PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 200 Park Avenue, 42nd Floor New York, New York 10166
September 2, 2024
MEMORANDUM
I. Executive Summary
This memorandum supplements our comprehensive Material Adverse Effect ("MAE") analysis memorandum dated August 25, 2024 (the "Initial MAE Memorandum"), which analyzed in detail the clinical data readout from the Marlowe Asset Management-2 Phase II trial (NCT05837291) on August 14, 2024. Since the date of the Initial MAE Memorandum, a significant new development has occurred: on August 22, 2024, the United States Food and Drug Administration (the "FDA") imposed a partial clinical hold on VRD-4187 under Investigational New Drug Application No. 154832 ("IND 154832"), pending investigation of cytokine release syndrome ("CRS")-related deaths observed in the treatment arm of the Marlowe Asset Management-2 trial. This supplemental memorandum evaluates the cumulative impact of (a) the adverse Marlowe Asset Management-2 interim safety and efficacy data and (b) the FDA partial clinical hold on the determination of whether a "Material Adverse Effect" (as defined in the Stock Purchase Agreement) has occurred under Section 1.1 of the Stock Purchase Agreement dated June 10, 2024 (the "SPA" or the "Agreement") among Penterra Pharmaceuticals Corp. ("Penterra" or the "Buyer"), Veridian Biosciences, Inc. ("Veridian" or the "Company"), the Sellers identified therein, and David Ng as Stockholder Representative.
Conclusion. The FDA partial clinical hold significantly strengthens Penterra's position that a Material Adverse Effect has occurred under the SPA. In our assessment, the clinical hold represents an independent, externally imposed regulatory constraint that (i) halts enrollment in the only active registrational pathway for VRD-4187, Veridian's lead and most advanced clinical asset, (ii) introduces substantial uncertainty regarding both the timeline and the ultimate viability of VRD-4187's regulatory approval, and (iii) when combined with the underlying safety and efficacy data from the Marlowe Asset Management-2 interim analysis, satisfies the durational significance standard articulated by the Delaware Court of Chancery in Akorn, Inc. v. Fresenius Kabi AG and its progeny. The clinical hold is not a transient or routine regulatory event; it is a formal government action reflecting the FDA's independent determination that VRD-4187 presents an unreasonable and significant risk of illness or injury to clinical trial subjects. This determination, layered on top of the already troubling Marlowe Asset Management-2 data—including a 23.4% incidence of Grade 3 or higher CRS and seven treatment-related deaths—fundamentally impairs the value proposition that animated the Transaction.
Based on our analysis, we recommend that Penterra proceed toward formal notice of the failure of closing conditions under SPA Sections 7.2(a) and 7.2(b), with a view toward termination under Section 8.1(d) if conditions are not timely cured (which, in our assessment, they cannot be). We address below the legal basis for this recommendation, the anticipated counterarguments from Veridian and its counsel at Zalcourt Archer & Cole LLP, and the procedural steps that Penterra should take in the coming days.
II. Background and Procedural Posture
A. The Transaction
On June 10, 2024, Penterra Pharmaceuticals Corp. entered into a Stock Purchase Agreement with Veridian Biosciences, Inc., the individual sellers of Veridian's capital stock identified on Schedule A to the SPA (collectively, the "Sellers"), and David Ng in his capacity as Stockholder Representative, pursuant to which Penterra agreed to acquire one hundred percent (100%) of the issued and outstanding capital stock of Veridian for an aggregate cash purchase price of Nine Hundred Million Dollars ($900,000,000), subject to customary adjustments for working capital, indebtedness, and transaction expenses (the "Transaction"). The SPA was executed following approximately four months of negotiations between Penterra and Veridian, during which Penterra conducted extensive financial, legal, regulatory, clinical, and scientific due diligence on Veridian and its assets.
Veridian is a privately held, clinical-stage biotechnology company incorporated in Delaware and headquartered in Cambridge, Massachusetts. Veridian has no product revenue. For the fiscal year ended December 31, 2023, Veridian reported total revenue of zero dollars ($0) and a net loss of approximately $87.3 million, driven predominantly by research and development expenses related to its clinical programs. As of March 31, 2024, Veridian had cash and cash equivalents of approximately $112.4 million and employed 148 persons, including 97 employees engaged in research, clinical development, and regulatory functions. To date, Veridian has raised approximately $420 million in aggregate venture and growth equity financing through its Series A, Series B, Series C, and Series D preferred stock rounds, with the most recent Series D round closing in April 2023 at a pre-money valuation of approximately $630 million.
