Shareholder Representative Services LLC v. Gilead Sciences, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ___________________________________________ ) SHAREHOLDER REPRESENTATIVE ) SERVICES LLC, in its capacity as the ) Stockholders’ Agent for the former ) securityholders of Calistoga ) Pharmaceuticals, Inc., ) ) Plaintiff, ) v. ) C.A. No. 10537-CB ) 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. ) __________________________________________
MEMORANDUM OPINION
Date Submitted: January 10, 2017 Date Decided: March 15, 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.
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.”
1 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
2 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
1 On September 22, 2014, Gilead Biopharmaceutics Ireland Corporation was renamed Gilead Biopharmaceutics Ireland UC. JX702-004.
3 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
2 Tr. 140-41 (Gallagher). 3 Tr. 190 (Gallagher). 4 Tr. 142-43 (Gallagher). 5 Tr. 155 (Gallagher); Tr. 43 (Miller).
4 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,
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ___________________________________________ ) SHAREHOLDER REPRESENTATIVE ) SERVICES LLC, in its capacity as the ) Stockholders’ Agent for the former ) securityholders of Calistoga ) Pharmaceuticals, Inc., ) ) Plaintiff, ) v. ) C.A. No. 10537-CB ) 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. ) __________________________________________
MEMORANDUM OPINION
Date Submitted: January 10, 2017 Date Decided: March 15, 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.
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.”
1 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
2 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
1 On September 22, 2014, Gilead Biopharmaceutics Ireland Corporation was renamed Gilead Biopharmaceutics Ireland UC. JX702-004.
3 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
2 Tr. 140-41 (Gallagher). 3 Tr. 190 (Gallagher). 4 Tr. 142-43 (Gallagher). 5 Tr. 155 (Gallagher); Tr. 43 (Miller).
4 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
6 JX057-004; Tr. 144 (Gallagher). 7 Tr. 144-45 (Gallagher); Tr. 831-32 (O’Connell); Mansuri Dep. 66-67; JX066. 8 Tr. 884 (O’Connell); JX712-005. 9 JX371-007. 10 Tr. 192-93 (Gallagher). 11 JX068-002; JX068-013; Tr. 15-16 (Miller). 12 JX068-065; Tr. 217 (Gallagher).
5 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
13 See Tr. 5 (Miller), Stephens Dep. 17-18. 14 Tr. 15-16 (Miller); Tr. 768-69 (Hawkins); see Tr. 13-14 (Miller); JX068. 15 Tr. 24-28 (Miller); see e.g., JX068-017 (summarizing studies). 16 JX068-050; JX084-004-05. 17 Tr. 23 (Miller); Tr. 151-52 (Gallagher); Tr. 401-02 (Arbuck); Tr. 907-08 (O’Connell).
6 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
18 Tr. 24 (Miller). 19 Tr. 250 (Gallagher). 20 Tr. 249 (Gallagher). 21 Tr. 381 (Arbuck). 22 Tr. 76 (Miller); Tr. 775 (Hawkins). 23 JX068-027; JX068-029; Tr. 771 (Hawkins). 24 JX068-027; Tr. 31-33 (Miller); Tr. 257 (Gallagher); see Milligan Dep. 68-69.
7 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
25 Tr. 579-80 (Dearden). 26 Tr. 580 (Dearden). 27 Tr. 412-13 (Arbuck); Tr. 673 (Dearden); Milligan Dep. 68. 28 Tr. 412-13 (Arbuck); JX1000-003; JX1002-003. 29 See Tr. 428-29 (Arbuck) (testifying that around 10% of newly diagnosed CLL patients have 17p deletion or TP53 mutation, and the number rises to 40-50% among relapsed and refractory CLL patients); JX785-006 (Gilead marketing presentation stating that around 7- 13% of frontline CLL patients and 48-53% of relapsed/refractory CLL patients have 17p deletion or TP53 mutation); Tr. 114 (Miller) (“about 5 to 8 percent of CLL patients will exhibit 17p deletion or TP53 mutation if tested at the time of their first treatment”); Tr. 659-60 (Dearden) (acknowledging studies that found around 10-15% of CLL patients have a defect in the TP53 gene at the time of diagnosis and that as high as 40-50% of refractory CLL patients have this genetic abnormality). 30 Tr. 32 (Miller); Tr. 771-72 (Hawkins).
8 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 US 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 US 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.
31 Tr. 148 (Gallagher); JX160. 32 JX160-003. 33 The dates of the drafts discussed in this opinion refer to the dates they were exchanged, which varies for some drafts by one day from the date that appears on the document.
9 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
34 JX175-016; Tr. 154 (Gallagher). 35 JX175-053 § 9(bk)(i). If the first Regulatory Approval is obtained on or before June 30, 2014, then the first milestone payment shall be increased to $150 million. Id. 36 JX175-053 § 9(bk)(ii). 37 JX175-053-054 § 9(bk)(iii). “P110 Delta Product” was defined as “a pharmaceutical product (i) the manufacture, use, importation or sale of which is covered by a Valid Claim or (ii) is a P13K-delta inhibitor for which clinical trials for an oncology indication are conducted prior to the fifth anniversary of the Closing Date.” JX175-013. 38 JX175-054 § 9(bk)(iv). “Initiation of a Registration Study” was defined as “first dosing of the first patient in such Registration Study.” JX175-012. “Registration Study” was defined as a “human clinical trial of a P110 Delta Product on patients, which trial is
10 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
designed to establish substantial evidence of the efficacy and/or safety of the P110 Delta Product to support Regulatory Approval of such P110 Delta Product . . . .” JX175-014. 39 JX175-053-054. 40 See generally JX175; Tr. 161 (Gallagher); Tr. 840 (O’Connell). 41 JX175-015. 42 JX175-007. 43 JX175-056 § 9(bl)(iii)(B).
11 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 US 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 US 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 US and then in an EU Country would trigger the First and Second milestones, respectively. 44 JX175-009. 45 Tr. 829 (O’Connell). 46 JX185-002 (emphasis in original); Tr. 841-42 (O’Connell). 47 Tr. 73 (Miller); Tr. 829 (O’Connell).
12 As a second potential example, iNHL approval in the US 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 US and then CLL approval in the US 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
48 JX196-001; Tr. 847-48 (O’Connell). 49 JX192-001. 50 See Tr. 854 (O’Connell). 51 JX197-001; Tr. 851 (O’Connell). 52 JX197-002.
13 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
53 See JX197-002; Tr. 852-53 (O’Connell). 54 JX206-102; Tr. 852-53 (O’Connell). 55 JX207-021 & 075-076 § 9.1; JX207-019. 56 JX 207-100.
14 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
57 Tr. 852 (O’Connell); see also Tr. 913 (O’Connell). 58 JX207-019; see also Tr. 912 (O’Connell). 59 JX207-014; JX207-075-076. 60 JX175-011; JX175-053. 61 JX207-079 § 9.1(b)(iii)(B).
15 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
62 JX223-017 & 089. 63 Tr. Oral Arg. 26, 103 (Jan. 10, 2017).
16 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
64 JX224-018. 65 JX224-079 § 9.1(b)(iii)(B). 66 See e.g., Tr. 262, 264, 273-74 (Gallagher); Tr. 55, 64 (Miller). 67 Tr. 389-90, 537 (Arbuck); Tr. 569-70, 574 (Dearden). 68 There are slight differences in wording between Schedule 1.1 and the top-level tumor types in the WHO Classification, which Dr. Dearden credibly testified are likely the result of the use of different versions of the WHO Classification. Tr. 597-99 (Dearden).
17 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
69 Tr. 54 (Miller). 70 JX217-001. 71 JX226-001; Tr. 56-57 (Miller). 72 Tr. 61 (Miller); see JX028. 73 JX028-003; Tr. 62 (Miller).
18 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
74 Tr. 47-48, 64 (Miller). 75 Tr. 57-58, 60 (Miller). 76 JX227. 77 JX227-001. 78 JX223-001.
19 “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
79 Compare JX227-002-004 with JX223-089. 80 Tr. 855-56 (O’Connell). 81 Tr. 856 (O’Connell). Dr. Mansuri testified similarly in deposition. See Mansuri Dep. 42-43. Dr. Claire Dearden, Gilead’s expert, also testified that Part 1 of Schedule 1.1 was “immediately recognizable” as tumor types defined within the WHO Classification. Tr. 595-98 (Dearden). 82 Tr. 789 (Hawkins).
