of a drug in a population of patients with a particular disease" and thus that the milestone at issue can be triggered by a regulatory approval of CAL-101 as a first-line therapy for a subpopulation of people suffering from a disease, such as CLL patients with 17p deletion or TP53 mutation. Gilead, by contrast, contends that "indication" means "disease" and thus that the milestone at issue can be triggered only by a disease-level regulatory approval of CAL-101.

         For the reasons explained below, after finding that the word "indication" is ambiguous when construed within the four corners of the merger agreement, I find that the overwhelming weight of extrinsic evidence supports the conclusion that the shared intention of the parties at the time of contracting was that the word "indication" means "disease" and that the milestone at issue could only be triggered by a disease-level regulatory approval. Finally, I find that the European Commission's approval of CAL-101 was not a disease-level approval and thus that the milestone in question is not due.

         I. Background

         The facts recited in this opinion are my findings based on the testimony and documentary evidence of record from a four-day trial held in September 2016 during which four fact and two expert witnesses testified. Plaintiff's expert was Dr. Susan G. Arbuck, a consultant who provides strategic research and development services for drug development. Gilead's expert was Dr. Claire Dearden, the Clinical Director of the Haemato-Oncology Department and the Specialist Haematological Malignancy Diagnostic Service at the Royal Marsden Hospital & Biomedical Research Center in London, United Kingdom. I accord the evidence the weight and credibility I find it deserves.

         A. The Parties

         Before the merger, Calistoga Pharmaceuticals, Inc. ("Calistoga") was a privately-held biotechnology company that developed and held a portfolio of proprietary compounds for the treatment of inflammatory and autoimmune diseases and hematologic cancers.

         Defendant Gilead Sciences, Inc., a Delaware corporation with its principal place of business in California, is a biopharmaceutical company that develops and commercializes drugs for the treatment of life-threatening diseases and illnesses. Defendant Gilead Biopharmaceutics Ireland Corporation, a company formed under the laws of Ireland, was a wholly-owned subsidiary of Gilead Sciences, Inc.[1] In this opinion, I refer to Gilead Sciences, Inc. and Gilead Biopharmaceutics Ireland Corporation together as "Gilead."

         On February 21, 2011, Gilead and Calistoga executed an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Gilead acquired Calistoga. Under Section 9.3(a) of the Merger Agreement, plaintiff Shareholder Representative Services LLC ("SRS"), a Colorado limited liability company, was appointed as the agent for the former securityholders of Calistoga for the purpose of, among other things, enforcing the terms of the Merger Agreement.

         B. Calistoga Initiates a Sale Process

         In the fall of 2010, Calistoga began considering various potential strategic alternatives, including licensing the commercial rights of its drugs, an initial public offering, and a sale of the company.[2] By the fourth quarter of 2010, Calistoga decided to run a sale process.[3] Around that time, it retained J.P. Morgan Securities LLP ("JP Morgan") to assist it in the sale process.[4] Carol Gallagher, Calistoga's Chief Executive Officer, oversaw the sale process with assistance from Cliff Stocks, Calistoga's Chief Business Officer.[5]

          By December 7, 2010, Calistoga had received offers from a number of pharmaceutical companies including: AstraZeneca, Human Genome Sciences, Bristol-Myers Squibb, Daiichi Sankyo, and GlaxoSmithKline.[6] Later that month, Gilead expressed interest in acquiring Calistoga.[7] Gilead's team was led by Dr. Muzammil Mansuri, Executive Vice President of Strategy, Business Development, and Licensing; and Sean O'Connell, Senior Director of Corporate Development.[8]

         C. Calistoga Makes Due Diligence Presentations to Gilead

         At the time of the sale process, Calistoga held a portfolio of compounds.[9]Only two compounds (CAL-101 and CAL-263) had been tested on human beings, and only one (CAL-101) had demonstrated initial efficacy in humans.[10] CAL-101 had shown promise in early trials to treat blood cancers, including two types of incurable B-cell malignancies known as chronic lymphocytic leukemia (CLL) and indolent Non-Hodgkin's Lymphoma (iNHL).[11] CAL-101 also showed potential as a treatment in solid tumors and inflammatory ailments.[12] CAL-101 was later given the generic name idelalisib, and is now sold by Gilead under the trade name Zydelig.[13] In this opinion, I use the terms "CAL-101, " "idelalisib, " and "Zydelig" interchangeably.

