PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
This memorandum and all attachments hereto constitute a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP at the direction and for the benefit of Penterra Pharmaceuticals Corp. in connection with the proposed acquisition of Veridian Biosciences, Inc. This memorandum has been prepared in anticipation of litigation and reflects the mental impressions, conclusions, opinions, and legal theories of counsel. This document is protected from disclosure by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum shall not be disclosed, distributed, or shared with any person or entity, in whole or in part, without the prior written approval of Calderwood & Harkness LLP. Any inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, New York 10166
MEMORANDUM
TO: Thomas F. Holbrook, General Counsel & Secretary, Penterra Pharmaceuticals Corp. Natalie Reiner, SVP Corporate Development, Penterra Pharmaceuticals Corp.
FROM: Oliver Mackenzie, Partner, Mergers & Acquisitions Megan Chu, Associate, Mergers & Acquisitions
CC: Harrison Wexford, Partner, Mergers & Acquisitions Derek Okonkwo, Associate, Mergers & Acquisitions
DATE: September 16, 2024
RE: Analysis of Veridian Biosciences, Inc.'s Response to Penterra's Deficiency Notice — Assessment of Veridian's Arguments Disputing Material Adverse Effect and Demanding Closing
MATTER NO.: 1018-00008
I. Executive Summary
The purpose of this memorandum is to analyze the letter dated September 13, 2024, transmitted by Rebecca Whitmore of Zalcourt Archer & Cole LLP on behalf of Veridian Biosciences, Inc. ("Veridian" or the "Company") in response to Penterra Pharmaceuticals Corp.'s ("Penterra" or "Buyer") Deficiency Notice dated September 6, 2024 (the "Deficiency Notice"), which was delivered pursuant to the Stock Purchase Agreement dated June 10, 2024 (the "SPA" or the "Agreement"). A copy of Veridian's response letter is annexed hereto as Appendix A.
In its response, Veridian categorically disputes the occurrence of a material adverse effect ("MAE") within the meaning of SPA § 1.1, demands that Penterra proceed to closing on the terms and within the timeframe contemplated by the Agreement, and expressly reserves Veridian's rights under SPA § 10.12 (specific performance) and all other remedies available under the Agreement, at law, and in equity. Veridian further threatens litigation in the Court of Chancery of the State of Delaware pursuant to the exclusive forum selection clause in SPA § 10.6.
Veridian's response advances four principal arguments in support of its position:
(1) The Marlowe Asset Management-2 Phase II clinical data is preliminary and interim, and therefore insufficient to establish an MAE;
(2) The Protocol v4.0 amendment implemented by Veridian on August 28, 2024 adequately addresses the safety concerns identified in the interim data;
(3) The FDA partial clinical hold imposed on VRD-4187 (IND 154832) on August 22, 2024 is a routine and temporary regulatory action common in oncology drug development; and
(4) The MAE definition's negotiated carveouts — specifically the carveouts for industry-wide conditions, changes in law, and pandemic-related disruptions — apply to preclude an MAE finding.
We have carefully reviewed each of these arguments against the factual record, the terms of the SPA, applicable Delaware law, and the clinical and regulatory assessments provided by Penterra's advisors. Our overall assessment is as follows: Veridian's arguments have some factual bases and are not frivolous, but they are legally insufficient to overcome Penterra's MAE position under the Agreement. The severity of the Marlowe Asset Management-2 safety signals, the absence of any statistically significant efficacy benefit, the independent confirmation of the safety concern through the FDA's partial clinical hold, and the inapplicability of the MAE carveouts to company-specific clinical trial failures collectively establish a strong foundation for Penterra's MAE determination. That said, we note that Veridian's arguments will be vigorously pressed in any litigation before the Delaware Court of Chancery, and no outcome can be guaranteed given the fact-intensive nature of MAE determinations and the historically high bar set by Delaware courts.
Recommendation: Veridian's September 13, 2024 response does not alter our analysis — set forth in our memoranda of August 25, 2024 (Appendix C) and September 2, 2024 (Appendix D) — that a material adverse effect has occurred within the meaning of SPA § 1.1. We recommend that Penterra proceed with termination planning as outlined in Section VI below, including preparation of a Board memorandum and formal Termination Notice for delivery on or about September 30, 2024.
II. Background and Procedural Context
A. The Deficiency Notice (September 6, 2024)
On September 6, 2024, Calderwood & Harkness LLP transmitted a formal Deficiency Notice on behalf of Penterra to Veridian (with a courtesy copy to Zalcourt Archer & Cole LLP, counsel to Veridian). The Deficiency Notice, a copy of which is annexed hereto as Appendix B, identified two categories of events that, in Penterra's assessment, rendered the conditions to Buyer's obligation to close under the SPA unsatisfied.
First, the Deficiency Notice identified the failure of the condition set forth in SPA § 7.2(a), which requires that each of the Sellers' representations and warranties set forth in Article III of the SPA be true and correct in all respects as of the date of the Agreement and as of the Closing Date as if made on and as of such date (except to the extent that the failure of any such representation or warranty to be true and correct would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect). The Deficiency Notice explained that events occurring after the date of the Agreement had rendered multiple representations untrue in respects that would reasonably be expected to have a Material Adverse Effect, including without limitation the representations regarding the status and conduct of clinical trials (SPA § 3.17), regulatory compliance and the absence of regulatory actions affecting the Company's product candidates (SPA § 3.18), and the absence of changes or developments constituting a Material Adverse Effect since the date of the Balance Sheet (SPA § 3.7).
Second, the Deficiency Notice identified the failure of the condition set forth in SPA § 7.2(b), which requires that since the date of the Agreement, no Material Adverse Effect shall have occurred. The Deficiency Notice stated that the events described therein, individually and in the aggregate, constituted a Material Adverse Effect on the business, results of operations, financial condition, and assets of Veridian and its subsidiaries, taken as a whole.
