PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Special Committee of the Board of Directors, Penterra Pharmaceuticals Corp.
Diane Prescott, Chair James Okafor Dr. Helen Ng
FROM: Renata Vasquez, Partner, and Sophie Tremblay, Associate
Calderwood & Harkness LLP 1700 Market Street, Suite 3400 Philadelphia, PA 19103
DATE: August 10, 2023
RE: Hart-Scott-Rodino Antitrust Improvements Act Analysis — Proposed Acquisition of Caliston BioSciences, Inc. by Penterra Pharmaceuticals Corp.
Matter No.: 1025-00006 (Project Coriander)
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I. Executive Summary
The purpose of this memorandum is to assess the pre-merger notification filing requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), 15 U.S.C. § 18a, and to evaluate the substantive antitrust risks associated with the proposed acquisition by Penterra Pharmaceuticals Corp. ("Penterra" or the "Company") of one hundred percent (100%) of the outstanding equity of Caliston BioSciences, Inc. ("Caliston") through a one-step merger of Caliston with and into Penterra (the "Transaction"). The Transaction contemplates an aggregate equity value of Nine Hundred Twenty-Five Million Dollars ($925,000,000), plus up to One Hundred Twenty-Five Million Dollars ($125,000,000) in contingent value rights ("CVRs"), for a maximum aggregate transaction value of One Billion Fifty Million Dollars ($1,050,000,000).
Based on our analysis, we have reached the following principal conclusions:
HSR Filing Requirement. An HSR Act pre-merger notification filing is required prior to consummation of the Transaction. The aggregate equity value of $925,000,000 clearly exceeds the applicable size-of-transaction threshold of $111.4 million (as adjusted for fiscal year 2023). Because the transaction value also exceeds $445.5 million, the size-of-person test is inapplicable, and filing is required solely on the basis of the size-of-transaction. Both the acquiring person (Penterra) and the acquired person (Caliston, together with its ultimate parent entities) are required to submit notification forms.
Waiting Period. The standard initial waiting period under the HSR Act is thirty (30) calendar days from the date both parties' notifications are filed. We recommend that Penterra request early termination of the waiting period, although we note that the Federal Trade Commission ("FTC") has suspended the granting of early termination requests since February 2021 and has not reinstated this practice as of the date of this memorandum. Accordingly, the full thirty-day waiting period should be expected.
Substantive Antitrust Risk. Substantive antitrust risk is assessed as low. The product portfolios of Penterra and Caliston are complementary and non-overlapping. Penterra does not currently market or develop any CDK4/6 inhibitors or selective kinase inhibitors targeting the same molecular pathway as Caliston's lead asset, CLT-4019. Caliston is a pre-commercial, clinical-stage company with no marketed products and zero revenue. We have identified no material competitive overlap that would likely prompt a Second Request for additional information or an enforcement action by the FTC or the Antitrust Division of the U.S. Department of Justice ("DOJ"). The Transaction does not increase market concentration in any identifiable relevant product market, and the combination is properly characterized as a portfolio expansion rather than a consolidation of competing assets.
Recommendation. We recommend that Penterra proceed with the HSR filing promptly upon execution of the definitive merger agreement, targeting submission within five to ten business days of signing. The merger agreement should include customary antitrust covenants, including an obligation to file HSR notification forms, mutual cooperation commitments, and a closing condition tied to expiration or early termination of the HSR waiting period. We do not believe that a "hell-or-high-water" divestiture commitment is warranted given the low risk profile of this Transaction, although this point may be raised during merger agreement negotiations and should be addressed strategically.
II. Background
A. The Parties
Penterra Pharmaceuticals Corp. Penterra is a specialty pharmaceutical company incorporated in the State of Delaware and publicly traded on the New York Stock Exchange under the ticker symbol "PPHR." The Company maintains its principal executive offices at 400 Innovation Drive, Suite 1200, Princeton, New Jersey 08540. Penterra is focused on the development and commercialization of therapeutic products in the oncology and immunology therapeutic areas. For fiscal year 2022, Penterra reported total revenue of approximately $1.836 billion and adjusted EBITDA of approximately $412 million. As of December 31, 2022, Penterra's total assets were approximately $5.12 billion, as reported in its Annual Report on Form 10-K filed with the Securities and Exchange Commission. Penterra's market capitalization as of June 1, 2023 was approximately $4.72 billion based on the closing price of its common stock on that date. Penterra's commercial portfolio includes a diversified set of marketed oncology and immunology products, and its research and development pipeline encompasses multiple clinical-stage and preclinical programs across these therapeutic areas.
Caliston BioSciences, Inc. Caliston is a clinical-stage biopharmaceutical company incorporated in the State of Delaware and privately held. Caliston maintains its principal office at 88 Harbor Point Road, Cambridge, Massachusetts 02142. The company is focused on the discovery and development of novel kinase inhibitors for the treatment of solid tumors. Caliston is a pre-commercial enterprise that has not yet generated any product revenue; its fiscal year 2022 revenue was zero. Caliston's lead asset is CLT-4019, a selective CDK4/6 inhibitor being developed for the treatment of HR+/HER2– metastatic breast cancer. CLT-4019 is currently in Phase 2b clinical trials pursuant to Investigational New Drug Application No. 158429, which was filed with the U.S. Food and Drug Administration ("FDA") in March 2020. Topline data from the Phase 2b trial are expected in the fourth quarter of 2023. In addition to CLT-4019, Caliston has two preclinical candidates in its pipeline: CLT-5227 and CLT-6034, both of which are novel kinase inhibitors targeting solid tumors and which have not yet entered clinical development. Caliston completed its Series C financing round in October 2021, which valued the company at $680 million on a post-money basis. Since its founding, Caliston has raised a total of $347 million in equity capital from venture capital and strategic investors. As of March 31, 2023, Caliston reported cash and cash equivalents on hand of approximately $112.6 million. The company currently employs ninety-four (94) individuals.
