PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Attorneys at Law
555 South Hope Street, Suite 4400 Los Angeles, California 90071
Telephone: (213) 555-7800 Facsimile: (213) 555-7801
March 20, 2023
VIA EMAIL AND Sundial Data Systems
Jonathan Whitfield, Esq. Whitfield Sayer & Gregg LLP 200 South Tryon Street, Suite 2800 Charlotte, NC 28202
Re: Asset Purchase Agreement — Sale of OncuPath™ Companion Diagnostics Business by Genome Dx Therapeutics Inc. to Meridian Precision Diagnostics, Inc. C&H Matter No. 1013-00006&A-4471
Dear Jonathan:
I. Transmittal of Initial Draft APA
On behalf of our client, Genome Dx Therapeutics Inc. ("GDT" or "Seller"), Calderwood & Harkness LLP is pleased to transmit the enclosed initial draft of the Asset Purchase Agreement (the "Agreement" or "APA") by and between GDT, as Seller, and Meridian Precision Diagnostics, Inc. ("Meridian" or "Buyer"), for the purchase and sale of substantially all of the assets constituting GDT's OncuPath™ companion diagnostics assay line, together with certain associated liabilities (collectively, the "OncuPath Business"). This draft represents the culmination of extensive internal review and coordination with GDT's management, in-house legal team, and financial advisors, and we believe it provides a comprehensive and balanced framework from which to negotiate a definitive agreement.
The enclosed draft APA reflects the commercial terms set forth in the binding letter of intent executed between GDT and Meridian on February 24, 2023 (the "LOI"). We have endeavored to memorialize each of the material economic and structural terms agreed upon in the LOI, while also incorporating customary provisions appropriate for a transaction of this nature, size, and complexity in the life sciences and diagnostics sector. Where the LOI was silent on a particular point, we have drafted provisions consistent with prevailing market practice for comparable asset divestitures, and we have noted our client's positions on key open issues throughout this letter for your reference.
The draft APA and ancillary documents are being transmitted to you both electronically, via a secure file transfer to the email address on file for your deal team, and in hard copy via Sundial Data Systems for your convenience. In addition to the APA itself, we are transmitting initial forms of the following ancillary documents:
• Earnout Agreement (attached as Exhibit A to the APA);
• Bill of Sale;
• Assignment and Assumption Agreement;
• intellectual Property Assignment Agreement;
• Escrow Agreement (with Ashgrove Equity Partners Escrow Services, Inc. as escrow agent);
• Transition Services Agreement; and
• Non-Competition and Non-Solicitation Agreement.
A complete list of all enclosed documents, including forms of closing certificates, is provided in Section IX of this letter below.
In order to maintain the transaction timeline contemplated by the parties, and to allow sufficient time for meaningful negotiation rounds prior to the targeted board approval dates, we respectfully request that Buyer's counsel provide its markup of the APA and comments on the ancillary documents within three weeks of the date hereof — that is, on or about April 10, 2023. As you are aware, both parties are targeting board approvals by early May 2023, with signing of the definitive agreement to follow shortly thereafter. Prompt engagement with the draft will be essential to achieving these objectives, and we are, of course, available to discuss any questions or preliminary observations your team may have in the interim.
II. Overview of Transaction Structure
We set forth below a summary of the principal structural elements of the transaction as reflected in the enclosed draft APA, for the convenience of your review.
Form of Transaction. The transaction is structured as a purchase and sale of assets, rather than a stock acquisition. The APA is governed by the laws of the State of Delaware, without regard to its conflicts-of-law principles.
Total Consideration. The aggregate purchase price for the OncuPath Business is One Hundred Forty Million Dollars ($140,000,000), consisting of (a) One Hundred Twenty-Six Million Dollars ($126,000,000) in cash payable at the Closing (the "Closing Cash Payment"), and (b) an earnout of up to Fourteen Million Dollars ($14,000,000) payable upon the achievement of two specified clinical and regulatory milestones within thirty-six (36) months following the Closing (the "Earnout Payments"), as further described in Section IV of this letter.