Veridian's principal asset—and the primary value driver for the Transaction—is VRD-4187, a bispecific T-cell engager antibody targeting delta-like ligand 3 ("DLL3"), a highly expressed antigen on the surface of small cell lung cancer ("SCLC") cells. VRD-4187 is built on Veridian's proprietary VeriTCE bispecific antibody engineering platform and was, at the time of the SPA's execution, in a Phase II clinical trial (the Marlowe Asset Management-2 trial, NCT05837291) in patients with relapsed or refractory extensive-stage SCLC. In addition to VRD-4187, Veridian has two earlier-stage pipeline candidates—VRD-6223 (a VeriTCE-based bispecific targeting CLDN18.2 for gastric cancer, in IND-enabling studies) and VRD-7801 (a next-generation VeriTCE construct targeting MSLN for mesothelioma, in preclinical development). However, neither VRD-6223 nor VRD-7801 was independently valued at or near the $900 million purchase price, and both were treated in the fairness opinion and in Penterra's internal valuation models as optionality and platform value rather than as principal value drivers.
The SPA is governed by the laws of the State of Delaware, without regard to conflict of laws principles, and provides for exclusive jurisdiction in the Court of Chancery of the State of Delaware (or, if the Court of Chancery declines jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware). SPA § 10.6. The scheduled Outside Date for consummation of the Transaction is December 10, 2024 (i.e., six months from the date of the Agreement). SPA § 8.1(b).
B. The August 25, 2024 MAE Analysis
As discussed at length in the Initial MAE Memorandum, the Marlowe Asset Management-2 trial Data Monitoring Committee ("DMC") conducted a pre-planned interim analysis on August 14, 2024, reviewing data from 387 enrolled patients across 42 clinical sites in the United States and the European Union (194 patients in the VRD-4187 treatment arm and 193 patients in the standard-of-care control arm). The interim analysis revealed the following material findings:
Safety:
• Grade 3 or higher cytokine release syndrome ("CRS") occurred in 23.4% of patients in the VRD-4187 treatment arm (45 of 194 patients) compared with 4.1% in the standard-of-care control arm (8 of 193 patients)—a 19.3 percentage point difference.
• Seven (7) treatment-related deaths occurred in the VRD-4187 arm, constituting 3.6% of the 194 patients in the treatment arm. By contrast, one (1) treatment-related death occurred in the control arm (0.5% of 193 patients). The treatment-related deaths in the VRD-4187 arm were attributed to severe or fatal CRS (four patients), multiorgan failure secondary to CRS (two patients), and cardiac arrest in the setting of Grade 4 CRS (one patient).
Efficacy:
• The overall response rate ("ORR") in the VRD-4187 treatment arm was 31.4% (61 of 194 patients) compared with 28.9% in the control arm (56 of 193 patients). This difference was not statistically significant (p = 0.58, two-sided, per the pre-specified statistical analysis plan).
• The ORR differential of 2.5 percentage points fell well below the clinically meaningful threshold of approximately 10–15 percentage points typically expected for a favorable risk-benefit assessment in the SCLC setting.
Based on these findings, the DMC recommended immediate suspension of new enrollment in the Marlowe Asset Management-2 trial and dose modification for any ongoing treatment of currently enrolled patients. Penterra received notice of the DMC's findings from Veridian on August 16, 2024, pursuant to the information-sharing covenant in SPA Section 5.1(b), which requires Veridian to promptly notify Penterra of any material development concerning the Company's clinical trials or regulatory status.
In connection with the Initial MAE Memorandum, Broadleaf Scientific Consulting LLC ("Broadleaf"), acting through its Managing Director, Dr. Raymond Kapoor, M.D., Ph.D. (a board-certified medical oncologist and former FDA Division of Oncology Products reviewer), delivered a supplemental clinical assessment on August 19, 2024, confirming the severity and clinical significance of the Marlowe Asset Management-2 adverse findings. Dr. Kapoor's assessment concluded, among other things, that (i) the 23.4% incidence of Grade 3 or higher CRS was "substantially in excess of the range observed in approved and late-stage bispecific T-cell engagers in the oncology setting," (ii) the seven treatment-related deaths represented a "serious and potentially program-defining safety signal," and (iii) the non-significant ORR data suggested "a lack of efficacy differentiation that, when combined with the safety profile, creates a distinctly unfavorable risk-benefit ratio."
The Initial MAE Memorandum concluded that the Marlowe Asset Management-2 clinical data alone presented a strong basis for a determination that a Material Adverse Effect had occurred under the SPA, but acknowledged that Veridian could mount a colorable argument that the data were preliminary and potentially amenable to remediation through protocol modification, dose adjustment, and additional data collection. The Initial MAE Memorandum recommended monitoring the situation and withholding formal notice until additional clarity emerged regarding the FDA's response and Veridian's remediation strategy.
C. The FDA Partial Clinical Hold — New Development
The additional clarity we anticipated has now arrived—in the form of a formal FDA action that dramatically alters the landscape.
On August 22, 2024, the FDA's Center for Drug Evaluation and Research ("CDER"), Division of Oncology Products 2 ("DOP2"), imposed a partial clinical hold on VRD-4187 under IND 154832. The partial clinical hold was communicated to Veridian via a clinical hold letter (the "Hold Letter") issued pursuant to 21 C.F.R. § 312.42. Penterra was notified of the Hold Letter by Veridian on August 23, 2024, again pursuant to SPA § 5.1(b). We have reviewed a copy of the Hold Letter as provided by Veridian's counsel.