B. Transaction Structure
The Transaction is structured as a one-step merger, pursuant to which Caliston will merge with and into Penterra, with Penterra surviving the merger as the surviving corporation. Upon consummation of the merger, all outstanding equity interests of Caliston will be cancelled and converted into the right to receive the merger consideration.
The aggregate equity value of the Transaction is Nine Hundred Twenty-Five Million Dollars ($925,000,000). The merger consideration is structured as a blend of cash and equity, allocated as follows:
• Cash Consideration: Seventy-five percent (75%) of the aggregate equity value, or Six Hundred Ninety-Three Million Seven Hundred Fifty Thousand Dollars ($693,750,000), payable in immediately available funds at closing.
• Stock Consideration: Twenty-five percent (25%) of the aggregate equity value, or Two Hundred Thirty-One Million Two Hundred Fifty Thousand Dollars ($231,250,000), payable in shares of Penterra common stock, par value $0.001 per share. Based on the thirty-day volume-weighted average price ("VWAP") of Penterra common stock of $39.17 per share as of June 1, 2023, the stock consideration implies the issuance of approximately 5,903,497 shares of Penterra common stock to the former equity holders of Caliston.
• Contingent Value Rights: In addition to the upfront merger consideration, the former equity holders of Caliston will be entitled to receive additional consideration in the form of CVRs. The CVRs provide for a payment of up to One Hundred Twenty-Five Million Dollars ($125,000,000) in the aggregate, contingent upon FDA approval of CLT-4019 on or before December 31, 2026. The CVRs will be governed by a separate CVR Agreement to be entered into at closing between Penterra and a rights agent.
Accordingly, the maximum aggregate transaction value, inclusive of the CVR component, is One Billion Fifty Million Dollars ($1,050,000,000).
C. Related-Party Context
We note for the Special Committee's awareness that this Transaction involves a related-party dimension. Specifically, Dr. Marcus Hale, who serves as the Chairman of the Board of Directors and Chief Executive Officer of Penterra, personally holds a 28.5% equity interest in Caliston, representing a personal investment of approximately $42 million. Based on the proposed aggregate equity value of $925 million, Dr. Hale's implied proceeds from the Transaction are approximately $263,625,000, exclusive of any CVR payments. As the Special Committee is aware, an independent Special Committee process was established by the Penterra Board to evaluate the Transaction and address the conflicts of interest arising from Dr. Hale's dual position. We understand that the Special Committee has retained Thorngate Partners LLC as its independent financial advisor and Calderwood & Harkness LLP as its independent legal counsel.
For purposes of this memorandum, we note that the antitrust analysis of the Transaction is independent of, and unaffected by, the related-party considerations. The federal antitrust agencies evaluate the competitive effects of proposed transactions on their merits, without regard to the internal governance structures or conflicts of interest that may exist among the parties' officers, directors, or stockholders. Accordingly, while Dr. Hale's ownership interest in Caliston is relevant to the Special Committee's broader fiduciary analysis, it does not alter the substance of the antitrust assessment presented herein.
III. HSR Act Filing Requirements
A. Overview of the Hart-Scott-Rodino Act
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, codified at 15 U.S.C. § 18a, establishes a federal pre-merger notification program requiring parties to certain acquisitions of voting securities, assets, or non-corporate interests to file notification forms with the FTC and the DOJ Antitrust Division and to observe a mandatory waiting period before consummating the proposed transaction. The HSR Act is administered jointly by the FTC and the DOJ, which share responsibility for reviewing proposed transactions and determining whether enforcement action is warranted under the federal antitrust laws, including Section 7 of the Clayton Act, 15 U.S.C. § 18.
The pre-merger notification requirements are intended to provide the federal antitrust agencies with advance notice of significant transactions and an opportunity to investigate the likely competitive effects of a proposed combination before the transaction is consummated. The filing requirement applies to acquisitions that meet certain jurisdictional thresholds — principally, the "size-of-transaction" test and, in certain cases, the "size-of-person" test — each of which is discussed in detail below. The applicable thresholds are adjusted annually by the FTC to account for changes in gross national product, pursuant to Section 18a(a)(2) of the HSR Act and the implementing rules promulgated at 16 C.F.R. Part 801 et seq.
Failure to comply with the HSR Act's notification and waiting period requirements exposes the parties to significant civil penalties. Under current law, each day of non-compliance constitutes a separate violation, and the maximum civil penalty is $50,120 per day (as adjusted for inflation). Additionally, any transaction consummated in violation of the HSR Act may be unwound by a federal court upon application by the FTC or the DOJ.
B. Size-of-Transaction Test
The threshold inquiry under the HSR Act is whether the proposed transaction satisfies the "size-of-transaction" test. As adjusted for fiscal year 2023, the size-of-transaction threshold is $111.4 million. A transaction requires pre-merger notification if, as a result of the acquisition, the acquiring person would hold voting securities or assets of the acquired person valued in excess of $111.4 million. We note that this threshold is the one effective as of the expected filing date, and we will confirm the applicable threshold at the time the notification is actually submitted in the event of any interim adjustment.
In the present Transaction, the aggregate equity value is $925,000,000. This figure represents the total consideration — comprising both cash and stock — that the former equity holders of Caliston will receive at closing, exclusive of the CVR component. Even without regard to the CVRs, the $925 million base transaction value exceeds the $111.4 million size-of-transaction threshold by a factor of more than eight. When the CVR component is included, the maximum aggregate transaction value is $1,050,000,000, further exceeding the threshold.
We note that the treatment of contingent consideration under the HSR Act rules requires some additional analysis. Under the implementing regulations, contingent consideration that is "determinable" — that is, consideration that is based on a fixed formula or that has a determinable maximum value — is generally included in the calculation of the transaction value for HSR purposes. Here, the CVRs have a stated maximum aggregate value of $125 million, payable upon the occurrence of a defined milestone (FDA approval of CLT-4019 on or before December 31, 2026). The CVR consideration is therefore determinable and would be included in the size-of-transaction calculation. However, this point is immaterial to the filing obligation, because even if the CVR component were excluded entirely, the $925 million base equity value far exceeds the $111.4 million threshold.