Purchased Assets. The Purchased Assets encompass substantially all assets, properties, and rights exclusively related to, or exclusively used or held for use in connection with, the OncuPath Business, including without limitation:
• All intellectual property related to the OncuPath Business, including fourteen (14) issued United States patents, seven (7) pending United States patent applications, three (3) registered trademarks — specifically, OncuPath™ (U.S. Reg. No. 5,847,321), OncuPath-HER3™ (U.S. Reg. No. 6,412,088), and OncuPath-GENOMARK™ (U.S. Reg. No. 6,118,754) — trade secrets, proprietary know-how, and related goodwill;
• GDT's rights under that certain Exclusive License Agreement, dated September 12, 2019, by and between GDT and Vantage Molecular Sciences, Inc., relating to probe-labeling technology used in the OncuPath assays (the "Vantage License");
• All contracts, purchase orders, customer agreements, and supplier agreements exclusively related to the OncuPath Business;
• All raw materials, work-in-process, finished goods inventory, reagents, kits, and other inventory related to the OncuPath Business;
• All laboratory equipment, instruments, fixtures, furniture, and tangible personal property located at the OncuPath facilities and used exclusively in the OncuPath Business;
• All regulatory filings, approvals, and clearances related to the OncuPath Business, including three FDA-cleared 510(k) assays and one pending PMA supplement; and
• All books, records, files, data, and documentation exclusively related to the OncuPath Business, including clinical and analytical validation data.
Excluded Assets. The following categories of assets are expressly excluded from the transaction and shall be retained by GDT:
• GDT's GenoStrat™ liquid biopsy platform, together with all assets, intellectual property, contracts, and personnel related thereto;
• All other retained GDT businesses, divisions, and product lines not constituting the OncuPath Business;
• All corporate-level cash, cash equivalents, short-term investments, and bank accounts of GDT;
• All tax refunds, credits, and overpayments attributable to pre-Closing periods;
• GDT's corporate name, logos, and trademarks outside the OncuPath brand family (including the "Genome Dx" name and the "GDT" mark); and
• All assets set forth on the Excluded Assets Schedule to be delivered with the Disclosure Schedules.
Assumed Liabilities. Meridian's assumption of liabilities under the APA is limited to the following categories of obligations arising after the Closing:
• Trade payables and accounts payable of the OncuPath Business arising in the ordinary course of business after the Closing;
• All obligations arising after the Closing under assumed contracts that are included within the Purchased Assets; and
• Product warranty and product liability claims arising from OncuPath assays shipped by Meridian after the Closing Date.
Excluded Liabilities. All liabilities not expressly assumed by Meridian are retained by GDT, including without limitation:
• All liabilities of the OncuPath Business arising prior to the Closing, including pre-Closing trade payables and accrued expenses;
• All pending or threatened litigation, claims, or proceedings against GDT as of the Closing Date, regardless of whether related to the OncuPath Business;
• All employee benefit obligations and liabilities relating to GDT employees who do not transfer to Meridian;
• All environmental liabilities arising at GDT facilities that are not being conveyed to Meridian in connection with the transaction; and
• All other liabilities of GDT not arising from the Purchased Assets or the OncuPath Business after the Closing.
Employee Transfer. The draft APA contemplates the transfer of eighty-three (83) employees of the OncuPath Business to Meridian. Meridian will be required to extend offers of employment to such employees on terms and conditions substantially comparable to those currently provided by GDT. GDT will provide transition services under the Transition Services Agreement (the "TSA") for a period of up to nine (9) months following the Closing, covering information technology, facilities management, and human resources and payroll functions, at a rate equal to GDT's direct cost plus five percent (5%).
Facilities. Two facilities are associated with the OncuPath Business and are addressed in the APA:
• The lease at 4820 Towne Centre Drive, Suite 200, San Diego, California 92121, which serves as the OncuPath reference laboratory and research and development facility. Assignment of this lease will be subject to the prior written consent of the landlord, Towne Centre Properties LLC.
• The sublease at 925 Industrial Court, Carlsbad, California 92010, which serves as the OncuPath manufacturing and kitting space. This sublease has a current expiration date of December 31, 2025.
