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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE — ATTORNEY WORK PRODUCT DOCTRINE This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It is intended solely for the use of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. and should not be disclosed, distributed, or copied without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to evaluate the legal sufficiency of the fairness opinion (the "Opinion") delivered by Thorngate Partners LLC ("Thorngate") to the Special Committee of the Board of Directors (the "Special Committee") of Penterra Pharmaceuticals Corp. ("Penterra" or the "Company") on November 15, 2023. The Opinion concludes that the $925,000,000 aggregate equity value consideration (excluding the $125,000,000 in contingent value rights (the "CVRs")) to be paid by Penterra in connection with the proposed acquisition (the "Transaction") of 100% of the outstanding equity interests of Caliston BioSciences, Inc. ("Caliston") is fair, from a financial point of view, to Penterra.
This memorandum assesses the adequacy and sufficiency of the Opinion under three distinct analytical frameworks: (a) Delaware fiduciary duty standards, with particular emphasis on the entire fairness doctrine as informed by the fair price prong; (b) Securities and Exchange Commission ("SEC") disclosure requirements applicable to the inclusion of the Opinion and a summary thereof in the definitive proxy statement to be filed in connection with the Transaction; and (c) internal consistency between the final Opinion and the preliminary valuation analyses delivered by Thorngate to the Special Committee on August 3, 2023.
Overall Conclusion. Based on our thorough review of the Opinion, the underlying valuation analyses, Thorngate's independence representations, the procedural history of the financial advisory engagement, and the applicable legal and regulatory standards, we conclude that the Thorngate fairness opinion is legally sufficient in both form and substance for purposes of supporting the Special Committee's recommendation to the full Penterra board of directors. The Opinion meets the standards required for proxy statement disclosure under the rules and regulations of the SEC, and is internally consistent with the preliminary valuation work presented to the Special Committee earlier in the process. The methodologies employed by Thorngate are recognized and appropriate for the valuation of a clinical-stage biopharmaceutical company, and the valuation ranges generated by those methodologies bracket the negotiated Transaction price in a manner that supports a finding of fair price.
Context. The fairness opinion is a critical element of the Special Committee process, and its legal sufficiency warrants careful analysis given the related-party nature of the Transaction. Dr. Marcus Hale, who serves as Chairman of the Board and Chief Executive Officer of Penterra, holds a 28.5% equity interest in Caliston, acquired through a personal investment of approximately $42,000,000. At the negotiated Transaction price of $925,000,000, Dr. Hale's implied proceeds would total approximately $263,625,000, representing an implied personal gain of approximately $221,625,000. This substantial personal financial interest in the Transaction creates a conflict of interest that subjects the Transaction to heightened judicial scrutiny under Delaware law. The Opinion provides essential support for the determination that fair price has been achieved notwithstanding this conflict, and its adequacy is a necessary predicate for the Special Committee's ability to discharge its fiduciary duties with respect to the Transaction.
This memorandum should be read in conjunction with our prior memoranda to the Special Committee regarding the formation and authority of the Special Committee, the engagement of independent advisors, and the negotiation process, all of which are maintained as part of the Project Coriander privileged files.
II. Background
A. Transaction Summary
The proposed Transaction contemplates a one-step merger of Caliston with and into Penterra, to be effected pursuant to an Agreement and Plan of Merger (the "Merger Agreement") under Section 251 of the Delaware General Corporation Law (the "DGCL"). Upon consummation of the merger, Caliston will cease to exist as a separate legal entity, and Penterra will succeed to all of Caliston's assets, liabilities, rights, and obligations by operation of law.
The key financial terms of the Transaction are as follows:
Aggregate Equity Value. The aggregate equity value consideration for the Transaction is $925,000,000 (the "Base Consideration"), which represents the total value to be paid to the holders of Caliston's outstanding equity securities (including common stock, preferred stock, and vested equity awards) at the closing of the Transaction, subject to customary closing adjustments.
Consideration Mix. The Base Consideration is structured as a combination of cash and stock, allocated as follows:
• Cash Component: Approximately 75% of the Base Consideration, or $693,750,000, to be paid in cash at closing. Penterra intends to fund the cash component through a combination of cash on hand and committed debt financing.
• Stock Component: Approximately 25% of the Base Consideration, or $231,250,000, to be paid in newly issued shares of Penterra common stock (NYSE: PPHR). The stock component is valued based on the 30-day volume-weighted average price ("VWAP") of Penterra common stock as of June 1, 2023, which was $39.17 per share. Based on this reference price, the Transaction would require the issuance of approximately 5,903,497 shares of Penterra common stock. The issuance of these shares will require approval of Penterra's stockholders under applicable NYSE listing rules, as the number of shares to be issued exceeds the thresholds set forth in Section 312.03 of the NYSE Listed Company Manual.
Contingent Value Rights. In addition to the Base Consideration, the Merger Agreement provides for the issuance of CVRs to Caliston equity holders, entitling them to receive an additional $125,000,000 in aggregate value upon the achievement of a specified regulatory milestone — namely, the receipt of approval from the U.S. Food and Drug Administration ("FDA") for CLT-4019 (IND 158429, a selective CDK4/6 inhibitor for the treatment of HR+/HER2– metastatic breast cancer) on or before December 31, 2026. If the milestone is not achieved by the expiration date, the CVRs will expire without payment. If the CVRs are fully earned, the maximum aggregate transaction value would be $1,050,000,000.
Premium Analysis. The Base Consideration of $925,000,000 represents a premium of approximately 36.03% over Caliston's post-money valuation in its most recent private financing round — the Series C preferred stock financing completed in October 2021, which valued Caliston at $680,000,000 on a post-money basis. It should be noted that the Series C occurred approximately two years prior to the date of the fairness opinion, during which period Caliston made significant clinical progress, including advancement of CLT-4019 into Phase 2b clinical trials.