The Hold Letter cites, as the basis for the partial clinical hold, the seven treatment-related deaths in the VRD-4187 arm and the 23.4% incidence of Grade 3 or higher CRS, and states that the FDA has determined that clinical subjects enrolled in the Marlowe Asset Management-2 trial are "exposed to an unreasonable and significant risk of illness or injury" within the meaning of 21 C.F.R. § 312.42(b)(1)(i). The partial clinical hold prohibits the enrollment of any new subjects in the Marlowe Asset Management-2 trial but permits continued treatment of currently enrolled patients under modified protocols, subject to enhanced safety monitoring, dose modification, and mandatory adverse event reporting on an accelerated timeline. The Hold Letter requires Veridian to submit a "complete response" to the FDA's safety concerns before enrollment may resume, and specifies the categories of information that the FDA expects to receive, including updated safety analyses, a revised investigator's brochure, a proposed risk evaluation and mitigation strategy for CRS, and a proposed amended protocol with modified dosing.
On August 28, 2024, Veridian submitted to the FDA a Protocol v4.0 amendment for the Marlowe Asset Management-2 trial. The key changes in Protocol v4.0 include (i) mandatory tocilizumab prophylaxis (8 mg/kg IV) administered one hour prior to each VRD-4187 infusion, and (ii) a reduction in the starting dose of VRD-4187 from 1.5 mg/kg to 0.75 mg/kg (a 50% dose reduction), with provisions for intra-patient dose escalation only upon demonstration of acceptable tolerability over at least two treatment cycles. As of the date of this memorandum, the FDA has not reviewed or accepted the Protocol v4.0 amendment as a basis for lifting the partial clinical hold. The 30-day review clock under 21 C.F.R. § 312.42(e) does not begin until the FDA determines that it has received a "complete response," and there is no assurance that Veridian's August 28 submission will be deemed complete.
III. The MAE Definition Under the SPA
A. Text of the MAE Definition (SPA § 1.1)
Section 1.1 of the SPA defines "Material Adverse Effect" as follows:
"Material Adverse Effect" means any event, change, development, occurrence, condition, or effect that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the business, results of operations, financial condition, or assets of the Company, taken as a whole, or (b) the ability of the Sellers to consummate the Transactions contemplated by this Agreement.
Several features of this definition warrant particular attention in the context of the present analysis.
First, the definition employs a two-pronged temporal standard: the triggering event must either have "has had" a material adverse effect (a backward-looking, present-tense assessment) or "would reasonably be expected to have" a material adverse effect (a forward-looking, predictive assessment). The "would reasonably be expected to have" formulation is significant because it does not require that the full scope of adverse consequences have already materialized; rather, it is sufficient that the event or development, as of the relevant measurement date, would reasonably be expected to produce material adverse consequences. This forward-looking prong is particularly relevant here, where the ultimate consequences of the clinical hold and adverse clinical data may take months or years to fully manifest but are already reasonably foreseeable.
Second, the definition allows for aggregation: events may be considered "individually or in the aggregate." This means that the Marlowe Asset Management-2 data readout, the FDA partial clinical hold, and the resulting protocol amendments need not each independently satisfy the MAE standard; they may be—and should be—evaluated as a cumulative whole.
Third, the definition encompasses both the Company's "business, results of operations, financial condition, or assets" (prong (a)) and the "ability of the Sellers to consummate the Transactions" (prong (b)). For purposes of this memorandum, our primary focus is on prong (a), as the clinical hold and data readout directly affect the value and viability of Veridian's business, though prong (b) may also be implicated to the extent the developments call into question the regulatory preconditions for the Transaction or the Sellers' ability to deliver the Company in the condition contemplated by the SPA.
Fourth, and critically, the definition measures the impact on the Company "taken as a whole." In the context of a single-product, clinical-stage biotechnology company with no revenue, the "taken as a whole" standard effectively reduces to an assessment of the impact on VRD-4187's clinical and regulatory prospects, because VRD-4187 is Veridian's business, taken as a whole.
B. MAE Carveouts
The MAE definition in SPA § 1.1 contains the following enumerated carveouts, which exclude from the MAE determination any event, change, development, occurrence, condition, or effect to the extent arising from or relating to:
(i) general economic or political conditions, including changes in interest rates, currency exchange rates, or commodity prices;
(ii) conditions affecting the biotechnology or pharmaceutical industries generally (and not specifically relating to the Company);
(iii) changes in applicable law (including any statute, rule, regulation, ordinance, or order) or changes in United States generally accepted accounting principles ("GAAP") or the interpretation thereof;
(iv) pandemics, epidemics, or disease outbreaks (including COVID-19 and similar public health emergencies), including any quarantine, "shelter in place," "stay at home," workforce reduction, social distancing, shut down, closure, sequester, or similar law, directive, guideline, or recommendation promulgated by any governmental authority;
(v) earthquakes, hurricanes, floods, or other natural disasters, or any act of war (whether or not declared), armed hostilities, sabotage, or terrorism;
(vi) changes in the financial or securities markets generally, including changes in prevailing interest rates, credit availability, or investor sentiment; and
(vii) the announcement or pendency of the Transactions contemplated by this Agreement, including any loss of, or adverse change in, the relationship of the Company with any of its employees, customers, suppliers, partners, or other business relationships attributable to the announcement or pendency of such Transactions.