III. Key Seller-Position Commentary — Purchase Price and Working Capital Adjustment
We draw your attention to several provisions in the draft APA on which GDT has taken a considered position, and on which we anticipate substantive discussion during the negotiation process. We address the purchase price and working capital mechanisms first.
Closing Cash Payment. The Closing Cash Payment of $126,000,000 represents the total consideration of $140,000,000 less the maximum potential Earnout Payments of $14,000,000. GDT's position is that the base purchase price should be paid in full at the Closing, with only milestone-contingent amounts deferred. This structure reflects Seller's view that the intrinsic value of the OncuPath Business, as a going concern with three FDA-cleared assays, a robust patent portfolio, and a substantial installed customer base, warrants full payment at Closing, with the earnout representing upside participation in future regulatory achievements that will be primarily within Buyer's control following the transaction.
Working Capital Adjustment. The draft APA provides for a post-Closing working capital adjustment mechanism. The target net working capital of the OncuPath Business (the "Target NWC") has been set at Six Million Eight Hundred Thousand Dollars ($6,800,000), based on the carve-out financial statements prepared by Haverford & Lane LLP, GDT's independent auditors for purposes of the OncuPath Business carve-out. The working capital adjustment includes a collar of plus or minus Three Hundred Fifty Thousand Dollars (±$350,000) around the Target NWC. If the actual net working capital at Closing falls within this collar, no adjustment will be made. This collar is designed to avoid disputes over de minimis deviations from the target and to promote certainty of closing economics for both parties. Any adjustment required outside the collar will be settled through a true-up payment within ninety (90) days following the Closing, based on a final closing balance sheet to be prepared by Haverford & Lane.
Preparation of Closing Balance Sheet. It is GDT's position that Haverford & Lane, as the firm that prepared the carve-out financial statements upon which the Target NWC is based, is the appropriate party to prepare the final Closing balance sheet. This approach ensures methodological consistency and avoids disputes arising from differing accounting judgments or approaches. Under the draft APA, Buyer will be entitled to review the Closing balance sheet and to dispute specific line items through a defined resolution process, which culminates in submission to an independent accounting firm mutually selected by the parties for final and binding determination.
Purchase Price Allocation. Consistent with the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations promulgated thereunder, the parties are required to agree upon an allocation of the purchase price among the Purchased Assets within one hundred twenty (120) days following the Closing. Both GDT and Meridian shall file IRS Forms 8594 (Asset Acquisition Statement Under Section 1060) consistent with the agreed-upon allocation and shall not take any position inconsistent therewith on any federal, state, or local tax return or in any tax proceeding, absent a contrary determination by the applicable taxing authority.
IV. Key Seller-Position Commentary — Earnout Structure
The Earnout Payments, representing up to $14,000,000 (approximately 10% of total consideration), are structured around two discrete clinical and regulatory milestones, as follows:
Milestone 1 — FDA Clearance/Approval of OncuPath-HER3™. An Earnout Payment of Eight Million Dollars ($8,000,000) shall become payable to GDT upon the achievement of FDA clearance or approval of the OncuPath-HER3™ assay as a companion diagnostic for use with any FDA-approved therapeutic agent, on or before the date that is twenty-four (24) months following the Closing Date. For the avoidance of doubt, this milestone may be satisfied by receipt of either a PMA approval, a 510(k) clearance, or a de novo classification order, provided that the cleared or approved indication encompasses use as a companion diagnostic.
Milestone 2 — HCPCS Code and Medicare Reimbursement. An Earnout Payment of Six Million Dollars ($6,000,000) shall become payable to GDT upon (a) the issuance by the Centers for Medicare & Medicaid Services ("CMS") of a unique HCPCS (Healthcare Common Procedure Coding System) code for the OncuPath-HER3™ assay (or any successor assay derived therefrom), and (b) the receipt by Meridian of the first Medicare reimbursement payment under such code, on or before the date that is thirty-six (36) months following the Closing Date.