20 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
83 Tr. 789-90 (Hawkins). 84 Tr. 790 (Hawkins). 85 JX385-003 (original phrase was in all caps); Tr. 858-59 (O’Connell). 86 See JX247-276 § 9.1(a)(i) & (ii). 87 JX240. 88 JX241-012.
21 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
89 Compare JX241-095 with JX223-089. 90 Compare JX241-095-096 with JX207-100. 91 JX241-018. 92 JX241-019; JX241-072-073 § 9.1(a). 93 JX241-072-073 § 9.1(a)(i) & (ii). 94 JX241-072-073 § 9.1(a)(ii). The remaining three milestones in this draft were dropped from the later draft and are irrelevant to the analysis in this opinion. 95 JX241-017.
22 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
96 JX256-001. 97 JX274-007. See also Milligan Dep. 84; Mansuri Dep. 111-12. 98 JX277-018; JX277-072-073 § 9.1(a).
23 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] US 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] US 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,
99 JX304-001. “CRE” and “CREs” are acronyms for “Commercially Reasonable Efforts.” See Tr. 184 100
(Gallagher); Mansuri Dep. 120. 101 In some of the earlier drafts of the merger agreement, the first milestone payment could be increased to $150 million if the first Regulatory Approval was obtained on or before June 30, 2014. See JX175-053; JX207-075; JX223-068; JX241-072. 102 JX304-001. 103 JX277-096.
24 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
104 JX277-016-017. 105 JX277-072-073 § 9.1(a). 106 JX277-075-076 § 9.1(b)(iii)(B). 107 JX307-001; Mansuri Dep. 114-16.
25 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
108 JX351-070-071 § 9.1(b)(iii)(B). 109 JX350-002-003.
26 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- 27 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 Date110].
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
110 JX351-068 § 9.1(a)(iv)(A). 111 JX351-069 § 9.1(a)(iv)(C). 112 JX345-004. In a footnote, JP Morgan suggested that it believed it was more likely for Calistoga to trigger the third milestone by meeting the $1 billion annual sales requirement than by obtaining a Regulatory Approval of CAL-101 for a solid tumor indication or as a first-line treatment for a Hematologic Cancer Indication.
28 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
113 JX371-001; Tr. 778-79 (Hawkins). 114 JX371-032. 115 JX434-022. 116 JX434-001; JX434-022. 117 Tr. 798 (Hawkins).
29 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
118 JX434-023. 119 JX457-001. 120 JX443-003. 121 JX457-008.
30 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 122 JX457-008. 123 JX457-009. 124 JX457-009. 125 PTO ¶ II.19; JX643 ¶ 5.
31 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
126 JX510-001. 127 JX702 ¶ 5. 128 See JX540. 129 JX643 ¶ 28; JX702 ¶ 28. 130 JX455.
32 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:”
131 JX455-002. 132 JX505-049. 133 JX508-005.
33 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,
134 JX508-006 (emphasis in original). 135 JX518-004. 136 See JX536; JX537. 137 JX549-210.
34 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 connection with its approval
states in relevant part:
4.1 Therapeutic indications 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. Zydelig is indicated as monotherapy for the treatment of adult patients with follicular lymphoma (FL) that is refractory to two prior lines of treatment.140
138 JX556-077-078. 139 JX591; JX702 ¶ 29. 140 JX796-002.
35 The part of this label authorizing the use of Zydelig “as first line treatment in the
presence of 17p deletion or TP53 mutation in patients unsuitable for chemo-
immunotherapy” is referred to hereafter as the “17p/TP53 Label.”
I. Disputes over the Third Milestone Payment Arise
On July 15, 2014, Pat Kilgannon, a former Calistoga employee now working
at Gilead, asked Robert Christian, a member of Gilead’s Alliance Management team
tasked with interacting with Calistoga’s former securityholders, whether the
potential approval of Zydelig as a “first line treatment in the presence of high-risk
features, such as a 17p deletion or TP53 mutation in patients unsuitable for chemo-
immunotherapy” would trigger the Third Milestone.141 Later that day, Christian
forwarded the inquiry to O’Connell.142
On July 28, 2014, Chris Letang, a managing director at SRS responsible for
monitoring the progress on achieving the milestones, emailed Dr. Topper,
Calistoga’s founder and Chairman, and Dr. Gallagher, both of whom are members
of the committee controlling this litigation on behalf of Calistoga’s former
securityholders. In his email, Letang recapped the terms of the Third Milestone,
stating that one of the triggers for the Third Milestone was “approval as a first-line
141 JX520; Tr. 947 (O’Connell). 142 JX520.
36 drug treatment.” 143 The next day, Dr. Gallagher sent an email to her husband
containing a link to a Gilead press release announcing that the CHMP had
recommended the approval of the 17p/TP53 Label.144 The text of the email stated:
“Approval in EU as well!”145
The Merger Agreement obligates Gilead to provide status reports to SRS
periodically concerning the progress of its development and regulatory activities.146
On August 18, 2014, Christian emailed Dr. Mansuri a draft of such a report, noting
in the text of his email that “[t]he Shareholder agent sent me an e-mail last week,
asking about the third milestone and its status.”147 Dr. Mansuri replied on August
25: “With regard [to] the final payment, can we not simply say we are looking at
this. I still have not had a chance to discuss with John Milligan and Norbert.”148
Milligan was Gilead’s President and Chief Executive Officer, and Norbert
Bischofberger was its Executive Vice President of Research and Development and
Chief Scientific Officer.
143 JX567-003; Tr. 312-13 (Gallagher). 144 JX544; JX536; Tr. 319 (Gallagher). 145 JX544. 146 See JX351-072 § 9.1(b)(iii)(F). 147 JX564-002. 148 JX564-002.
37 On August 27, 2014, Letang emailed Drs. Topper and Gallagher again,
attaching an update report from Gilead.149 Page 3 of the update report stated that:
“Plans for registration trials in patients with previously untreated CLL are being
implemented and include two phase 3 studies and one phase 2 study (described
below). As of 31 July 2014, 2 studies were open for enrollment.”150 Page 5 of the
update report noted the most recent positive opinion from the CHMP concerning
CHMP Positive Opinion on 24 July 2014—proposed label text below The approved indication is: o 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.151
The same day, Dr. Topper forwarded Letang’s email, including the attached update
report, to another partner in his venture capital firm, noting: “Phase 3 upfront trials
are enrolling[.] That is one of the triggers for the rest of the milestones[.]”152
149 JX567-001; JX567-007-013. 150 JX567-009. 151 JX567-011. 152 JX567-001.
38 On September 19, 2014, the day the European Commission approved the
17p/TP53 Label, Dr. Topper sent an email to the partners in his venture capital firm
entitled “zydelig was approved in EU today.” The text of the email stated: “No
milestone, but good progress to next one.”153
Also on September 19, Dr. Topper sent an email to some of Calistoga’s former
executives announcing that “Zydelig was just approved in the EU today.”154 Dr.