Importantly, the SPA contains a "disproportionate-impact exception" to carveouts (i) through (vi): these carveouts do not apply to the extent that the relevant event, change, or condition disproportionately affects the Company relative to other comparably situated companies operating in the biotechnology industry. The disproportionate-impact exception is a standard market provision that ensures that general-industry or macroeconomic events that happen to devastate the target company more severely than its peers cannot be shielded from the MAE analysis simply because they have some general applicability.
There is no carveout for company-specific clinical trial results, FDA regulatory actions directed at the Company's specific product candidates, or product-specific safety findings. This omission is critical to the analysis that follows. The absence of such a carveout is consistent with the fundamental allocation of risk embodied in the SPA: Penterra is protected against post-signing, company-specific adverse developments that fundamentally alter the value of the asset it agreed to acquire. The FDA's partial clinical hold on IND 154832, based on VRD-4187-specific safety data, falls squarely outside the scope of any carveout.
C. Closing Conditions Implicated
The MAE events described in this memorandum implicate the following closing conditions in the SPA:
SPA § 7.2(a) — Bring-Down of Representations and Warranties. Section 7.2(a) conditions Buyer's obligation to close on the accuracy of the Sellers' representations and warranties contained in Article III of the SPA, both as of the date of the Agreement and as of the Closing Date (or, with respect to representations that speak as of a specific date, as of such date), with the same force and effect as though such representations had been made on and as of the Closing Date. The bring-down standard is qualified by a materiality standard: the failure of representations and warranties to be true and correct must be such as would, individually or in the aggregate, reasonably be expected to constitute a Material Adverse Effect (disregarding, for purposes of this bring-down, any Material Adverse Effect qualification or other materiality qualification contained in such representations). This "double-MAE" construct—a bring-down to a Material Adverse Effect-qualified standard—means that the representations need not be perfectly accurate; rather, the inaccuracies, in the aggregate, must rise to the level of a Material Adverse Effect. For the reasons set forth in this memorandum, we believe they do.
SPA § 7.2(b) — No-MAE Condition. Section 7.2(b) provides a standalone condition that "no Material Adverse Effect shall have occurred since the date of this Agreement that is continuing as of the Closing Date." This is a freestanding closing condition, independent of the bring-down of representations. It directly addresses the scenario at hand: a post-signing development that constitutes a Material Adverse Effect and that remains uncured as of the date on which closing is to occur. The clinical hold and adverse Marlowe Asset Management-2 data satisfy this condition, as discussed in detail in Section VIII below.
SPA § 8.1(d) — Buyer Termination Right. Section 8.1(d) provides that Buyer may terminate the Agreement if any of the conditions set forth in Section 7.2 are incapable of being satisfied prior to the Outside Date (December 10, 2024) and such failure or incapability has not been caused by, or resulted from, a breach by Buyer of any representation, warranty, covenant, or agreement of Buyer contained in the Agreement. This termination right is Penterra's primary avenue for exiting the Transaction in the current circumstances.
IV. Analysis of the FDA Partial Clinical Hold
A. Nature and Significance of the Partial Clinical Hold
A clinical hold is one of the most consequential regulatory actions available to the FDA short of an outright IND withdrawal or refusal to file. Under 21 C.F.R. § 312.42, the FDA may order a sponsor to delay a proposed clinical investigation or to suspend an ongoing clinical investigation, in whole or in part. A "partial" clinical hold, as distinct from a "full" clinical hold, permits certain aspects of the clinical investigation to continue (e.g., treatment of currently enrolled patients under modified safety monitoring) while prohibiting others (e.g., enrollment of new patients). The distinction between partial and full holds, however, should not obscure the severity of the action: a partial clinical hold is imposed only when the FDA determines that there exists an "unreasonable and significant risk of illness or injury" to the subjects of the clinical investigation. 21 C.F.R. § 312.42(b)(1)(i).
In the case of VRD-4187, the specific basis for the partial clinical hold is the CRS-related deaths observed in the Marlowe Asset Management-2 trial. As noted above, seven treatment-related deaths occurred in the VRD-4187 arm—representing 3.6% of the 194 patients in the treatment arm—all of which were attributed to CRS or its sequelae (severe CRS, multiorgan failure secondary to CRS, and cardiac arrest in the setting of Grade 4 CRS). This death rate in a Phase II oncology trial, particularly one involving a drug candidate in a therapeutic class (bispecific T-cell engagers) where CRS management protocols are well-established, is exceptional and alarming. The FDA's decision to impose a partial clinical hold confirms that the agency shares this assessment.
