PRIVILEGED & CONFIDENTIAL PREPARED AT THE DIRECTION OF COUNSEL ATTORNEY-CLIENT PRIVILEGE / WORK PRODUCT DOCTRINE
CALDERWOOD & HARKNESS LLP 1700 Market Street, Suite 3400 Philadelphia, PA 19103
MEMORANDUM
August 4, 2023
TO: Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp.
Diane Prescott (Chair) James Okafor Dr. Helen Ng
FROM: Sophie Tremblay, Lead Associate, Calderwood & Harkness LLP
REVIEWED BY: Renata Vasquez, Responsible Partner, Calderwood & Harkness LLP
RE: Summary of Preliminary Valuation Analyses Presented by Thorngate Partners LLC — Project Coriander
C&H Matter No.: 1025-00006
Thorngate Engagement Ref.: 1018-00003
This memorandum is protected by the attorney-client privilege and work product doctrine. It is prepared by Calderwood & Harkness LLP for the sole use of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. and should not be disclosed to any person outside the Special Committee without the prior written consent of the undersigned. This memorandum should not be shared with Dr. Marcus Hale, Angela Whitmore, Raymond Tusk, or any other person outside the information barrier established pursuant to the Independence Protocol & Information Barrier Policy dated June 2, 2023.
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I. Purpose and Background
This memorandum summarizes the preliminary valuation analyses of Caliston BioSciences, Inc. ("Caliston" or the "Target") presented by Thorngate Partners LLC ("Thorngate") to the Special Committee (the "Committee") of the Board of Directors of Penterra Pharmaceuticals Corp. ("Penterra" or the "Company") (NYSE: PPHR) at the Special Committee meeting held on August 3, 2023.
Thorngate was engaged as the independent financial advisor to the Special Committee effective June 16, 2023, pursuant to an engagement letter dated June 15, 2023, and countersigned by the Committee on June 16, 2023. The engagement letter provides for an aggregate advisory fee of $2,500,000, structured as follows: (i) fifty percent (50%) of such fee, or $1,250,000, payable upon delivery by Thorngate of a formal fairness opinion to the Committee, and (ii) fifty percent (50%) of such fee, or $1,250,000, payable upon the earlier of the closing or termination of the transaction. The engagement letter also provides for reimbursement of reasonable out-of-pocket expenses. A non-refundable retainer of $500,000 was paid to Thorngate upon execution of the engagement letter; such retainer is creditable against the final aggregate fee. The fee structure was reviewed and approved by the Committee at its meeting on June 14, 2023, and was determined by the Committee to be consistent with market practice for engagements of this nature and to be structured so as not to create an impermissible incentive for Thorngate to recommend any particular outcome.
The August 3, 2023 presentation was led by Gregory Ashford, Managing Director at Thorngate Partners LLC, 590 Madison Avenue, 22nd Floor, New York, NY 10022, and attended in person by all three members of the Special Committee. Also in attendance were Renata Vasquez and Sophie Tremblay of Calderwood & Harkness LLP, serving as counsel to the Special Committee. No members of Penterra management or Caliston management were present during the presentation.
This memorandum is prepared for the Special Committee's records to document the substance of the preliminary analyses presented by Thorngate and to facilitate the Committee's ongoing evaluation of the proposed acquisition of Caliston by Penterra. As the Committee is aware, the proposed transaction constitutes a related-party transaction because Penterra's Chairman and Chief Executive Officer, Dr. Marcus Hale, holds a 28.5% equity interest in Caliston. The existence of this conflict of interest was the basis for the formation of the Special Committee on June 2, 2023, and for the Committee's retention of independent legal counsel and an independent financial advisor.
It is important to emphasize that the analyses summarized herein are preliminary in nature. Thorngate has not rendered a fairness opinion—whether formal or informal—at this stage. The preliminary analyses are intended to inform the Committee's evaluation of the proposed transaction and to establish a framework for the Committee's negotiating posture. Final analyses and a formal fairness opinion will follow after further due diligence has been completed, additional data room materials have been reviewed, definitive transaction terms have been negotiated, and Thorngate has conducted the further analyses described in Section X below.
II. Transaction Overview
A. Proposed Transaction Structure
Penterra proposes to acquire 100% of the outstanding equity of Caliston BioSciences, Inc. via a one-step merger pursuant to which a newly formed, wholly owned subsidiary of Penterra would merge with and into Caliston, with Caliston surviving as a wholly owned subsidiary of Penterra. The transaction would be structured as a reverse triangular merger under Delaware law, subject to the approval of the holders of a majority of Caliston's outstanding equity (including preferred stock voting on an as-converted basis). As of the date of this memorandum, definitive transaction documentation has not been agreed upon, and the material terms of the merger agreement remain under discussion.
B. Caliston Company Profile
Caliston BioSciences, Inc. is a Delaware-incorporated, privately held, clinical-stage biopharmaceutical company headquartered at 88 Harbor Point Road, Cambridge, Massachusetts 02142. The company was founded in 2017 by Dr. Nadia Sorensen and Dr. Raj Malhotra, who serve as Chief Executive Officer and Chief Scientific Officer, respectively. Caliston's research and development programs focus on the development of novel kinase inhibitors for the treatment of solid tumors, with a particular emphasis on breast cancer and related oncology indications.