Conclusion: The size-of-transaction test is clearly satisfied. The proposed Transaction requires HSR Act notification on this basis alone.
C. Size-of-Person Test
Under the HSR Act, the size-of-person test is an additional jurisdictional requirement that applies to certain transactions. However, the size-of-person test is only relevant when the transaction value falls within a specified intermediate range. Specifically, under the 2023 adjusted thresholds, the size-of-person test applies when the transaction value exceeds $111.4 million but is less than or equal to $445.5 million. If the transaction value exceeds $445.5 million, the HSR Act requires notification regardless of the sizes of the acquiring and acquired persons, and the size-of-person test does not apply.
In the present Transaction, the aggregate equity value of $925,000,000 — and, a fortiori, the maximum aggregate transaction value of $1,050,000,000 including CVRs — clearly exceeds the $445.5 million upper threshold. Accordingly, the size-of-person test is inapplicable, and an HSR filing is required solely on the basis of the size-of-transaction.
Nevertheless, for the sake of completeness and to provide the Special Committee with a comprehensive analysis, we note that even if the size-of-person test did apply, it would be satisfied. Under the HSR Act, the size-of-person test requires that one party to the transaction have total assets or annual net sales of at least $222.7 million (2023 threshold) and the other party have total assets or annual net sales of at least $22.3 million (2023 threshold). Here, Penterra's total assets as of December 31, 2022 were approximately $5.12 billion and its annual net sales for fiscal year 2022 were approximately $1.836 billion, each of which far exceeds the $222.7 million threshold applicable to the acquiring person. Caliston, while pre-revenue and pre-commercial, had total assets that included $112.6 million in cash and cash equivalents as of March 31, 2023, and has raised a total of $347 million in equity capital since its founding. Even under the most conservative assessment, Caliston's total assets would satisfy the $22.3 million threshold applicable to the acquired person. Accordingly, the size-of-person test, if applicable, would be met.
Conclusion: The size-of-person test is inapplicable because the transaction value exceeds $445.5 million. An HSR filing is required solely based on the size-of-transaction. Even if the size-of-person test applied, it would be satisfied by both parties.
D. Ultimate Parent Entity and Filing Persons
Under the HSR Act, notification obligations attach to the "ultimate parent entity" ("UPE") of each party to the transaction. The UPE is the entity that is not controlled by any other entity. For purposes of the HSR rules, "control" of a corporation means holding fifty percent (50%) or more of its outstanding voting securities. The HSR notification form must be filed by the acquiring person's UPE and the acquired person's UPE (or, in certain cases, by each UPE of the acquired person if there are multiple entities meeting the definition).
Penterra. Penterra Pharmaceuticals Corp. is a widely held public company. Based on our review of Penterra's most recent proxy statement and SEC filings, no single stockholder holds fifty percent (50%) or more of Penterra's outstanding voting securities. Accordingly, Penterra itself is the UPE for HSR purposes, and Penterra will be the filing person on the acquiring side of the Transaction.
Caliston. The UPE determination for Caliston is somewhat more complex due to Caliston's privately held ownership structure and the distribution of equity among multiple significant stockholders. Based on information provided by Caliston's counsel, the principal equity holders of Caliston and their approximate percentage ownership interests are as follows:
No single stockholder holds fifty percent (50%) or more of Caliston's outstanding voting securities. The UPE determination will therefore depend on whether any entity or individual is deemed to "control" Caliston within the meaning of the HSR rules. Because no single holder exceeds the fifty percent threshold, it is likely that no entity controls Caliston, and Caliston itself would be the UPE on the acquired side. However, under the HSR rules, each significant holder who will receive consideration valued in excess of the applicable notification threshold as a result of the Transaction may also have independent filing obligations if the holder's acquisition of Penterra common stock (in the case of the stock consideration component) triggers a separate notification requirement.
As a practical matter, the standard approach is as follows: Penterra will file as the acquiring person, and Caliston will file as the acquired person. To the extent that any individual Caliston UPE stockholder has independent filing obligations — for example, if a stockholder receiving Penterra shares as consideration would hold Penterra voting securities in excess of the notification threshold — such filings will need to be coordinated. We recommend that counsel at Whitfield Graves LLP, which represents Caliston in the Transaction, coordinate with each significant Caliston stockholder to determine whether any additional UPE-level filings are required on the acquired side. We will work with Kenneth Pratt at Whitfield Graves LLP to resolve this issue.
E. Notification Form and Filing Fee
Both the acquiring person and the acquired person are required to complete and submit the HSR Notification and Report Form (the "HSR Form") to the FTC and the DOJ Antitrust Division. The HSR Form requires, among other things, the following information:
• Identification of the filing person, its UPE, and all entities within its corporate structure;
• A description of the proposed transaction, including the aggregate consideration, the structure, and the expected timing;
• Financial data, including revenue and asset information for the filing person and its controlled subsidiaries;
• North American Industry Classification System ("NAICS") codes for the businesses of the filing person and the target;
• Information regarding current and prior-year revenues by NAICS code at the six-digit level;
• A list of overlapping NAICS codes between the acquiring and acquired persons;
• Copies of certain documents relating to the transaction, including the merger agreement, board presentations, and certain documents analyzing the transaction, competition, market shares, or synergies (often referred to as "Item 4(c) and 4(d) documents"); and
• Biographical information for certain officers, directors, and partners of the filing person and its UPE (including personal financial information sufficient to enable the agencies to assess the individual's other business holdings).
The preparation of the HSR Form typically requires coordination between outside counsel, the parties' internal legal teams, and financial advisors. We anticipate that the HSR Form for this Transaction can be prepared and submitted within five to ten business days of execution of the merger agreement, subject to timely receipt of information from Caliston.