The Hold Letter issued in connection with IND 154832 requires Veridian to submit a "complete response" to the FDA's safety concerns before any enrollment may resume. The term "complete response" is significant: it is not a mere acknowledgment or a pro forma submission. The FDA expects a comprehensive submission that addresses the root cause of the CRS-related deaths, proposes specific risk mitigation measures, provides updated safety analyses, and demonstrates that the proposed amendments to the investigational plan are adequate to protect the safety of future clinical trial subjects. Until the FDA is satisfied that the complete response is adequate, the enrollment freeze remains in effect.
The imposition of a partial clinical hold is not a routine event in clinical drug development. While clinical holds do occur with some regularity across the pharmaceutical industry, they are disproportionately associated with serious safety signals that frequently result in significant delays to—or outright termination of—clinical development programs. Published analyses of FDA clinical holds indicate that the median duration of clinical holds involving patient deaths is approximately nine to twelve months, and that a substantial minority of programs subject to clinical holds involving treatment-related deaths are ultimately discontinued. The clinical hold on VRD-4187, arising from seven treatment-related deaths in a 194-patient treatment arm, falls at the more severe end of this spectrum.
B. Regulatory Timeline Implications
The regulatory timeline implications of the partial clinical hold are substantial and multifaceted.
Under 21 C.F.R. § 312.42(e), after a sponsor submits a complete response to a clinical hold, the FDA has thirty (30) days to respond. However, this 30-day clock does not begin to run until the FDA determines that the submission constitutes a "complete response"—a determination that may itself take weeks. If the FDA determines that the submission is incomplete or inadequate, the clock resets. In practice, clinical holds involving patient deaths frequently require multiple rounds of correspondence between the sponsor and the FDA, often extending over many months. Based on Broadleaf's experience with similar regulatory proceedings, Dr. Kapoor has estimated that the partial clinical hold on VRD-4187 is likely to persist for a minimum of six months and could extend to twelve months or longer, depending on the FDA's assessment of Veridian's complete response and any additional information requests.
Even this timeline, however, understates the practical impact of the hold on VRD-4187's clinical development program. Several cascading consequences deserve attention:
Enrollment Disruption. The partial clinical hold prohibits new enrollment in the Marlowe Asset Management-2 trial. As of the date of the hold, 387 patients had been enrolled across 42 clinical sites. The trial's target enrollment was 600 patients, meaning that enrollment was approximately 65% complete at the time of the hold. The halt in enrollment creates a gap in the trial timeline that cannot be made up simply by resuming enrollment at a later date; rather, the statistical analysis plan and the trial's powering assumptions must be revisited in light of the interruption.
Data Heterogeneity. The enrolled patient population of 387 patients has now been split into at least two cohorts with materially different treatment protocols: (a) the 387 patients treated under the original protocol (VRD-4187 at 1.5 mg/kg without mandatory tocilizumab prophylaxis) and (b) any future patients enrolled under Protocol v4.0 (VRD-4187 at 0.75 mg/kg with mandatory tocilizumab prophylaxis). This data heterogeneity may compromise the interpretability and statistical power of the trial, as the two cohorts will have received materially different treatment regimens. The FDA may require the two cohorts to be analyzed separately, effectively reducing the evaluable population for the modified protocol to zero until sufficient new patients are enrolled and treated under Protocol v4.0.
Efficacy Uncertainty at Reduced Dose. Broadleaf's August 19 assessment specifically flagged the concern that the dose reduction from 1.5 mg/kg to 0.75 mg/kg may reduce the already modest efficacy of VRD-4187. The ORR of 31.4% observed in the Marlowe Asset Management-2 interim analysis was achieved at the 1.5 mg/kg dose—and, critically, was not statistically significant relative to the control arm (ORR 28.9%, p = 0.58). A 50% dose reduction, while potentially mitigating the severity of CRS, may further diminish any efficacy signal, rendering VRD-4187 no better than—or potentially inferior to—the standard of care. There are no published clinical data supporting the efficacy of VRD-4187 at the 0.75 mg/kg dose level.
Potential for Additional Pre-Clinical or Phase I Requirements. Depending on the FDA's assessment of Veridian's complete response, the agency may require additional non-clinical (animal) studies to characterize the CRS mechanism at the molecular level, or may require a new Phase I dose-escalation study at the 0.75 mg/kg dose to establish a revised safety profile before any resumption of Phase II enrollment. Either requirement would add months to years to the development timeline.
Competitive Landscape Erosion. The SCLC treatment landscape is evolving rapidly. Several competing DLL3-targeting agents and other novel modalities (including antibody-drug conjugates, CAR-T therapies, and checkpoint inhibitor combinations) are in mid-to-late-stage clinical development. Each month of delay caused by the clinical hold allows competitors to advance their programs and potentially achieve first-mover advantage in the DLL3-SCLC space, diminishing the commercial opportunity for VRD-4187 even if it ultimately achieves regulatory approval.