Deal Protection Provisions. The Merger Agreement includes the following deal protection provisions:
• Reverse Termination Fee: $32,375,000, representing 3.5% of the Base Consideration, payable by Penterra to Caliston in specified circumstances, including failure to obtain required regulatory approvals or failure to consummate the Transaction due to a financing failure.
• Company Termination Fee: $27,750,000, representing 3.0% of the Base Consideration, payable by Caliston to Penterra in the event that Caliston terminates the Merger Agreement to accept a superior proposal.
• Escrow: $46,250,000, representing 5.0% of the Base Consideration, to be deposited into escrow at closing with Greystone National Bank, N.A. serving as escrow agent. The escrow fund will be subject to an 18-month survival period and will secure Penterra's indemnification rights for breaches of representations and warranties and certain specified indemnification matters set forth in the Merger Agreement.
B. Related-Party Conflict
The Transaction presents significant related-party conflict-of-interest issues that necessitate the heightened procedural protections that have been implemented, including the formation of the Special Committee and the engagement of independent advisors.
Dr. Marcus Hale. Dr. Hale serves as Chairman of the Board and Chief Executive Officer of Penterra. He also holds a personal equity interest in Caliston representing approximately 28.5% of Caliston's outstanding equity, acquired through a series of personal investments totaling approximately $42,000,000. At the negotiated Base Consideration of $925,000,000, Dr. Hale's pro rata share of the equity consideration would be approximately $263,625,000, yielding an implied gain on his personal investment of approximately $221,625,000 (exclusive of any additional amounts that may be payable under the CVRs). In addition, Dr. Hale has served as a board observer of Caliston since 2018, during which time he attended 14 of 16 Caliston board meetings. Dr. Hale's dual position — as the chief executive of the acquiror and a significant equity holder in the target — creates a direct and material conflict of interest.
Angela Whitmore. Ms. Whitmore serves as a member of the Penterra Board of Directors and as Executive Vice President, Commercial Operations of the Company. Ms. Whitmore is the spouse of Dr. Evan Whitmore, who serves as Head of Clinical Development at Caliston and is a member of Caliston's board of directors. This spousal relationship creates an additional related-party conflict that implicates Ms. Whitmore's independence with respect to deliberations regarding the Transaction.
Special Committee Formation and Authority. In recognition of these conflicts, the Penterra Board of Directors constituted the Special Committee on June 2, 2023, consisting of three independent and disinterested directors: Diane Prescott (Chair), James Okafor, and Dr. Helen Ng. The Board vested the Special Committee with sole and exclusive authority to evaluate, negotiate, and determine whether to recommend the Transaction to the full Board, including the express power to reject the Transaction (the "say no" power). Dr. Hale, Angela Whitmore, and Raymond Tusk (who was recused due to his participation in Caliston's Series B financing round through a personal investment vehicle) were excluded from all Special Committee deliberations and were not provided access to the Special Committee's work product, advisor communications, or internal deliberations, consistent with the Project Coriander information barrier policy implemented on June 2, 2023.
Independent Advisors. Calderwood & Harkness LLP was engaged as independent legal counsel to the Special Committee, and Thorngate Partners LLC was engaged as independent financial advisor to the Special Committee. The engagement of Thorngate is dated June 16, 2023, and bears reference number 1018-00003. Both engagements were initiated and approved exclusively by the Special Committee, without involvement by Penterra management, Dr. Hale, or any other conflicted party.
C. Thorngate Engagement Terms
The Special Committee engaged Thorngate pursuant to an engagement letter dated June 16, 2023 (attached hereto as Appendix C). The material terms of the engagement are as follows:
Advisory Fee. Thorngate is entitled to an aggregate advisory fee of $2,500,000, structured as follows: (i) $1,250,000 (50% of the fee) payable upon delivery of the fairness opinion to the Special Committee; and (ii) $1,250,000 (50% of the fee) payable upon the earlier of the closing of the Transaction or the termination of the Merger Agreement (regardless of whether the Transaction is consummated). The first installment was earned upon delivery of the Opinion on November 15, 2023.
Retainer. Thorngate received a non-refundable retainer of $500,000 upon execution of the engagement letter, which is credited against the final advisory fee payment. The purpose of the non-refundable retainer was to provide Thorngate with a baseline level of compensation irrespective of the outcome of its engagement, thereby mitigating any potential concern that the contingent nature of the fee structure might influence Thorngate's willingness to deliver a negative opinion if warranted by its analyses.
Expense Reimbursement. Penterra (at the direction of the Special Committee) agreed to reimburse Thorngate for its reasonable out-of-pocket expenses incurred in connection with the engagement, including travel, data services, and third-party research costs.
Scope of Engagement. Thorngate's role encompasses: (i) independent valuation analyses of Caliston; (ii) delivery of a fairness opinion to the Special Committee regarding the financial fairness of the Transaction consideration to Penterra; and (iii) assistance to the Special Committee in evaluating and negotiating the financial terms of the Transaction.
Lead Banker. Gregory Ashford, Managing Director at Thorngate Partners LLC, has served as the lead banker on the engagement throughout the process.
D. Procedural History of Financial Advisory Process
The following timeline summarizes the key milestones in the financial advisory process:
• June 16, 2023: Thorngate Partners LLC formally engaged as independent financial advisor to the Special Committee pursuant to the executed engagement letter (reference 1018-00003).
• June 20, 2023: Calderwood & Harkness LLP transmitted a letter to Thorngate outlining the Special Committee's expectations regarding the scope, methodology, and procedural safeguards for the fairness opinion engagement. The letter specified, among other things, that Thorngate should employ multiple recognized valuation methodologies, that Thorngate should review and independently assess management projections rather than accept them without scrutiny, and that the final opinion should clearly articulate all material assumptions and limitations.
• June 28, 2023: Initial due diligence materials received from Caliston, transmitted through Caliston's outside counsel, Whitfield Graves LLP (Kenneth Pratt, responsible partner). The materials included audited financial statements, clinical trial data packages, intellectual property summaries, capitalization records, and material contracts.