Roger Ulrich, Calistoga’s Chief Development Officer, emailed back, asking what
the Third Milestone conditions were.155 In reply, Dr. Topper wrote: “One of three[:]
1B in sales[;] Approval in an upfront indication for heme malig[;] Approval of a non
hem onc indication (solid tumors e.g.)[.] I think first two are likely to happen, given
it is phase III in upfront now[.]”156
Still on September 19, Kamal Puri, a former Calistoga employee now working
at Gilead, asked several former Calistoga executives in an email whether the
17p/TP53 Label would trigger the Third Milestone.157 At 2:44 p.m., Dr. Gallagher
replied: “The last milestone will most likely be achieved by a sales goal so a few
153 JX589 (emphasis added). 154 JX585-001. 155 JX585-001. 156 JX585-001. 157 JX587.
39 years away perhaps.”158 At 3:24 p.m., Dr. Yu informed Dr. Gallagher that he had
“[j]ust got a message from Leanne that Gilead is indicating the frontline label in
subset of CLL patients does not meet milestone” and asked Dr. Gallagher for her
thoughts on the subject.159 At 3:35 p.m., Dr. Gallagher replied to Puri’s email again,
stating: “I forgot about the front-line path for the milestone. I haven’t heard through
the official channels yet.”160
Later on September 19, Dr. Gallagher emailed Letang, stating that since the
17p/TP53 Label “is a front-line label in a heme malignancy, it seems that this
approval could trigger the third milestone.”161 Letang agreed to “take a closer look”
and to get back to Dr. Gallagher.162 On September 20, Dr. Topper also emailed
Letang, stating: “With the approval of Zydelig in the EU, for in part, the up front
treatment of 17p negative or p53 mutant patients with heme malignancy, it would
seem pretty clear that milestone 3 has been satisfied. . . . My suggestion is that we
notify Gilead that we believe the milestone has been triggered.”163
158 JX587; Tr. 321-22 (Gallagher). 159 JX854. 160 JX586. 161 JX583-002. 162 JX583-001. 163 JX592-001.
40 On September 24, 2014, Letang emailed Cryn Nutt, corporate counsel at
Gilead, stating Calistoga’s belief that “the new approvals [in Europe] . . . would
appear to trigger the third ($50M) milestone.” Letang further stated that he “was
hoping to connect with [Nutt] or someone at Gilead to confirm that this milestone
was achieved and begin to work through the mechanics for the distribution of the
milestone payment.”164
On October 7, 2014, Christian notified Letang that Gilead did not believe the
Third Milestone had been triggered because “the intent of the agreement was that
the approval needed to be for a broad indication, not a smaller subset of an indication,
for it to trigger the milestone.”165 To date, Gilead has not made the Third Milestone
payment.
II. Procedural Posture
On January 14, 2015, SRS filed a complaint against Gilead asserting a single
claim for breach of the Merger Agreement for failure to pay the Third Milestone as
a result of the European Commission’s approval of the 17p/TP53 Label.
On February 27, 2015, Gilead filed an answer and three counterclaims, which
it later amended. The first counterclaim seeks a declaration that the European
Commission’s approval of the 17p/TP53 Label did not trigger the Third Milestone.
164 JX607-004. 165 JX609-001; see also Letang Dep. 134-35.
41 The second and third counterclaims, which were asserted in the alternative to the
first counterclaim, sought reformation of the Merger Agreement on the grounds of
mutual and unilateral mistake. On December 11, 2015, Gilead notified the Court
that it had dropped its two reformation counterclaims and associated affirmative
defenses.
On January 13, 2016, SRS filed a motion for judgment on the pleadings on its
claim for breach of the Merger Agreement and Gilead’s remaining counterclaim for
declaratory relief. On May 25, 2016, after briefing and argument, I deferred
resolution of the motion for judgment on the pleadings until after trial because the
scientific and technical nature of the subject matter at issue in this case prevented
me from being able to resolve the matter on the pleadings.
III. Analysis
A. Legal Standard
To succeed at trial, “Plaintiffs, as well as Counterclaim-Plaintiffs, have the
burden of proving each element, including damages, of each of their causes of action
against each Defendant or Counterclaim-Defendant, as the case may be, by a
preponderance of the evidence.” 166 “Proof by a preponderance of the evidence
166 inTEAM Associates, LLC v. Heartland Payment Systems, Inc., 2016 WL 5660282, at *13 (Del. Ch. Sept. 30, 2016).
42 means proof that something is more likely than not.”167 This standard applies to both
SRS’s claim for breach of the Merger Agreement for failure to pay the Third
Milestone, and Gilead’s counterclaim for a declaration that the Third Milestone was
not triggered by the European Commission’s approval of the 17p/TP53 Label.168
“A contract’s express terms provide the starting point in approaching a
contract dispute.”169 If, on its face, the “contract is unambiguous, extrinsic evidence
may not be used to interpret the intent of the parties, to vary the terms of the contract
or to create an ambiguity.”170 If a contract is ambiguous, however, the Court may
consider extrinsic evidence, including “evidence of prior agreements and
communications of the parties as well as trade usage or course of dealing.”171
Under Delaware’s objective theory of contracts, “a contract is not rendered
ambiguous simply because the parties do not agree upon its proper construction.
Rather, a contract is ambiguous only when the provisions in controversy are
reasonably or fairly susceptible of different interpretations or may have two or more
167 Id. 168 See Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016 WL 4401038, at *17 (Del. Ch. Aug. 18, 2016). 169 Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007). GMG Capital Inv., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 783-84 (Del. 170
2012) (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)). 171 Eagle Indus., 702 A.2d at 1233.
43 different meanings.”172 In considering extrinsic evidence, the Court should uphold,
“to the extent possible, the reasonable shared expectations of the parties at the time
of contracting.”173 “In giving effect to the parties’ intentions, it is generally accepted
that the parties’ conduct before any controversy has arisen is given ‘great
weight.’”174
Importantly, ascertaining the shared intent of the parties does not mandate
slavish adherence to every principle of contract interpretation. As this Court recently
stated: “Contract principles that guide the Court—such as the tenet that all
provisions of an agreement should be given meaning—do not necessarily drive the
outcome. Sometimes apparently conflicting provisions can be reconciled, but in
order to prevail on a contract claim, a party is not always required to persuade the
172 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 173 Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003). 174 Ostroff, 2007 WL 121404, at *11; see also Radio Corp. of Am. v. Philadelphia Storage Battery Co., 6 A.2d 329, 340 (Del. 1939) (“It is a familiar rule that when a contract is ambiguous, a construction given to it by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the courts. The reason underlying the rule is that it is the duty of the court to give effect to the intention of the parties where it is not wholly at variance with the correct legal interpretation of the terms of the contract, and a practical construction placed by the parties upon the instrument is the best evidence of their intention.”).
44 Court that its position is supported by every provision or collection of words in the
agreement.”175
B. The Term “Indication” is Ambiguous as used in the Merger Agreement
The provision of the Merger Agreement at the center of this dispute is the
Third Milestone, which states that:
Within fifteen (15) Business Days following . . . (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 . . ., [Gilead] shall notify [SRS] that the [Third Milestone] has been satisfied and pay or cause to be paid to the Company Securityholders in accordance with Section 9.1(b) Fifty Million Dollars ($50,000,000), as such amount may be adjusted pursuant to Section 9.1(b).176
It is undisputed that the 17p/TP53 Label constituted a “Regulatory Approval of
CAL-101 in the European Union,” but it is heavily disputed whether CAL-101 was
approved “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,” and in particular, what the word “indication” means as used in this term.
“Hematologic Cancer Indication” is defined in the Merger Agreement to mean
“any hematologic cancer indication specifically identified in Part 1 of Section 1.1 of
175 Cyber Hldg. LLC v. CyberCore Hldg., Inc., 2016 WL 791069, at *7 (Del. Ch. Feb. 26, 2016). 176 JX351-068 § 9.1(a)(iii)(B).
45 the Company Disclosure Schedule.” 177 Part 1 of Section 1.1 of the Company
Disclosure Schedule in turn states that “Hematologic Cancer Indications” means
“[a]ny indication within the following tumor types,” the first of which is “B-cell
neoplasms,” and the last of which is “[a]ny Specified Hematologic Cancer Indication
listed in Part 2 of this Schedule 1.1.”178
“Specified Hematologic Cancer Indication” is defined in the Merger
Agreement as “any hematologic cancer indication specifically identified in Part 2 of
Section 1.1 of the Company Disclosure Schedule.”179 Part 2 of Section 1.1 lists nine
specific diseases, including “Chronic Lymphocytic Leukemia,” or CLL.180
The definitions in the Merger Agreement are only the starting point, rather
than the end, of the parties’ dispute. As witnesses for both SRS and Gilead testified,
in the oncology industry, the meaning of the term “indication” is context specific.181
Depending on the context, for example, it could refer to a “disease,” a “tumor,” “an
indication for starting treatment in a patient,” or “a regulatory approval.”182
177 JX351-011. 178 JX350-002 (emphasis added). 179 JX351-016. 180 JX350-002. 181 See, e.g., Tr. 88 (Miller); Tr. 336 (Gallagher); Tr. 386; 502 (Arbuck); Tr. 613 (Dearden); Tr. 889 (O’Connell). 182 See, e.g., Tr. 88 (Miller); Tr. 386-87, 502 (Arbuck); Tr. 889 (O’Connell).