The realistic regulatory timeline for resolution of the clinical hold and resumption of meaningful clinical development can be summarized as follows: (i) Veridian must submit a complete response to the FDA's safety concerns (Protocol v4.0 was submitted on August 28, but its sufficiency as a "complete response" is uncertain); (ii) the FDA must determine that the submission is complete and then has 30 days to respond; (iii) if the FDA requires additional data, amendments, or pre-clinical studies, the cycle restarts; (iv) even upon lifting of the hold, re-enrollment at the 0.75 mg/kg dose level under Protocol v4.0 could require six to twelve months of additional enrollment time to reach statistically powered patient numbers; and (v) a sufficient follow-up period for safety and efficacy data at the new dose will be required before any pivotal or registrational conclusions can be drawn. In our assessment, the cumulative effect of these sequential steps is a delay of at least eighteen to thirty-six months in VRD-4187's path toward a potential Biologics License Application ("BLA") or New Drug Application ("NDA") filing, with a material probability that the program will be abandoned altogether.
C. Impact on Veridian's Commercial Prospects
VRD-4187 is Veridian's lead clinical candidate and its only asset in active Phase II clinical development. The remaining two pipeline candidates on the VeriTCE platform—VRD-6223 (CLDN18.2/gastric cancer, IND-enabling studies) and VRD-7801 (MSLN/mesothelioma, preclinical)—are at substantially earlier stages of development and were not, individually or collectively, independently valued at or near the $900 million purchase price. During the negotiation of the SPA, Penterra's internal valuation analysis, supported by the fairness opinion delivered by Garrison Zanthor & Co. on June 9, 2024, attributed the vast majority of Veridian's enterprise value—in excess of 85%—to VRD-4187 and its projected risk-adjusted net present value as a potential commercial product in the SCLC market. The VeriTCE platform and the earlier-stage pipeline candidates accounted for the remaining value, primarily on an option-value basis.
The strategic impetus for the Transaction further underscores VRD-4187's centrality. Penterra's own lead internal oncology candidate, PPC-0921 (a KRAS G12C inhibitor for non-small cell lung cancer), failed a pre-planned futility analysis in a Phase III registration-directed trial on November 18, 2023, resulting in the discontinuation of the PPC-0921 program and the write-off of approximately $340 million in capitalized development costs. The loss of PPC-0921 created a significant gap in Penterra's late-stage oncology pipeline, and the Veridian acquisition was undertaken specifically to fill that gap with VRD-4187. The significance of VRD-4187 to the deal rationale—both as a standalone commercial opportunity and as a replacement for the failed PPC-0921 program—cannot be overstated.
The clinical hold, combined with the underlying safety signal and the lack of efficacy differentiation, creates a realistic scenario in which VRD-4187 may never achieve regulatory approval in its current form. Even under the most optimistic assumptions—that the FDA accepts Protocol v4.0, lifts the hold within three to six months, and permits re-enrollment at the reduced dose—VRD-4187 would face a profoundly challenging path to approval. The 50% dose reduction introduces unknown efficacy dynamics; the existing safety database is permanently encumbered by the seven treatment-related deaths and the high CRS incidence; and the competitive landscape will have advanced considerably during the period of clinical hold. A more realistic assessment is that VRD-4187 may require a fundamentally different clinical development strategy—potentially including a new formulation, a new dosing regimen, a new patient population, or some combination of the three—effectively resetting the development timeline by years and incurring hundreds of millions of dollars in additional development costs.
D. Financial Impact on Veridian
The financial impact of the clinical hold on Veridian must be evaluated in the context of Veridian's financial profile as a clinical-stage company with no product revenue, limited cash resources, and a cost structure driven almost entirely by clinical development activities.
As noted above, Veridian reported zero revenue and a net loss of approximately $87.3 million for the fiscal year ended December 31, 2023. Veridian's operating expenses are dominated by R&D expenses (approximately $68 million in FY2023) and general and administrative expenses (approximately $19.3 million in FY2023). As of March 31, 2024, Veridian had cash and cash equivalents of approximately $112.4 million. Based on the FY2023 net cash used in operating activities of approximately $79.6 million, Veridian's pre-hold cash runway was approximately 15 to 18 months from the balance sheet date (i.e., through approximately mid-to-late 2025), assuming no significant increase or decrease in the rate of cash consumption.
The clinical hold and the required protocol amendments will have two countervailing effects on Veridian's cash burn: on the one hand, the enrollment freeze will temporarily reduce certain direct clinical trial costs (e.g., patient recruitment, site activation, and drug supply for new patients); on the other hand, the costs of responding to the FDA's safety concerns, conducting additional analyses, preparing the complete response, maintaining the 42 active clinical sites, continuing treatment and monitoring of the 387 enrolled patients under enhanced safety monitoring protocols, and ultimately re-enrolling patients under Protocol v4.0 will substantially increase Veridian's overall clinical development expenditures over the medium term. Net-net, the clinical hold is expected to extend the development timeline and increase total program costs without a corresponding increase in the probability of regulatory success—a combination that is deeply adverse to Veridian's financial condition.