C. Caliston Lead Asset — CLT-4019
Caliston's lead development-stage asset is CLT-4019, a selective cyclin-dependent kinase 4/6 ("CDK4/6") inhibitor being developed for the treatment of hormone receptor-positive, human epidermal growth factor receptor 2-negative ("HR+/HER2–") metastatic breast cancer. An Investigational New Drug ("IND") application, IND No. 158429, was filed with the U.S. Food and Drug Administration ("FDA") in March 2020, and clinical development has advanced through Phase 1 and Phase 2a trials. CLT-4019 is currently in a Phase 2b clinical trial, and topline data from the Phase 2b trial are expected in the fourth quarter of 2023. The clinical profile of CLT-4019, including early-stage efficacy signals and safety data, was presented to the Committee in detail during the Caliston management presentation on July 19, 2023. CLT-4019 targets a well-validated molecular pathway and, if approved, would compete with existing CDK4/6 inhibitors, including palbociclib (Ibrance®), ribociclib (Kisqali®), and abemaciclib (Verzenio®), although Caliston management has asserted that CLT-4019's selectivity profile may confer differentiated efficacy and tolerability advantages.
D. Caliston Additional Pipeline
In addition to CLT-4019, Caliston's pipeline includes two preclinical-stage compounds:
(i) CLT-5227, a next-generation kinase inhibitor targeting an undisclosed molecular target in non-small cell lung cancer, currently in lead optimization; and
(ii) CLT-6034, a dual kinase inhibitor being developed for potential application in colorectal cancer, currently in preclinical pharmacology studies.
Both CLT-5227 and CLT-6034 are at early stages of development. Neither compound has an IND application on file, and projected timelines for clinical entry are uncertain. Thorngate's treatment of these assets in its valuation analyses is discussed in Section V below.
E. Caliston Financial Profile
Caliston is a pre-commercial, clinical-stage company with no product revenue. Key financial metrics as of and for the periods indicated are as follows:
• FY2022 Revenue: $0 (pre-commercial stage)
• FY2022 Net Cash Burn: $78.4 million (comprising R&D expenditures, G&A expenses, and net working capital changes)
• Cash and Cash Equivalents (as of March 31, 2023): $112.6 million
• Estimated Cash Runway: Through Q1 2025, based on current burn rate projections provided by Caliston management
• Headcount: Approximately 94 full-time employees as of March 31, 2023
F. Caliston Capitalization
Caliston has raised total equity capital of approximately $347 million to date through a series of private financing rounds, as summarized below:
• Seed Round: Undisclosed amount (2017)
• Series A: Undisclosed amount (2018)
• Series B: Undisclosed amount (2019)
• Series C: Completed October 2021, at a post-money valuation of $680 million
The Series C round, which represents the most recent private valuation benchmark, was led by Meridian Life Sciences Fund III, LP and included participation from existing investors, including Ridgeline Ventures, LP. The Series C post-money valuation of $680 million serves as an important reference point for several of Thorngate's valuation methodologies, as discussed below.
G. Caliston Key Stockholders
The following table summarizes the equity ownership of Caliston's principal stockholders as of the date of this memorandum:
Dr. Hale's 28.5% equity interest in Caliston, acquired through a personal investment of approximately $42 million, constitutes the conflict of interest that necessitated the formation of the Special Committee and the retention of independent advisors.
H. Penterra Financial Context
For context, the following summary financial information regarding Penterra is provided:
• FY2022 Revenue: $1.836 billion
• FY2022 EBITDA: $412 million
• FY2022 Net Income: $247 million
• Market Capitalization (as of June 1, 2023): Approximately $4.72 billion
• Common Shares Outstanding: Approximately 121.4 million shares
• Cash and Cash Equivalents: $892 million
• Total Debt: $1.35 billion
Penterra is a publicly traded, commercial-stage specialty pharmaceutical company with a diversified portfolio of oncology products. The proposed acquisition of Caliston would represent a significant capital deployment for the Company and, given the pre-commercial nature of Caliston's business, would be expected to be dilutive to Penterra's near-term earnings.
I. Proposed Consideration
As indicated by Dr. Hale's initial proposal communicated to the Board on May 28, 2023, the proposed aggregate equity value for the acquisition of 100% of Caliston's outstanding equity is in the vicinity of $925 million. As of the date of Thorngate's presentation, definitive terms had not been agreed, and the $925 million figure represents the starting point advanced by management rather than a negotiated price. The Special Committee has not endorsed any particular price. Thorngate's analyses are designed to inform the Committee's evaluation of the proposed transaction and to establish a basis for the Committee's future negotiation posture.
J. Potential Contingent Value Right (CVR) Component
During preliminary discussions between Penterra management and Caliston representatives, the parties have discussed the potential inclusion of a contingent value right ("CVR") tied to FDA approval of CLT-4019. The CVR, as preliminarily discussed, would entitle Caliston stockholders to receive additional consideration upon the achievement of a specified regulatory milestone. The CVR is addressed in greater detail in Section IX of this memorandum. For purposes of Thorngate's core valuation analyses, the CVR was not included in the base consideration; the core analyses focus on the upfront equity value of $925 million.
III. Summary of Valuation Methodologies Employed
At the August 3, 2023 meeting, Thorngate presented the results of four principal valuation methodologies applied to Caliston in its preliminary analyses:
1. discounted Cash Flow ("DCF") Analysis — CLT-4019 Only. A risk-adjusted discounted cash flow analysis of projected cash flows attributable solely to CLT-4019, Caliston's lead Phase 2b clinical-stage asset.
2. discounted Cash Flow ("DCF") Analysis — Full Pipeline (Risk-Adjusted NPV). A risk-adjusted net present value ("rNPV") analysis applied to Caliston's full pipeline, including CLT-4019, CLT-5227, and CLT-6034, with each asset modeled separately and then aggregated.