The Deficiency Notice specifically cited the following events as the factual basis for its conclusions:
(a) The interim data readout from the independent Data Monitoring Committee ("DMC") for the Marlowe Asset Management-2 Phase II clinical trial on August 14, 2024, which revealed a Grade ≥3 cytokine release syndrome ("CRS") incidence of 23.4% in the VRD-4187 treatment arm (as compared to 4.1% in the control arm), seven treatment-related deaths in the VRD-4187 arm (3.6% of 194 enrolled patients) versus one in the control arm (0.5% of 193 patients), and an objective response rate ("ORR") of 31.4% in the VRD-4187 arm versus 28.9% in the control arm (p = 0.58, not statistically significant); and
(b) The partial clinical hold imposed by the United States Food and Drug Administration ("FDA") on the VRD-4187 investigational new drug application (IND 154832) on August 22, 2024, pending investigation of the CRS-related treatment deaths reported in the Marlowe Asset Management-2 trial.
On September 9, 2024, Megan Chu of Calderwood & Harkness sent a follow-up email to Jonathan Pratt of Zalcourt Archer & Cole LLP requesting a timely response to the Deficiency Notice and expressly reserving all of Penterra's rights under the SPA, including but not limited to its right to terminate the Agreement pursuant to SPA § 8.1(d) in the event that the conditions to Buyer's obligations to close are not satisfied or remain incapable of satisfaction by the Outside Date.
B. Veridian's Response (September 13, 2024)
On September 13, 2024, Calderwood & Harkness received a letter from Rebecca Whitmore of Zalcourt Archer & Cole LLP addressed to Oliver Mackenzie and transmitted on behalf of Veridian (the "Response Letter"). The Response Letter, annexed hereto as Appendix A, consists of twelve single-spaced pages and three exhibits (consisting of published clinical literature and regulatory guidance documents). The substantive content of the Response Letter may be summarized as follows:
Denial of MAE. The Response Letter categorically denies that a Material Adverse Effect has occurred within the meaning of SPA § 1.1. Veridian characterizes Penterra's Deficiency Notice as "premature, unsupported, and inconsistent with the allocation of risk agreed to by the parties at signing."
Demand for Closing. The Response Letter demands that Penterra proceed to closing of the transaction contemplated by the SPA, asserting that all conditions to Buyer's obligation to close under SPA §§ 7.1, 7.2, and 7.3 are satisfied or are "readily capable of being satisfied" prior to the Outside Date of December 10, 2024.
Reservation of Rights. The Response Letter expressly reserves Veridian's right to seek specific performance under SPA § 10.12 to compel Penterra to consummate the closing, and/or to seek damages for breach of contract in the event Penterra fails or refuses to close. Veridian also reserves "all other remedies available to the Sellers under the Agreement, at law, and in equity."
Threat of Litigation. The Response Letter states that if Penterra does not proceed to closing within a "reasonable period" (which Veridian's letter does not define), Veridian intends to file an action in the Court of Chancery of the State of Delaware pursuant to the exclusive forum selection clause in SPA § 10.6, seeking specific performance and/or damages.
The Response Letter advances four principal arguments in support of Veridian's position, each of which is analyzed in detail in Section III below.
C. Key Underlying Facts
For the convenience of the reader and to provide the necessary factual context for the analysis that follows, we summarize below the key facts underlying the current dispute. These facts are drawn from the SPA, the transaction record, communications between the parties and their respective counsel, the DMC interim analysis report, FDA correspondence, and the independent clinical assessment provided by Broadleaf Scientific Consulting LLC.
The Transaction. The SPA was executed on June 10, 2024, and provides for the acquisition by Penterra of one hundred percent (100%) of the outstanding capital stock of Veridian for a purchase price of $900,000,000 in cash (subject to customary adjustments). The SPA was negotiated at arm's length over a period of approximately four months, with both parties represented by experienced M&A counsel. The purchase price reflects a significant premium attributable to the value of Veridian's clinical-stage pipeline, and in particular its lead product candidate, VRD-4187.
VRD-4187. VRD-4187 is Veridian's lead pipeline candidate — a bispecific T-cell engager antibody targeting delta-like ligand 3 (DLL3) for the treatment of small cell lung cancer ("SCLC"). VRD-4187 is the principal driver of Veridian's enterprise value. Veridian is a clinical-stage biopharmaceutical company with no products on the market and no revenue (fiscal year 2023 revenue: $0; fiscal year 2023 net loss: $87.3 million). Substantially all of Veridian's enterprise value — and the rationale for the $900 million purchase price — is derived from its clinical-stage pipeline, with VRD-4187 representing the overwhelming majority of that value based on Penterra's internal valuation models and the analyses performed by Garrison Zanthor during due diligence.
The Marlowe Asset Management-2 Phase II Trial. VRD-4187 is the subject of the Marlowe Asset Management-2 Phase II clinical trial (ClinicalTrials.gov identifier NCT05837291), a randomized, open-label, multi-center study enrolling 387 patients across 42 clinical sites in the United States and the European Union. The trial compares VRD-4187 to an active control arm (standard-of-care chemotherapy) in patients with relapsed or refractory SCLC who have progressed following at least one prior line of platinum-based therapy.
DMC Interim Analysis (August 14, 2024). On August 14, 2024, the independent DMC for the Marlowe Asset Management-2 trial convened to review a pre-specified interim analysis of safety and efficacy data. The DMC recommended immediate enrollment suspension and dose modification based on the following key findings:
• Grade ≥3 CRS Incidence: 23.4% of patients in the VRD-4187 treatment arm (n = 194) experienced Grade 3 or higher cytokine release syndrome, compared to 4.1% in the control arm (n = 193) — a differential of 19.3 percentage points;
• Treatment-Related Deaths: Seven (7) treatment-related deaths occurred in the VRD-4187 arm (3.6% of 194 patients), compared to one (1) treatment-related death in the control arm (0.5% of 193 patients);
• Objective Response Rate: The ORR in the VRD-4187 arm was 31.4%, compared to 28.9% in the control arm, with a p-value of 0.58 — indicating no statistically significant difference in efficacy between the two arms.
Notification to Penterra. Penterra received notice of the DMC findings from Veridian on August 16, 2024, pursuant to the information-sharing obligations set forth in SPA § 5.1(b). Penterra immediately engaged Broadleaf Scientific Consulting LLC ("Broadleaf") to conduct a supplemental clinical assessment of the interim data.