Without the acquisition proceeds from the Transaction, Veridian will need to raise additional capital to fund the extended VRD-4187 development program. Any such capital raise would be conducted under significantly adverse circumstances—a clinical hold, a serious safety signal, a 50% dose reduction, and an uncertain regulatory pathway—that would substantially impair Veridian's ability to raise capital on favorable terms. The Series D round closed at a pre-money valuation of approximately $630 million in April 2023, before the Marlowe Asset Management-2 data and the clinical hold; it is reasonable to expect that any post-hold financing would occur at a substantially lower valuation, diluting existing stockholders and further impairing Veridian's financial position.
Veridian's federal net operating loss ("NOL") carryforward of approximately $312 million, while a potentially valuable tax attribute in the context of a profitable acquirer, has limited current utility to Veridian given the absence of taxable income. Moreover, approximately $148 million of the NOL carryforward was generated prior to a Section 382 ownership change event in 2020 and is subject to an annual Section 382 limitation of approximately $5.9 million per year, significantly limiting the rate at which those losses can be utilized even after an acquisition. The remaining $164 million in post-2020 NOLs are not subject to the Section 382 limitation but are subject to the 80% taxable income limitation under Section 172(a) as amended by the Tax Cuts and Jobs Act. These tax attributes, while not without value, do not materially alter the fundamental financial picture of a company whose value is overwhelmingly concentrated in a single clinical asset that is now subject to a regulatory hold.
V. Delaware Law Framework: Durational Significance and the MAE Standard
A. The Akorn Standard and Its Progeny
The leading Delaware precedent on the Material Adverse Effect standard is 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). Akorn is the first—and, as of the date of this memorandum, remains the leading and most thoroughly reasoned—Delaware Court of Chancery decision finding that a material adverse effect had in fact occurred, entitling the buyer to refuse to close.
In Akorn, Vice Chancellor Laster articulated the following principles, which we apply to the present facts:
Durational Significance. A material adverse effect "refers to an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months." Akorn, 2018 WL 4719347, at 84. The court rejected the notion that a MAE must be permanent; rather, the relevant question is whether the adverse change substantially threatens the target's earning power "over a durationally-significant period." Id.*
Quantitative and Qualitative Analysis. The MAE determination is not purely financial; it requires both a quantitative assessment (the magnitude of the financial impact) and a qualitative assessment (the nature, persistence, and root cause of the adverse change). Id. at 85. The court noted that a decline of 20% or more in the target's profitability metrics was a "useful starting point" but not a dispositive threshold. Id.*
Buyer's Burden of Proof. The party seeking to invoke the MAE provision—here, the buyer—bears the burden of proving that a material adverse effect has occurred. The standard is a "heavy" one, reflecting the allocation of risk in the acquisition context, but it is not insurmountable. Id. at *83.
Carveout Interpretation. The court construed MAE carveouts narrowly, consistent with the principle that carveouts represent specific, negotiated risk allocations. General carveouts (e.g., industry-wide conditions) do not shield company-specific developments that are attributable to the target's own conduct or circumstances. Id. at *106–07.
Forward-Looking Assessment. Where the MAE definition includes a "would reasonably be expected to have" prong, the court will consider the expected future consequences of the triggering event, not merely the impact that has already materialized as of the measurement date. Id. at *89.
Subsequent Delaware cases have refined but not materially altered the Akorn framework. In AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020), aff'd, 268 A.3d 198 (Del. 2021), the Court of Chancery found that the COVID-19 pandemic caused a material adverse effect on a hotel business but that the effect fell within the "natural disasters" and "pandemics" carveouts. The AB Stable decision reinforced the principle that MAE carveouts are construed according to their plain terms and that the burden of proving the applicability of a carveout rests on the party seeking to invoke it (i.e., the seller/target). In Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. Apr. 30, 2021), the court declined to find an MAE where the buyer failed to demonstrate that the target's pandemic-related revenue decline was durationally significant, emphasizing the importance of a multi-year time horizon.
A comprehensive analysis of the Delaware MAE case law through the present date is set forth in our August 27, 2024 Delaware MAE Case Law Survey memorandum, which is cross-referenced and incorporated herein by reference. For purposes of this supplemental memorandum, we focus on the application of the Akorn framework to the FDA partial clinical hold on VRD-4187.
B. Application of the Durational Significance Standard to the FDA Clinical Hold
The durational significance standard asks whether the adverse development is "consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months." Applying this standard to the present facts, we conclude that the FDA partial clinical hold—particularly when evaluated in conjunction with the underlying Marlowe Asset Management-2 safety and efficacy data—satisfies the durational significance requirement.