3. Comparable Transactions Analysis. An analysis of selected precedent merger and acquisition transactions involving clinical-stage oncology biopharmaceutical companies, with relevant multiples and benchmarks applied to Caliston's profile.
4. Premiums Paid Analysis. An analysis of premiums paid in acquisitions of private biotechnology companies relative to their most recent private financing round valuations, applied to Caliston's Series C post-money valuation.
Each of these methodologies is summarized in detail in Sections IV through VII below, including the key assumptions, inputs, and resulting valuation ranges presented by Thorngate.
In preparing its analyses, Thorngate confirmed that it relied upon the following categories of information and sources:
• Publicly available information regarding Penterra, the CDK4/6 inhibitor competitive landscape, and the oncology biopharmaceutical sector generally;
• Caliston data room materials, which were first received on June 28, 2023, from Whitfield Graves LLP, acting as counsel to Caliston, and which include Caliston's audited and unaudited financial statements, clinical trial protocols and interim results, intellectual property summaries, and material contracts;
• The Caliston management presentation delivered on July 19, 2023, by Dr. Nadia Sorensen and Dr. Raj Malhotra, which included detailed projections for CLT-4019, an overview of the preclinical pipeline, and a summary of Caliston's competitive positioning;
• Penterra management projections provided to Thorngate in connection with the engagement;
• Industry research reports, consensus analyst estimates for comparable publicly traded companies, and publicly available clinical and regulatory data;
• Thorngate's professional judgment and experience in advising on transactions involving clinical-stage biopharmaceutical companies.
Thorngate noted that it had not independently verified the accuracy or completeness of the information provided by Caliston or Penterra management and had assumed, with the Committee's consent, the reliability of such information for purposes of its preliminary analyses, subject to further verification in connection with ongoing due diligence.
IV. Discounted Cash Flow Analysis — CLT-4019 Only
A. Methodology Description
Thorngate performed a risk-adjusted discounted cash flow analysis focused solely on projected cash flows attributable to CLT-4019, Caliston's lead clinical-stage compound. This analysis is intended to capture the fundamental value of Caliston's most advanced and de-risked asset in isolation, providing the Committee with a baseline valuation that reflects the primary value driver of the proposed transaction.
The DCF model projects the estimated future cash flows associated with CLT-4019 over its expected commercial life, from the present date through the anticipated end of the compound's patent protection and regulatory exclusivity periods. Projected cash flows encompass estimated product revenue, cost of goods sold ("COGS"), selling, general and administrative ("SG&A") expenses attributable to the commercialization of CLT-4019, and ongoing research and development ("R&D") expenditures necessary to advance the compound through the remaining stages of clinical development (completion of Phase 2b, Phase 3 pivotal trial, NDA preparation and filing, and post-marketing commitments).
Critically, the projected cash flows are risk-adjusted to reflect the probability that CLT-4019 will successfully complete the remaining stages of clinical development, receive FDA approval, and achieve commercial launch. This risk adjustment is based on Thorngate's assessment of historical success rates for Phase 2b oncology compounds transitioning through Phase 3 clinical trials to NDA approval. Risk adjustments are applied at each major development milestone (Phase 2b completion, Phase 3 initiation, Phase 3 completion, NDA filing, and NDA approval) as cumulative probability-of-success ("POS") factors.
B. Key Assumptions
The following key assumptions underlie Thorngate's CLT-4019-only DCF analysis:
Projection Period. The projection period spans 2023 through 2038, a total of approximately 15 years. This time horizon reflects the expected commercial life of CLT-4019, taking into account anticipated patent protection (Caliston's composition-of-matter patent, U.S. Patent No. [to be confirmed in due diligence], is expected to expire in the mid-2030s) and potential regulatory exclusivity periods (including potential pediatric exclusivity, orphan drug exclusivity, and new chemical entity exclusivity, as applicable). Thorngate noted that the precise duration of patent and exclusivity protection remains subject to confirmation through ongoing intellectual property due diligence by Calderwood & Harkness LLP.
Probability of Regulatory Approval. Thorngate applied a cumulative risk adjustment factor reflecting the historical success rates for Phase 2b oncology compounds transitioning through Phase 3 to NDA approval. Based on published industry data (including analyses by Biotechnology Innovation Organization, Crowne Albany Services Inc., and the FDA's published approval statistics), Thorngate estimated a cumulative POS of approximately 25%–35% for a Phase 2b oncology compound to achieve NDA approval, with the range reflecting differences in the underlying datasets and assumptions regarding the quality and differentiation of CLT-4019's clinical profile. Thorngate presented the DCF results using a base-case POS and conducted sensitivity analyses around this assumption.
Peak Revenue Estimates. Peak annual revenue estimates for CLT-4019 were derived from a combination of Caliston management's internal projections and Thorngate's independent assessment of the addressable market for a selective CDK4/6 inhibitor in HR+/HER2– metastatic breast cancer. Thorngate considered the total addressable U.S. and ex-U.S. patient population, estimated market penetration rates, anticipated pricing (benchmarked to existing CDK4/6 inhibitors), and the competitive landscape (including the potential entry of additional CDK4/6 inhibitors and novel therapeutic modalities). Caliston management projected peak annual global revenues in the range of $1.2 billion to $1.8 billion; Thorngate applied a more conservative range in its independent assessment, consistent with typical practice for preliminary valuation analyses of clinical-stage compounds.
Revenue Build and Decline Curve. Thorngate modeled a revenue ramp from projected commercial launch (estimated in 2027, assuming successful Phase 3 completion and NDA approval) to peak revenue (estimated in 2032–2034), followed by a gradual decline as the compound approaches patent expiration and faces increasing generic/biosimilar competition.