• July 19, 2023: Caliston management presentation conducted for the benefit of the Special Committee and Thorngate. The presentation was delivered by Dr. Nadia Sorensen, Chief Executive Officer of Caliston, and Dr. Raj Malhotra, Chief Scientific Officer of Caliston. The presentation covered Caliston's clinical pipeline, competitive positioning, commercial strategy for CLT-4019, and five-year financial projections.
• August 3, 2023: Thorngate delivered its preliminary valuation analyses to the Special Committee in a presentation attended by all three Special Committee members, Calderwood & Harkness counsel, and the Thorngate deal team led by Gregory Ashford. The preliminary analyses employed four valuation methodologies and presented valuation ranges for each methodology.
• August 22, 2023: Following deliberation, the Special Committee directed Thorngate to conduct a targeted market check to assess whether alternative acquisition targets might present a more favorable strategic and financial profile for Penterra's oncology pipeline strategy.
• September 14, 2023: Thorngate completed the market check and reported to the Special Committee that no clearly superior alternative targets had been identified that would warrant discontinuing negotiations with Caliston or pursuing an alternative transaction.
• September 29, 2023 – October 18, 2023: A series of negotiation sessions were conducted between the Special Committee (represented by Calderwood & Harkness LLP and supported by Thorngate) and Caliston (represented by Whitfield Graves LLP), resulting in an agreement in principle on the Base Consideration of $925,000,000 and the CVR structure of $125,000,000.
• November 15, 2023: Thorngate delivered the final fairness opinion to the Special Committee, concluding that the Base Consideration of $925,000,000 is fair, from a financial point of view, to Penterra Pharmaceuticals Corp.
III. Delaware Law Standards for Fairness Opinions in Interested-Director Transactions
A. Entire Fairness Doctrine
Under Delaware law, when a corporate fiduciary stands on both sides of a transaction, or when a transaction involves self-dealing by a controlling stockholder or a director with a material interest in the transaction, the entire fairness standard of review applies. The entire fairness standard is the most exacting standard of judicial review under Delaware corporate law and requires the proponents of a challenged transaction to demonstrate the entire fairness of the transaction to the corporation and its stockholders.
The entire fairness standard comprises two interrelated components:
Fair Dealing. The fair dealing component examines the procedural aspects of the transaction, including its timing, how the transaction was initiated, how it was structured, how the negotiations were conducted, what disclosures were made to the board and stockholders, and how the approvals of the directors and stockholders were obtained. In Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the Delaware Supreme Court established that fair dealing "embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained." The formation of an independent special committee with sole and exclusive negotiating authority, the engagement of independent legal and financial advisors, and the implementation of information barriers are among the procedural protections that courts evaluate under the fair dealing rubric.
Fair Price. The fair price component examines the economic and financial considerations of the transaction, including "all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock." Weinberger, 457 A.2d at 711. The fair price inquiry is not limited to any single valuation methodology; rather, courts consider the totality of the financial analysis supporting the transaction price. A fairness opinion delivered by an independent, qualified financial advisor is an important piece of evidence bearing on the fair price determination. While the opinion itself does not conclusively establish fair price, it provides significant evidentiary support for a board's or committee's determination that the consideration paid or received is financially fair.
Role of the Fairness Opinion. The fairness opinion serves as evidence supporting the fair price component of the entire fairness analysis. Delaware courts have recognized that a properly prepared and adequately supported fairness opinion, delivered by an independent and qualified financial advisor, is an important element of the record upon which a board or committee of directors may rely in determining that a transaction satisfies the fair price requirement. However, courts have also cautioned that a fairness opinion is not a substitute for the independent exercise of fiduciary judgment by the directors. The opinion is advisory in nature and must be considered by the fiduciaries as one factor among others in their overall deliberative process.
Burden of Proof. Under the entire fairness standard, the burden of proof rests on the proponents of the transaction — that is, the interested fiduciary or the party defending the transaction — to establish that the transaction was entirely fair. This is significant because, absent the procedural protections discussed below in connection with the MFW framework, the defendants in any stockholder challenge bear the burden of demonstrating both fair dealing and fair price by a preponderance of the evidence.
B. MFW Framework Applicability
In Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), the Delaware Supreme Court held that the business judgment standard of review, rather than the more demanding entire fairness standard, would apply to a controlling stockholder merger where the transaction was conditioned, from the outset, on two procedural protections: (i) approval by a fully empowered, properly functioning special committee of independent directors; and (ii) a fully informed, uncoerced vote of a majority of the disinterested stockholders (i.e., those stockholders unaffiliated with the controlling stockholder). This framework is commonly referred to as the "MFW" framework or "MFW dual protections."
In the present case, Dr. Hale holds approximately 28.5% of Caliston's equity but is not a controlling stockholder of Penterra. Dr. Hale's direct holdings in Penterra amount to approximately 2,140,000 shares, representing approximately 1.8% of Penterra's approximately 121,400,000 outstanding shares of common stock. Nevertheless, Dr. Hale's role as Chairman of the Board and Chief Executive Officer confers upon him significant practical influence over Penterra's strategic direction, management decisions, and board agenda. The Transaction therefore implicates the type of self-dealing concerns that the entire fairness doctrine is designed to address, even though Dr. Hale does not possess mathematical voting control of Penterra.
The Special Committee process has been designed to invoke the most favorable standard of judicial review available under the circumstances. Specifically, the Special Committee was constituted with independent and disinterested directors, was vested with sole and exclusive authority to evaluate and negotiate the Transaction (including the "say no" power), was provided with independent legal and financial advisors, and has operated subject to robust information barriers that have excluded all conflicted parties from its deliberations. While the MFW framework was originally articulated in the context of controlling stockholder transactions, its principles inform the analysis in any interested-director transaction where a special committee and independent advisors have been deployed.