Broadleaf Scientific Consulting Assessment (August 19, 2024). On August 19, 2024, Dr. Raymond Kapoor of Broadleaf delivered a supplemental clinical assessment to Penterra (annexed hereto as Appendix H). Broadleaf's assessment concluded that the Marlowe Asset Management-2 interim safety profile raises "fundamental questions about VRD-4187's commercial viability," noting that the severity and incidence of CRS, combined with the lack of a meaningful efficacy signal, "substantially diminish the probability of regulatory approval and, even in a favorable regulatory scenario, would result in a significantly restricted label, limited patient population, and material increases in post-market risk management costs."
FDA Partial Clinical Hold (August 22, 2024). On August 22, 2024, the FDA imposed a partial clinical hold on IND 154832 (VRD-4187) pursuant to 21 C.F.R. § 312.42. The partial hold prohibits new patient enrollment in the Marlowe Asset Management-2 trial pending investigation of the CRS-related treatment deaths. Existing patients already enrolled and receiving treatment may continue under the protocol, but no new patients may be enrolled until the hold is lifted. The FDA's action letter cited concerns regarding the "unacceptable rate of serious and fatal cytokine release syndrome" observed in the Marlowe Asset Management-2 interim data.
Protocol v4.0 Amendment (August 28, 2024). On August 28, 2024, Veridian implemented a protocol amendment (Protocol v4.0) to the Marlowe Asset Management-2 trial. The amendment introduced two principal modifications: (i) mandatory prophylactic administration of tocilizumab to all patients in the VRD-4187 treatment arm prior to each dosing cycle; and (ii) a reduction of the starting dose of VRD-4187 from 1.5 mg/kg to 0.75 mg/kg — a fifty percent (50%) dose reduction. We note that the question of whether Veridian was required to obtain Penterra's consent under the operating covenants of SPA § 5.1 prior to implementing this protocol amendment was raised in our August 30, 2024 letter to Zalcourt Archer & Cole LLP and remains an open issue.
III. Detailed Analysis of Veridian's Arguments
We address each of Veridian's four principal arguments below, summarizing Veridian's position and then providing our assessment of the argument's legal and factual merit.
A. Argument 1: The Marlowe Asset Management-2 Clinical Data Is Preliminary and Interim
1. Veridian's Position
The first and most prominent argument in the Response Letter is that the DMC interim analysis of the Marlowe Asset Management-2 Phase II trial represents, in Veridian's characterization, merely "a snapshot in time" and that the data is "inherently preliminary, immature, and subject to substantial change as the trial progresses." Veridian elaborates this argument across several pages of the Response Letter, making the following specific assertions:
Nature of interim data. Veridian argues that interim data from Phase II oncology trials is, by its nature, a preliminary assessment intended to guide ongoing trial management rather than to serve as a definitive measure of a drug candidate's safety or efficacy profile. Veridian cites published literature (Exhibit 1 to the Response Letter) for the proposition that interim safety signals in early- and mid-stage oncology trials are common and are frequently managed through protocol modifications without adverse long-term consequences for the program.
Maturity of efficacy data. Veridian asserts that the ORR data from the Marlowe Asset Management-2 interim analysis is immature and that longer follow-up may demonstrate an improved efficacy signal in the VRD-4187 arm. Veridian notes that the primary endpoint of the trial is overall survival, not ORR, and that the interim ORR comparison is not the metric on which VRD-4187's clinical value should be assessed at this stage.
Known class effect. Veridian characterizes the CRS observed in the Marlowe Asset Management-2 trial as a "known and manageable class effect" associated with bispecific T-cell engager therapies generally. Veridian cites the approved prescribing information for blinatumomab and other T-cell engager products as evidence that CRS is a recognized risk in this drug class and that clinical management strategies are well-established.
Buyer sophistication. Veridian argues that Penterra is a "sophisticated pharmaceutical acquirer" that conducted extensive due diligence on VRD-4187's clinical program prior to execution of the SPA and that Penterra "understood and accepted the inherent risks of acquiring a clinical-stage biopharmaceutical company with a pipeline candidate in active Phase II development." Veridian suggests that the MAE clause was not intended to function as a mechanism by which Penterra could terminate the Agreement in response to any adverse clinical trial result, but rather was reserved for truly catastrophic and unprecedented events.
2. Our Assessment
The "preliminary data" argument has some surface appeal, particularly to a court unfamiliar with the specific clinical data at issue, but it is ultimately undermined by the severity and breadth of the safety signals revealed by the Marlowe Asset Management-2 interim analysis.
Severity of the CRS signal. Veridian's characterization of CRS as a "known and manageable class effect" is technically accurate at a general level — CRS is indeed a recognized adverse event associated with T-cell engager therapies — but this characterization significantly understates the magnitude of the signal observed in Marlowe Asset Management-2. A Grade ≥3 CRS incidence of 23.4% is not merely a confirmation of a known class effect; it represents a 19.3 percentage point differential over the control arm, a rate that far exceeds published benchmarks for approved T-cell engagers. By way of comparison, the Grade ≥3 CRS rate for blinatumomab (the most widely-used approved T-cell engager) in its pivotal trials was approximately 4–5%, and the rates observed in the approved bispecific antibody mosunetuzumab in the LOTIS-2 trial were approximately 2–3% at Grade 3 or higher. The CRS rate observed for VRD-4187 is therefore four to five times higher than the rates observed for comparable approved products — a difference that cannot credibly be described as a routine manifestation of a known class effect.
Treatment-related deaths. The seven treatment-related deaths in the VRD-4187 arm (3.6% of 194 patients) represent a statistically and clinically significant mortality signal that cannot be dismissed as "interim noise." The differential relative to the control arm (one death, 0.5% of 193 patients) is stark, and the absolute number of treatment-related fatalities in a trial of this size is a serious adverse finding by any clinical measure. These deaths are not subject to the kind of statistical fluctuation that might accompany changes in response rate as follow-up matures; they are discrete, irreversible events that are already fully reflected in the safety database.