Cost of Goods Sold (COGS). COGS were estimated as a percentage of net revenue, consistent with industry benchmarks for small-molecule oncology therapeutics. Thorngate assumed a COGS margin in the range of 15%–20% of net revenue, reflecting manufacturing costs, royalties, and supply chain expenses.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses were projected based on Caliston's anticipated commercial infrastructure buildout, including the establishment of a U.S. commercial Pinnacle Health IT, medical affairs capabilities, and market access functions. Thorngate assumed SG&A expenses as a percentage of net revenue consistent with comparable commercial-stage oncology companies, with higher SG&A as a percentage of revenue during the launch years and declining ratios as the product reaches scale.
Research and Development (R&D) Expenses. Ongoing R&D expenses include the costs of completing the Phase 2b trial, conducting a Phase 3 pivotal trial, preparing and filing an NDA, and post-marketing commitments. These costs were estimated based on Caliston management's internal budget projections and benchmarked against comparable clinical development programs.
Weighted Average Cost of Capital (WACC). Thorngate applied a WACC of 12.5% to discount the projected risk-adjusted cash flows to present value. The 12.5% WACC reflects the risk profile of a clinical-stage biopharmaceutical asset, incorporating a risk-free rate based on the yield on 10-year U.S. Treasury notes, an equity risk premium, a size premium appropriate for a clinical-stage company, and a company-specific risk adjustment. Thorngate noted that the selection of an appropriate discount rate for clinical-stage biopharmaceutical companies involves significant judgment and that the results are sensitive to changes in the discount rate assumption.
Terminal Growth Rate. Thorngate applied a terminal growth rate of 2.0% to calculate a terminal value using the perpetuity growth method beyond the explicit projection period. The 2.0% rate reflects the long-term expected growth rate of the broader pharmaceutical industry and general inflation. Terminal value was calculated using the Gordon Growth Model, applied to the normalized free cash flow in the final year of the projection period.
Tax Rate. Thorngate assumed a normalized corporate tax rate of 21%, consistent with the current U.S. federal statutory rate, applied to projected pre-tax income. State and local taxes, and potential international tax considerations, were not separately modeled in the preliminary analysis but may be refined in subsequent work.
Cash Burn Consideration. In bridging from enterprise value to equity value, Thorngate acknowledged Caliston's current cash position ($112.6 million as of March 31, 2023) and ongoing cash burn ($78.4 million net burn in FY2022). The DCF model captures the cash outflows associated with ongoing development activities as part of the projected cash flows; therefore, the current cash balance is treated as a component of the enterprise-to-equity bridge rather than as an input to the DCF model itself.
C. Valuation Range
Based on the foregoing assumptions, Thorngate's DCF analysis of CLT-4019 only yielded the following implied enterprise value range for Caliston:
Thorngate presented sensitivity analyses around two key variables: the discount rate (WACC) and the terminal growth rate. The sensitivity ranges were as follows:
• WACC Range: 11.0% to 14.0% (base case: 12.5%)
• Terminal Growth Rate Range: 1.0% to 3.0% (base case: 2.0%)
At the extremes of the sensitivity analysis (WACC of 11.0% and terminal growth rate of 3.0%), the implied enterprise value exceeded the upper end of the base-case range. Conversely, at the high end of the WACC range (14.0%) and the low end of the terminal growth rate range (1.0%), the implied enterprise value fell below the lower end of the base-case range. The sensitivity tables are included as Attachment B and are maintained in the Project Coriander secure workspace.
Thorngate noted that the CLT-4019-only DCF is the most conservative of the four valuation methodologies because it excludes any value attributable to Caliston's preclinical pipeline.
V. Discounted Cash Flow Analysis — Full Pipeline
A. Methodology Description
In addition to the CLT-4019-only DCF, Thorngate performed a risk-adjusted net present value ("rNPV") analysis of Caliston's full pipeline, encompassing CLT-4019, CLT-5227, and CLT-6034. The rNPV methodology is a standard valuation approach for multi-asset biopharmaceutical companies, in which each development-stage asset is modeled separately with distinct probability-of-success adjustments, projected development timelines, and estimated revenue streams, and the resulting risk-adjusted present values are then aggregated to derive a total enterprise value for the company.
This approach allows the Committee to assess the incremental value contribution of the preclinical assets (CLT-5227 and CLT-6034) relative to the lead Phase 2b asset (CLT-4019), and to evaluate whether the proposed consideration adequately captures the value of the full pipeline or only the lead asset.
B. Key Assumptions
CLT-4019. The assumptions for CLT-4019 in the full-pipeline rNPV analysis are substantially the same as those described in Section IV.B above, with minor refinements to reflect potential cross-pipeline synergies. Specifically, Thorngate made modest adjustments to the projected SG&A cost structure to account for the potential for shared commercial infrastructure (e.g., shared Pinnacle Health IT, shared medical affairs functions) across multiple oncology products, which could reduce the per-product SG&A burden once additional pipeline compounds reach commercialization. These refinements had a modest positive impact on the projected cash flows for CLT-4019 relative to the CLT-4019-only analysis.