A stockholder vote will be required under NYSE listing rules in connection with the issuance of approximately 5,903,497 shares of Penterra common stock as part of the Transaction consideration, as the issuance exceeds the applicable thresholds set forth in Section 312.03 of the NYSE Listed Company Manual. On the Caliston side, the written consent of holders of a majority of Caliston's outstanding shares has already been obtained (representing approximately 69.5% of Caliston's outstanding equity as of December 1, 2023), which satisfies the stockholder approval requirements applicable to Caliston under the DGCL and Caliston's governing documents.
The fairness opinion is a key procedural safeguard that supports both the fair dealing and fair price components of the entire fairness analysis. Under the fair dealing prong, the engagement of an independent financial advisor and the delivery of a fairness opinion demonstrate that the Special Committee conducted an informed and rigorous process. Under the fair price prong, the opinion provides affirmative evidentiary support for the conclusion that the negotiated consideration is within the range of fairness.
C. Role of the Financial Advisor and Fairness Opinion Under Delaware Law
Delaware courts have developed a well-established body of case law examining the role and reliability of fairness opinions in the context of fiduciary duty litigation. In reviewing a fairness opinion, courts typically examine the following factors:
(i) Independence of the Financial Advisor. Courts assess whether the financial advisor was independent and free from conflicts of interest that might have influenced its analysis or conclusions. Relevant considerations include the advisor's prior and existing relationships with the parties to the transaction, the advisor's fee structure (particularly the presence of contingent fees), and any equity or debt positions held by the advisor in the relevant parties. See, e.g., In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813 (Del. Ch. 2011) (criticizing the role of a conflicted financial advisor in an MBO transaction).
(ii) Adequacy of Information. Courts examine whether the financial advisor was provided with, and appropriately relied upon, adequate and accurate information in preparing its opinion. This includes the quality and completeness of the financial, operational, and clinical data provided by the target company, as well as the advisor's efforts to review and, where appropriate, independently assess that information.
(iii) Methodologies Employed. Courts assess whether the valuation methodologies used by the financial advisor are recognized, appropriate for the type of company and transaction at issue, and applied in a competent and thorough manner. The use of multiple methodologies and appropriate cross-validation is generally viewed favorably by the courts.
(iv) Consistency of the Opinion with Underlying Analyses. Courts scrutinize whether the fairness conclusion is consistent with and supported by the advisor's own valuation analyses. An opinion that concludes that a price is fair when the price falls outside the advisor's own valuation ranges will be viewed with skepticism and may undermine the reliability of the opinion.
(v) Adequate Disclosure to the Board or Committee. Courts examine whether the board or committee was adequately informed of the bases, assumptions, and limitations of the fairness opinion. The directors must understand the opinion well enough to exercise their own independent judgment in reliance thereon.
It is well established under Delaware law that the fairness opinion is advisory in nature and does not substitute for the exercise of fiduciary judgment by the board or committee. See Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989). The Special Committee is not required to accept the fairness opinion, nor is the Special Committee absolved of its fiduciary duties simply because a fairness opinion has been obtained. Rather, the opinion is one factor — albeit an important one — that the Special Committee should consider as part of its overall deliberative process.
Delaware courts have been critical of fairness opinions in cases where the opinion was based on flawed or incomplete data, where the advisor harbored undisclosed conflicts of interest, or where the valuation methodologies employed diverged materially from industry norms or standard financial practice. See, e.g., In re Emerging Commc'ns, Inc. S'holders Litig., 2004 WL 1305745 (Del. Ch. June 4, 2004) (questioning the reliability of a fairness opinion where the financial advisor had limited familiarity with the target's industry and relied on questionable comparable company data). These precedents underscore the importance of ensuring that the Thorngate Opinion is grounded in sound methodology, based on reliable data, and delivered by an advisor that is genuinely independent.
D. SEC Disclosure Requirements
In addition to the Delaware fiduciary duty considerations, the fairness opinion is subject to disclosure requirements under the federal securities laws. The relevant regulatory provisions are as follows:
Item 14(b)(6) of Schedule 14A. Item 14(b)(6) of Schedule 14A under the Securities Exchange Act of 1934 requires that, where a proxy statement solicits votes in connection with a transaction involving a merger or acquisition, the proxy statement must disclose any report, opinion, or appraisal materially relating to the transaction. Where a fairness opinion has been obtained, the proxy statement must include a summary of the financial advisor's analyses, the material assumptions underlying the analyses, and any material relationships between the financial advisor and the company or its affiliates. The proxy statement must also disclose the financial advisor's fee arrangement, including any contingent fee components.
Item 1015(b) of Regulation M-A. Item 1015(b) of Regulation M-A requires disclosure of the basis for any fairness determination made in connection with a Rule 13e-3 transaction or a going-private transaction. While the Transaction at issue here is not a going-private transaction, Item 1015(b) is nonetheless relevant as a guide to best practices for disclosure of fairness opinions in conflicted transactions. Item 1015(b) requires disclosure of the material factors upon which the belief as to fairness is based and, to the extent practicable, the weight given to each factor.
Accuracy and Completeness. Under Rule 14a-9 under the Exchange Act, a proxy statement may not contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading. This anti-fraud standard applies to the disclosure of the fairness opinion and the summary thereof in the proxy statement. The description of the fairness opinion, including the valuation methodologies, key inputs, valuation ranges, and fairness conclusion, must be accurate, complete, and not misleading.
Staff Guidance on Fee Disclosure. SEC staff has, through comment letters issued in connection with the review of proxy statements involving conflicted transactions, emphasized the importance of full and transparent disclosure of the financial advisor's fee structure, particularly where the fee includes a contingent component. The staff has noted that investors should be informed of any arrangement that could create an incentive for the advisor to deliver a favorable opinion. Full disclosure of the fee structure — including the aggregate advisory fee, the allocation between contingent and non-contingent components, the existence and amount of any retainer, and expense reimbursement arrangements — is essential to satisfy the staff's expectations and to provide stockholders with the information necessary to evaluate the reliability of the fairness opinion.