Efficacy data. Veridian's argument that the efficacy data is "immature" and that longer follow-up may demonstrate improved ORR in the VRD-4187 arm is speculative and, more importantly, fails to grapple with the implications of the current data. The ORR in the VRD-4187 arm (31.4%) is not meaningfully different from the control arm (28.9%), and the p-value of 0.58 indicates that this difference is far from statistical significance. While Veridian is correct that overall survival, not ORR, is the primary endpoint of the Marlowe Asset Management-2 trial, the absence of a statistically significant ORR signal at the interim analysis is a negative indicator for the overall survival endpoint. More critically, the efficacy data must be assessed in conjunction with the safety data: even if VRD-4187 ultimately demonstrates a modest efficacy improvement, the dramatically elevated CRS rate and treatment-related mortality render the risk-benefit profile deeply unfavorable. A drug that is significantly more dangerous than the standard of care but no more effective is not a commercially viable product.
Delaware MAE standard. Veridian's argument implicitly assumes that Penterra must wait for final trial data before asserting an MAE, but this is not the law. The MAE definition in SPA § 1.1 asks whether the relevant events "have had or would reasonably be expected to have" a material adverse effect on the business, results of operations, financial condition, or assets of the Company and its subsidiaries, taken as a whole. This is a forward-looking standard that does not require certainty of outcome; it requires a reasonable expectation of material adverse impact. The interim data here — showing a dramatically compromised safety profile with no countervailing efficacy benefit and an independent FDA action confirming the seriousness of the safety concern — more than satisfies this standard. Delaware law does not require a buyer to close its eyes to available information and hope for the best.
Broadleaf assessment. The independent clinical assessment prepared by Broadleaf Scientific Consulting (Dr. Raymond Kapoor) on August 19, 2024 (Appendix H) corroborates Penterra's conclusion that the Marlowe Asset Management-2 interim data represents substantially more than a transient setback. Broadleaf concluded that the safety profile raises "fundamental questions about VRD-4187's commercial viability" and that the data "substantially diminish the probability of regulatory approval." This is not the kind of interim clinical noise that resolves itself with additional follow-up; it is a fundamental impairment to the value proposition of VRD-4187.
Buyer sophistication argument. Veridian's contention that Penterra is a sophisticated buyer who accepted clinical-stage risk at signing is a common argument in MAE disputes but does not withstand analysis in the context of the SPA. Penterra undoubtedly understood that VRD-4187 was a clinical-stage product with inherent development risks. But Penterra did not agree to close the transaction regardless of any adverse development in VRD-4187's clinical program. To the contrary, the parties specifically negotiated an MAE clause and closing conditions that were designed to allocate the risk of material adverse developments to the Sellers, subject to the negotiated carveouts. If the parties had intended that no adverse clinical result could constitute an MAE, they would have included a specific carveout for clinical trial results — and they did not. The absence of such a carveout is telling and should be dispositive on this point.
Counterargument Strength: Moderate. We acknowledge that Veridian will be able to retain experts who characterize interim Phase II data as inherently uncertain and who will testify that it is premature to draw definitive conclusions from the Marlowe Asset Management-2 interim analysis. However, the specific magnitude of the safety signals — a 19.3 percentage point CRS differential, seven treatment deaths, and no efficacy benefit — is difficult to minimize, and we expect that Penterra's expert testimony will be more persuasive on this point. The strength of Veridian's argument depends heavily on the court's willingness to accept the premise that interim data, no matter how severe, is inherently insufficient to establish an MAE — a premise that is inconsistent with the forward-looking "would reasonably be expected to have" standard in the MAE definition.
B. Argument 2: Protocol v4.0 Amendment Adequately Addresses Safety Concerns
1. Veridian's Position
Veridian's second principal argument is that its implementation of the Protocol v4.0 amendment on August 28, 2024 demonstrates proactive risk management and adequately addresses the safety concerns identified in the Marlowe Asset Management-2 interim analysis. Specifically, Veridian argues:
Tocilizumab prophylaxis. Veridian asserts that the addition of mandatory tocilizumab prophylaxis to the Marlowe Asset Management-2 protocol is a well-established clinical intervention that has been shown in published literature to significantly reduce the incidence and severity of CRS in both CAR-T cell therapies and bispecific antibody programs. Veridian attaches to its Response Letter a selection of peer-reviewed articles (Exhibit 2) documenting the efficacy of tocilizumab in CRS management.
Dose reduction. Veridian contends that the reduction of the starting dose of VRD-4187 from 1.5 mg/kg to 0.75 mg/kg is "standard clinical practice" in oncology drug development and is "expected to materially reduce the incidence of CRS while preserving the therapeutic efficacy of VRD-4187."
Proactive management narrative. More broadly, Veridian frames the protocol amendment as evidence of responsible and competent clinical trial management, arguing that Veridian "acted swiftly and decisively to address the safety signals identified in the interim analysis" and that the amendment "reflects the Company's deep commitment to patient safety and its confidence in the long-term viability of VRD-4187."
No impairment of commercial viability. Veridian asserts that the protocol amendment does not impair the commercial viability of VRD-4187 and that dose modifications and prophylactic co-medications are common features of marketed oncology products.
2. Our Assessment
The Protocol v4.0 amendment is a relevant factual development, but it does not cure the Material Adverse Effect for the reasons discussed below. In certain respects, the amendment actually strengthens Penterra's position.
Dose reduction and efficacy. The most significant vulnerability in Veridian's argument is the fifty percent dose reduction from 1.5 mg/kg to 0.75 mg/kg. This reduction was presumably implemented to reduce CRS incidence, and it may well have that effect. However, it raises serious and unanswered questions about whether VRD-4187 at the lower dose will maintain any efficacy whatsoever — let alone demonstrate the kind of efficacy improvement over standard of care that would justify the drug's development and eventual commercialization. It is critical to recall that VRD-4187 at the full dose of 1.5 mg/kg already failed to demonstrate a statistically significant efficacy improvement over the control arm (ORR of 31.4% versus 28.9%, p = 0.58). Reducing the dose by half, absent compelling dose-response data suggesting that a lower dose would be equally or more effective, introduces the very real possibility that VRD-4187 at 0.75 mg/kg will be even less effective than it was at the full dose — while still carrying residual CRS risk. There is no evidence in the record that Veridian possesses dose-response data supporting the efficacy of VRD-4187 at 0.75 mg/kg, and Veridian's Response Letter conspicuously fails to cite any such data.