CLT-5227 (Preclinical — Non-Small Cell Lung Cancer). Given CLT-5227's preclinical status (currently in lead optimization), Thorngate applied significantly higher risk adjustments than those applied to CLT-4019. The cumulative probability of success for a preclinical oncology compound achieving NDA approval is substantially lower than for a Phase 2b compound, with published industry data suggesting cumulative POS rates in the range of approximately 5%–10% from preclinical stage. Thorngate modeled a projected development timeline with an estimated IND filing in 2025–2026, Phase 1 initiation in 2026–2027, and projected commercial launch (if successful) no earlier than the early 2030s. Peak revenue estimates for CLT-5227 were based on preliminary assessments of the non-small cell lung cancer market, recognizing the high degree of uncertainty given the compound's early stage and the lack of clinical data.
CLT-6034 (Preclinical — Colorectal Cancer). CLT-6034 is at an even earlier stage than CLT-5227, currently in preclinical pharmacology studies. Thorngate applied the lowest probability-of-success assumptions to this compound, consistent with published data for early preclinical oncology programs. The projected timeline and revenue assumptions were similar in structure to those for CLT-5227, with an estimated commercial launch (if successful) in the early-to-mid 2030s. Thorngate noted that the valuation contribution of CLT-6034 is highly speculative and that the compound's inclusion in the full-pipeline analysis is primarily for completeness.
WACC. Thorngate applied a blended WACC of 12.5% across the full pipeline, consistent with the rate used in the CLT-4019-only analysis. Thorngate noted that a more granular approach would apply higher discount rates to the preclinical assets (reflecting their greater risk) and a lower rate to CLT-4019 (reflecting its more advanced stage). However, for purposes of the preliminary analysis, Thorngate used a blended rate to maintain consistency across the two DCF analyses. Thorngate indicated that it may refine this approach in its final analyses by applying compound-specific discount rates.
Terminal Growth Rate. A terminal growth rate of 2.0% was applied consistently across all pipeline assets, consistent with the CLT-4019-only analysis.
Corporate Overhead and G&A. Corporate-level overhead and general and administrative expenses were allocated across the three pipeline assets based on Caliston's current cost structure (94 employees) and projected headcount growth. Thorngate assumed that corporate G&A would scale with the number of active development programs and the overall level of commercial activity.
C. Valuation Range
Based on the foregoing assumptions, Thorngate's full-pipeline rNPV analysis yielded the following implied enterprise value range for Caliston:
The incremental value attributable to the preclinical pipeline (CLT-5227 and CLT-6034) over the CLT-4019-only analysis ranged from approximately $90 million to $160 million. This incremental value reflects the early-stage, higher-risk nature of these preclinical assets. Thorngate emphasized that the value attributed to CLT-5227 and CLT-6034 is highly dependent on probability-of-success assumptions and that small changes in POS inputs produce significant changes in the valuations of these compounds.
Thorngate presented the incremental value contribution of each preclinical asset separately in its presentation slides, enabling the Committee to evaluate the relative contribution of each compound to the overall valuation. The detailed breakdown is included in Attachment A (Thorngate Partners LLC presentation slides, maintained in the Project Coriander secure workspace).
VI. Comparable Transactions Analysis
A. Methodology Description
As a complement to the DCF analyses, Thorngate performed a comparable transactions analysis by examining selected precedent merger and acquisition transactions involving clinical-stage oncology biopharmaceutical companies. The purpose of this analysis is to provide market-based benchmarks for the valuation of Caliston by reference to the prices paid in arm's-length transactions for comparable companies.
Thorngate identified seven precedent transactions considered relevant to the evaluation of the proposed Caliston acquisition. The selection criteria employed by Thorngate included the following:
(i) The target company was a clinical-stage oncology biopharmaceutical company with a Phase 2 or Phase 3 lead asset at the time of the transaction;
(ii) The target company's therapeutic focus was comparable to Caliston's, with an emphasis on solid tumor programs, kinase inhibitors, and/or CDK-pathway-related mechanisms of action;
(iii) The transaction occurred within a reasonable time period (2019–2023) to ensure relevance and comparability given current market conditions, financing environments, and regulatory dynamics; and
(iv) Sufficient public information was available regarding the transaction terms to permit meaningful analysis.
B. Selected Comparable Transactions
Thorngate provided the Special Committee with a summary table of the seven selected precedent transactions during the August 3 meeting. The summary table included the names of the acquirors and targets, announcement dates, deal structures, aggregate transaction values (including upfront consideration and milestone/CVR components where applicable), implied premiums to prior financing rounds (where available), and relevant valuation multiples. The detailed comparable transactions summary table is included as Attachment C and is maintained in the Project Coriander secure workspace.
The seven transactions reviewed by Thorngate reflected a range of deal sizes, premium levels, and transaction structures. Several of the precedent transactions included milestone-based or contingent value right components, which is relevant to the Committee's evaluation of the potential CVR structure discussed in the Caliston transaction. Thorngate discussed each of the seven transactions in the context of its comparability to the proposed Caliston acquisition, noting both similarities and differences with respect to asset quality, stage of clinical development, competitive positioning, market dynamics, and the negotiation context in which each transaction was consummated.
Thorngate noted that certain of the selected precedent transactions involved targets with more advanced clinical programs (e.g., Phase 3 pivotal trial data available at the time of the transaction), while others involved targets at earlier stages (e.g., Phase 2 with only interim data). The range of transaction characteristics in the comparable set reflects the reality that no single precedent transaction is perfectly analogous to the proposed Caliston acquisition, and the analysis should be interpreted as providing a range of reference points rather than point estimates.
C. Valuation Range
Based on its analysis of the seven precedent transactions, Thorngate derived the following implied enterprise value range for Caliston:
This range was derived by applying relevant multiples and benchmarks observed in the comparable transaction set to Caliston's clinical-stage profile, risk-adjusted peak revenue estimates, and pipeline breadth. The specific multiples applied included, among others, enterprise value as a multiple of risk-adjusted peak revenue and enterprise value as a multiple of estimated probability-adjusted NPV.