IV. Review of Thorngate Partners Fairness Opinion — Substance and Methodology
A. Overview of the Opinion
The Opinion was delivered by Thorngate Partners LLC to the Special Committee on November 15, 2023, during a meeting of the Special Committee at which all three members were present, together with Calderwood & Harkness counsel and the Thorngate deal team led by Gregory Ashford, Managing Director.
The concluding language of the Opinion provides that, based upon and subject to the assumptions, qualifications, and limitations set forth therein, the aggregate consideration of $925,000,000 to be paid by Penterra in the Transaction is "fair, from a financial point of view," to Penterra Pharmaceuticals Corp. This formulation is standard for fairness opinions in comparable M&A transactions and appropriately frames the fairness conclusion as a financial determination (as distinguished from a legal, regulatory, or strategic determination).
Several important features of the Opinion's scope warrant emphasis:
• The Opinion addresses only the fairness of the consideration to Penterra as the acquiror. It does not opine on the fairness of the consideration to Caliston, to the stockholders of Caliston, or to any other party, including Dr. Hale in his individual capacity as a Caliston equity holder.
• The Opinion addresses only the Base Consideration of $925,000,000 and does not separately address the CVRs or the maximum aggregate transaction value of $1,050,000,000 (i.e., the Base Consideration plus the full CVR payout). This is an important limitation that must be disclosed in the proxy statement and is discussed further in Section VII of this memorandum.
• The Opinion is rendered as of its date (November 15, 2023) and is based on conditions, facts, and circumstances as they existed on that date. Thorngate has no obligation to update, revise, or reaffirm the Opinion to reflect subsequent developments.
B. Valuation Methodologies Employed
Thorngate employed four distinct valuation methodologies in arriving at its fairness conclusion. Each methodology is discussed in detail below.
1. Discounted Cash Flow Analysis — CLT-4019 Only
The first DCF analysis focused exclusively on CLT-4019, Caliston's lead clinical-stage asset — a selective CDK4/6 inhibitor currently in Phase 2b clinical development for the treatment of HR+/HER2– metastatic breast cancer (IND 158429). This methodology represents the most conservative of the valuation approaches employed by Thorngate, as it excludes any value attributable to Caliston's preclinical pipeline candidates.
Key parameters and assumptions of the CLT-4019-only DCF analysis include:
• Valuation Range: $780,000,000 to $1,020,000,000, with a midpoint of $900,000,000.
• Weighted Average Cost of Capital (WACC): 12.5%, applied as the discount rate to projected free cash flows. This rate reflects the risk profile of a clinical-stage biopharmaceutical company with a single lead asset in Phase 2b development, and incorporates an equity risk premium, a size premium, and an industry-specific risk adjustment.
• Terminal Growth Rate: 2.0%, applied to the terminal year cash flows to estimate the perpetuity value of CLT-4019 cash flows beyond the explicit projection period. The terminal growth rate of 2.0% is conservative and reflects the expectation that CLT-4019's revenue growth will moderate to approximately the rate of GDP growth over the long term, accounting for potential generic competition and the eventual expiration of market exclusivity.
• Revenue Projections: Based on Caliston management's financial projections for CLT-4019, as reviewed, discussed, and in certain respects adjusted by Thorngate. The revenue projections assume successful completion of Phase 2b clinical trials (with topline data expected in Q4 2023), followed by progression through Phase 3 clinical development, FDA regulatory review, and commercial launch. Peak year revenue estimates were evaluated in the context of the addressable market for HR+/HER2– metastatic breast cancer therapies and competitive dynamics within the CDK4/6 inhibitor class.
• Risk Adjustments: Thorngate applied probability-weighted risk adjustments to account for the clinical and regulatory uncertainty inherent in a Phase 2b-stage asset. These adjustments reflect the probability of successful completion of each remaining development stage (Phase 2b, Phase 3, FDA review, and commercial launch), as well as the risk of clinical failure, adverse regulatory outcomes, or competitive displacement. This risk-adjusted NPV ("rNPV") methodology is the standard approach for valuing clinical-stage biopharmaceutical assets.
• Cash Burn: Thorngate considered Caliston's current cash burn rate (approximately $78,400,000 in net cash used in operating activities for FY2022) and its cash on hand ($112,600,000 as of March 31, 2023) in assessing Caliston's ability to fund continued development of CLT-4019 through key value-creating milestones.
2. Discounted Cash Flow Analysis — Full Pipeline (Risk-Adjusted NPV)
The second DCF analysis expanded the valuation framework to include Caliston's full pipeline, encompassing CLT-4019 as well as two preclinical-stage candidates: CLT-5227 and CLT-6034. This methodology provides a more comprehensive view of Caliston's total enterprise value, but necessarily involves a wider range of outcomes given the early stage of the preclinical assets and the attendant uncertainty regarding their likelihood of eventual clinical and commercial success.
Key parameters and assumptions of the full-pipeline DCF analysis include:
• Valuation Range: $870,000,000 to $1,180,000,000, with a midpoint of $1,025,000,000.
• Probability-Weighted Success Factors: Thorngate applied stage-specific probability-of-success factors to each pipeline asset, reflecting the historical success rates for biopharmaceutical assets at each stage of development. For CLT-4019 (Phase 2b), the probability-of-success adjustments were consistent with those used in the CLT-4019-only DCF analysis. For CLT-5227 and CLT-6034 (both preclinical), significantly lower probability-of-success factors were applied, reflecting the inherently higher attrition rates associated with preclinical-stage compounds.
• Wider Valuation Range: The broader valuation range ($870,000,000 to $1,180,000,000) reflects the greater uncertainty associated with the preclinical candidates. As Thorngate noted in its presentation, the inclusion of preclinical-stage assets introduces additional speculative elements into the valuation, and the value attributable to these assets is highly sensitive to assumptions regarding probability of success, timeline to commercialization, and estimated peak revenues.