Tocilizumab as mitigation. The addition of tocilizumab prophylaxis is a recognized clinical approach to CRS management, and we do not dispute that tocilizumab may reduce CRS incidence in the modified protocol. However, mandatory prophylactic tocilizumab administration adds cost, complexity, and additional risk management requirements to VRD-4187's clinical and commercial profile. Tocilizumab itself carries potential adverse effects (including immunosuppression, hepatotoxicity, and infusion reactions) and its co-administration adds treatment burden for patients. If VRD-4187 were ever to reach market with a requirement for mandatory tocilizumab prophylaxis, this would significantly affect its commercial profile, including pricing, reimbursement, and patient and physician uptake. The fact that Veridian must resort to mandatory prophylactic co-medication to manage the safety profile of its lead candidate is itself evidence of the fundamental impairment to VRD-4187's value proposition.
The amendment as evidence of material change. From a legal standpoint, the protocol amendment is a double-edged sword for Veridian. While it supports a narrative of responsive management, it is simultaneously an admission that the clinical program as designed and described during due diligence — and as reflected in the Sellers' representations and warranties — was materially different from the clinical reality revealed by the interim data. The drug profile presented to Penterra during due diligence contemplated a dosing regimen of 1.5 mg/kg without mandatory tocilizumab prophylaxis. The current clinical reality is a dramatically revised protocol with half the dose and mandatory co-medication. This is not a minor protocol adjustment; it is a fundamental redesign of the clinical program driven by a severe safety signal. The amendment thus serves as independent evidence that the events described in the Deficiency Notice have had a material adverse effect on the business.
Delaware law on post-signing remediation. Under Delaware MAE jurisprudence, the question is whether the relevant events have had or would reasonably be expected to have a material adverse effect on the business of the target, taken as a whole. While post-signing remediation efforts may be relevant to a court's assessment of durational significance and the long-term impact of an adverse development, the buyer is not required to accept remediation efforts that are uncertain in outcome. The Protocol v4.0 amendment is precisely such an uncertain remediation: its effect on CRS incidence is unknown, its effect on efficacy at the reduced dose is unknown, and the FDA has not yet reviewed or approved the amended protocol in connection with the lifting of the partial clinical hold. Penterra is not required to assume the risk that the protocol amendment will prove effective.
Consent under operating covenants. As noted above and addressed in our August 30, 2024 letter to Zalcourt Archer & Cole LLP, Veridian's implementation of the Protocol v4.0 amendment may have required Penterra's consent under the operating covenants of SPA § 5.1, which restricts the Company from making material changes to its clinical trial protocols without Buyer's prior written consent. Veridian did not seek or obtain Penterra's consent before implementing the amendment. While this issue is analytically separate from the MAE question, it is relevant to the overall dispute and may provide an additional basis for asserting breach of the SPA.
Counterargument Strength: Moderate to Weak. The protocol amendment helps Veridian's narrative to the extent it demonstrates responsible management, but it introduces new uncertainties — particularly regarding efficacy at the reduced dose — that may actually strengthen Penterra's position. A court evaluating the amendment would likely view it as a reasonable response to a serious safety signal but would not treat it as curative of the MAE, particularly in the absence of any data demonstrating that VRD-4187 at 0.75 mg/kg retains clinical utility.
C. Argument 3: The FDA Partial Clinical Hold Is Routine and Temporary
1. Veridian's Position
Veridian's third argument addresses the FDA partial clinical hold imposed on IND 154832 on August 22, 2024. Veridian makes the following specific assertions:
Routine regulatory action. Veridian characterizes the partial clinical hold as "a routine regulatory action that is a well-understood feature of the drug development process, particularly in oncology." Veridian attaches excerpts from FDA guidance documents (Exhibit 3 to the Response Letter) discussing the clinical hold process and asserts that partial holds are imposed with some frequency in oncology drug development programs.
Partial vs. full hold. Veridian emphasizes that the FDA's action is a partial hold — not a full clinical hold — meaning that existing patients already enrolled in the Marlowe Asset Management-2 trial may continue treatment under the current protocol, and certain trial activities (such as follow-up assessments and data collection for enrolled patients) may proceed. Veridian argues that this distinction is significant because it indicates that the FDA does not view VRD-4187 as presenting an imminent and unacceptable danger to all patients.
Anticipated timeline for lifting. Veridian asserts that it "expects the partial clinical hold to be lifted within 30 to 60 days of submission of the Protocol v4.0 amendment and updated safety data to the FDA." Veridian states that it submitted the protocol amendment and a comprehensive safety update to the FDA on September 5, 2024, and is awaiting the FDA's response.
No impact on closing timeline. Veridian argues that even under a conservative estimate of the timeline for lifting the hold, the hold is likely to be resolved well before the Outside Date of December 10, 2024, and therefore does not impede satisfaction of the closing conditions.
2. Our Assessment
Veridian's characterization of the partial clinical hold as "routine" is misleading, and its prediction of a 30-to-60-day resolution timeline is speculative and unsupported.
Partial clinical holds are not routine. While partial clinical holds do occur in oncology drug development, they are not routine events. The FDA imposes clinical holds — whether partial or full — when it determines that there is a specific safety concern that warrants restricting the clinical investigation. The imposition of a clinical hold reflects a formal regulatory determination that the identified risk is serious enough to justify interrupting the sponsor's clinical program. The fact that partial holds are contemplated by the FDA's regulations does not mean they are common or insignificant; to the contrary, the imposition of a clinical hold is one of the most serious actions the FDA can take with respect to an investigational drug, short of refusing to file or withdrawing approval.
Triggered by treatment-related deaths. The significance of the partial clinical hold is underscored by the fact that it was triggered by treatment-related deaths — the most serious category of adverse event in clinical drug development. The FDA's action letter, as described in Veridian's September 5, 2024 submission to the Agency, cited concerns regarding the "unacceptable rate of serious and fatal cytokine release syndrome" in the Marlowe Asset Management-2 trial. This is not a hold imposed on the basis of a theoretical safety concern or a precautionary measure; it is a regulatory action taken in direct response to patient deaths attributed to VRD-4187.