We note for your reference that GDT submitted a PMA supplement for the OncuPath-HER3™ assay to the FDA on January 30, 2023 (PMA Supplement No. P230014). The submission of this supplement prior to the execution of the LOI underscores that meaningful regulatory progress is already underway with respect to Milestone 1, and that the earnout milestones are achievable within the contemplated timeframes, provided that Buyer continues to prosecute the regulatory pathway with appropriate diligence and resources following the Closing.
Commercially Reasonable Efforts. The draft APA imposes upon Buyer an obligation to use "commercially reasonable efforts" to achieve the earnout milestones. GDT's position is that this standard must be defined with specificity in the body of the Agreement to provide both parties with clarity and to minimize the potential for future disputes. The draft defines "commercially reasonable efforts" as efforts consistent with those that a company of similar size, resources, and capabilities operating in the in vitro diagnostics industry would use for a product of similar commercial potential, market opportunity, and stage of development, taking into account all relevant factors, including competitive dynamics, regulatory requirements, reimbursement landscape, and the scientific profile of the product. We believe this definition strikes the appropriate balance between affording Buyer operational flexibility and protecting Seller's legitimate interest in the realization of the earnout milestones.
Anti-Embarrassment Protections. The draft APA contains an acceleration provision designed to protect GDT's earnout rights in the event of a change of control of Meridian during the earnout period. Specifically, if Buyer undergoes a Change of Control (as defined in the APA) at any time prior to the expiration of the thirty-six (36)-month earnout period, all unpaid Earnout Payments shall accelerate and become immediately due and payable to Seller in full, regardless of whether the applicable milestones have been achieved at the time of such Change of Control. GDT views this provision as essential to ensuring that Seller receives the full benefit of the bargained-for earnout consideration, particularly in circumstances where a third-party acquirer of Meridian may not have the same incentive or capability to pursue the earnout milestones as Meridian itself.
Anti-Sandbagging Provisions. The draft APA further provides that Buyer shall not take any action, or fail to take any action, with the primary intent or purpose of frustrating, impeding, or preventing the achievement of either earnout milestone. This anti-sandbagging covenant is intended to operate as a backstop against bad-faith conduct by Buyer during the earnout period. GDT recognizes that Buyer must retain the ability to make good-faith business decisions regarding the OncuPath Business, and the draft APA does not restrict Buyer's ordinary-course operational discretion. However, affirmative acts or deliberate omissions undertaken with the intent of defeating Seller's earnout rights should be, and are, prohibited.
Dispute Resolution for Earnout Claims. Given the inherently complex and scientifically nuanced nature of the earnout milestones, the draft APA provides for a tiered dispute resolution mechanism for any disagreement relating to the achievement, measurement, or payment of an earnout milestone. Disputes shall first be escalated to designated senior officers of the respective parties for good-faith negotiation over a period of thirty (30) days. If not resolved through such negotiation, the dispute shall be submitted to binding expert determination by an independent regulatory consultant with relevant FDA and CMS expertise, to be jointly selected by the parties (or, failing agreement on selection, appointed by the American Arbitration Association). Only if the expert determination process fails to resolve the dispute may either party resort to litigation in the courts of the State of Delaware.
Reporting and Information Access. GDT expects robust reporting and information-access rights during the earnout period. The draft APA requires Buyer to provide Seller with quarterly written reports detailing the status of regulatory submissions, CMS coding applications, material correspondence with the FDA and CMS, and any other developments bearing on the achievement of the earnout milestones. GDT shall have the right, upon reasonable notice, to review relevant books, records, and regulatory files during normal business hours, subject to appropriate confidentiality protections.
V. Key Seller-Position Commentary — Indemnification and Risk Allocation
The indemnification provisions in the enclosed draft APA have been carefully crafted to allocate risk in a manner that GDT believes is fair, balanced, and consistent with prevailing market terms for transactions of this size and type in the biotech diagnostics sector. We highlight the following key provisions:
Indemnification Cap. Seller's aggregate liability for indemnification claims under the APA (other than claims for Fundamental Representations and fraud) is capped at Twenty-Eight Million Dollars ($28,000,000), representing twenty percent (20%) of the total consideration of $140,000,000. GDT's position is that a 20% cap is appropriate and at the upper end of market norms for asset divestitures in the life sciences sector, reflecting GDT's confidence in the accuracy and completeness of its representations and warranties and providing Buyer with meaningful recourse in the event of a breach.