46 Gilead contends that in the context of the Merger Agreement the only
reasonable interpretation of the word “indication” is that it means a “disease.”183 By
contrast, SRS contends that the only reasonable interpretation of the word is “the
approved use of a drug in a population of patients with a particular disease.” 184
Thus, according to SRS, the term “indication” does not describe a disease but instead
“refers to the label or indication statement that Gilead receives from a regulatory
authority such as the EMA or FDA,” which describes “the particular patient
population with that disease that a drug can be used to treat.”185 Despite their sharp
disagreement, SRS and Gilead both argue that the Merger Agreement is
unambiguous and that the plain language of the contract supports their respective
interpretations.
“Indication” appears five times in Schedule 1.1, and the parties agree that it
has the same meaning in all five places.186 The parties also agree that Part 2 of
Schedule 1.1 (set forth below) is a list of blood cancers or diseases.187
183 Answering Post-Trial Br. 45. 184 Opening Post-Trial Br. 1. 185 Opening Post-Trial Br. 44; see also Reply Post-Trial Br. 2. 186 Tr. Oral Arg. 16; Answering Post-Trial Br. 46-47; see also Tr. 523-24 (Arbuck); Tr. 601-02 (Dearden). 187 Tr. 166; 273 (Gallagher); Tr. 602 (Dearden); see also Answering Post-Trial Br. 45; Reply Post-Trial Br. 7.
47 Building on this point of agreement, Gilead argues that, since “Specified
Hematologic Cancer Indications” is defined as “any hematologic cancer indication
specifically identified in Part 2” and since Part 2 consists of a list of diseases, it
logically follows that the term “Hematologic Cancer Indications” as used in Part 1
also must refer to diseases.
SRS advances two arguments in response to Gilead’s plain meaning
argument. First, SRS argues that to interpret “indication” to mean “disease” would
render the very same word superfluous as used in the phrase “Hematologic Cancer
Indications,” contrary to the principle of contract construction that each word in a
contract must be given meaning and effect. It is undisputed that a “hematologic
cancer” is a “blood cancer,” which is a disease.188 Therefore, according to SRS, if
“indication” also means “disease,” it adds nothing to the phrase “Hematologic
188 Tr. 718 (Dearden).
48 Cancer Indication.” In essence, SRS argues that people in the oncology industry do
not use the phrase “hematologic cancer disease” or “cancer disease” because that
would be repetitive.
Although this argument has some appeal to a law-trained judge accustomed
to applying interpretative principles to construe a contract, the reality of life is that
human language is not perfect.189 In this case, for example, O’Connell, Gilead’s lead
negotiator, used the term “hematologic cancer diseases” at least ten times in a
natural, unforced manner when responding to questions at trial.190 As reflected in
numerous publications, moreover, people in the oncology industry in fact do use the
phrase “cancer diseases” or “hematologic cancer diseases,” including in peer-
reviewed journals, to describe the disease of cancer or blood cancer.191 Thus, I am
189 See Atlantic Northern Airlines v. Schwimmer, 96 A.2d 652, 656 (N.J. Supr. 1953) (“Language is only too often an imperfect and uncertain means of communicating ideas and concepts.”). 190 See e.g., Tr. 846; 852; 859-60; 864; 919; 920; 956 (O’Connell). O’Connell also used “hematological cancer” and “hematologic cancer indication” interchangeably in Gilead’s internal documents concerning the milestones. See, e.g., JX185-002. 191 Gilead’s Objs. to New Reply Evid. 2-3 (citing nine different publications). Although Gilead submitted these publications after the close of the evidence, I take judicial notice of them in the interests of fairness because they were submitted in response to certain dictionary definitions SRS relied on for the first time in its post-trial reply brief and because the contents of these publications are not subject to reasonable dispute. Khanna v. McMinn, 2006 WL 1388744, at *30 (Del. Ch. May 9, 2006) (“[T]he Court may take judicial notice ‘of matters that are not subject to reasonable dispute.’”).
49 not persuaded that it would be unreasonable to construe “indication” to mean
“disease” based on SRS’s surplusage argument.192
SRS next argues that Gilead’s interpretation of “indication” to mean “disease”
makes no sense when the initial clause of Part 1 is read together with the last bullet
point in Part 1. More specifically, according to SRS, it would be nonsensical “to
read the reference in the disclosure schedule to ‘[a]ny indication within . . . any
Specified Hematologic Cancer Indication listed in Part 2 of this Schedule 1.1’ as
meaning ‘[a]ny [disease or blood cancer] within . . . any Specified Hematologic
Cancer Indication’” because “Part 2 of the Company Disclosure Schedule lists only
‘diseases’ such as CLL” but “there are no diseases ‘within’ CLL.” 193 Although a
highly technical point, this discrepancy illustrates an apparent inconsistency when
Gilead’s proffered interpretation is applied to all uses of the word “indication” found
in Schedule 1.1.
SRS’s plain meaning argument, on the other hand, suffers from more
profound problems. To start, there is no obvious textual anchor in the Merger
Agreement from which to import into the word “indication” the concept of a
regulatory label reflecting an “approved use of a drug in a population of patients
192 See Cyber Hldg. LLC, 2016 WL 791069, at *7 (“in order to prevail on a contract claim, a party is not always required to persuade the Court that its position is supported by every provision or collection of words in the agreement.”). 193 Opening Post-Trial Br. 53 (emphasis added) (citation omitted).
50 with a particular disease,” as SRS advocates. Additionally, it is difficult to see how
such a construction can be reconciled with the fact that Part 2 of Schedule 1.1
concededly defines “Specified Hematologic Cancer Indications” to mean a specified
list of diseases.
SRS counters that it is consistent for Part 2 to be a list of blood cancers and
for “indication” to mean an approved label or an indication statement, since a label
normally would identify both the type of disease and the population of disease
sufferers the drug is approved to treat.194 This contention is unconvincing. It is true
that a drug label would identify the specific disease the drug is approved to treat, but
that does not turn the label into a disease. The definition of Specified Hematologic
Cancer Indication in the Merger Agreement is clear in my view. It is “any
hematologic cancer indication specifically identified in Part 2 of Section 1.1 of the
Company Disclosure Schedule.” What is identified in Part 2 is a list of diseases, not
labels that describe diseases.
For the reasons discussed above, I find the word “indication” to be ambiguous
when considered within the four corners of the Merger Agreement. This result is
hardly surprising given the shifting positions both parties have taken in this
litigation. In its motion for judgment on the pleadings, for example, SRS advanced
194 Reply Post-Trial Br. 7-8.
51 a seemingly different interpretation, arguing that the term Hematologic Cancer
Indication meant “[t]he basis for initiation of a treatment or of a diagnostic test.”195
For its part, Gilead did not display much confidence in the plain meaning of the term
at the outset of this case when it asserted, albeit in the alternative, that the Merger
Agreement should be reformed because of a mutual or unilateral mistake—claims it
has since abandoned.196 Given the ambiguity, I turn to extrinsic evidence to interpret
the term.
C. The Parties’ Negotiation History Demonstrates that “Indication” Means “Disease” in the Merger Agreement
When the extrinsic evidence in the record is considered, in particular the
negotiation history concerning the Merger Agreement, the overwhelming weight of
the evidence demonstrates in my opinion that the parties mutually understood when
they entered into the Merger Agreement that the term “indication” meant “a
disease.” I begin by recapping the evolution of the terms “Hematologic Cancer
Indication” and “Specified Hematologic Cancer Indication” as the parties negotiated
the milestone structure in the Merger Agreement.