Timeline for lifting is speculative. Veridian's assertion that the hold will be lifted within 30 to 60 days is entirely speculative and is not supported by any communication from the FDA. The timeline for lifting a clinical hold is within the FDA's sole discretion and depends on the Agency's assessment of the sponsor's submission, including the adequacy of the proposed protocol modifications, the completeness and persuasiveness of the updated safety data, and the Agency's independent analysis of the risk-benefit profile. Clinical holds in oncology programs have been known to last for months and, in some cases, have not been lifted at all. The FDA is under no obligation to accept the sponsor's proposed protocol amendment, and it may require additional data, analyses, or modifications before considering the hold for release. Veridian's projection of a 30-to-60-day resolution is wishful thinking, not a factual basis for disputing the MAE.
Lifting the hold does not cure the underlying data. Even if the partial clinical hold were lifted tomorrow, the underlying safety data would not change. The 23.4% Grade ≥3 CRS rate and the seven treatment-related deaths are permanent features of the Marlowe Asset Management-2 clinical record. These data will follow VRD-4187 through any future regulatory submission, will appear prominently in any FDA review of a marketing application, and will affect labeling, risk evaluation and mitigation strategy ("REMS") requirements, and commercial prospects even in the most favorable regulatory scenario. The lifting of the hold would permit the trial to resume enrollment, but it would not erase the safety signal or restore VRD-4187's pre-August clinical profile.
Cumulative impact. The partial clinical hold must be assessed not in isolation but in conjunction with the Marlowe Asset Management-2 clinical data. The hold is an independent confirmation by a government regulatory agency of the seriousness of the safety concerns identified in the interim analysis. The fact that the FDA — an entity with no financial interest in the transaction — reviewed the safety data and determined that it warranted restricting VRD-4187's clinical program is powerful evidence that the safety concerns are real, serious, and material. Under the MAE definition in SPA § 1.1, the relevant inquiry is whether the events described in the Deficiency Notice — individually or in the aggregate — have had or would reasonably be expected to have a material adverse effect on the business of Veridian and its subsidiaries, taken as a whole. The cumulative weight of the clinical data and the FDA's regulatory action strongly supports Penterra's position.
Counterargument Strength: Weak to Moderate. The "routine" characterization of the partial clinical hold will not withstand close scrutiny given that the hold was imposed in response to seven treatment-related deaths, and Veridian's speculative timeline for lifting the hold is a significant liability in litigation. Veridian's strongest point on this issue is the distinction between a partial hold and a full hold, but the practical significance of this distinction is limited: the hold prevents new enrollment, effectively freezing the growth of the trial's data set and delaying any potential regulatory advancement of VRD-4187.
D. Argument 4: MAE Carveouts Apply
1. Veridian's Position
Veridian's fourth and final argument invokes the carveouts negotiated within the MAE definition in SPA § 1.1. Veridian argues that the events cited in the Deficiency Notice fall within one or more of these carveouts and therefore cannot constitute a Material Adverse Effect under the Agreement. Specifically, Veridian advances the following three carveout arguments:
Industry conditions carveout (SPA § 1.1, carveout (ii)). Veridian argues that clinical trial setbacks, including safety signals and DMC recommendations for enrollment suspension and dose modification, are "an inherent part of the biotechnology and pharmaceutical industries" and that the events described in the Deficiency Notice fall within the SPA's carveout for "conditions affecting the biotechnology or pharmaceutical industries generally." Veridian asserts that "clinical-stage drug development programs regularly encounter safety signals that require protocol modification, and such events are industry-wide phenomena that cannot constitute a company-specific Material Adverse Effect."
Change in law carveout (SPA § 1.1, carveout (iii)). Veridian argues that the FDA partial clinical hold, "to the extent it reflects a change in or stricter application of regulatory standards governing clinical trial safety," may fall within the SPA's carveout for "changes in applicable law or the interpretation or enforcement thereof."
Pandemic carveout (SPA § 1.1, carveout (iv)). Veridian makes a brief reference to the SPA's pandemic carveout in connection with alleged potential disruptions to clinical trial operations, though this argument is not developed in any detail in the Response Letter.
2. Our Assessment
The carveout arguments are the least compelling aspect of Veridian's Response Letter. We address each in turn.
Industry Conditions Carveout (Carveout (ii)). This is Veridian's strongest carveout argument, but it is nonetheless weak. The SPA's MAE definition carves out "conditions affecting the biotechnology or pharmaceutical industries generally." The critical word in this carveout is "generally" — the carveout was designed to exclude from the MAE definition broad industry trends, macroeconomic conditions, and systemic developments that affect all or substantially all participants in the biotechnology or pharmaceutical industries. Classic examples would include a general decline in public equity valuations for biotech companies, a broad-based tightening of FDA approval standards affecting all drug developers, or an industry-wide disruption to drug supply chains.
The events at issue here are the opposite of industry-wide conditions. The Marlowe Asset Management-2 interim data and the FDA partial clinical hold are specific to VRD-4187 — a single product candidate belonging to a single company. There is no evidence in the record — and Veridian's Response Letter cites none — that the biotechnology industry generally experienced a wave of CRS-related safety failures or clinical holds during the relevant period. Company-specific clinical trial results are the paradigm case of an event that is not covered by an industry-conditions carveout. Veridian's attempt to bootstrap its company-specific drug safety failure into an industry-wide phenomenon by arguing that clinical trial setbacks are "inherent" in the industry is unpersuasive: the fact that clinical trial setbacks can occur in any biotech company does not make a particular clinical trial setback an industry-wide condition. By that logic, any adverse event that could theoretically befall any company in an industry would be carved out — a reading that would render the MAE clause meaningless for clinical-stage biotech companies.
This analysis is consistent with Delaware case law, including the Chancery Court's reasoning in Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018), aff'd, 198 A.3d 724 (Del. 2018), in which the court held that company-specific regulatory violations and data integrity failures were not covered by an industry-conditions carveout, even though regulatory compliance challenges are a feature of the pharmaceutical industry generally. The same principle applies here: VRD-4187's specific clinical trial results are not an industry-wide condition.