Filing Fee. Under the HSR Act, a filing fee is payable by the acquiring person at the time of submission. Filing fees are assessed on a tiered basis according to the value of the transaction. The fee schedule was revised effective February 27, 2023 pursuant to the Merger Filing Fee Modernization Act of 2022, which was enacted as part of the Consolidated Appropriations Act, 2023. Under the revised fee schedule, the applicable filing fee for transactions valued at $500 million or more but less than $1 billion is $250,000. Based on the aggregate equity value of $925 million, the applicable filing fee for this Transaction is $250,000. If the total transaction value is calculated to include the CVR component (yielding a maximum aggregate value of $1,050,000,000), the applicable tier may shift to the $1 billion to $2 billion range, for which the filing fee is $400,000. We will confirm the applicable fee tier at the time of filing based on the final determination of the reportable transaction value, including the treatment of the CVRs for fee calculation purposes. For budgeting purposes, Penterra should plan for a filing fee in the range of $250,000 to $400,000.
IV. Waiting Period and Timing Considerations
A. Initial Waiting Period
Following submission of the HSR notification forms by both parties, a mandatory waiting period commences during which the parties are prohibited from consummating the Transaction. The standard initial waiting period for a cash tender offer or merger is thirty (30) calendar days from the date on which both parties' notifications are filed. 15 U.S.C. § 18a(b)(1)(B). The waiting period begins to run when both the acquiring person's and the acquired person's notification forms have been received by the agencies.
During the initial waiting period, the FTC and the DOJ will conduct a preliminary review of the Transaction to determine whether it raises competitive concerns warranting further investigation. If neither agency takes any action during the initial waiting period, the waiting period expires by its own terms, and the parties are free to consummate the Transaction (subject to satisfaction of other closing conditions). If the waiting period expires on a weekend or federal holiday, the parties may close on the next business day.
It is critical that the parties not take any steps to consummate or partially consummate the Transaction — including, without limitation, transferring beneficial ownership of any voting securities or assets, exercising operational control over Caliston's business, or engaging in conduct that could be characterized as "gun jumping" — prior to the expiration or early termination of the waiting period. Pre-closing integration planning should be carefully structured to avoid any appearance of premature coordination, and we recommend that a protocol for information sharing and integration planning be established in coordination with the parties' respective antitrust counsel.
B. Early Termination
The HSR Act authorizes the FTC and the DOJ to grant early termination of the waiting period upon request by either party, if the reviewing agency determines that it has completed its review and does not intend to take further action with respect to the Transaction. Historically, early termination has been a routine and widely utilized mechanism, particularly for transactions that do not present material competitive concerns.
We recommend that Penterra submit a request for early termination contemporaneously with the filing of its HSR notification form. The request for early termination is made by checking the applicable box on the HSR Form and is typically accompanied by a brief cover letter highlighting the absence of competitive overlap and the complementary nature of the parties' businesses.
However, we note an important caveat regarding current agency practice. On February 4, 2021, the FTC announced that it was suspending the granting of early termination requests, citing the high volume of HSR filings and the agencies' limited resources. As of the date of this memorandum, the FTC has not reinstated the practice of granting early termination. We will continue to monitor this situation and will advise the Special Committee if the FTC announces a resumption of early termination grants. In the interim, the parties should plan for the full thirty-day initial waiting period to run its course. Based on the current regulatory environment, we believe that the Transaction will receive clearance upon expiration of the initial thirty-day waiting period without the issuance of a Second Request.
C. Second Request Risk
If, during the initial thirty-day waiting period, the reviewing agency determines that a proposed transaction warrants further investigation, the agency may issue a "Second Request" — a formal request for additional information and documentary material pursuant to 15 U.S.C. § 18a(e). Issuance of a Second Request extends the waiting period until thirty (30) days after the date on which both parties have substantially complied with the Second Request. In practice, Second Request compliance is a lengthy and resource-intensive process, often requiring the production of millions of documents and extensive economic analysis, and can extend the pre-closing review period by six months or more.
Second Requests are typically issued in transactions that raise significant competitive concerns, such as mergers between direct competitors with overlapping product lines, acquisitions that would result in high market concentration in a relevant market, or combinations that would eliminate a significant independent competitive force in a concentrated industry. As discussed in detail in Section V below, the Transaction does not present any of these characteristics.
For the reasons set forth in Section V, we assess the risk of a Second Request as low. The absence of any current product-market overlap between Penterra and Caliston, the complementary nature of the parties' respective therapeutic portfolios, and the presence of multiple other competitors in the CDK4/6 inhibitor space all weigh strongly against the likelihood that the reviewing agency would determine that additional investigation is warranted.
D. Timing Implications for the Transaction
The HSR filing process and waiting period have direct implications for the overall transaction timeline. We recommend the following approach to timing:
Filing Timing. The HSR notification forms should be filed as promptly as practicable following execution of the definitive merger agreement. Our target is to file within five (5) to ten (10) business days of signing. To facilitate this timeline, we recommend beginning the preparation of the HSR Forms — including the collection of financial data, NAICS code information, and Item 4(c)/4(d) documents — in parallel with the finalization of the merger agreement. Penterra's internal legal team should be prepared to provide the required financial and operational data on an expedited basis following signing.
Merger Agreement Provisions. The definitive merger agreement, which we understand is currently under negotiation, should include customary antitrust covenants and conditions. Specifically, the merger agreement should provide that (i) both parties are obligated to file their respective HSR notification forms within ten (10) business days of the date of the merger agreement, (ii) both parties agree to cooperate in good faith with respect to any antitrust filings and any inquiries from the reviewing agency, and (iii) the expiration or early termination of the HSR Act waiting period is a condition precedent to the obligation of both parties to consummate the Transaction at closing.
Expected Timeline. Assuming the merger agreement is executed in late August or early September 2023, and the HSR notification forms are filed within the target five-to-ten-business-day window, we would expect the thirty-day initial waiting period to expire in October 2023. If early termination is available and granted, the waiting period could expire sooner, but as noted above, this should not be expected under current FTC practice. Absent a Second Request (which we view as unlikely), the antitrust clearance process should not be a gating item for the transaction closing, provided that the filing is submitted promptly.