De Minimis Threshold. The draft APA includes a de minimis threshold of Seventy-Five Thousand Dollars ($75,000) per individual claim. Claims for Losses that do not individually exceed this threshold shall not count toward the aggregate deductible basket described below and shall not be independently recoverable by Buyer. This provision is intended to filter out immaterial claims and to focus the indemnification mechanism on claims of genuine economic significance.
Aggregate Deductible Basket. The aggregate deductible basket is set at One Million Four Hundred Thousand Dollars ($1,400,000), representing one percent (1%) of the total consideration. The basket is structured as a "tipping basket" (sometimes referred to as a "first dollar" basket), such that once the aggregate amount of qualifying Losses exceeds the basket amount, Buyer shall be entitled to recover the full amount of all qualifying Losses from dollar one, including Losses that were previously counted toward the basket. GDT's position is that the tipping basket structure is appropriate for this transaction for two reasons: first, it aligns with the retention under the buyer-side representations and warranties insurance policy described below, providing a seamless transition between the contractual indemnification and insurance recovery mechanisms; and second, it appropriately incentivizes Buyer to pursue indemnification claims only when Losses are material, while still preserving Buyer's right to full recovery once that materiality threshold is crossed.
Survival Periods. General representations and warranties of Seller shall survive the Closing for a period of eighteen (18) months. GDT strongly resists any survival period in excess of eighteen months for general representations and warranties and notes that this period is consistent with prevailing market practice for asset divestitures in the diagnostics and life sciences industries, as reflected in recent published deal studies. Fundamental Representations — specifically, representations as to authority, due organization, title to the Purchased Assets, tax matters, and brokers and finders — shall survive the Closing for a period of sixty (60) months. Claims based on Fundamental Representations shall not be subject to the indemnification cap or basket described above; however, Seller's aggregate liability for all claims under the APA, including claims based on Fundamental Representations, shall not exceed the total consideration of $140,000,000. The Seller retains the right to challenge any claim noticed after the expiration of the applicable survival period.
Escrow. At the Closing, Fourteen Million Dollars ($14,000,000), representing ten percent (10%) of the total consideration, shall be deposited into a segregated escrow account at Ashgrove Equity Partners Escrow Services, Inc. (the "Escrow Agent") pursuant to the terms of the Escrow Agreement attached as Exhibit E to the APA. GDT's position is that the escrow fund should constitute the exclusive source of recovery for Buyer's general indemnification claims (i.e., claims other than those based on fraud or Fundamental Representations), and that Buyer should be required to exhaust the escrow fund before seeking recourse directly against Seller. The draft APA provides for the following release schedule:
• First Release: Fifty percent (50%) of the remaining escrow balance (net of amounts subject to pending and unresolved claims) shall be released to Seller on the date that is twelve (12) months following the Closing Date.
• Final Release: The remaining escrow balance (net of amounts subject to pending and unresolved claims) shall be released to Seller upon the expiration of the eighteen (18)-month survival period for general representations and warranties.
Representations and Warranties Insurance. The draft APA contemplates that Buyer will obtain a buyer-side representations and warranties insurance policy (the "R&W Policy") from Apex Mutual Insurance Company with a policy limit of $28,000,000, matching the contractual indemnification cap. The R&W Policy will carry a retention of $1,400,000, matching the aggregate deductible basket. The estimated premium for the R&W Policy is $840,000, representing approximately three percent (3%) of the policy limit, which GDT proposes be shared equally between the parties, with each party bearing $420,000 of the premium cost. GDT's position is that the R&W Policy should serve as the primary source of recovery for Buyer's indemnification claims, and that the availability of insurance coverage should be taken into account in evaluating the overall reasonableness of the indemnification provisions, including the cap, basket, and survival periods. We anticipate that binding quotes from Apex Mutual (and potentially alternative carriers) will be obtained during the negotiation period and that the R&W Policy will be bound contemporaneously with the signing or closing of the APA.