3. Comparable Transactions Analysis
Thorngate's comparable transactions analysis benchmarked the proposed Transaction against a set of seven precedent transactions involving the acquisition of oncology-focused biopharmaceutical companies at clinical-stage or early-commercial stages of development. This methodology provides a market-based reference point for evaluating the reasonableness of the Transaction price by reference to the valuations implied by comparable transactions in the relevant sector.
Key aspects of the comparable transactions analysis include:
• Valuation Range: $820,000,000 to $1,050,000,000.
• Precedent Transactions: The seven transactions selected by Thorngate were identified based on criteria including therapeutic area (oncology), stage of development (clinical-stage or early-commercial), transaction size, and transaction timing (completed within the past five years). Thorngate selected transactions that were sufficiently comparable in terms of the target company's profile and the nature of the acquisition to provide meaningful valuation benchmarks.
• Valuation Metrics: Thorngate applied enterprise value to estimated peak sales multiples and enterprise value to pipeline value metrics derived from the precedent transactions to Caliston's financial and clinical profile. Adjustments were made to account for differences in stage of development (e.g., Phase 2 vs. Phase 3), therapeutic area specifics (e.g., competitive positioning within the CDK4/6 inhibitor landscape), and deal structure (e.g., the presence or absence of contingent consideration in the precedent transactions).
4. Premiums Paid Analysis
Thorngate's premiums paid analysis evaluated the Transaction premium relative to Caliston's most recent private financing benchmark. Because Caliston is a privately held company without publicly traded equity, the premiums paid analysis necessarily relied on the Series C financing round as the reference valuation, rather than a public market stock price.
Key aspects of the premiums paid analysis include:
• Premium Range: 30% to 45% over the last private financing round, applied to comparable private-to-public and private-to-private acquisition premiums in the biopharmaceutical sector.
• Reference Valuation: The Caliston Series C preferred stock financing, completed in October 2021, which valued Caliston at $680,000,000 on a post-money basis.
• Implied Value Range: Applying the 30% to 45% premium range to the $680,000,000 Series C post-money valuation yields an implied value range of $884,000,000 to $986,000,000.
• Intervening Developments: Thorngate appropriately noted that the Series C financing occurred approximately two years prior to the date of the fairness opinion. During the intervening period, Caliston achieved significant clinical progress, including the enrollment of patients in Phase 2b clinical trials for CLT-4019. Thorngate considered these intervening developments, as well as changes in broader market conditions and the biotechnology financing environment, in evaluating the appropriateness of the Series C valuation as a benchmark.
C. Summary Valuation Matrix
The following table summarizes the valuation ranges generated by each of Thorngate's four analytical methodologies, as well as the negotiated Transaction price:
As reflected in the table above, the negotiated Base Consideration of $925,000,000 falls within the valuation range of each of the four methodologies employed by Thorngate. Moreover, the Base Consideration is at or near the midpoint of each range, which is a strong indication that the negotiated price is within the zone of fairness from a financial point of view. The additional CVR consideration of $125,000,000 — which is not included in the scope of the fairness opinion — provides further upside protection for Penterra, as the total potential consideration of $1,050,000,000 would be payable only upon the achievement of an FDA approval milestone that would be expected to create substantial value for Penterra.
D. Assessment of Methodology Adequacy
Based on our review of the Thorngate Opinion and the supporting valuation analyses, we assess the adequacy of the methodologies as follows:
Methodological Appropriateness. All four valuation methodologies employed by Thorngate are recognized and standard methodologies for the valuation of clinical-stage biopharmaceutical companies. The use of risk-adjusted DCF analysis (both CLT-4019-only and full-pipeline approaches) is particularly appropriate for a pre-revenue company like Caliston, where the company's value is derived primarily from the expected future cash flows of its development-stage pipeline assets. The comparable transactions and premiums paid analyses provide important market-based reference points that complement the intrinsic valuation provided by the DCF models.
Multiple Methodologies. The use of four distinct valuation methodologies provides the analytical rigor and cross-validation that Delaware courts expect in fairness opinion analyses. By employing multiple methodologies that approach valuation from different analytical perspectives, Thorngate has reduced the risk that its fairness conclusion is dependent on a single set of assumptions or a single analytical framework.
DCF Assumptions. The DCF analyses appropriately employ risk-adjusted NPV methodology, which is the industry-standard approach for valuing clinical-stage biopharmaceutical assets. The WACC of 12.5% is within the range typically applied to specialty pharmaceutical and clinical-stage biotechnology targets, reflecting the risk profile of a company with a Phase 2b lead asset and preclinical pipeline candidates. The terminal growth rate of 2.0% is conservative and defensible, consistent with long-term GDP growth expectations and the anticipated maturation of CLT-4019's commercial lifecycle. The revenue projections, which are based on Caliston management forecasts as reviewed and adjusted by Thorngate, reflect reasonable assumptions regarding the addressable market, competitive dynamics, and probability of clinical and regulatory success.
Comparable Transactions. The seven precedent transactions cited in the comparable transactions analysis are sufficiently comparable in terms of therapeutic area (oncology), development stage (clinical and early-commercial), and transaction timing (completed within the past five years) to provide meaningful valuation benchmarks. Thorngate's adjustments for differences in development stage, therapeutic area specifics, and deal structure are appropriate and consistent with standard valuation practice.
Premiums Paid. The premiums paid analysis appropriately acknowledges and accounts for the age of the Series C benchmark (approximately two years) and the significant clinical and commercial developments that have occurred during the intervening period. While the staleness of the benchmark introduces some analytical uncertainty (discussed further in Section IX.B below), Thorngate's use of the premiums paid analysis as one of four methodologies, rather than as the sole or primary valuation approach, mitigates this concern.
Overall Assessment. The valuation methodologies employed by Thorngate are adequate, appropriate, and consistent with the standards expected by Delaware courts and the SEC for fairness opinions in comparable M&A transactions. The analyses are competently executed, internally consistent, and provide a robust foundation for Thorngate's fairness conclusion.