         During due diligence, Calistoga provided Gilead with information about CAL-101's potential for treating hematologic cancers, with a particular focus on CLL and iNHL.[14] Calistoga also explained to Gilead the clinical trials it was conducting and planned to conduct for CAL-101 in support of regulatory approvals of the drug.[15] For example, in two January 2011 presentations, Calistoga outlined its plans to obtain an accelerated approval of CAL-101 "for the treatment of patients with iNHL refractory to rituximab and alkylating agents" by 2013; and to obtain full approvals "for use in combination for the treatment of patients with previously treated CLL" by 2015, and "for use in combination for the treatment of patients with previously treated iNHL" by 2016.[16]

         In the United States, the term "accelerated approval, " which is known as "conditional approval" in Europe, is a special process that allows a drug to be approved more rapidly when there is a high unmet medical need.[17] After one obtains an accelerated approval, additional studies still must be conducted to secure a full and unconditional approval from the relevant regulatory authority.[18]

         The term "refractory" or "previously treated" refers to "the time of treatment of the drug relative to previous therapies."[19] The cancers that are the subject of this case typically are incurable and will return.[20] After the first therapy of a patient- known as the "first-line" or "frontline" treatment-a patient who relapses becomes "refractory."[21] The next line of therapy for a refractory patient is known as a "second-line" treatment, which can progress to a third-line treatment and so on.[22]

         Early data for CAL-101 that Calistoga presented to Gilead suggested that the drug was effective in all patients with CLL.[23] The presentation highlighted the drug's efficacy in one particular subgroup-CLL patients with genetic abnormalities known as "17p deletion/TP53 mutation."[24] Patients with 17p deletion do not have the short arm of chromosome 17, on which the TP53 gene resides.[25] Even if a patient has the TP53 gene, the TP53 gene may have mutated and still not function.[26]

         The oncology community widely recognized that patients with the 17p deletion or the TP53 mutation had tumors that were particularly resistant to then-existing forms of treatment, such as chemotherapy and certain types of immunotherapy.[27] As a result, those patients were commonly considered to have the worst prognosis among all CLL patients.[28] Approximately 10% of newly diagnosed CLL patients and 50% of relapsed/refractory CLL patients have 17p deletion or TP53 mutation.[29] Calistoga's initial data for CAL-101 suggested that, unlike some traditional regimens, CAL-101 circumvented the treatment-resistant characteristics of the 17p deletion or TP53 mutation genetic abnormality.[30]

          D. Gilead and Calistoga Exchange Drafts of the Merger Agreement

         On January 28, 2011, Gilead provided JP Morgan with a preliminary and non-binding expression of interest to acquire Calistoga.[31] Gilead's preliminary offer consisted of a cash payment of $310 million at closing and additional contingent payments totaling $275 million based on the achievement of three milestones:

a) One time payment of $100M payable after receipt of the first accelerated approval (i.e., "Subpart H" in U.S. or "Conditional" in EU) of CAL-101 for indolent Non-Hodgkin's Lymphoma (iNHL) or Chronic Lymphocytic Leukemia (CLL) provided such accelerated approval is obtained no later than December 31, 2013. For clarity, no such milestone payment will be payable if such accelerated approval is obtained after December 31, 2013.
b) One time payment of $75 million upon dosing of first patient in a Phase III study of CAL-101 for first line treatment of patients with iNHL or CLL.
c) One time payment of $100M payable upon obtaining first full regulatory approval of CAL-101 in U.S. or EU for iNHL or CLL (in either relapsed/refractory or first line setting).[32]

         After Gilead made its preliminary offer, the parties began an exchange of drafts of a merger agreement, [33] and occasionally engaged in conversations.

         1. The February 1 Calistoga Draft

         On February 1, 2011, Calistoga sent Gilead a first draft of a merger agreement, which contemplated an up-front payment of at least $300 million and four different milestones totaling at least $300 million:[34]

• $100 million within "10 business days following the receipt of the first Regulatory Approval in the United States or an EU Country, whichever occurs first, of CAL-101 for a hematologic cancer indication."[35]
• $75 million within "10 business days following the receipt of the second Regulatory Approval in the United States or an EU Country, whichever occurs first, of CAL-101 for a hematologic cancer indication."[36]
• $50 million within "10 business days following the receipt of the first Regulatory Approval in the United States or an EU Country, whichever occurs first, of a P110 Delta Product, for an indication other than a hematologic cancer indication."[37]
• $75 million within "10 business days following the Initiation of a Registration Study involving CAL-101 as a first line treatment for an oncology indication."[38]