VI. Key Seller-Position Commentary — Non-Competition and Non-Solicitation
The enclosed draft includes a form of Non-Competition and Non-Solicitation Agreement to be entered into by GDT at the Closing, the material terms of which are as follows:
Non-Competition Covenant. GDT proposes a post-Closing non-competition period of three (3) years within the United States, during which GDT will refrain from engaging, directly or indirectly, in the companion diagnostics field. GDT's position is that the restricted field must be narrowly and precisely defined to encompass only companion diagnostics — that is, assays or tests developed, marketed, or sold for the purpose of identifying patients who are most likely to benefit from a particular therapeutic product — and must not extend to GDT's retained GenoStrat™ liquid biopsy platform, general genomic profiling activities, clinical trial support services, or any other business activities that GDT currently conducts or may in the future conduct outside the companion diagnostics space. GDT will resist any attempt by Buyer to broaden the geographic scope of the non-compete beyond the United States or to extend the temporal scope beyond three years, as GDT believes that a three-year, U.S.-only restriction appropriately balances the protection of the goodwill being conveyed with the APA against GDT's legitimate interest in continuing to operate and grow its retained businesses.
Non-Solicitation Covenant. GDT will agree to a two (2)-year post-Closing non-solicitation period with respect to transferred employees. Importantly, this non-solicitation obligation applies only to those OncuPath Business employees who actually accept offers of employment from Meridian and transfer to Buyer's employ at or following the Closing — not to all eighty-three (83) employees to whom offers may be extended. GDT believes this distinction is critical, as it would be inequitable to restrict GDT from engaging with employees who elected not to join Meridian.
Carve-Outs. The draft Non-Competition and Non-Solicitation Agreement includes the following customary carve-outs to the non-solicitation covenant:
(a) General advertisements or solicitations of employment (including postings on job boards, social media platforms, and GDT's website) that are not specifically targeted at or directed toward transferred employees;
(b) The hiring of any former transferred employee who contacts or approaches GDT on his or her own initiative, without any direct or indirect solicitation by GDT; and
(c) The solicitation or hiring of any transferred employee whose employment with Buyer has been terminated by Buyer (whether voluntarily or involuntarily) prior to the date of such solicitation or hiring by GDT.
Governing Law. The Non-Competition and Non-Solicitation Agreement will be governed by Delaware law, consistent with the APA and the other ancillary agreements.
VII. Key Seller-Position Commentary — Closing Conditions and Regulatory Approvals
The draft APA sets forth customary conditions to the obligations of each party to consummate the Closing, as summarized below.
HSR Act Filing. Because the transaction value exceeds the applicable size-of-transaction threshold under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the applicable implementing regulations, both parties are required to file notifications with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice. The draft APA requires the parties to cooperate in the preparation and filing of such notifications promptly after the execution of the Agreement and to use their best efforts to obtain early termination of the applicable waiting period. Each party shall bear its own filing fees. The consummation of the Closing is conditioned upon the expiration or early termination of the applicable HSR Act waiting period.
Third-Party Consents. The draft APA identifies the following material third-party consents as conditions to the Closing:
(i) The written consent of Vantage Molecular Sciences, Inc. to the assignment of the Vantage License (dated September 12, 2019) from GDT to Meridian. The Vantage License contains a standard anti-assignment clause requiring Vantage's prior written consent for any assignment, and we anticipate engaging with Vantage's counsel promptly to secure such consent.
(ii) The written consent of Towne Centre Properties LLC, as landlord, to the assignment of the lease for the OncuPath reference laboratory and R&D facility located at 4820 Towne Centre Drive, Suite 200, San Diego, California 92121. We note that the lease contains customary assignment and subletting restrictions, and GDT has initiated preliminary discussions with the landlord regarding the proposed assignment.
Regulatory Matters. In connection with the Closing, the parties will coordinate the transfer of the CLIA certificate of accreditation (CLIA ID: 05D2178493) associated with the OncuPath reference laboratory and the update of the FDA establishment registration to reflect Meridian as the new operator of the OncuPath Business. These regulatory matters are ministerial in nature and are expected to be completed in the ordinary course in connection with the Closing.