V. Independence Confirmations
A. Thorngate's Representation of Independence
In the Opinion, Thorngate makes the following representations regarding its independence:
• Thorngate has confirmed that it has no material relationship with Penterra, Caliston, Dr. Marcus Hale, or any of their respective affiliates that would impair its independence or its ability to render an objective and unbiased opinion.
• Thorngate has confirmed that neither it nor any of its affiliates hold any equity or debt securities of Penterra or Caliston, either directly or through any investment fund, account, or other vehicle managed or controlled by Thorngate.
• Thorngate has confirmed that it has not provided investment banking services to Penterra, Caliston, or any Caliston stockholder — including Ridgeline Ventures, LP and Meridian Life Sciences Fund III, LP, each of which is a significant institutional investor in Caliston — in the past two years.
These representations are unqualified and are consistent with the independence standards expected by Delaware courts and the SEC for financial advisors delivering fairness opinions in conflicted transactions. We have not identified any facts or circumstances that would call into question the accuracy or completeness of these representations, and we have confirmed through independent research that Thorngate has no publicly disclosed relationships with any of the relevant parties that would contradict these representations.
B. Fee Structure Independence Considerations
As discussed in Section II.C above, Thorngate's fee structure includes a significant contingent component: $1,250,000 of the $2,500,000 aggregate advisory fee is payable upon the closing of the Transaction or the termination of the Merger Agreement (regardless of whether the Transaction is consummated). The remaining $1,250,000 was payable upon delivery of the fairness opinion.
Delaware courts have noted that contingent fee arrangements — particularly those in which a substantial portion of the advisor's compensation is contingent upon the consummation of the transaction — can create a potential appearance of conflict, insofar as the advisor may have a financial incentive to deliver a favorable opinion that facilitates the closing of the transaction. See, e.g., In re El Paso Corp. S'holder Litig., 41 A.3d 432 (Del. Ch. 2012) (noting the "troubling" nature of financial advisor conflicts, including the advisor's interest in the completion of the transaction). However, Delaware courts have also generally accepted contingent fee arrangements as standard market practice in fairness opinion engagements, provided that the fee structure is adequately disclosed to the board or committee and to stockholders in the proxy statement. See In re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975 (Del. Ch. 2005).
In the present case, several features of the fee arrangement mitigate any potential concern:
• The contingent component is payable upon the closing or termination of the Merger Agreement, meaning that Thorngate will receive the fee regardless of whether the Transaction is ultimately consummated. This structure reduces the incentive for Thorngate to favor a particular outcome.
• The non-refundable $500,000 retainer (credited against the final fee) was specifically designed to provide Thorngate with a baseline level of compensation that would not be at risk regardless of the outcome, thereby ensuring Thorngate's willingness to deliver a negative opinion if its analyses so warranted.
• The aggregate fee of $2,500,000 is reasonable and within market norms for fairness opinion engagements of this size and complexity.
C&H Assessment. We conclude that the fee structure is consistent with market practice, is adequately disclosed in the Opinion, and does not raise a material independence concern. We note, however, that the fee structure must be fully and transparently described in the proxy statement, and we recommend that the proxy statement include a statement that the Special Committee considered the fee structure and determined that it did not impair Thorngate's independence. This recommendation is discussed further in Section VIII below.
C. No Prior Engagement by Alcott, Barringer & Cole LLP
Thorngate was selected and engaged by the Special Committee independently, without involvement by Penterra management, Dr. Hale, or Alcott, Barringer & Cole LLP ("ABC"), which serves as Penterra's regular outside corporate counsel under the leadership of Victoria Shen. Consistent with the Project Coriander information barrier policy, ABC has been recused from advising the Special Committee on any matters relating to the Transaction, and all legal advice to the Special Committee has been provided exclusively by Calderwood & Harkness LLP.
Thorngate's engagement was initiated by the Special Committee through Calderwood & Harkness, which solicited proposals from three independent financial advisory firms before recommending Thorngate to the Special Committee. The Special Committee selected Thorngate based on, among other factors, the firm's experience in clinical-stage biopharmaceutical valuations, the qualifications of the deal team led by Gregory Ashford, the absence of any prior relationships with the relevant parties, and the competitiveness of the proposed fee arrangement.
This selection process reinforces the independence of the financial advisory engagement and provides further support for the conclusion that the fairness opinion was delivered by a genuinely independent advisor.
VI. Consistency with Preliminary Valuation Analyses (August 3, 2023)
A. Comparison of Preliminary and Final Analyses
As part of our review, we compared the valuation ranges and methodological approaches presented in Thorngate's preliminary valuation analyses, delivered to the Special Committee on August 3, 2023, with the corresponding ranges and methodologies reflected in the final fairness opinion delivered on November 15, 2023. This comparison is important because material unexplained deviations between preliminary and final analyses could undermine the reliability of the fairness opinion or suggest that the final analyses were tailored to support a predetermined conclusion.
The preliminary valuation analyses employed the same four methodologies as the final opinion: (i) DCF — CLT-4019 only; (ii) DCF — full pipeline (risk-adjusted NPV); (iii) comparable transactions analysis; and (iv) premiums paid analysis. The valuation ranges presented in the preliminary analyses were as follows:
As the table reflects, the final valuation ranges are consistent with, and represent modest upward adjustments from, the preliminary ranges across all four methodologies. The adjustments range from approximately 1.5% to 4.0% at both the low and high ends of each range, which falls well within the margin of adjustment that would be expected given the passage of approximately three and a half months between the preliminary and final analyses.
B. Assessment of Material Changes
We assessed whether any material changes in Caliston's clinical program status, cash position, competitive landscape, or broader market conditions occurred between the delivery of the preliminary analyses on August 3, 2023, and the delivery of the final opinion on November 15, 2023, that would warrant the modest upward adjustments observed or that might call into question the consistency of the two sets of analyses.