V. Substantive Antitrust Analysis
A. Relevant Product Markets
The substantive antitrust analysis of a proposed merger begins with the identification of the relevant product market or markets in which the parties compete or could potentially compete. Under the FTC/DOJ Horizontal Merger Guidelines (2010, as revised 2023), a relevant product market is defined as the smallest group of products such that a hypothetical monopolist controlling all products in the group could profitably impose a small but significant and non-transitory increase in price ("SSNIP test"). In the pharmaceutical industry, relevant product markets are typically defined at the level of individual therapeutic indications or drug classes, rather than at the level of the broader pharmaceutical industry as a whole.
1. Penterra's Product Portfolio. Penterra is a specialty pharmaceutical company with a diversified portfolio of marketed products and development-stage candidates in the oncology and immunology therapeutic areas. Penterra's commercialized oncology therapeutics include targeted therapies and immunotherapies indicated for the treatment of various solid and hematological malignancies. Its immunology products address a range of autoimmune and inflammatory conditions. Penterra's marketed oncology products are concentrated in therapeutic sub-categories that are distinct from the CDK4/6 inhibitor class of drugs.
Critically, based on our review of Penterra's publicly available product information, pipeline disclosures, and SEC filings, as well as the due diligence materials made available to the Special Committee to date, Penterra does not currently market or develop any CDK4/6 inhibitors or selective kinase inhibitors targeting the same molecular pathway as Caliston's lead asset, CLT-4019. Penterra's oncology pipeline includes assets in different mechanistic categories and therapeutic indications. While Penterra does have oncology-related research and development programs, none of these programs targets the CDK4/6 pathway or is directed at the HR+/HER2– metastatic breast cancer indication that is the focus of CLT-4019.
We note that the precise composition of Penterra's product portfolio and pipeline is subject to ongoing diligence, and we recommend that Penterra's internal team confirm the absence of any CDK4/6-related or closely related programs that may not have been disclosed in public filings. Any undisclosed internal research or exploratory-stage efforts in this area, even if preliminary, should be identified and evaluated prior to the HSR filing, as such information could be relevant to the agencies' competitive effects analysis and may need to be disclosed in response to Item 4(c) and 4(d) of the HSR Form.
2. Caliston's Pipeline. Caliston is a clinical-stage biopharmaceutical company with no marketed products and no commercial revenue. Its entire business consists of its research and development pipeline, which is focused on novel kinase inhibitors for the treatment of solid tumors. The key assets in Caliston's pipeline are:
• CLT-4019: Caliston's lead asset is a selective CDK4/6 inhibitor being developed for the treatment of hormone receptor-positive, HER2-negative (HR+/HER2–) metastatic breast cancer. CLT-4019 is currently in Phase 2b clinical trials under IND No. 158429 (filed March 2020). Topline data from the Phase 2b trial are expected in the fourth quarter of 2023. CLT-4019 is designed to offer a differentiated clinical profile relative to existing approved CDK4/6 inhibitors, including palbociclib (Ibrance), ribociclib (Kisqali), and abemaciclib (Verzenio), each of which is marketed by other pharmaceutical companies. The CVR component of the Transaction consideration is tied to FDA approval of CLT-4019 on or before December 31, 2026.
• CLT-5227: A preclinical-stage novel kinase inhibitor targeting solid tumors. This candidate has not yet entered clinical development and is in the lead optimization stage.
• CLT-6034: A preclinical-stage novel kinase inhibitor targeting solid tumors. Like CLT-5227, this candidate is in early-stage development and has not yet been the subject of an IND filing.
Because Caliston has no marketed products, its pipeline assets — and in particular CLT-4019, which is the most advanced and the primary driver of the Transaction's value — are the focus of the competitive analysis.
3. Overlap Assessment. Based on the information reviewed to date, we have identified no current product-market overlap between Penterra and Caliston. The key findings of our overlap assessment are as follows:
No marketed product overlap. Penterra does not market any CDK4/6 inhibitors. Caliston has no marketed products at all. There is therefore no overlap in currently marketed products in any therapeutic category, indication, or drug class.
No pipeline overlap. Based on Penterra's publicly disclosed pipeline and the diligence materials reviewed to date, Penterra is not developing any CDK4/6 inhibitors or products targeting the same mechanism of action or patient population as CLT-4019. Penterra's oncology development programs are directed at different molecular targets, different tumor types, and different treatment modalities. We recommend confirming this finding through a detailed review of Penterra's internal research files and development records, but based on available information, we are not aware of any pipeline overlap.
Complementary portfolios. The Transaction is properly characterized as a portfolio expansion. Penterra is acquiring Caliston in order to add a late-clinical-stage CDK4/6 inhibitor — and the associated kinase inhibitor platform — to its existing oncology portfolio. The combination of the two companies' assets creates a broader and more diversified therapeutic portfolio without eliminating any existing or prospective competition between the parties.
Broad market analysis. Even under the broadest plausible market definition — for example, "all oncology therapeutics" or "all pharmaceutical products for the treatment of breast cancer" — the combined entity's market share would remain modest relative to the overall size of the relevant market. The global oncology pharmaceutical market exceeds $180 billion in annual revenue, and the U.S. breast cancer therapeutics market is served by numerous large pharmaceutical companies with diverse product portfolios. The addition of Caliston's pipeline to Penterra's portfolio does not create competitive concerns under any reasonable market definition.
B. Relevant Geographic Market
Pharmaceutical products are generally analyzed on a national (United States) basis for antitrust purposes, consistent with the FTC's and DOJ's standard practice in pharmaceutical merger reviews. This reflects the fact that pharmaceutical products are typically marketed and distributed on a nationwide basis in the United States, subject to a unified federal regulatory framework administered by the FDA, and are generally available to patients and healthcare providers throughout the country at comparable prices (subject to payer-specific variations in coverage and reimbursement).