Buyer's Closing Conditions. The draft APA provides that Buyer's obligation to consummate the Closing is subject to the satisfaction (or waiver by Buyer) of the following conditions, among others:
• The accuracy of Seller's representations and warranties as of the Closing Date (subject to a "Material Adverse Effect" qualifier for purposes of the bring-down condition);
• The performance and compliance in all material respects by Seller of all covenants and obligations required to be performed by Seller at or prior to the Closing;
• The receipt of all required third-party consents and governmental approvals (including HSR clearance);
• The absence of any order, injunction, or decree of any governmental authority restraining or prohibiting the consummation of the transaction; and
• The delivery by Seller of all closing certificates, ancillary documents, and other deliverables required under the APA.
Seller's Closing Conditions. Seller's obligation to consummate the Closing is conditioned upon:
• The accuracy of Buyer's representations and warranties as of the Closing Date;
• The performance and compliance in all material respects by Buyer of all covenants and obligations required to be performed by Buyer at or prior to the Closing;
• The payment of the Closing Cash Payment of $126,000,000 by wire transfer to an account designated by Seller;
• The deposit of the escrow amount of $14,000,000 with the Escrow Agent in accordance with the Escrow Agreement; and
• The delivery by Buyer of all closing certificates and other deliverables required under the APA.
Material Adverse Effect Definition. The definition of "Material Adverse Effect" in the draft APA includes customary carve-outs for changes, effects, events, or conditions attributable to: (a) general economic, financial, or market conditions; (b) developments generally affecting the in vitro diagnostics industry; (c) changes in applicable law, regulations, or accounting standards (including GAAP); and (d) effects arising from the public announcement or pendency of the transactions contemplated by the APA. These carve-outs are standard in transactions of this nature and are intended to ensure that the Material Adverse Effect qualifier is not triggered by extrinsic factors outside the control of, and unrelated to the specific condition of, the OncuPath Business.
VIII. Other Notable Provisions
We briefly note several additional provisions in the draft APA that may be of interest to your review:
Tax Structuring. The asset purchase structure provides Buyer with a step-up in tax basis in the Purchased Assets, which is typically favorable from a Buyer's perspective. As noted in Section III above, the parties are required to agree upon a purchase price allocation under Section 1060 of the Code within one hundred twenty (120) days following the Closing and to file consistent IRS Forms 8594.
Transferred Regulatory Assets. The Purchased Assets include the following regulatory filings, clearances, and approvals related to the OncuPath Business:
• Three FDA-cleared 510(k) assays: K201847, K193215, and K210562;
• CLIA certificate of accreditation, CLIA ID: 05D2178493; and
• Pending OncuPath-HER3™ PMA supplement, PMA Supplement No. P230014 (submitted January 30, 2023).
intellectual Property. As noted in Section II, the intellectual property portfolio being transferred encompasses fourteen (14) issued United States patents, seven (7) pending United States patent applications, and three (3) registered trademarks:
• OncuPath™ — U.S. Trademark Reg. No. 5,847,321
• OncuPath-HER3™ — U.S. Trademark Reg. No. 6,412,088
• OncuPath-GENOMARK™ — U.S. Trademark Reg. No. 6,118,754
A complete schedule of all patents, patent applications, and trademark registrations will be included in the Disclosure Schedules.
Transition Services Agreement. The TSA provides for transition services to be rendered by GDT to Meridian for a period of up to nine (9) months following the Closing, covering information technology infrastructure and systems, facilities management and maintenance, and human resources and payroll administration. Services will be provided at GDT's direct cost plus a five percent (5%) administrative surcharge. The TSA will include customary provisions regarding service levels, termination rights, and limitations of liability.
Governing Law and Dispute Resolution. The APA and each ancillary agreement (unless otherwise specified) shall be governed by and construed in accordance with the laws of the State of Delaware. The parties consent to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or, if the Court of Chancery declines to accept jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware) for the resolution of any dispute arising out of or relating to the APA or the transactions contemplated thereby, subject to the specific dispute resolution mechanisms applicable to earnout disputes as described in Section IV above.