Our assessment identified the following developments during the interim period:
• Caliston continued to enroll patients in the Phase 2b clinical trial for CLT-4019, and enrollment progressed in line with the timelines presented in the Caliston management projections. No adverse clinical events or regulatory developments were reported during this period.
• Market conditions in the biotechnology sector remained broadly stable during the August-November 2023 period, with no material macroeconomic shocks or sector-specific disruptions that would have significantly altered the valuation framework.
• The market check directed by the Special Committee on August 22, 2023, and completed on September 14, 2023, confirmed the absence of clearly superior alternative acquisition targets, providing additional support for the reasonableness of the negotiated price.
• Thorngate conducted additional due diligence during the interim period, including review of updated financial projections, refinement of clinical probability-of-success assumptions based on additional data, and analysis of recently completed comparable transactions.
Based on this assessment, we conclude that no material changes occurred during the interim period that would call into question the consistency of the preliminary and final analyses. The modest upward adjustments in the final valuation ranges are adequately explained by the combination of continued clinical progress, additional due diligence, and the incorporation of recent comparable transaction data.
Negotiated Price Within Preliminary Ranges. We note that the negotiated Base Consideration of $925,000,000 falls within the valuation ranges presented in the preliminary analyses across all four methodologies. This is significant because it demonstrates that the negotiated price was anchored to the financial framework presented to the Special Committee at the outset of the negotiation process, rather than being reverse-engineered to fit a post hoc fairness conclusion.
C. C&H Conclusion on Consistency
Based on our comparison of the preliminary and final valuation analyses, we conclude that the final fairness opinion is materially consistent with the preliminary valuation analyses delivered on August 3, 2023. The methodologies employed are identical, the valuation ranges reflect only modest and well-explained adjustments, and the negotiated price falls within both the preliminary and final ranges across all four methodologies. This consistency supports the integrity of the financial advisory process and the Special Committee's reliance on Thorngate's work product throughout the evaluation and negotiation of the Transaction.
VII. Assumptions and Limitations Disclosed
A. Key Assumptions
The Thorngate Opinion sets forth a series of assumptions upon which the fairness conclusion is based. Our review of these assumptions is as follows:
Reliance on Caliston Management Projections. Thorngate relied on financial projections prepared by Caliston's management, including revenue forecasts for CLT-4019 and the broader pipeline, expense projections, and cash flow estimates. Thorngate states in the Opinion that it reviewed these projections with the Special Committee and Calderwood & Harkness, and that it made certain adjustments to the projections based on its own independent assessment of the reasonableness of the underlying assumptions. Reliance on management projections is standard practice in fairness opinion engagements, as the financial advisor is typically not in a position to independently generate bottom-up projections for a target company's business. The important safeguard is that the advisor reviews, discusses, and, where appropriate, adjusts the projections rather than accepting them uncritically — a standard that Thorngate appears to have met in this engagement.
Assumed Accuracy of Financial Information. Thorngate assumed the accuracy and completeness of the financial information provided by Caliston (audited by Brentmoor Advisors LLP) and by Penterra (audited by Harwick & Tolliver LLP). Thorngate did not independently verify the financial data. This assumption is standard and appropriate, as the financial advisor is not engaged to perform an audit or independent verification of the parties' financial statements.
Consummation of the Merger. Thorngate assumed that the merger will be consummated in accordance with the terms of the Merger Agreement, without waiver or modification of any material conditions to closing. This assumption is standard and reflects the fact that the fairness opinion addresses the financial fairness of the Transaction as currently structured, rather than the risk of non-consummation.
Non-Verification of Non-Financial Information. Thorngate states that it did not independently verify legal, regulatory, or tax information relating to Caliston, Penterra, or the Transaction. Thorngate relied on the representations and warranties set forth in the Merger Agreement and on the work of the parties' respective legal counsel.
Regulatory Approvals. Thorngate assumed that all required regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), will be obtained without the imposition of material adverse conditions, divestitures, or other remedial measures that would alter the economic terms or value of the Transaction.
B. Limitations
The Opinion includes a series of limitations on its scope that are important for the Special Committee to understand:
Scope Limited to Fairness to Penterra. The Opinion addresses only the fairness of the Base Consideration to Penterra as the acquiror. It does not address the fairness of the Transaction to any other party, including the stockholders of Caliston or Dr. Hale in his individual capacity as a Caliston equity holder.
No Opinion on Business Decision. The Opinion does not address the underlying business decision to pursue the acquisition of Caliston, the relative merits of the Transaction as compared to alternative strategic options available to Penterra (including organic growth, alternative acquisitions, or the status quo), or the decision to structure the Transaction as a one-step merger under DGCL §251 rather than as a tender offer, stock-for-stock exchange, or other alternative structure.
Exclusion of CVRs. The Opinion does not address the CVR component of the Transaction consideration ($125,000,000 upon FDA approval of CLT-4019 by December 31, 2026) or the maximum aggregate transaction value of $1,050,000,000 (Base Consideration plus full CVR payout). This limitation is significant and must be clearly disclosed in the proxy statement, as discussed in Section VIII below.
Opinion as of a Specific Date. The Opinion is rendered as of its date — November 15, 2023 — and reflects conditions, market data, and other facts and circumstances as they existed on that date. Thorngate has no obligation to update, revise, or reaffirm the Opinion to reflect any subsequent developments, including changes in market conditions, clinical developments relating to CLT-4019, regulatory actions, or changes in the financial condition of Penterra or Caliston.
No Stockholder Recommendation. The Opinion does not constitute a recommendation to any stockholder of Penterra or Caliston as to how such stockholder should vote or act with respect to the Transaction. The Opinion is directed solely to the Special Committee and is intended for the Special Committee's use in connection with its evaluation of the Transaction.
C. C&H Assessment of Assumptions and Limitations
We assess the assumptions and limitations set forth