On January 28, 2011, Gilead made its preliminary offer to Calistoga,
proposing three milestones, two of which were based on regulatory approvals of
195 JX729-027-028 n.9. 196 JX702-037-040.
52 CAL-101 for one of two specific blood cancers, i.e., indolent Non-Hodgkin’s
Lymphoma (iNHL) or Chronic Lymphocytic Leukemia (CLL).197 On February 1,
Calistoga sent Gilead the first draft of the merger agreement, introducing a new set
of four milestones, the first two of which would be triggered by regulatory approvals
for a “hematologic cancer indication,” which term was not defined.198
On February 8, Gilead responded with a revised draft of the merger agreement
in which it replaced the undefined term “hematologic cancer indication” with a
defined term “Specified Hematologic Cancer Indication,” which referred to “any
hematologic cancer indication specifically listed on Schedule 1.1.” 199 Gilead’s
proposed “Schedule 1.1” was a list of nine blood cancers O’Connell had compiled
with the assistance of the Boston Consulting Group for the purpose of limiting the
milestone payments to “major” blood cancers.200
On February 12, Calistoga sent Gilead another draft of the merger agreement,
replacing Schedule 1.1 in Gilead’s last draft with a new list of eleven tumor types
that came under the heading “Specified Hematologic Cancer Indications.” 201
Significantly, as discussed above, the trial record clearly establishes that Calistoga
197 JX160-003 (emphasis added). 198 JX175-053-054 § 9(bk)(i)&(ii). 199 JX207-075-076 § 9.1(a); JX207-019. 200 JX206-102; Tr. 852 (O’Connell). 201 JX223-089.
53 derived its list of eleven tumor types from the top level categories of diseases in the
WHO Classification, which lists numerous other diseases under these eleven
categories. These subcategories of diseases were not listed by name in Calistoga’s
February 12 revision of Schedule 1.1, but to ensure that the disease subcategories
would trigger a milestone payment, Calistoga inserted a clause before the list of
eleven tumor types stating: “Any indication within the following [eleven] tumor
types.” Dr. Gallagher, the person who oversaw Calistoga’s sale process, confirmed
at trial that the “within the following tumor types” language “was intended to sweep
in the subcategories of diseases.”202
When Gilead received Calistoga’s February 12 draft, it recognized that
Calistoga’s revision of Schedule 1.1 tracked the WHO Classification and thus that
Calistoga was seeking to expand Gilead’s prior list of nine blood cancers “to include
all hematologic cancer indications” in the WHO Classification.203 On February 16,
Gilead went back with a compromise in order to narrow the triggers for the second
milestone that was under discussion.
Specifically, in its February 16 draft, Gilead divided Schedule 1.1 into two
parts, Part 1 being the last schedule Calistoga had proposed on February 12, and Part
202 Tr. 271 (Gallagher); see also Tr. 67-68 (Miller). 203 JX385-003.
54 2 being the nine blood cancers Gilead had proposed on February 8.204 The draft
introduced a new defined term “Hematologic Cancer Indication,” meaning “any
hematologic cancer indication specifically identified in Part 1 of Schedule 1.1,” and
changed the definition of “Specified Hematologic Cancer Indication” to mean “any
hematologic cancer indication specifically identified in Part 2 of Schedule 1.1.”205
Under the February 16 draft, if both the first and the second regulatory approvals
were in the same location (i.e., the United States or a Major Market Country), then
in order for the second milestone to be triggered, one of the two approvals had to be
for a Specified Hematologic Cancer Indication.206
On February 18, Calistoga sent another draft to Gilead, proposing a new set
of three milestones and adding what became the twelfth and final bullet to the
definition of Hematologic Cancer Indication in Part 1 of Schedule 1.1, namely to
include “[a]ny Specified Hematologic Cancer Indication listed in Part 2 of this
Schedule 1.1.”207 Although the record provides no definitive evidence of the reason
for this late change to Schedule 1.1, the timing of its addition—coming two drafts
after Calistoga already had introduced into Part 1 of the schedule the “within the
204 JX241-095-096. 205 JX241-012; JX241-018. 206 JX241-072-073 § 9.1(a)(ii). 207 JX277-096.
55 following tumor types” language to pick up the subcategories of diseases for the first
eleven bullets—suggests to me, and I so find, as Dr. Gallagher testified,208 that it
was added simply to make clear (for the avoidance of any doubt) that the Specified
Hematologic Cancer Indications “listed in Part 2” also were included in Part 1. The
final Merger Agreement maintained the milestone structure and Schedule 1.1 from
the February 18 draft.209
In sum, the drafting history of the Merger Agreement shows that the parties
always were talking about regulatory approval of CAL-101 for a disease when they
were negotiating over the milestone payments. By contrast, the drafting history does
not reflect that the parties were discussing regulatory labels when negotiating the
triggers for the milestone payments. Indeed, to find that “indication” means “label”
or “label approval” would contradict Dr. Gallagher’s testimony that “the ‘within the
following tumor type’ language was not intended to depart from the scientifically
recognized definition of diseases,” that “no one at Calistoga evinced, in words or
deeds, to Gilead that the purpose of Section 1.1 was to depart from the scientifically
recognized definition of diseases,” that she “never told anyone at Gilead that the
purpose of the ‘any hematologic indication’ language in Schedule 1.1 was to sweep
Tr. 273 (“Q. And the purpose of the last bullet point in part 1 is to confirm that it also 208
sweeps in the specific blood cancers listed in part 2, correct? A. Yes.”); see also Arbuck Dep. 81. 209 JX350-002-003; JX351-067-068 § 9.1(a).
56 in any patient with any genetic mutation that may also have a blood cancer,” and
that it “was not the intent of Calistoga to depart from the scientific[ally] accepted
definition of ‘tumors’ when it prepared Schedule 1.1.”210
In addition to the merger agreement drafts, other contemporaneous
communications between SRS and Gilead show that both parties used “indication”
as synonymous for “disease” during their negotiations. For example, when
O’Connell sought clarification from Stocks concerning the operation of the
milestones in the first draft of the merger agreement that Calistoga had prepared,
Stocks focused on approvals for diseases (e.g., iNHL and CLL) as the triggers for
the first two milestones:
As one potential example, iNHL approval in the US and then in an EU Country would trigger the First and Second milestones, respectively. As a second potential example, iNHL approval in the US 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 US and then CLL approval in the US also would trigger the first and second milestones, respectively.211
As another example, in a February 16 email to Stocks to give him “a heads up” on
Gilead’s forthcoming revisions to the merger agreement, O’Connell characterized
the trigger for second milestone as an approval for a blood cancer:
$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 210 Tr. 271-72 (Gallagher). 211 JX196-001 (emphasis added).
57 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)212
Calistoga also used “indication” to refer to “diseases” in some of the
presentations and regulatory materials it sent to Gilead during the negotiations.213 In
fact, Dr. Gallagher expressed no surprise to the prospect of being shown
“presentation after presentation in which ‘indication’ was used as synonymous with
‘blood cancer’ at Calistoga,”214 and testified that when using the word “indication”
in a presentation to refer to blood cancers, Calistoga was “trying to use it in the way
that folks generally in the industry use it.”215
In contrast to the abundance of evidence supporting Gilead’s position, SRS
could point to little concrete evidence in its favor. Gilead’s February 16 draft of the
merger agreement defined the term “Phase II Trial” as “a randomized controlled
clinical human study conducted to evaluate the effectiveness of a drug for a
particular indication or indications in patients with the disease or condition under
study.”216 Pointing to this definition, SRS argues that Gilead “specifically used the
212 JX256-001 (emphasis added). 213 See, e.g., JX123-018; JX874-009 § 2.2; JX377-007 § 2.2; JX086-011 § 3; JX086-046 § 10.1.7 (“in the indications indolent B-cell NHL, MCL and CLL”); JX086-152 § 4; Stocks Dep. 25-26; Tr. 507-11 (Arbuck). 214 Tr. 245 (Gallagher). 215 Tr. 240-43 (Gallagher) (discussing JX183-014). 216 JX241-016.
58 term ‘particular indication or indications’ to describe the use of a drug in a patient
population with a disease.”217 This definition, however, actually makes as much, if
not more, sense if “indication” means “disease” than if it means “label,” because
people normally talk about the “effectiveness of a drug for a particular [disease] or
[diseases],” as opposed to the “effectiveness of a drug for a particular [label] or
[labels].”
SRS next points to some slide presentations during the parties’ negotiations
where the term “indication” was used to refer to “the approved use of a drug” in the
context of regulatory approval. 218 But as discussed above, the parties also used
“indication” to refer to “disease” in those presentations as well as in regulatory
materials Calistoga shared with Gilead.219 Thus, this evidence is non-conclusive and
just highlights a point on which both parties agree—that use of the term “indication”
in the oncology industry is context specific.