IX. Enclosed Documents
For your convenience, the following is a complete list of the documents transmitted herewith:
1. Asset Purchase Agreement (Initial Draft), including all articles and exhibit placeholders;
2. Earnout Agreement (Exhibit A to the APA);
3. Form of Bill of Sale (Exhibit B);
4. Form of Assignment and Assumption Agreement (Exhibit C);
5. Form of intellectual Property Assignment Agreement (Exhibit D);
6. Form of Escrow Agreement (Exhibit E) — with Ashgrove Equity Partners Escrow Services, Inc. designated as Escrow Agent;
7. Form of Transition Services Agreement (Exhibit F);
8. Form of Non-Competition and Non-Solicitation Agreement (Exhibit G);
9. Form of Seller's Closing Certificate (Exhibit H);
10. Form of Secretary's Certificate (Exhibit I); and
11. Form of FIRPTA Certificate (Exhibit J).
Please note that the Disclosure Schedules to the APA are not included with this initial draft transmittal. GDT is in the process of compiling and finalizing the Disclosure Schedules based on its ongoing internal diligence review, and we expect to deliver the initial draft of the Disclosure Schedules in a subsequent package within approximately two to three weeks of the date hereof. We will advise you as soon as a delivery date for the Schedules has been confirmed.
X. Process and Next Steps
As noted above, we respectfully request that Whitfield Sayer & Gregg provide its markup of the APA and comments on the ancillary documents by approximately April 10, 2023. This timeline will allow for at least two rounds of substantive negotiation before the parties' respective board meetings, which we understand are currently being scheduled as follows:
• GDT Board Approval: Targeted for early May 2023.
• Meridian Board Approval: Expected to follow shortly after GDT's board action, in accordance with the timeline contemplated by the LOI.
Assuming successful completion of board approvals, the parties are targeting the execution and delivery of the definitive APA in mid-May 2023. The HSR Act notification filing would be made promptly following the signing of the Agreement. GDT anticipates that the Closing would occur approximately sixty (60) to ninety (90) days after signing, subject to the expiration or early termination of the HSR Act waiting period and the satisfaction or waiver of all other conditions to Closing set forth in the APA.
We would welcome the opportunity to schedule an introductory call with you and Rachel Dempsey, Senior Associate, at a mutually convenient time to walk through the draft, identify priority issues, and discuss the overall negotiation approach and timeline. Please let us know your availability, and we will coordinate accordingly.
Separately, GDT's financial advisor, Brindoval Partners LLC, is available to discuss valuation methodology, financial diligence matters, and the carve-out financial statements directly with Meridian's financial advisors. Victor Sandoval, Managing Director at Brindoval Partners, may be reached directly to arrange such discussions.
XI. Confidentiality Reminder
We remind you that all materials transmitted in connection with this letter, including the draft APA and all ancillary documents, are subject to the confidentiality and non-disclosure provisions set forth in Section 8 of the LOI executed by GDT and Meridian on February 24, 2023. In addition, all materials are subject to the virtual data room access protocols and confidentiality undertakings established upon the opening of the secure virtual data room on March 6, 2023.
We request that access to the draft APA and ancillary documents be limited to Meridian's internal deal team and its outside legal counsel, and that no copies be provided to third parties without the prior written consent of GDT, except to the extent expressly permitted by the terms of the LOI and the data room protocols.
We look forward to working with you and your team on this transaction. Please do not hesitate to contact me or any member of the Calderwood & Harkness team listed below if you have any questions or wish to discuss any aspect of the enclosed materials.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
James Prentice Partner
Telephone: (213) 555-7800
Email: jprentice@calderwoodharkness.com
cc: (via email)
Sandra Tung, Esq., Calderwood & Harkness LLP (Billing Partner) Tiffany Rosenthal, Esq., Calderwood & Harkness LLP (Lead Associate) Andrew Fitzpatrick, Esq., Calderwood & Harkness LLP (Working Associate) Rebecca Chiang, Esq., General Counsel, Genome Dx Therapeutics Inc. Victor Sandoval, Managing Director, Brindoval Partners LLC Rachel Dempsey, Esq., Senior Associate, Whitfield Sayer & Gregg LLP
Enclosures: As listed above