         The first two of these milestones were each triggered by a "Regulatory Approval" of CAL-101 for a "hematologic cancer indication, "[39] which term was not defined.[40] The draft defined "Regulatory Approval" as "all approvals, licenses, registrations or authorizations by any Regulatory Authority necessary to market a P110 Delta Product in such country or jurisdiction. For clarity, an Accelerated Approval shall constitute a Regulatory Approval."[41] "Accelerated Approval" in turn was defined as "a Regulatory Approval in the United States or an EU Country, based on the results of a single Registration Study (such as Study 101-09), i.e., without a second Registration Study being required to be completed prior to the receipt of such Regulatory Approval."[42]

         The February 1 draft of the merger agreement required Gilead to use "Commercially Reasonable Efforts" to achieve all of the milestones "in a prompt and expeditious manner."[43] The term "Commercially Reasonable Efforts" was defined to mean "the expenditure of efforts and resources, consistent with the usual practice of [Gilead], with respect to development and/or commercialization of its other important pharmaceutical products with significant market potential being actively and diligently pursued by [Gilead]."[44]

         After receiving Calistoga's February 1 draft, Sean O'Connell, the lead negotiator for Gilead, [45] prepared a summary of Calistoga's proposed milestones for himself, which stated in relevant part as follows:

(a) $100M upon first regulatory approval of CAL-101 in U.S. or EU country (whichever occurs first) for hematological cancer . . .
(c) $75M upon first patient dosing in registrational [sic] study for CAL-101 for first line treatment
(d) $75M upon second regulatory approval of CAL-101 in U.S. or EU country (whichever occurs first) for hematological cancer
(e) $50M upon first regulatory approval of a P110 Delta Product for an indication other than hematological cancer (e.g., CAL-101 for solid tumors or back-up compound for any non-hematological cancer indication)[46]

         On February 4, 2011, O'Connell sought clarification from Cliff Stocks, Calistoga's lead negotiator, [47] concerning the operation of the first two milestones. Stocks responded in an email the same day, explaining that each of the proposed milestones would have "significant commercial value:"

As one potential example, iNHL approval in the U.S. and then in an EU Country would trigger the First and Second milestones, respectively.
As a second potential example, iNHL approval in the U.S. and then CLL approval in an EU Country also would trigger the First and Second milestones, respectively. As a third potential, iNHL approval in the U.S. and then CLL approval in the U.S. also would trigger the first and second milestones, respectively. . . . We believe in any of these cases . . . the event would result in significant commercial value and therefore worthy of the milestone defined.[48]

         2. The February 8 Gilead Draft

         Later on February 4, O'Connell wrote an email to another member of Gilead's deal team, asking for help to generate "a list of hematological cancers in order of size (either patient number or size of market), " so he could "qualify the . . . milestone payment obligations as only applying to the first or second approval for a 'major' hematological cancer so [Gilead is not] paying a big milestone for a tiny hemonc indication."[49] "Hemonc" was O'Connell's shorthand for "hematological."[50]

         On February 6, a consultant from the Boston Consulting Group, which was assisting Gilead, sent O'Connell an email attaching some slides summarizing "estimated size of patient populations for all hematological cancers."[51] The first slide in the attachment listed certain blood cancers in descending order based on the estimated incidence for each cancer in the United States in 2010.[52] O'Connell drew a line on the slide under "Chronic Myeloid Leukemia, " which was the last blood cancer on the list with an incidence in the United States exceeding 4, 000 in 2010, and placed check marks next to nine of the blood cancers listed above the line.[53]

         The nine blood cancers O'Connell selected became Schedule 1.1 in a revised draft of the merger agreement that Gilead sent to Calistoga on February 8, 2011.[54]In this draft, which included an upfront payment of $310 million, Gilead replaced the undefined term "hematologic cancer indication" in the milestone provisions of the February 1 draft with the defined term "Specified Hematologic Cancer Indication, " which referred to "any hematologic cancer indication specifically listed on Schedule 1.1."[55] Schedule 1.1 in turn stated as follows:[56]

Specified hematologic Cancer indications
Diffuse Large B-cell lymphoma
Multiple Myeloma
Chronic Lymphocytic Lcukemia/Lymphoma
Acute Myeloid Leukemia
Indolent or Follicular Non-Hodgkin's Lymphoma
Hodgkin's Lymphoma
Marginal Zone Lymphoma
Acute Lymphocytic Leukemia
Chronic Myeloid Leukemia