The fact that SRS failed to identify any better evidence to support its
interpretation is hardly surprising, considering Dr. Gallagher’s admission that she
could not recall any time during the negotiations when Calistoga told Gilead that
“indication” meant “a label that you would receive for the specific patient population
217 Opening Post-Trial Br. 56. 218 Opening Post-Trial Br. 56-60. 219 See supra note 213.
59 that you would treat with the hematologic cancer.”220 Nor could she recall any time
during the negotiation when Calistoga used the term “indication” to refer to any
genetic subpopulations.221
In an attempt to make up for a scarcity of helpful evidence from the
negotiation history, SRS argues that the Court should construe the milestone
provisions in the context of regulatory approval of a drug, and cites to parts of the
record where people testified that in the regulatory approval context, “indication”
could mean the indication statement in a drug label. Putting aside that SRS used
“indication” to refer to “disease” in some of its own regulatory materials that it
shared with Gilead during the negotiations, as discussed above, 222 this argument
misses the mark. The milestone at issue here is triggered by a regulatory approval,
but the appropriate context in which the contract provision should be construed is
the context in which the Merger Agreement was negotiated, which is evinced, first
and foremost, by the parties’ contemporaneous communications, such as their
exchange of drafts of the merger agreement.223
*****
220 Tr. 233 (Gallagher). 221 Tr. 256-57 (Gallagher). 222 See JX086-011 § 3; JX086-046 § 10.1.7 (“in the indications indolent B-cell NHL, MCL and CLL”); JX086-152 § 4. 223 See Tr. 246 (Gallagher).
60 For all the reasons discussed above, the overwhelming weight of the extrinsic
evidence demonstrates in my opinion that the parties mutually understood when they
entered into the Merger Agreement that the term “indication” meant “a disease.”
D. The Third Milestone Can Only Be Triggered by a Disease-Level Approval
SRS next argues that even if the word “indication” means a blood cancer or
disease, the Third Milestone was still triggered because the Merger Agreement does
not specify that a Regulatory Approval must cover an entire population of disease
sufferers to qualify for the milestone. More specifically, SRS argues that even
though the 17p/TP53 Label limited the patient population to those with “17p deletion
or TP53 mutation [who are] unsuitable for chemo-immunotherapy,” Zydelig still
was approved as a first-line treatment for CLL.224 The parties do not dispute that
CLL is a blood cancer within the tumor type B-cell neoplasms listed in Part 1 of
Schedule 1.1 as well as a Specified Hematologic Cancer Indication listed in Part 2
of Schedule 1.1.225 Thus, according to SRS, the 17p/TP53 Label triggered the Third
Milestone under both Parts 1 and 2.
I disagree with SRS’s position for two basic reasons. First, the negotiation
history of the milestone provisions, the subsequent conduct of SRS’s own witnesses,
224 Opening Post-Trial Br. 61. 225 JX702 ¶ 5.
61 and the structure and operation of the milestone provisions all support the conclusion
that the form of regulatory approval necessary to trigger a milestone payment must
be a disease-level approval. Second, the 17p/TP53 Label does not satisfy the
disease-level approval requirement in the Third Milestone.
1. The Parties’ Negotiation History Demonstrates, and Their Subsequent Conduct Confirms, that only a Disease-Level Regulatory Approval Could Trigger the Third Milestone
Simplifying its second line of argument to its essence, SRS contends that the
“key is . . . are the people being treated with this drug for diseases [that are] listed”
in Schedule 1.1. 226 In other words, under SRS’s logic, as long as Zydelig was
approved to treat a subpopulation of CLL patients, no matter how small that
subpopulation may be, the Third Milestone payment would be due. Fatal to SRS’s
position, however, is that this argument finds no support in the parties’ negotiation
history.
As discussed in detail above, the extrinsic evidence demonstrates that the
parties were discussing disease-level regulatory approvals throughout their
negotiations over the milestones.227 No evidence was presented suggesting that they
discussed approvals for subpopulations of disease sufferers when negotiating the
milestones. As Dr. Hawkins testified, that subject “never came up” during the
226 Tr. Oral Arg. 49. 227 See supra Section III.C.
62 negotiations.228 Rather, the consistent focus of the parties’ discussions was on which
diseases would trigger the milestones. Indeed, by incorporating the WHO
Classification—an authoritative list of hematologic tumors—into Part 1 of the
Schedule 1.1, and by agreeing to a specific list of diseases in Part 2, the parties
effectively excluded subpopulation approvals as a trigger for a regulatory milestone.
In short, for the same reasons I have concluded that the term “indication” means
“disease” in the Merger Agreement, the form of regulatory approval required to
trigger a milestone payment under the Merger Agreement logically must be a
disease-level approval.
SRS points to evidence that Calistoga “repeatedly rejected Gilead’s efforts to
limit the application of the milestones as (a) applying only to major hematological
cancers; (b) as applying only to approvals in ‘Major Market Countries;’ and (c) as
not including accelerated or conditional approvals.”229 This evidence is beside the
point. The fact that SRS was successful in expanding the list of blood cancers that
could trigger a milestone (from the two initial diseases Gilead proposed (iNHL and
CLL) to all of the blood cancers in the WHO Classification), and in broadening the
scope of the necessary Regulatory Approval (to include more countries and
accelerated approvals), may have enlarged the number of opportunities to trigger a
228 See Tr. 795 (Hawkins). 229 Opening Post-Trial Br. 62 n.26; see also Reply Post-Trial Br. 18-19.
63 milestone payment in certain respects, but that does not change the fact that the
necessary approval had to occur at the disease level.
The conduct of Calistoga’s principals before the dispute in this action arose
confirms my finding that both parties understood that the milestones could only be
triggered by a disease-level regulatory approval. Dr. Gallagher (who oversaw the
merger negotiations) and Dr. Topper (Calistoga’s founder and Chairman at the time
of the merger) both worked with SRS to oversee this litigation on behalf of
Calistoga’s former securityholders.230 Significantly, for the two-month period from
July 29, 2014, when the CHMP publicly recommended the 17p/TP53 Label, until
September 19, 2014, when Gilead publicly announced the European Commission’s
approval of the 17p/TP53 Label, they both believed that the Third Milestone was not
due. 231 Indeed, neither of them concluded that the Third Milestone had been
triggered even after first learning about the European Commission’s approval of the
17p/TP53 Label.
230 Tr. 315 (Gallagher). 231 Dr. Gallagher admitted that she did not inform anyone between July 29, 2014 and August 27, 2014 that she believed the Third Milestone was triggered. Tr. 319-20 (Gallagher). Dr. Topper similarly admitted that, on August 27, 2014, after reading a Gilead update report disclosing both CHMP’s positive opinion on Zydelig and the fact that Gilead was conducting two phase 3 studies and one phase 2 study in patients with previously untreated CLL, he looked to the phase 3 trials, rather than the 17p/TP53 Label, as the potential trigger for the Third Milestone. JX567; Topper Dep. 25-26.
64 On September 19, 2014, upon learning about the European Commission’s
approval, Dr. Topper specifically said in an email entitled “zydelig was approved in
EU today” that “No milestone, but good progress to next one.”232 Later that day, in
emails responding to two separate inquiries from former Calistoga employees as to
whether the 17p/TP53 Label triggered the Third Milestone, both Drs. Topper and
Gallagher, who had been reminded about the terms of the Third Milestone in an
email from SRS as recently as July 28, 2014,233 took the same position.