For pipeline products that have not yet received FDA approval and are not yet commercially available, the geographic market analysis may extend to a global level, since clinical development activities and regulatory submissions may be conducted in multiple jurisdictions. However, for purposes of the HSR filing and the U.S. antitrust analysis, the relevant geographic market is the United States.
No geographic overlap concerns arise in this Transaction. Caliston has no commercial operations in any geographic market, and its clinical trial activities are conducted at sites within the United States. The Transaction does not raise competitive concerns on a geographic basis.
C. Competitive Effects Analysis
The core of the substantive antitrust analysis is the assessment of whether the proposed Transaction is likely to substantially lessen competition or tend to create a monopoly in any relevant market, within the meaning of Section 7 of the Clayton Act, 15 U.S.C. § 18. We have evaluated the Transaction under each of the principal theories of competitive harm recognized by the federal antitrust agencies.
Horizontal Effects. A horizontal merger is one that combines firms that compete in the same relevant market. Horizontal effects are the primary concern in most merger reviews, as the elimination of direct competition between the merging parties can lead to higher prices, reduced output, or diminished innovation. Here, there are minimal to no horizontal effects. As discussed in Section V.A.3 above, there is no current product-market overlap between Penterra and Caliston. Penterra does not market or develop any CDK4/6 inhibitors, and Caliston has no marketed products. The Transaction does not eliminate any existing head-to-head competition between the parties.
The agencies could theoretically examine whether Penterra might have independently entered the CDK4/6 inhibitor market absent the acquisition, thereby making Penterra a "potential competitor" whose independent entry would be foreclosed by the Transaction. However, the "potential competition" doctrine has significant limitations under current law and agency practice. To establish a credible potential competition theory, the agencies would need to demonstrate that (i) Penterra had concrete plans or a demonstrated capability to independently develop a CDK4/6 inhibitor, (ii) Penterra's independent entry would have been likely in the reasonably foreseeable future, and (iii) the elimination of Penterra as an independent entrant would result in a meaningful loss of future competition. Based on our review of Penterra's pipeline and strategic plans, there is no evidence that Penterra was pursuing independent development of a CDK4/6 inhibitor, and the agencies would have limited basis to challenge the Transaction under a potential competition theory.
Vertical Effects. A vertical merger combines firms that operate at different levels of the same supply chain — for example, a manufacturer and a distributor, or a supplier of inputs and a downstream producer. Vertical concerns do not apply here. Caliston is not a supplier, customer, or distributor of Penterra or any of Penterra's products. The parties do not have any vertical relationship, and the Transaction does not create any vertical integration that could give rise to foreclosure or raising-rivals'-costs concerns.
Innovation Market / Potential Competition Theories. The FTC has, in certain prior pharmaceutical merger cases, applied an "innovation market" theory, under which the agency analyzes whether a combination would reduce the number of independent research and development efforts in a particular therapeutic area, thereby diminishing the pace or breadth of innovation to the detriment of consumers. This theory has been applied most commonly in situations where the merging parties are among a small number of firms conducting R&D in a narrowly defined therapeutic area, and the combination would eliminate one of only a handful of independent development programs.
Here, the innovation market concern is not material. The CDK4/6 inhibitor class is a well-established therapeutic category in oncology, with three CDK4/6 inhibitors already approved by the FDA and widely marketed: palbociclib (Ashbury Industries's Ibrance, approved 2015), ribociclib (Brightwater Industries's Kisqali, approved 2017), and abemaciclib (Crowne Albany Enterprises's Verzenio, approved 2017). In addition to these approved products, multiple pharmaceutical and biotechnology companies are actively developing next-generation CDK4/6 inhibitors and related compounds targeting the CDK pathway. The addition of Caliston's CLT-4019 to Penterra's portfolio does not meaningfully reduce the number of independent R&D efforts in this space, because (i) Penterra was not independently pursuing a CDK4/6 inhibitor program, and (ii) the CDK4/6 inhibitor market is served by multiple existing and prospective competitors. There is no basis for the agencies to conclude that the Transaction would reduce innovation competition in this area.
Conglomerate/Portfolio Effects. Conglomerate or portfolio effects theories posit that a merger combining products in adjacent or related markets may give the merged entity the ability and incentive to engage in exclusionary conduct — such as bundling or tying — to the detriment of rivals in one or more of those markets. While conglomerate theories have received attention in European Commission merger review practice, they are not a significant concern under current U.S. antitrust enforcement practice. The FTC and DOJ have not, in recent years, challenged mergers primarily on conglomerate or portfolio effects grounds, and we do not believe that such a theory would be applied to this Transaction.
D. Market Concentration
Under the FTC/DOJ Horizontal Merger Guidelines, the agencies assess market concentration using the Herfindahl-Hirschman Index ("HHI"), which is calculated by summing the squares of the market shares of all firms in the relevant market. Mergers that result in highly concentrated markets (post-merger HHI above 2,500) and that increase the HHI by more than 200 points are presumed to enhance market power and are subject to heightened scrutiny. Mergers that result in unconcentrated markets (post-merger HHI below 1,500) are unlikely to be challenged.
Because there is no meaningful product-market overlap between Penterra and Caliston, the Transaction does not increase the HHI in any identified relevant market. Penterra and Caliston do not share any market in which their respective products compete, and the Transaction therefore does not result in any consolidation of market share. This is the strongest indicator that the Transaction is unlikely to raise competitive concerns under the Merger Guidelines framework.
To the extent that the agencies were to define a broader relevant market — such as "all oncology therapeutics" or "all breast cancer therapeutics" — in which both parties' products could theoretically be included, the combined entity's market share in any such broadly defined market would be negligible. Penterra's share of the overall U.S. oncology pharmaceutical market is modest relative to the major oncology companies (including Strathmore Group, Calderon Corporation, Ostrander Group, Ridgeway Holdings, and Ashbury Industries), and Caliston's share is zero, as it has no marketed products.