         O'Connell explained that his intent in compiling the Schedule 1.1 was to make sure the milestones were triggered by "significant commercial events for Gilead." [57]

         In its February 8 draft, Gilead proposed several other changes to the milestone provisions contained in Calistoga's February 1 draft, three of which are relevant here. First, Gilead revised the definition of "Regulatory Approval" to exclude accelerated approvals so that they would not trigger any of the milestones.[58] Second, Gilead further narrowed the scope of milestone-eligible regulatory approvals by requiring the regulatory approval to come from the United States or a "Major Market Country, " which was defined to include only "France, Germany, Spain, Italy and the U.K."[59] Calistoga previously had proposed that the required regulatory approval could come from the United States or any "country that is a member state of the European Union."[60] Third, Gilead removed the obligation to use Commercially Reasonable Efforts to achieve the third milestone once CAL-101 was approved for a Specified Hematologic Cancer Indication in both the United States and a Major Market Country.[61]

         3. The February 12 Calistoga Draft

         On February 12, Calistoga sent Gilead a revised draft of the merger agreement that pushed back against Gilead's revisions to the milestone provisions in three ways. First, Calistoga introduced a new Schedule 1.1, set forth below, [62] which defined "Specified Hematologic Cancer Indication" as "[a]ny indication within the following tumor types, " and thereafter listed eleven types of tumors. It is undisputed that tumors are "cancers."[63]

         Schedule 1.1

         Specified Hematologic Cancer Indications

         [Any indication within the following tumor types:

         1. B-ccll neoplasms

         2. T-cell and putative NIC-cell neoplasms

         3. Hodgkin lymphoma

         4. Myeloproliferative neoplasms (MPN)

         5. Myeloid and lymphoid neoplasms associated with eosinophilia and abnormalities of PDGFRA, PDGFRB, or FGFRI

         6. Myelodysplastic/myeloproliferative neoplasms (MDS/MPN)

         7. Myelodysplastic syndrome (MDS)

         8. Acute myeloid leukemia

         9. Acute leukemias of ambiguous lineage

         10. B lymphoblastic lcukcmia/lymphoma

         11. T lymphoblastic leukemia/lymphoma]6

         Second, Calistoga again revised the definition of Regulatory Approval to include accelerated approvals.[64] Third, Calistoga reinstated Gilead's obligation to use Commercially Reasonable Efforts to achieve all milestones and added that Gilead shall "refrain from taking any action the primary purpose of which is to avoid the satisfaction of any Milestone."[65]

         Significant to this case, when it revised Schedule 1.1 in its February 12 draft, Calistoga relied on the WHO Classification of Tumours of Haematopoietic and Lymphoid Tissues (the "WHO Classification") to establish what "indications" would trigger the regulatory milestones.[66] The WHO Classification, which is compiled by the World Health Organization, is considered the authoritative source of hematologic tumor classifications.[67] Thus, although the subject was a matter of considerable dispute before trial, the evidence at trial clearly establishes that Calistoga effectively incorporated the framework of the WHO Classification into Schedule 1.1 for purposes of defining when the regulatory milestone payments would be due.[68]

         Specifically, in connection with preparing the February 12 draft to send to Gilead, Dr. Gallagher asked Dr. Langdon Miller, Calistoga's Executive Vice President of Research and Development, to prepare "a list of possible indications or possible diseases in which [CAL-101] might be used" that "would be used as part of the definition of the milestone."[69] Dr. Miller was assisted by Dr. Albert Yu, Calistoga's Vice President of Clinical Affairs and Chief Medical Officer.

         On February 11, 2011, Dr. Yu emailed Dr. Miller, attaching a document entitled "REAL WHO Classification Lymphoma."[70] The next day, on February 12, Dr. Miller emailed back to Dr. Yu, stating: "Just FYI. Here's the final list sent to Carol [Gallagher]. Myeloid list comes from an update published in Blood in 2009. Thanks for the collective help on this."[71] The 2009 Blood article Dr. Miller referred to in his email was an article entitled "The 2008 revision of the World Health Organization (WHO) classification of myeloid neoplasms and acute leukemia: rationale and important changes."[72] Table 2 of the article "lists the major subgroups of myeloid neoplasms and acute leukemia in the WHO classification, and the specific entities of which they are composed."[73]

         Dr. Miller testified at trial that the final list he sent to Dr. Gallagher was a combination of the list Dr. Yu had sent him and the list he took from the 2009 Blood article.[74] Dr. Miller also testified that the "List of Hematological Malignancies" he prepared is "a list of diseases within hematologic cancer tumor types, " which did not include any "subpopulations of patients, " "any type of patient risk stratification factors, " or any "genetic aberrations in CLL cells."[75]