At 2:38 p.m., Dr. Topper, after summarizing the three triggers in the Third
Milestone in his email, did not say that the milestone had been triggered because of
the 17p/TP53 Label, but that it was “likely” the milestone would be satisfied in the
future because of the pending Phase III study: “I think first two [triggers] are likely
to happen, given it is phase III in upfront now.”234 At 2:44 p.m., Dr. Gallagher also
did not say that the milestone had been triggered because of the 17p/TP53 Label, but
that it “most likely” would be triggered under the $1 billion sales subpart of the
milestone: “The last milestone will most likely be achieved by a sales goal so a few
years away perhaps.”235
232 JX589 (emphasis added). 233 JX567-003. 234 JX585-001 (emphasis added). 235 JX587; Tr. 321-22 (Gallagher).
65 Dr. Gallagher attempted to minimize this evidence at trial, testifying
emphatically that shortly after sending her 2:44 p.m. email she pulled out a copy of
the Merger Agreement at her home office and reviewed the milestone provisions,
which prompted her to send out another email at 3:35 p.m. saying she “forgot about
the front-line path for the milestone.”236 Putting aside that the meaning of the 3:35
p.m. email is inconclusive, Dr. Gallagher’s explanation for why she sent it strains
credibility given her previous testimony that she had not read the Merger Agreement
on September 19, 2014, and that she was out of town that day and thus could not
have reviewed it then at her home as she claimed so confidently at trial.237
Noting that the reactions of Drs. Topper and Gallagher discussed above
occurred several years after the Merger Agreement was signed, SRS argues that this
evidence is not useful to the interpretation of the Merger Agreement. Although
contemporaneous evidence is far more probative of the shared expectations of
contracting parties as a general matter, that does not mean that a party’s subsequent
conduct has no probative value. Indeed, this Court has stated that, “[i]n giving effect
to the parties’ intentions, it is generally accepted that the parties’ conduct before any
controversy has arisen is given ‘great weight.’” 238 That proposition rings
236 JX586, Tr. 353-58 (Gallagher). 237 Tr. 363-64 (Gallagher). 238 Ostroff, 2007 WL 121404, at *11. In support of its position, SRS relies on Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997). There, the Supreme Court
66 particularly true here, where the party whose conduct is at issue acts in a manner
directly contrary to their personal financial interests.
In any event, even if I were to completely disregard this evidence, it would
make no difference. The extensive evidence concerning the negotiation of the
milestone provisions is more than sufficient by itself in my opinion to support the
conclusion that the parties both understood that a disease-level approval was
necessary to trigger the Third Milestone. The Topper/Gallagher admissions are
merely corroborative. Also corroborative are reasonable inferences concerning the
commercial logic of the Third Milestone that can be drawn from its structure and
operation, which I address next.
2. The Structure and Operation of the Milestone Provisions Further Corroborates that the Regulatory Approval Must Be at the Disease Level
SRS argues that the Third Milestone “was a great deal for Gilead” even if it
could be triggered by a regulatory approval in a subpopulation of disease sufferers
as evidenced by the fact that Gilead was not obligated to use “Commercially
Reasonable Efforts” to meet the Third Milestone and was not even prevented from
taking any action for the primary purpose of avoiding the Third Milestone.239 In
did not proscribe reliance on all subsequent conduct evidence, but commented only that “backward-looking evidence gathered after the time of contracting is not usually helpful.” Eagle Indus., 702 A.2d at 1233 n.11 (emphasis added). 239 See JX351-070 § 9.1(b)(iii)(B).
67 SRS’s words, Gilead “had the liberty under the contract to actually [step] in front of
the train and stop the third milestone from happening.”240
The problem with this reasoning is that if the Third Milestone could be
triggered by a subpopulation approval, then the First and Second Milestones
logically also could be triggered by subpopulation approvals, since they similarly
were conditioned upon a regulatory approval of CAL-101 for a Hematologic Cancer
Indication.241 But Gilead was obligated to use Commercially Reasonable Efforts to
achieve the first two milestones and to refrain from taking any action the primary
purpose of which was to avoid the satisfaction of the first two milestones.242
There are genetic mutations within CLL that are present in only 0.44% of CLL
patients.243 Thus, under SRS’s reasoning, Gilead negotiated a Merger Agreement
that potentially obligated it to pay $175 million if it received regulatory approvals
for the treatment of patients who have CLL and a mutation present in 0.44% of
CLL.244 Not only is this interpretation contrary to reasonable business expectations,
240 Tr. Oral Arg. 42; Opening Post-Trial Br. 66. 241 JX351-067-068 § 9.1(a)(i)-(ii). 242 JX351-070 § 9.1(b)(iii)(B). 243 JX705-023. 244 SRS contends that Gilead “had no obligation to pursue a milestone that it did not believe would result in [significant commercial gain]” because Commercially Reasonable Efforts was defined as efforts “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].” Reply
68 it contradicts the express language of the Merger Agreement, which states that “[t]he
parties acknowledge and agree that [Gilead’s] achievement of the Milestones are
material factors in determining the valuation of [Calistoga by Gilead].”245
The structure of the Third Milestone itself suggests that the parties did not
contemplate it would be triggered by a frontline approval for treatment of a
subpopulation of disease sufferers. As set forth below, the Third Milestone could
be triggered by the earliest to occur of three events:
(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].246
Post-Trial Br. 17. But this would not necessarily shield Gilead from the risk of milestone payments for approvals in a tiny population. If, for example, Gilead pursued a disease- level approval, but the Regulatory Authority only granted an approval for treatment of a small subpopulation of the disease sufferers because of weakness in its data or for some other reason, Gilead could be required as a practical matter to make the milestone payments under SRS’s theory even if the approval was not commercially valuable. See Arbuck Dep. 88, 190 (“[I]f the European Union asked you to do something, you’d do what they ask you to do. . . . [A]nd for sure if they asked us to submit language to get an indication, we would do that.”). 245 JX351-072 § 9.1(b)(iii)(E). 246 JX351-068 § 9.1(a)(iii).
69 As Calistoga’s lead negotiator Stocks testified, each of the three subparts were
“intended to recognize value inflections that could lead to significant commercial
reward.” 247 Obtaining an approval for a solid tumor in satisfaction of the first
subpart would be highly valuable because it would expand the drug’s use “to a
completely different class and universe of cancers.”248 The commercial value of
achieving annual net sales of at least $1 billion in satisfaction of the third subpart is
self-evident.249 Given Stocks’ testimony, which accords with common sense and
which I credit, one reasonably would expect that satisfaction of the second subpart—
Regulatory Approval of CAL-101 as a first-line drug treatment for a Hematologic
Cancer Indication—also was intended to reward an event of significant commercial
success. Yet the record is devoid of any hard evidence that a first-line regulatory
approval for a small subpopulation of disease sufferers would yield such a result.
SRS’s best evidence on this point is Dr. Gallagher’s testimony that “having
any first-line approval gives a halo effect to the drug, to be able to then continue to
broaden the use” because even though the drug “may be indicated for this small
247 Stocks Dep. 52. 248 Yu Dep. 70; Tr. 872 (O’Connell) (“[S]olid tumors is very large diseases, much larger than hematological diseases in terms of patient numbers. So it meant a significant commercial gain, really an upside for Gilead that we hadn't even anticipated.”); Tr. 803-04 (Hawkins). 249 Yu Dep. 70.
70 patient population . . . it tells physicians that there’s a positive risk/benefit profile
that would then have them think about using it in other first-line indications.”250 Dr.
Gallagher also acknowledged, however, that the parties put in the “$1 billion annual
sales” trigger of the Third Milestone as a “backstop” or “schmuck insurance” for
protection for “a small approval.”251 Although not dispositive, the existence of such
a backstop cuts against the notion that the second subpart of the Third Milestone was
intended to trigger an immediate payment for a sub-disease level approval (i.e.,
before a meaningful amount of sales is achieved), particularly if, as Stocks testified,
each of the three subparts was intended to capture events that one reasonably would
expect to lead to a significant commercial reward.
3. SRS’s Other Subpopulation Arguments Also Fail
I next address two remaining arguments SRS advances in support of its
subpopulation approval argument. First, SRS contends that the FDA Label that
triggered the First and Second Milestones was itself a subpopulation approval.252
The FDA Label approved Zydelig for the treatment of patients with:
250 Tr. 188-89 (Gallagher). 251 Tr. 210-12, 359-60 (Gallagher); See also Tr. 873-76 (O’Connell). Indeed, under Section 9.1(a)(iv)(C) of the Merger Agreement, if the First Milestone has been met but the Second Milestone has not been met when CAL-101 achieves annual net sales of at least $1 billion, then Gilead would be obligated to make both the Second and Third Milestone payments. 252 Tr. Oral Arg. 57.