Thorngate expressly cautioned the Committee that the comparable transactions analysis is inherently limited by differences in asset quality, stage of clinical development, market dynamics, competitive landscapes, financing environments, and negotiation contexts between the comparable transactions and the proposed Caliston acquisition. The analysis is presented as a market-based reference point to supplement the fundamental DCF analyses and should not be viewed as a definitive or standalone indicator of Caliston's value.
VII. Premiums Paid Analysis
A. Methodology Description
Thorngate's fourth valuation methodology is a premiums paid analysis, which examines the premiums paid in acquisitions of private biotechnology companies relative to the target company's most recent private financing round valuation. This approach is particularly relevant in the context of the proposed Caliston acquisition because Caliston is a privately held company with a well-documented and relatively recent Series C financing round that establishes a market-based valuation benchmark.
The premiums paid analysis provides an alternative, market-convention-based perspective on the appropriate valuation of Caliston by reference to how acquirors have historically priced private biotechnology targets relative to their last private round valuations.
B. Key Inputs
Caliston Series C Post-Money Valuation. Caliston's most recent private financing round, the Series C, closed in October 2021 at a post-money valuation of $680 million. The Series C round was led by Meridian Life Sciences Fund III, LP and included participation from existing investors, including Ridgeline Ventures, LP. The $680 million post-money valuation reflects the price at which sophisticated institutional investors valued Caliston's equity approximately two years prior to the proposed transaction.
Observed Premium Range. Thorngate reviewed premiums paid in comparable private biotechnology acquisitions (i.e., acquisitions of privately held biotechnology companies by larger pharmaceutical or biopharmaceutical acquirors) where the target company's last private financing round valuation was publicly available or could be reliably estimated. Based on this review, Thorngate identified a relevant range of premiums of 30% to 45% above the last private round valuation. The range reflects variability in premiums across the comparable set, driven by differences in the stage of clinical development at the time of acquisition, the elapsed time since the last financing round, the intervening clinical and regulatory progress achieved by the target, and prevailing market conditions.
Time Elapsed Since Series C. Approximately two years have elapsed since Caliston's Series C closing in October 2021 and the date of Thorngate's preliminary analyses. During this interval, CLT-4019 has advanced through Phase 2b clinical development, with topline data expected in Q4 2023. This clinical progress represents a meaningful de-risking of the lead asset and, in Thorngate's assessment, may justify a premium at the higher end of the observed range. Additionally, Thorngate noted that the broader biotech financing and M&A environment has evolved over this period, with prevailing public market biotech valuations experiencing volatility. These factors were considered qualitatively by Thorngate in applying the premium range to Caliston.
C. Implied Valuation Range
Applying the observed premium range to Caliston's Series C post-money valuation yields the following implied enterprise value range:
• 30% premium to Series C: $680 million × 1.30 = $884 million
• 45% premium to Series C: $680 million × 1.45 = $986 million
Thorngate cautioned that the premiums paid analysis reflects market convention regarding private-round premiums and is subject to the limitations inherent in comparing transactions with different underlying asset characteristics and market conditions. The analysis should be considered alongside, and in the context of, the fundamental DCF analyses and the comparable transactions analysis. In particular, Thorngate noted that the Series C valuation was established in October 2021, a period of relatively robust biotech valuations, and that adjustments for subsequent market conditions may be warranted.
VIII. Summary of Valuation Ranges
The following table consolidates the implied enterprise value ranges for Caliston derived from each of Thorngate's four preliminary valuation methodologies:
The reference range across all four methodologies spans approximately $780 million to $1,180 million, with the central tendency of the analyses falling in the $900 million to $1,025 million range.
The preliminary consideration under discussion — an aggregate equity value of $925 million — falls within all four valuation ranges. Specifically:
• In the CLT-4019-only DCF, $925 million is above the midpoint of $900 million and well within the $780 million–$1,020 million range.
• In the full-pipeline rNPV analysis, $925 million is below the midpoint of $1,025 million and within the lower portion of the $870 million–$1,180 million range.
• In the comparable transactions analysis, $925 million is near the midpoint of $935 million and within the $820 million–$1,050 million range.
• In the premiums paid analysis, $925 million is at the midpoint of $935 million and within the $884 million–$986 million range.
The implied premium to the Series C valuation at a $925 million equity value is calculated as follows:
($925 million – $680 million) ÷ $680 million = 36.03%
This premium falls within the 30%–45% observed range identified by Thorngate in its premiums paid analysis.
The convergence of the four methodologies around a central tendency of $900 million to $1,025 million provides a degree of corroboration for the valuation range, although Thorngate emphasized that each methodology involves significant judgment and is sensitive to the underlying assumptions. The Committee should consider the full range of results, rather than any single point estimate, in evaluating the proposed transaction.
IX. Discussion of Contingent Value Rights (CVRs)
At the August 3 meeting, Thorngate addressed the potential inclusion of a contingent value right ("CVR") as a component of the transaction consideration. The CVR has been discussed in preliminary terms between Penterra management and Caliston representatives as a mechanism to bridge the valuation gap between buyer and seller expectations and to allocate the binary regulatory risk associated with CLT-4019's FDA approval.
CVR Structure (as Preliminarily Discussed). The CVR, as preliminarily discussed, would entitle Caliston stockholders to receive additional aggregate consideration of $125 million, payable upon the achievement of FDA approval of CLT-4019 by a specified date (the "Milestone Date," which has not yet been defined). If the milestone is not achieved by the Milestone Date, the CVR would expire without payment. The CVR would be non-transferable and non-tradeable, and would be issued to Caliston stockholders as part of the merger consideration.