E. Precedent Agency Action
We note that the FTC has increased its scrutiny of pharmaceutical mergers during the 2022–2023 period, consistent with the agency's broader trend toward more aggressive antitrust enforcement under Chair Lina Khan. Recent FTC enforcement actions in the pharmaceutical sector have included challenges to mergers involving overlapping marketed products (e.g., requiring divestitures as a condition of approval in cases where the merging parties' products competed directly in the same therapeutic indication) and, in limited cases, challenges based on pipeline competition where the merging parties were among a small number of firms developing competing products for the same indication.
However, the enforcement actions that have resulted in challenges or required remedies have involved factual circumstances materially different from those present here. In each of the recently challenged pharmaceutical mergers, the agencies identified specific, identifiable competitive overlaps — either between marketed products or between late-stage pipeline assets targeting the same patient population with the same or similar mechanisms of action. The absence of any such overlap in the present Transaction distinguishes it from the recent wave of challenged pharmaceutical deals.
Moreover, the Transaction does not present the type of "killer acquisition" concern that has been the subject of recent academic commentary and agency attention — namely, the acquisition of a nascent competitor by a dominant incumbent for the purpose of eliminating a competitive threat. Penterra does not have a marketed CDK4/6 inhibitor, and the acquisition of Caliston's CLT-4019 does not eliminate a product that would have competed with any existing or planned Penterra product. The strategic rationale for the Transaction — expanding Penterra's oncology portfolio into the CDK4/6 inhibitor class — is pro-competitive, not exclusionary.
Based on the foregoing, we believe the Transaction is distinguishable from recent challenged pharmaceutical mergers and does not present the competitive concerns that have prompted agency action in those cases.
VI. State Antitrust Considerations
In addition to the federal HSR Act, we have considered whether any state-level antitrust filing requirements or substantive concerns may apply to the Transaction. Our assessment is as follows:
No state-level pre-merger notification filing requirements are anticipated to apply to this Transaction. While certain states have enacted pre-merger notification statutes that are separate from and in addition to the federal HSR Act, these state notification requirements are generally limited to specific industries (such as healthcare, insurance, or financial services) or apply only to mergers involving entities with a significant physical presence or workforce in the state. Neither Penterra nor Caliston operates a healthcare facility, hospital system, or insurance business that would trigger state-specific healthcare merger notification requirements. We will confirm the applicability of any state notification statutes in New Jersey (Penterra's principal place of business), Massachusetts (Caliston's principal place of business), and Delaware (the state of incorporation for both entities) prior to filing.
We also note that state attorneys general retain the authority to challenge mergers and acquisitions under state antitrust laws, as well as under Section 16 of the Clayton Act, 15 U.S.C. § 26, which grants state attorneys general standing to seek injunctive relief on behalf of the residents of their states. However, the risk of a state attorney general challenge to this Transaction is negligible, given the absence of any competitive overlap and the absence of any state-specific market impact that would likely attract state-level attention. State antitrust enforcement in the pharmaceutical sector has historically focused on price-fixing conspiracies, pay-for-delay settlements, and market allocation agreements, rather than on merger challenges involving complementary product portfolios of the type presented here.
VII. Merger Agreement Provisions — Antitrust Covenants
Based on our antitrust analysis, we recommend that the definitive merger agreement include the following customary antitrust-related provisions:
HSR Filing Obligation. The merger agreement should require both Penterra and Caliston to prepare and file their respective HSR notification forms with the FTC and the DOJ Antitrust Division within ten (10) business days of the date of the merger agreement. The obligation should extend to any supplemental filings or notifications required under state antitrust laws or the antitrust laws of any foreign jurisdiction, to the extent applicable.
Mutual Cooperation Covenant. The merger agreement should include a mutual cooperation covenant pursuant to which each party agrees to cooperate in good faith with the other party and with any governmental authority in connection with all antitrust filings and any investigation, inquiry, or proceeding initiated by any antitrust authority relating to the Transaction. This covenant should include an obligation to provide access to relevant information and documents, to make officers and employees available for interviews or testimony, and to respond promptly to any requests for additional information from the agencies.
Condition to Closing. The expiration or early termination of the HSR Act waiting period (and any applicable waiting periods under foreign antitrust laws or state notification statutes) should be included as a condition precedent to the obligations of both parties to consummate the Transaction. Neither party should be required to close the Transaction until the HSR waiting period has expired or been terminated.
Reasonable Best Efforts. The merger agreement should include a covenant requiring both parties to use their "reasonable best efforts" to obtain any required antitrust clearances and to resolve any objections or conditions imposed by the antitrust agencies. The "reasonable best efforts" standard is the customary formulation in merger agreements and requires the parties to take commercially reasonable steps to secure clearance, without obligating them to accept remedies that would be unduly burdensome or disproportionate to the value of the Transaction.
"Hell-or-High-Water" Commitment. We do not recommend that Penterra agree to a "hell-or-high-water" commitment — that is, an obligation to accept any divestiture, hold-separate order, or other structural or behavioral remedy required by the antitrust agencies as a condition of clearance, regardless of the scope or impact of such remedy. Given the low antitrust risk profile of this Transaction, such a commitment is unnecessary and would represent an unreasonable concession by Penterra. We note, however, that Caliston's counsel at Whitfield Graves LLP may request a hell-or-high-water commitment or a more expansive efforts standard as part of the merger agreement negotiations, as this is a common negotiating position for target companies seeking to ensure deal certainty. We recommend resisting this request and limiting Penterra's obligation to the "reasonable best efforts" standard described above. If necessary, a middle-ground formulation (e.g., an obligation to accept remedies that do not, individually or in the aggregate, have a material adverse effect on the combined company) may be explored as a negotiating compromise.