71 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)253
In other words, the FDA Label contained three approvals. The first approval was
for the treatment of relapsed CLL patients with certain co-morbidities; the second
approval was for the treatment of FL patients who were receiving third-line or later
therapies; and the third approval was for the treatment of SLL patients who were
receiving third-line or later therapies.
SRS asserts that the concept of “relapse” or “third-line” denotes
“subpopulation” in the same sense as genetic mutations such as 17p deletion or TP53
mutation. 254 This argument is disproved by both the language of the Merger
Agreement and trial testimony.
The Third Milestone expressly separates the concepts of “lines of therapy”
and “Hematologic Cancer Indication” by requiring “receipt of Regulatory Approval
of CAL-101 . . . as a first-line drug treatment . . . for a Hematologic Cancer
Indication.”255 As Dr. Gallagher admitted, when “the parties were thinking about
253 JX510-001. 254 See Opening Post-Trial Br. 62. 255 JX351-068 § 9.1(a)(iii)(B) (emphasis added). See also Tr. 617-18 (Dearden).
72 hematologic cancer indication, whatever it meant, it was defined separately from the
line of treatment.”256
Gilead’s lead negotiator O’Connell explained that he understood lines of
therapy to be a description of usage rather than a subpopulation of patients because
at each stage of therapy, the same patient is being treated.257 Drs. Hawkins and
Dearden concurred.258 SRS’s witnesses also do not seriously dispute the point. Dr.
Miller expressly agreed that the same patient could receive different lines of
treatment,259 and Dr. Arbuck agreed that first line, second line and later lines are
“usage descriptors.”260 Therefore, even though the second and third approvals under
the FDA Label were for patients who were receiving third-line or later treatments,
these two approvals were still at the disease level.
The first approval under the FDA Label, on the other hand, was limited to
relapsed CLL patients “for whom rituximab alone would be considered appropriate
therapy due to other co-morbidities” and thus might be considered a subpopulation
approval. But as SRS itself acknowledged, it did not know whether the first approval
256 Tr. 250-51 (Gallagher). See also Stocks Dep. 40-41 (line of therapy “doesn’t have anything to do with tumor type”). 257 Tr. 835-36 (O’Connell). 258 Tr. 774-75 (Hawkins); 633 (Dearden). 259 Tr. 76 (Miller). 260 Tr. 493-94 (Arbuck).
73 was a basis for triggering either of the first two milestones because the notice Gilead
sent out announcing satisfaction of the first two milestones did not specify which of
the three approvals in the FDA Label triggered them.261
Second, SRS contends that the parties’ inclusion of “accelerated approval or
conditional approval” in the definition of “Regulatory Approval” shows that Gilead
contemplated paying milestones for a subpopulation of disease sufferers.262 SRS
acknowledges, however, that “accelerated or conditional approval is granted upon a
showing of unmet medical need.”263 It has no direct correlation with whether the
approval sought is for a disease or a subpopulation.264 Indeed, in the FDA Label that
Gilead received, the FDA granted disease-level accelerated approvals of Zydelig for
third-line treatment of two diseases: follicular B-cell non-Hodgkin lymphoma (FL)
and small lymphocytic lymphoma (SLL).265
261 Tr. Oral Arg. 58; see JX540. 262 Opening Post-Trial Br. 63. 263 Opening Post-Trial Br. 63 (emphasis added); see also Tr. 23 (Miller); Tr. 151-52 (Gallagher); Tr. 401-02 (Arbuck); Tr. 907-08 (O’Connell). 264 Tr. 784 (Hawkins). 265 JX510-001. Another example is that the drug Imbruvica recently received accelerated approval as a second-line treatment for “Mantle cell lymphoma (MCL),” a blood cancer. JX841-001.
74 In view of the extrinsic evidence as well as the structure and operation of the
milestone provisions discussed above, I conclude that to trigger the second subpart
of the Third Milestone, the required regulatory approval must be at the disease level.
4. The European Commission Did Not Approve CAL-101 as a First-Line Drug Treatment for the Disease CLL
Having determined that the required form of regulatory must be a first-line
disease-level approval, the final issue is whether the17p/TP53 Label constitutes such
an approval. SRS contends that the European Commission’s approval
“unquestionably” was for a “first line treatment for the disease CLL.”266 The record,
however, is replete with evidence to the contrary.
In a March 18, 2016 report concerning certain safety issues related to
idelalisib, the EMA’s Pharmacovigilance Risk Assessment Committee observed that
“[p]reviously untreated CLL” is “[n]ot an authorized indication for CLL.” 267
Reviewing this report, SRS’s expert, Dr. Arbuck, agreed that the EMA was
observing that “Idelalisib in Europe was not previously approved as front line or for
previously untreated CLL patients.” 268 Dr. Miller testified similarly, stating
266 Opening Post-Trial Br. 61. 267 JX723-005. 268 Tr. 460. Dr. Arbuck re-characterized her testimony at trial to suggest that the report meant that idelalisib had not been approved for “all” persons with CLL. Id. 466-67. Even if true, it would not matter because, as discussed above, only a disease-level approval could trigger the second subpart of the Third Milestone.
75 explicitly that “Zydelig has not been approved in Europe for the disease of CLL.”269
Both witnesses also admitted that there is no disease recognized as “within” CLL.270
Both sides agree that a first-line approval is “the culmination of a complex
regulatory program proceeding through trials that appropriately demonstrate safety
and efficacy as treatment for the disease” and makes the drug a “gold standard.”271
Gilead received the 17p/TP53 Label, however, in a situation very different from the
typical first-line drug approval process. For example, although Zydelig had
demonstrated effectiveness in CLL patients, including those with 17p deletion or
TP53 mutation, Gilead had not even completed the “pivotal” phase 3 studies in
previously untreated CLL patients when the 17p/TP53 Label was approved.272 As
the CHMP’s Rapporteurs noted in their July 14, 2014 assessment report, “the front-
line experience for idelalisib in del17p / TP53 is limited to 9 patients” and the follow-
up period was only 6 to 12 months.273 In other words, as expert witnesses from both
sides testified, the efficacy and safety data for Zydelig was insufficient to support a
regulatory approval as a first-line treatment for the disease CLL.274
269 Tr. 114 (Miller) (emphasis added). See also Tr. 112 (Miller). 270 Tr. 67 (Miller); 527-29 (Arbuck). 271 Tr. 79-80 (Miller), 804 (Hawkins), Tr. 649 (Dearden); see also JX372-031. 272 See JX567-001, JX567-009, Bischofberger Dep. 78-79; Tr. 624 (Dearden) (describing “Phase 3 randomized trials” as being “pivotal”). 273 JX518-003; see also Tr. 626-27 (Dearden). 274 See Tr. 624-25, 633-34, 637 (Dearden); Tr. 482, 478-79 (Arbuck).
76 The European Commission nevertheless granted the 17p/TP53 Label not as a
first-line treatment for the disease of CLL, but to address the dire needs of a specific
subpopulation of patients with CLL. As Gilead’s expert Dr. Dearden credibly
explained, the EMA was,
making an exceptional circumstance for an exceptional population of patients who not only have this genetic abnormality, but also were unable to receive other treatments, that they don’t have options. That couldn’t be more different from the situation of a regular CLL patient, who has in the first-line a number of excellent options for treatment that have been well defined through pivotal registration Phase 3 randomized trials.275
In sum, when Gilead submitted its application to the EMA on October 29,
2013, it sought approval of CAL-101 for treatment of “relapsed chronic lymphocytic
leukaemia.”276 Gilead did not seek approval of CAL-101 as a first-line treatment for
the disease CLL, and the record shows that it did not receive such an approval.
IV. Conclusion
For the reasons explained above, SRS has failed to prove by a preponderance
of evidence that the 17p/TP53 Label triggered the Third Milestone under the Merger
Agreement, and Gilead has proven by a preponderance of evidence that it did not.
Accordingly, SRS’s motion for judgment on the pleadings is DENIED. Gilead is
entitled to judgment in its favor on its counterclaim for declaratory judgment and on
275 Tr. 624 (Dearden). 276 JX455-002 (emphasis added).
77 SRS’s claim for breach of contract. The parties are directed to submit an
implementing form of final order and judgment within five business days.
IT IS SO ORDERED.
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