Impact on Aggregate Transaction Value. If the CVR were achieved, the maximum aggregate transaction value would be:
$925 million (upfront equity value) + $125 million (CVR) = $1,050 million
This maximum aggregate value of $1,050 million falls within the upper portion of the full-pipeline rNPV range ($870 million–$1,180 million) and at the high end of the comparable transactions range ($820 million–$1,050 million).
Treatment in Core Valuation Analyses. The CVR was not included in Thorngate's core valuation methodologies. The four valuation ranges presented in Sections IV through VIII above reflect the upfront equity value only, exclusive of the CVR. This treatment is appropriate at the preliminary stage because the CVR represents contingent consideration that may or may not be payable depending on the outcome of the FDA regulatory process, and because the terms of the CVR (including the Milestone Date, the conditions for payment, and any limitations or offsets) have not yet been definitively agreed.
Thorngate's Preliminary Observations on the CVR. Thorngate indicated that the CVR structure, if appropriately designed, could serve as an effective mechanism to allocate regulatory risk between the parties and to provide Caliston stockholders with additional upside in the event of a favorable regulatory outcome. However, Thorngate also noted that the present value of the CVR to Caliston stockholders is a function of (i) the probability that CLT-4019 will achieve FDA approval by the Milestone Date and (ii) the discount rate applied to the contingent payment. These factors must be analyzed carefully to ensure that the CVR is appropriately valued and that the total consideration (upfront plus CVR) fairly reflects the value of Caliston.
Thorngate indicated that it would further analyze the appropriate CVR milestone conditions, probability assumptions, and the present value of the CVR payment in its subsequent work streams. This analysis will be presented to the Committee at a future meeting once additional data and clinical information become available and once the CVR terms have been further negotiated.
X. Preliminary Observations and Next Steps
A. Thorngate's Preliminary Observations
Based on the preliminary valuation analyses presented on August 3, 2023, Thorngate offered the following preliminary observations for the Committee's consideration:
1. Reasonableness of Starting Point. The proposed $925 million equity value (excluding CVRs) falls within all four valuation ranges derived by Thorngate, supporting its reasonableness as a starting point for negotiations. However, Thorngate emphasized that the $925 million figure is the price advanced by Dr. Hale and Penterra management, not a negotiated price, and that the Committee retains significant scope to negotiate within the valuation range identified by the analyses.
2. Incremental Pipeline Value. The full-pipeline DCF analysis suggests that CLT-5227 and CLT-6034 contribute meaningful incremental value in the range of $90 million to $160 million above the CLT-4019-only valuation. However, this incremental value is highly speculative given the preclinical status of both compounds and the substantial clinical, regulatory, and commercial risks that must be overcome before either compound could generate revenue. Thorngate recommended that the Committee carefully consider whether the upside from the full pipeline is adequately captured in the base consideration of $925 million or whether it should be allocated to a CVR, earn-out, or other contingent payment structure that would tie additional compensation to the achievement of future development milestones for the preclinical assets.
3. CLT-4019 Phase 2b Data as Key Value Driver. Thorngate identified the Phase 2b topline data readout for CLT-4019, expected in Q4 2023, as the single most significant value driver across all valuation scenarios. Positive topline data would be expected to significantly de-risk the CLT-4019 program and could shift the valuation range meaningfully upward, while negative or inconclusive data could have the opposite effect. Thorngate noted that the timing of the proposed transaction relative to the Phase 2b data readout is a critical strategic consideration for the Committee: completing the transaction before the data readout transfers the binary clinical risk to Penterra, while delaying the transaction until after the data readout would allow the Committee to negotiate with the benefit of greater information, albeit at the risk that a positive readout could increase the price demanded by Caliston stockholders.
4. CVR as Valuation Bridge. Thorngate noted that the CVR structure, if properly designed, could serve as an effective tool for bridging the valuation gap between the buyer and seller and for allocating regulatory risk in a manner that aligns the interests of the parties. However, the terms and probability-weighted present value of the CVR require further analysis before the Committee can evaluate the total consideration package.
B. Special Committee Discussion
Following Thorngate's presentation, the Special Committee engaged in a substantive discussion of the preliminary valuation analyses. The key topics addressed by the Committee included the following:
(i) Sensitivity to Probability-of-Success Assumptions. Committee members inquired about the sensitivity of the DCF analyses to changes in the probability-of-success assumptions for CLT-4019 and the preclinical compounds. Thorngate confirmed that the POS assumption is the single largest driver of the DCF valuation range and provided additional sensitivity data showing the impact of POS changes of plus or minus five percentage points on the implied enterprise value. The Committee noted the importance of conducting further clinical due diligence to refine the POS assumptions before finalizing the valuation analyses.
(ii) Comparability of Precedent Transactions. The Committee inquired about the degree of comparability between the seven precedent transactions selected by Thorngate and the proposed Caliston acquisition. Thorngate acknowledged that no single precedent transaction is a perfect analogue and discussed the key similarities and differences between each precedent and the Caliston transaction. The Committee directed Thorngate to continue to refine the comparable set as additional market data become available.