Change in Law Carveout (Carveout (iii)). This argument is very weak. The FDA did not change any law, regulation, or regulatory standard in connection with the partial clinical hold on IND 154832. The FDA exercised its existing statutory authority under 21 U.S.C. § 355(i) and 21 C.F.R. § 312.42 to impose a clinical hold based on safety data specific to VRD-4187. This is an enforcement action under existing law — an application of long-standing regulatory authority to a specific set of facts — not a change in the legal or regulatory framework. The carveout for "changes in applicable law or the interpretation or enforcement thereof" was designed to address legislative or regulatory changes of general applicability that affect the business environment in which the target operates (e.g., a new law imposing price controls on pharmaceuticals, or a change in FDA guidance regarding clinical trial design requirements). The FDA's decision to impose a clinical hold on a specific IND based on drug-specific safety data is not a "change in applicable law" by any reasonable interpretation. Veridian's argument conflates the application of existing law to a specific company with a change in the law itself.
Pandemic Carveout (Carveout (iv)). This argument appears to have no factual basis whatsoever. There is no pandemic or public health emergency currently affecting the conduct of the Marlowe Asset Management-2 trial or any other aspect of Veridian's business. The pandemic carveout was negotiated — as is standard practice in acquisition agreements executed during or after the COVID-19 pandemic — to address disruptions caused by COVID-19 or similar widespread public health emergencies. Veridian's passing reference to this carveout in its Response Letter appears to be an effort to invoke any and all available carveouts regardless of their applicability. This argument is not credible and is unlikely to be pursued by Veridian in litigation.
Disproportionate Impact Exception. Even if any of the above carveouts were otherwise applicable — and, for the reasons stated, we do not believe they are — the carveouts in SPA § 1.1 are subject to a critical limitation: they do not apply to the extent that the relevant conditions or events "disproportionately affect the Company and its Subsidiaries, taken as a whole, relative to other comparably situated companies operating in the biotechnology or pharmaceutical industries." Since the Marlowe Asset Management-2 clinical data and the FDA partial clinical hold are specific to VRD-4187 and Veridian, the disproportionate impact exception clearly applies. Veridian is the only company whose product candidate generated the specific safety signals at issue, and it is the only company subject to the partial clinical hold on IND 154832. There are no "comparably situated" companies that were similarly affected by these events. The disproportionate impact exception provides an independent and dispositive basis for excluding any carveout that might otherwise apply.
This analysis is set forth in greater detail in our Disproportionate Impact Exception Analysis memorandum dated September 3, 2024 (Appendix G), to which we cross-refer.
Counterargument Strength: Weak. The carveout arguments are the least compelling aspect of Veridian's response and are unlikely to succeed in litigation. Veridian may devote significant briefing to these arguments, particularly the industry-conditions carveout, but the fundamental problem is that the events at issue are company-specific and product-specific, which is precisely the category of events that the MAE definition — net of its carveouts — is designed to capture.
IV. Assessment of Veridian's Demand for Closing and Specific Performance Threat
A. Veridian's Demand
The Response Letter demands that Penterra "proceed to consummate the Closing in accordance with the terms and conditions of the Agreement without further delay." Veridian asserts that all conditions to Buyer's obligation to close under SPA §§ 7.1 (mutual conditions), 7.2 (conditions to Buyer's obligations), and 7.3 (conditions to Sellers' obligations) are currently satisfied or are "readily capable of being satisfied prior to the Outside Date of December 10, 2024." Veridian further asserts that SPA § 10.12 of the Agreement entitles the Sellers to seek specific performance of Penterra's obligations under the SPA, including the obligation to consummate the Closing, and that Veridian will not hesitate to exercise this right if Penterra fails to proceed.
B. Our Assessment of Closing Conditions
Veridian's assertion that the conditions to Buyer's obligation to close are satisfied or are capable of timely satisfaction is incorrect for the following reasons.
SPA § 7.2(a) — Bring-Down of Representations. Section 7.2(a) of the SPA conditions Buyer's obligation to close on the truth and correctness of Sellers' representations and warranties as of the Closing Date, except where the failure to be true and correct would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. As analyzed in our August 25, 2024 memorandum (Appendix C) and supplemental memorandum of September 2, 2024 (Appendix D), the Marlowe Asset Management-2 interim data and the FDA partial clinical hold render multiple Sellers' representations untrue in respects that would reasonably be expected to have a Material Adverse Effect. The affected representations include, without limitation:
• Section 3.17 (Clinical Trials), which represents that all clinical trials of the Company's product candidates are being conducted in compliance with applicable protocols and regulatory requirements and that no clinical trial has been the subject of a clinical hold or other restriction by any regulatory authority;
• Section 3.18 (Regulatory Compliance), which represents that the Company is in compliance with all applicable laws and regulations governing its clinical development activities and that the Company has not received any notice from any regulatory authority indicating that any product candidate is subject to a clinical hold, enforcement action, or investigation;
• Section 3.7 (Absence of Certain Changes), which represents that since the date of the Balance Sheet, there has been no Material Adverse Effect and no event, development, or condition that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect.
The failure of these representations to be true and correct as of the Closing Date — in respects that would reasonably be expected to have a Material Adverse Effect — means that the condition in SPA § 7.2(a) is not satisfied.
SPA § 7.2(b) — No Material Adverse Effect. Section 7.2(b) of the SPA conditions Buyer's obligation to close on the absence of a Material Adverse Effect since the date of the Agreement (June 10, 2024). For the reasons set forth in our prior memoranda and summarized in this memorandum, a Material Adverse Effect has occurred. The Marlowe Asset Management-2 interim data (August 14, 2024) and the FDA partial clinical hold (August 22, 2024) — each occurring after the date of the Agreement — individually and in the aggregate have had, and would reasonably be expected to continue to have, a material adverse effect on the business, results of operations, financial condition, and assets of Veridian and its subsidiaries, taken as a whole. The condition in SPA § 7.2(b) is therefore not satisfied.
Nature of these conditions. The conditions set forth in SPA §§ 7.2(a) and 7.2(b) are conditions to Buyer's obligation to close. They exist for Buyer's benefit, and Buyer has the right — but not the obligation — to waive them. Penterra has no intention of waiving these conditions and has affirmatively determined that the conditions are not satisfied.