         On February 12, at 12:43 a.m., Dr. Gallagher emailed Calistoga's legal and financial advisors, attaching the "List of Hematological Malignancies" that Dr. Miller had prepared.[76] The email read: "Langdon went to the WHO listing which is attached for a definition of hematological malignancies."[77] The Schedule 1.1 in Calistoga's revision of the merger agreement, which was sent to Gilead at 11:15 a.m. on February 12, tracks the top-level headers in Dr. Miller's list, such as "B-cell neoplasms" and "T-cell and putative NK-cell neoplasms." [78] It does not contain the more specific diseases listed under the top-level headers, but instead uses the phrase "Any indication within the following tumor types" before the list of top-level headers to capture the more specific diseases.[79]

         4. The February 16 Gilead Draft

         After receiving Calistoga's February 12 draft of the merger agreement, O'Connell recognized that the new Schedule 1.1 reflected "the WHO accepted classification system of hematological cancer diseases." [80] O'Connell initially thought it "looked familiar" based on his work in the field and then consulted with Dr. Michael Hawkins, Gilead's Senior Director of Oncology and the clinical advisor on Gilead's deal team, who "confirmed that it was the accepted list of hematological diseases."[81]

         Dr. Hawkins corroborated O'Connell's testimony. He explained that, at some point during the merger negotiations, someone on Gilead's team provided him with Calistoga's proposed schedule and asked where it came from.[82] Dr. Hawkins recognized that the list came from the WHO Classification because of the nomenclature, and then went online and confirmed that there was a one-to-one correlation between the terms in Calistoga's list and the terms in the WHO Classification.[83] Dr. Hawkins reported back that, "This looks to me like the WHO classification."[84]

         Recognizing that Calistoga had "[e]xpanded the definition of 'Specified Hematologic Cancer Indication' to include all hematologic cancer indications" by using the WHO Classification, O'Connell considered making a counter-proposal to limit the hematologic cancer indications that could trigger the milestones to only "those that satisfy a minimum number of annual cases."[85] Gilead prepared an internal draft reflecting this approach, but did not sent it to Calistoga.[86] Gilead instead took a different approach.[87]

         Specifically, in a February 16 draft it sent to Calistoga, Gilead introduced a new term-Hematologic Cancer Indication-which was defined as "any hematologic cancer indication specifically identified in Part 1 of Schedule 1.1."[88]Gilead then divided Schedule 1.1 into two parts. Part 1 was identical to the Schedule

          1.1 that Calistoga proposed in its February 12 draft.[89] Part 2 was identical to the Schedule 1.1 Gilead proposed in its February 8 draft.[90] Gilead also revised the definition for Specified Hematologic Cancer Indication, which now meant "any hematologic cancer indication specifically identified in Part 2 of Schedule 1.1."[91]

         The February 16 draft included an up-front payment of $310 million and up to $300 million in five milestone payments.[92] The first and second milestones of $100 million and $50 million, respectively, would be triggered by the first and second Regulatory Approvals in the United States or in a Major Market Country of CAL-101 for a Hematologic Cancer Indication, [93] unless both approvals were in the same location (i.e., both in the United States or in a Major Market Country), in which case one of the two approvals must be for a Specified Hematologic Cancer Indication to trigger the second milestone.[94] Once again, Gilead removed accelerated approvals from the definition of Regulatory Approval.[95]

         Shortly before sending the February 16 draft to Calistoga, O'Connell sent Stocks an email giving him "a heads up on the draft" and summarizing the proposed second milestone as follows:

$50M 2nd approval in any hematological indication but if it is for a second indication in the same territory as the 1st, one of the two indications would need to be in the narrower list of Specified Hematological Indication (i.e., CLL, iNHL and the other major hemonc cancers, as we tentatively agreed yesterday in Foster City)[96]

         As O'Connell's email to Stocks reflects, the intent of creating the term "Specified Hematologic Cancer Indication" was to create a "narrower list" of "cancers" to trigger the milestone when that term applied rather than the boarder term "Hematologic Cancer Indication."