(iii) Impact of Caliston's Cash Runway on Negotiating Leverage. Committee members discussed the significance of Caliston's estimated cash runway through Q1 2025. Given that Caliston's current cash position ($112.6 million as of March 31, 2023) and burn rate ($78.4 million per year) suggest that Caliston will need to raise additional capital or pursue a strategic transaction within the next 18 to 24 months, the Committee considered whether this funding constraint provides Penterra with negotiating leverage that could be used to negotiate a lower price. Thorngate noted that this factor is relevant but must be balanced against the competitive dynamics of the transaction, including the possibility that Caliston could pursue alternative strategic transactions or financing alternatives if the Penterra offer is perceived as inadequate.
(iv) Appropriateness of the WACC Assumption. The Committee discussed the 12.5% WACC assumption and whether it adequately reflects the risk profile of a clinical-stage biopharmaceutical company. Thorngate explained the derivation of the WACC and noted that the sensitivity analysis around the WACC (11.0%–14.0%) captures a range of risk assessments. The Committee asked Thorngate to provide additional support for the WACC derivation in its final analyses.
In addition to the foregoing, the Committee noted that Dr. Hale's implied proceeds from the transaction at a $925 million equity value are substantial. Specifically:
• Dr. Hale's Implied Proceeds: 28.5% × $925 million = $263,625,000
• Dr. Hale's Personal Investment in Caliston: Approximately $42,000,000
• Dr. Hale's Implied Gain: $263,625,000 – $42,000,000 = $221,625,000
The Committee observed that these figures represent a significant financial interest for Dr. Hale and reinforce the need for a rigorous, independent evaluation of the proposed transaction by the Special Committee and its advisors. The Committee reiterated its commitment to evaluating the transaction solely on the basis of whether it is fair to and in the best interests of Penterra and its unaffiliated stockholders.
As a result of the discussion, the Committee directed Thorngate to explore alternative acquisition targets as a market check, which the Committee formalized at a subsequent meeting on August 22, 2023. The purpose of the market check is to determine whether there are alternative strategic transactions or acquisition targets available to Penterra that might offer superior risk-adjusted returns relative to the proposed Caliston acquisition, and to provide the Committee with additional data points for evaluating the reasonableness of the proposed consideration.
C. Next Steps Identified
Based on the August 3, 2023 meeting and the subsequent August 22, 2023 meeting, the following next steps were identified:
1. Market Check. Thorngate to conduct a market check to identify potential alternative acquisition targets or strategic alternatives for Penterra. The scope and parameters of the market check were discussed at the August 3 meeting and formalized by the Committee at its August 22, 2023 meeting. Thorngate will report the results of the market check to the Committee at a subsequent meeting.
2. Refined Valuation Analyses. Thorngate to refine its preliminary valuation analyses following receipt of additional due diligence materials from the Caliston data room, updated Caliston financial projections (if available), and any additional clinical data or regulatory developments pertaining to CLT-4019 or the preclinical pipeline.
3. CVR Analysis. Thorngate to further analyze the proposed CVR structure, including the present value of the CVR payment under various probability-weighted scenarios, the appropriate milestone conditions and Milestone Date, and the impact of the CVR on the total transaction consideration and its allocation among Caliston stockholders.
4. Fairness Opinion. Thorngate to prepare final valuation analyses and deliver a formal fairness opinion to the Special Committee once definitive transaction terms have been agreed. The fairness opinion will address whether, in Thorngate's professional judgment, the consideration to be paid by Penterra in the proposed transaction is fair, from a financial point of view, to Penterra and its unaffiliated stockholders.
5. Legal and Regulatory Due Diligence. Calderwood & Harkness LLP to continue its due diligence review in parallel with Thorngate's financial analyses, including review of Caliston's intellectual property portfolio, material contracts, regulatory history, pending and threatened litigation, and other legal and regulatory risk factors relevant to valuation. Calderwood & Harkness will coordinate with Thorngate on the integration of legal and regulatory risk factors into the valuation framework.
XI. Limitations and Disclaimers
The following limitations and disclaimers apply to the analyses summarized in this memorandum:
1. The analyses summarized herein are preliminary and subject to revision. Thorngate has not rendered any opinion, formal or informal, on the fairness of any transaction at this time. The preliminary analyses are intended solely to inform the Special Committee's evaluation of the proposed transaction and to establish a framework for the Committee's negotiating posture.
2. Thorngate's analyses are based on information available as of August 3, 2023, and are subject to change as additional data room materials are reviewed, clinical developments occur (including, without limitation, the Phase 2b topline data readout for CLT-4019 expected in Q4 2023), and market conditions evolve. Thorngate has not independently verified the accuracy or completeness of the information provided by Caliston or Penterra management and has assumed, with the Committee's consent, the reliability of such information for purposes of its preliminary analyses.
3. This memorandum is prepared by Calderwood & Harkness LLP for the sole use of the Special Committee of the Board of Directors of Penterra Pharmaceuticals Corp. in connection with Project Coriander. This memorandum is protected by the attorney-client privilege and the work product doctrine and should not be disclosed to any third party without the prior written consent of the Special Committee and Calderwood & Harkness LLP.
4. This memorandum should not be shared with Dr. Marcus Hale, Angela Whitmore, Raymond Tusk, or any other person outside the information barrier established pursuant to the Independence Protocol & Information Barrier Policy dated June 2, 2023. Any unauthorized disclosure of this memorandum could waive the protections of the attorney-client privilege and work product doctrine and could compromise the integrity of the Special Committee's independent evaluation process.
5. Nothing in this memorandum constitutes legal advice regarding the legal obligations of the Special Committee, the Board of Directors, or any individual director. Legal advice regarding the Committee's fiduciary duties and the legal requirements applicable to related-party transactions will be provided by Calderwood & Harkness LLP in separate memoranda and communications.