Reverse Termination Fee. The merger agreement should include a reverse termination fee payable by Penterra to Caliston in the event that the Transaction fails to close due to the failure to obtain required regulatory or antitrust clearances. Based on market practice and the economics of this Transaction, we recommend a reverse termination fee of Thirty-Two Million Three Hundred Seventy-Five Thousand Dollars ($32,375,000), which represents approximately 3.5% of the aggregate equity value of $925 million. This reverse termination fee provides Caliston and its stockholders with meaningful downside protection against regulatory risk while remaining within the range of market-standard reverse termination fees for comparable pharmaceutical acquisitions. The reverse termination fee should be the sole and exclusive remedy available to Caliston in the event of a regulatory failure, and should be subject to customary exceptions and limitations.
VIII. Recommendations and Next Steps
Based on the analysis set forth in this memorandum, we make the following recommendations to the Special Committee:
1. HSR Filing Required. We confirm that a pre-merger notification filing under the HSR Act is required prior to consummation of the Transaction. Notification forms must be filed by Penterra (as the acquiring person) and by Caliston (as the acquired person), and potentially by certain Caliston UPE stockholders whose filings may be independently required. We recommend that the merger agreement expressly require both parties to submit their respective filings within the timeframe specified below.
2. Filing Timing. We recommend filing the HSR notification forms within five (5) to ten (10) business days after execution of the definitive merger agreement. To facilitate this timeline, we recommend commencing preparation of the HSR Forms — including the compilation of NAICS code data, revenue breakdowns, and Item 4(c)/4(d) document collections — in advance of signing, so that the forms can be substantially completed prior to the execution date.
3. Request Early Termination. We recommend submitting a request for early termination of the HSR waiting period contemporaneously with the filing. Although early termination is not currently being granted by the FTC, the request costs nothing to make and preserves the option in the event that the FTC resumes the practice before the filing is reviewed. In the cover letter accompanying the filing, we will highlight the complementary, non-overlapping nature of the parties' product portfolios and the absence of competitive concerns.
4. Filing Fee. Penterra should budget a filing fee of $250,000, based on the aggregate equity value of $925 million falling within the $500 million to $999.9 million tier of the current FTC fee schedule. If the total transaction value is determined to include the CVR component for fee calculation purposes, the applicable fee may increase to $400,000. We will confirm the applicable tier at the time of filing and advise Penterra accordingly.
5. Coordinate with Whitfield Graves LLP. We recommend that Calderwood & Harkness LLP coordinate promptly with Kenneth Pratt at Whitfield Graves LLP, counsel to Caliston, regarding (a) Caliston's filing obligations under the HSR Act, (b) the identification of Caliston's ultimate parent entities and any independent filing obligations of significant Caliston stockholders, (c) the timing of Caliston's filing to ensure that both parties' notifications are submitted simultaneously or in close sequence, and (d) the preparation and coordination of the Item 4(c)/4(d) document productions. We also recommend that Whitfield Graves LLP communicate directly with the significant Caliston stockholders — including Dr. Marcus Hale, Ridgeline Ventures, LP, and Meridian Life Sciences Fund III, LP — to determine whether any individual stockholder-level filings are required.
6. Monitor Regulatory Developments. We recommend that Calderwood & Harkness LLP continue to monitor FTC and DOJ enforcement trends in pharmaceutical mergers through the period between signing and closing. Specific areas of focus include (a) any changes in the FTC's early termination policy, (b) any new enforcement actions or consent orders in the oncology or CDK4/6 inhibitor space, (c) any revisions to the HSR filing thresholds or fee schedule, and (d) any developments in the FTC's proposed revisions to the HSR notification form, which were announced in June 2023 and, if adopted, could impose additional information requirements on filing parties. We will provide the Special Committee with periodic updates on any material regulatory developments.
7. Overall Risk Assessment. Our overall assessment of the antitrust risk associated with this Transaction is low. We do not anticipate that the reviewing agency will issue a Second Request for additional information or bring a substantive challenge to the Transaction. The complementary, non-overlapping nature of the parties' product portfolios, the absence of any identifiable competitive overlap, the well-established competitive landscape in the CDK4/6 inhibitor class, and the pre-commercial status of Caliston collectively support the conclusion that the Transaction does not raise material competitive concerns. Antitrust clearance should not be a gating item for the transaction timeline.
IX. Conclusion
Based on our analysis, the proposed acquisition of Caliston BioSciences, Inc. by Penterra Pharmaceuticals Corp. requires a pre-merger notification filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Transaction clearly exceeds the applicable size-of-transaction threshold, and because the transaction value exceeds $445.5 million, the size-of-person test does not apply. Both Penterra and Caliston are required to file notification forms, and the standard thirty-day initial waiting period will apply. We recommend requesting early termination of the waiting period, while recognizing that it may not be granted under current FTC practice.
The substantive antitrust risk associated with the Transaction is low. Penterra and Caliston operate in complementary therapeutic areas within the broader oncology landscape, and there is no current or prospective product-market overlap between the parties. The CDK4/6 inhibitor space in which Caliston's lead asset, CLT-4019, is being developed is well-served by multiple approved products and competing development programs. The Transaction does not increase market concentration in any identified relevant market, and we do not anticipate that the reviewing agency will issue a Second Request or seek to block or impose conditions on the Transaction.
We recommend that Penterra proceed with the HSR filing promptly upon execution of the merger agreement, targeting submission within five to ten business days of signing. The merger agreement should include customary antitrust covenants, including filing obligations, cooperation commitments, a closing condition tied to expiration or early termination of the HSR waiting period, and a reverse termination fee providing Caliston with downside protection against regulatory risk.
Calderwood & Harkness LLP is available to assist in the preparation and submission of the HSR notification forms, to coordinate with Whitfield Graves LLP and Caliston's stockholders regarding their respective filing obligations, and to manage any agency inquiries or requests for information that may arise during the review period. We are prepared to begin the substantive preparation of the HSR Forms upon the Special Committee's direction.
We are available to discuss this memorandum and its conclusions with the Special Committee at your convenience.
This memorandum is intended solely for the use of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. in connection with the proposed acquisition of Caliston BioSciences, Inc. and is protected by the attorney-cl