Incurability. The failure of SPA § 7.2(b) is not curable by Veridian. The Marlowe Asset Management-2 clinical data — including the 23.4% Grade ≥3 CRS rate, the seven treatment-related deaths, and the non-significant ORR result — is a permanent part of the clinical record. This data cannot be "uncured," reversed, or erased. Similarly, the FDA partial clinical hold, while theoretically capable of being lifted at some future date, cannot be retroactively removed, and the fact of its imposition will permanently affect VRD-4187's regulatory and commercial history. Moreover, even if the hold were lifted and the trial were to resume under the modified protocol, the underlying safety data and its implications for the drug's commercial profile would remain unchanged.
C. Specific Performance Analysis (Preliminary)
The Response Letter invokes SPA § 10.12, which provides, in relevant part, that the parties acknowledge that irreparable damage would occur if any provision of the Agreement were not performed in accordance with its terms and that the parties shall be entitled to seek specific performance to enforce the terms and provisions of the Agreement. Veridian asserts that this provision entitles it to compel Penterra to close the transaction.
While we intend to provide a comprehensive analysis of specific performance risk in a forthcoming separate memorandum, we offer the following preliminary assessment:
Specific performance requires satisfaction of closing conditions. SPA § 10.12 grants the Sellers the right to seek specific performance to compel the closing, but this right is necessarily predicated on the satisfaction (or valid waiver) of all conditions to Buyer's obligation to close. Specific performance is a remedy that compels a party to perform its contractual obligations; it does not override contractual conditions precedent. If the closing conditions in SPA §§ 7.2(a) and 7.2(b) are not satisfied due to the occurrence of a valid MAE, Buyer has no obligation to close, and there is no obligation that can be specifically enforced. In other words, the specific performance provision is not an independent right to close; it is a remedy for enforcing an existing obligation that has matured upon satisfaction of all conditions. The central question in any specific performance action will therefore be whether a Material Adverse Effect occurred — if it did, Veridian's specific performance claim fails.
Equitable remedy subject to court discretion. Under Delaware law, specific performance is an equitable remedy, and the Court of Chancery retains broad discretion in determining whether to grant it. Even in cases where a contractual right to specific performance exists, the court will consider the equities of the situation, including whether the party seeking specific performance has acted in good faith, whether there are adequate remedies at law, and whether enforcement would be practicable.
If Veridian files suit. If Veridian files an action in the Court of Chancery seeking specific performance — as it has threatened — the case will turn on the factual question of whether a Material Adverse Effect occurred. Veridian's burden will be to demonstrate that no MAE occurred (or that the events at issue fall within one or more carveouts) and that all closing conditions are satisfied or waivable. Penterra's defense will be that the closing conditions are unsatisfied due to the MAE and that Penterra's refusal to close is a proper exercise of its contractual rights.
A detailed analysis of specific performance risk, including an assessment of likely procedural posture, burden of proof, and evidentiary issues, will be provided in a separate memorandum.
D. Reverse Termination Fee
Veridian's Response Letter does not expressly invoke the reverse termination fee provision in the SPA, but it does reference "all remedies available to the Sellers under the Agreement, at law, and in equity." We address the reverse termination fee here for completeness and to ensure that Penterra is aware of its scope and limitations.
The SPA provides for a reverse termination fee of $45,000,000 (representing approximately 5% of the purchase price), payable by Buyer to Sellers under SPA § 8.3(b). The reverse termination fee is triggered only in the specific circumstance where Buyer fails to consummate the Closing because Buyer's committed financing was not obtained (i.e., a "financing failure"). The reverse termination fee is the Sellers' sole and exclusive remedy in the event of a financing failure, and it is not available in any other circumstance.
Penterra's position is that the closing conditions under SPA §§ 7.2(a) and 7.2(b) are not satisfied due to the occurrence of a Material Adverse Effect. This is not a financing failure. Penterra has $2.1 billion in unrestricted cash and cash equivalents on its balance sheet and has a $500 million committed term loan facility with Summit Ridge Capital Partners and Ironclad Trust Company available to fund the acquisition. At no point has Penterra indicated that it is unable or unwilling to fund the purchase price. The issue is not the availability of financing; it is the failure of substantive closing conditions.
The reverse termination fee is therefore inapplicable to the current circumstances. A more detailed analysis of this issue, including an assessment of Veridian's potential arguments regarding the scope of the reverse termination fee provision, will be provided in a separate memorandum if warranted by developments.
V. Evaluation of Litigation Risk
In light of Veridian's express threat of litigation in the Court of Chancery of the State of Delaware, we set forth below our preliminary assessment of the strengths and weaknesses of Penterra's position and our overall evaluation of litigation risk.
A. Strengths of Penterra's Position
Penterra's MAE position is supported by the following factors, which we expect would weigh heavily in any litigation:
Severity of the safety data. The Marlowe Asset Management-2 interim data reveals a safety profile of exceptional severity. A Grade ≥3 CRS rate of 23.4% in the VRD-4187 arm — representing a 19.3 percentage point differential over the control arm's rate of 4.1% — is far in excess of rates observed for approved T-cell engager therapies and exceeds what any reasonable clinical assessment would consider acceptable for a drug in active development. The seven treatment-related deaths in the VRD-4187 arm (3.6% of enrolled patients) versus one in the control arm (0.5%) represent a statistically and clinically significant mortality signal. These safety findings are severe, quantifiable, and documented in the DMC's formal interim analysis report.
Lack of efficacy benefit. The absence of a statistically significant efficacy improvement — ORR of 31.4% versus 28.9%, p = 0.58 — is a critical factor that transforms the safety data from a potentially manageable risk into a fundamental impairment. A drug that carries dramatically elevated safety risks but offers no statistically meaningful therapeutic benefit over existing standard-of-care therapy has a deeply unfavorable risk-benefit profile. This factor distinguishes the present case from situations in which a drug candidate demonstrates strong efficacy that could potentially justify an elevated safety profile.
FDA partial clinical hold. The imposition of a partial clinical hold by the FDA on August 22, 2024 provides independent, government-sourced confirmation of the seriousness of the safety concerns. The FDA is an independent regulatory agency with no financial interest in the transaction, and its determination that the safety data warranted restricting VRD-4187's clinical program carries substantial weight. The hold is a tangible regulatory action with real-world consequences for VRD-4187's development timeline and regulatory path.
VRD-4187 as the primary value driver. VRD-4187 is Veridian's lead an