         5. The February 18 Calistoga Draft

         On February 18, 2011, the day after Gilead's board of directors authorized the purchase of Calistoga for up to $750 million in total consideration, [97] Calistoga sent Gilead a further revision of the merger agreement. The February 18 draft increased the up-front payment from $310 million to $375 million and contained a new set of three milestones totaling $225 million-down from $300 million in the prior draft.[98]O'Connell summarized the terms of the milestones in an email to Stocks, stating that if his summary was correct, "we are in agreement with the economic terms of the agreement:"[99]

(1) $100M upon first approval of CAL-101 in [the] U.S. or EMA (centralized approval) for any hematologic indication (CRE[100] APPLIES)
(2) NO EARLY APPROVAL MILESTONE[101]
(3) $75M upon second approval of CAL-101 in [the] U.S. or EMA, provided that if the second approval is in the same territory as the first, one of the approvals must be for a "specified" hematologic indication (CRE APPLIES)
(4) $50M for the first to occur of the following: (i) approval of CAL-101 for solid tumors, (ii) approval of CAL-101 as a first-line treatment for any hematologic indication, OR (iii) if annual net sales of CAL-101 exceed $1B (NO CREs)[102]

         Calistoga made several other changes to the milestone provisions. First, it revised the definition of Hematologic Cancer Indication in Part 1 of Schedule 1.1 to add a twelfth category to the previous list of eleven tumor types, namely: "Any Specified Hematologic Cancer Indication listed in Part 2 of this Schedule 1.1."[103] Second, it again defined Regulatory Approval to include an accelerated approval, which term was not separately defined.[104] Third, it changed the geographical limitation in the milestone provisions from "in the United States or in a Major Market Country" back to "in the United States or in the European Union"-what it proposed in its initial February 1 draft.[105] Finally, it agreed to limit Gilead's obligation to use Commercially Reasonable Efforts to the first two milestones, although it still required Gilead to "refrain from taking any action the primary purpose of which is to avoid the satisfaction of any Milestone."[106]

         E. The Parties Finalize and Execute the Merger Agreement

         On the evening of February 18, Calistoga informed Gilead that its "Board supports management's recommendation to move forward expeditiously with Gilead to get to a deal announcement by Monday [February 21] night."[107] On February 21, the parties executed the Merger Agreement.

         The milestone provisions in the final Merger Agreement differed from Calistoga's February 18 draft in one significant respect: the requirement that Gilead refrain from taking any action for the primary purpose of avoiding the third milestone payment was removed.[108] The final Schedule 1.1, which was renamed "Section 1.1" in the Company Disclosure Schedule, reads as follows:[109]

         Section 1.1 Hematologic Cancer Indications

         PART 1 - HEMATOLOGIC CANCER INDICATIONS:

         Any indication within the following tumor types:

• B-cdl neoplasms
• T-cell and putative NK-cell neoplasms
• Hodgkin lymphoma
• My el oproliferative neoplasms (MP N)
• Myeloid and lymphoid neoplasms associated with eosinophilia and abnormalities of PDGFRA, PDGFRB, or FGFRI
• Myelodysplastic/myeloproliferative neoplasms (MDS/MPN)
• Myelodysplasia- syndrome (MDS)
• Acute myeloid leukemia
• Acute leukemias of ambiguous lineage
• B lymphoblastic leukemia/lymphoma
• T lymphoblastic leukemia/lymphoma
• Any Specified Hematologic Cancer Indication listed in Part 2 of this Schedule 1.1

         PART 2 - SPECIFIED HEMATOLOGIC CANCER INDICATIONS:

• Diffuse Large B-cell lymphoma
• Multiple Myeloma
• Chronic Lymphocytic Lcukcmia/Lymphoma
• Acute Myeloid Leukemia
• Indolent or Follicular Non-Hodgkin's Lymphoma
• Hodgkin's Lymphoma
• Marginal Zone Lymphoma
• Acute Lymphocytic Leukemia
• Chronic Myeloid Leukemia

         Hereafter, I refer at times to the two parts of Section 1.1 of the Company Disclosure Schedule as "Part 1" and "Part 2."

         Under Section 9.1(a)(i) of the Merger Agreement, the first milestone payment of $100 million (the "First Milestone") became due fifteen business days after the receipt of "the first Regulatory Approval in the United States or in the European Union, whichever occurs first . . . of CAL-101 for a Hematologic Cancer Indication." Under Section 9.1(a)(ii) of the Merger Agreement, the second milestone payment of $75 million (the "Second Milestone") became due fifteen business days after the receipt of the second "Regulatory Approval of CAL-101 in the United States or in the European Union, whichever occurs first, for a Hematologic Cancer Indication, " but if the second approval was obtained in the same location as the first approval, and the First Milestone was "achieved for an indication other than a Specified Hematologic Cancer Indication, then the [Second Milestone] shall not be satisfied unless such second Regulatory Approval is received for a Specified Hematologic Cancer Indication."

         Under Section 9.1(a)(iii) of the Merger Agreement, the third milestone of $50 million (the "Third Milestone") became due fifteen business days after the earliest to occur of:

(A) the receipt of Regulatory Approval of CAL-101 in the United States or the European Union, whichever occurs first, for a solid tumor indication, (B) the receipt of Regulatory Approval of CAL-101 in the United States or the European Union, whichever occurs first, as a first-line drug treatment (i.e., a treatment for patients that have not previously undergone systemic drug therapy therefor) for a Hematologic Cancer Indication, or (C) Annual Net Sales of CAL-101 achieving at least $1 Billion, so long as such Annual Net Sales are achieved on or before the first day of the first calendar quarter beginning after the Outside Date [i.e., the tenth (10th) anniversary of the Closing Date[110].

         The Merger Agreement further provides that, if the First Milestone has been met but the Second Milestone has not when CAL-101 achieves annual net sales of at least $1 billion, then the Second Milestone shall be deemed to have been met.[111]In other words, the achievement of annual net sales of at least $1 billion for CAL-101 potentially could trigger both the Second and Third Milestones, provided that they have not already been paid and the First Milestone has been met.

         In a presentation to Calistoga dated February 21, 2011, the day the Merger Agreement was executed, JP Morgan estimated that there was a 63% chance that the Third Milestone could be triggered by 2019.[112]

         On March 8, 2011, after the parties executed the Merger Agreement but before the merger closed, representatives from Calistoga and Gilead met to discuss their strategic plans after the merger.[113] A slide deck for the meeting identified a "comprehensive" development program for CAL-101 that Calistoga was generating, which included three registration studies.[114]

         F. Gilead's Development of CAL-101 after the Merger

         According to a Gilead internal document dated May 3, 2013, Gilead's project review committee had "previously approved two Phase 3 . . . trials [of idelalisib] in previously untreated CLL patients, "[115] and Gilead's idelalisib project team was "requesting approval for a companion single arm Phase 2 study, in order to address the del(17p) patient population which is unlikely to participate in the Phase 3 trials due to concerns of lack of efficacy on either of the control arms."[116] Dr. Hawkins explained the rationale for taking this approach, as follows:

[The] concern was that if you only had the two Phase 3 studies and you didn't have very many 17p patients in it, that the regulators might come back to you and say[:] "Well, you haven't studied enough 17p patients. And so you can't include them in your label, " even though you knew that the drug worked in that population. So to get around that, you create a Phase 2 study, a single-arm study, where all the patients get CAL-101.[117]

         The same internal document showed that the idelalisib project team planned to meet with the FDA "to discuss the proposed development plan in untreated CLL (two Phase 3 studies plus this proposed Phase 2 study). Included in this meeting will be a discussion of whether data from the proposed Phase 2 study could support accelerated approval in patients with untreated CLL with 17p deletion."[118]

         On September 5, 2013, representatives of Gilead met with FDA officials "to discuss Idelalisib for the treatment of previously untreated chronic lymphocytic leukemia."[119] When requesting this meeting, Gilead stated that the "Proposed Indication" was "[f]or the treatment of previously untreated chronic lymphocytic leukemia (CLL)."[120]

         According to the minutes of the September 5 meeting, Gilead asked if the FDA had "any comments on whether [the Phase 2 study in subjects with previously untreated CLL with 17p del and/or TP53 mutation] meets the requirements for regular approval in patients with previously untreated CLL with 17p del and/or TP53 mutation."[121] The FDA officials responded that they "do not agree that the proposed study design would be adequate for regulatory submission because it does not isolate the effect of idelalisib."[122] Gilead also asked whether the FDA "agree[d] that with demonstration of efficacy of IDELA in the 3 proposed CLL registration studies, a companion diagnostic for 17p del and/or TP53 mutation will not be required in the post-approval setting."[123] The FDA referred Gilead to the previous response and added that it was "unclear at this time whether a companion diagnostic [would] be required for the indications described in this submission."[124]

         G. Gilead Receives Approval from the FDA and Pays the First and Second Milestones

         On July 23, 2014, Gilead announced that the FDA had granted approval for CAL-101 under the trade name Zydelig.[125] The FDA-approved label (the "FDA Label") states as follows:

INDICATIONS AND USAGE
Zydelig is a kinase inhibitor indicated for the treatment of patients with:
• Relapsed chronic lymphocytic leukemia (CLL), in combination with rituximab, in patients for whom rituximab alone would be considered appropriate therapy due to other co-morbidities. (1.1)
• Relapsed follicular B-cell non-Hodgkin lymphoma (FL) in patients who have received at least two prior systemic therapies. (1.2)
• Relapsed small lymphocytic lymphoma (SLL) in patients who have received at least two prior systemic therapies. (1.3)
Accelerated approval was granted for FL and SLL based on overall response rate. Improvement in patient survival or disease related symptoms has not been established. Continued approval for these indications may be contingent upon verification of clinical benefit in confirmatory trials.[126]

         It is undisputed that CLL, FL, and SLL are all B-cell blood cancers, and that CLL and FL are both Specified Hematologic Cancer Indications under Part 2 of Schedule 1.1 of the Merger Agreement.[127]

         On July 24, 2014, the day after receiving the FDA Label, Gilead sent Calistoga a notice that the First and Second Milestones had been satisfied, but the notice did not specify which of the three approvals had triggered either the First or Second Milestone.[128] In August 2014, Gilead paid $175 million to the former Calistoga securityholders in satisfaction of those milestone obligations.[129]

         H. Gilead Receives Approval from the European Commission

         When Gilead sought regulatory approval of idelalisib in the United States, it also sought regulatory approval in the Europe. On October 29, 2013, Gilead submitted a "Marketing Authorization Application" for idelalisib to the European Medicines Agency ("EMA"). [130] The application stated that the "proposed indications are treatment of refractory indolent non-Hodgkin lymphoma and, alone or in combination, treatment of relapsed chronic lymphocytic leukaemia."[131]

         On June 26, 2014, the Committee for Medicinal Products for Human Use ("CHMP"), the scientific committee of the EMA, provided its preliminary review of Gilead's application. The CHMP noted the exceptional result of idelalisib among patients with either 17p deletion or TP53 mutation, and asked Gilead "to discuss a potential (explicit) inclusion of these patient groups in the indication for idelalisib, ie as first line treatment."[132]

         On June 28, 2014, Gilead responded to the CHMP's preliminary review, noting that:

The development program for IDELA in CLL has to date reported on clinical outcomes from 153 subjects with either 17p deletion or TP53 mutation; an additional 216 subjects are currently enrolled in the ongoing, randomized studies. Both treatment-naïve and relapsed, refractory subjects with these and other adverse genetic features have been successfully treated with IDELA monotherapy or with IDELA in combination with chemoimmunotherapy.[133]

         Gilead also discussed four clinical studies in its response, based on which it proposed "that the data summarized herein are sufficient to support the following proposed indication statement:"

Zydelig is indicated in combination with rituximab for the treatment of adult patients with chronic lymphocytic leukaemia (CLL):
who have received at least one prior therapy, or
as first line treatment in the presence of high-risk features, such as a 17p deletion or TP53 mutation.[134]

         On July 14, 2014, the Rapporteurs (i.e., reporters) for the CHMP issued an assessment report in which they recommended following modified approval for Zydelig:

Zydelig is indicated in combination with rituximab for the treatment of adult patients with chronic lymphocytic leukaemia (CLL):
-who have received at least one prior therapy, or
-as first line treatment in the presence of 17p deletion or TP53 mutation in patients unsuitable for chemo-immunotherapy.[135]

         On July 25, 2014, the CHMP recommended that the European Commission approve Zydelig as a first-line treatment in combination with rituximab for CLL patients in the presence of 17p deletion or TP53 mutation who are unsuitable for chemo-immunotherapy.[136]

         An internal Gilead presentation in this timeframe noted that "17p deletion is an important segment, " "[f]rontline is a smaller population, " and "[t]he fact that Zydelig is 'EVEN' indicated for frontline (difficult patients) suggests that it should be an excellent option for second/third."[137] Another internal Gilead presentation, dated August 15, 2014, similarly noted that "[t]he first line indication in the hardest-to-treat patients will have a positive halo effect on the attractiveness of Zydelig, " and that going forward, "CLL relapse forecast should assume . . . [s]trong competitive advantage for both Zydelig and irutinib in patients with 17pDel/TP53 which account for 31% of the whole relapse population: expect maximum penetration in this segment at peak."[138]

         On September 19, 2014, Gilead announced that it had received approval of Zydelig from the European Commission. [139] The "Summary of Product Characteristics" the European Commission issued in ...


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