The clinical hold is not a transient or short-term disruption. It is a formal regulatory action imposed by the FDA—the agency with sole authority over the approval of pharmaceutical products in the United States—that strikes at the core regulatory pathway for Veridian's principal (and essentially sole) asset. A clinical hold is not comparable to a temporary supply chain disruption, a quarterly revenue miss, or a seasonal fluctuation in demand. It is an externally imposed legal prohibition on the continued prosecution of a clinical trial, imposed because the agency charged with protecting patient safety has determined that the investigational product presents an unreasonable and significant risk of illness or injury to human subjects.
The adverse effects will persist for years, not months. As discussed in Section IV.B above, the realistic timeline for resolution of the clinical hold and resumption of meaningful clinical development extends over a period of eighteen to thirty-six months at minimum, and there is a material probability that the VRD-4187 program will be abandoned or fundamentally restructured. This timeline is inherently "measured in years" under the Akorn standard.
The underlying data permanently impairs the safety database. Even if the clinical hold were lifted immediately—an outcome that is not realistically possible—the underlying safety data from the Marlowe Asset Management-2 trial cannot be undone. The 23.4% Grade 3 or higher CRS rate and the seven treatment-related deaths will remain permanently in the VRD-4187 safety database and will accompany any subsequent regulatory submission (whether a BLA, NDA, or any other application). These data will significantly impact the FDA's risk-benefit assessment in any future review, will likely result in restrictive labeling (including boxed warnings), and will substantially impair commercial uptake even if approval is eventually obtained. The permanence of the safety data in the regulatory record ensures that the adverse effects are durationally significant regardless of the administrative timeline for resolving the hold itself.
The combination of the clinical data and the hold satisfies the "measured in years" standard for multiple independent reasons: (i) resolution of the hold itself will take months, based on historical precedent with clinical holds involving patient deaths; (ii) restarting enrollment with the modified dosing protocol (0.75 mg/kg with tocilizumab prophylaxis) will require additional months to years of enrollment and data collection to achieve adequate statistical power; (iii) the FDA may require additional pre-clinical studies or a new Phase I dose-escalation study at the 0.75 mg/kg dose, adding further years to the development timeline; and (iv) the competitive landscape in SCLC is evolving rapidly, and each month of delay diminishes VRD-4187's potential first-mover advantage and erodes the commercial opportunity.
C. Comparison to Akorn Facts
A comparison to the facts of Akorn is instructive and, in our assessment, favorable to Penterra.
In Akorn, the Delaware Court of Chancery found a material adverse effect based on a combination of (i) regulatory compliance failures (widespread data integrity issues in Akorn's FDA-regulated manufacturing and quality control processes, discovered through a whistleblower complaint and subsequent investigation) and (ii) a significant decline in Akorn's business performance (a year-over-year revenue decline of approximately 25% and an EBITDA decline of approximately 86% in the quarters following the signing of the merger agreement). The court emphasized that the data integrity issues were not isolated incidents but reflected a "pervasive" and "systemic" failure of Akorn's quality management systems, and that the combination of the compliance failures and the financial decline created a "durationally significant" adverse change in Akorn's earnings power.
The facts here are, in several critical respects, more compelling than those in Akorn:
Severity of the Regulatory Action. In Akorn, the FDA had issued warning letters and required Akorn to undertake remedial measures, but had not imposed a clinical hold or product-specific enforcement action of the type involved here. The FDA's partial clinical hold on VRD-4187 is a more severe and more directly consequential regulatory action: it halts the clinical trial that is the sole pathway to potential regulatory approval of Veridian's principal asset.
Existential Impact. In Akorn, the target was an established generic pharmaceutical company with ongoing revenue streams from a portfolio of approved products. The material adverse effect was measured in terms of declining revenue and profitability, but Akorn remained a going concern with products on the market. Here, Veridian has zero revenue and no approved products. Its entire value is contingent on the successful clinical development and regulatory approval of VRD-4187. The clinical hold and adverse data do not merely reduce Veridian's profitability; they threaten the fundamental viability of Veridian's only commercially relevant asset, raising the possibility of total value destruction.
Forward-Looking Uncertainty. In Akorn, the court had the benefit of several quarters of post-signing financial data demonstrating the magnitude of the decline. Here, because Veridian is a pre-revenue company, the adverse impact must be assessed primarily through the forward-looking "would reasonably be expected to have" prong. But this forward-looking assessment is, if anything, more damning: it is not merely that VRD-4187's prospects have declined—it is that the fundamental assumptions underlying the $900 million valuation (a successful Phase II readout, a path to registrational data, and a commercially viable safety profile) have been shattered.
Causation. In Akorn, the target argued (unsuccessfully) that the financial decline was attributable to general market conditions in the generic pharmaceutical industry rather than company-specific factors. Here, the causal link between the adverse development (clinical hold and safety data) and the impact on Veridian's business is direct and unambiguous: the clinical hold is directed specifically at VRD-4187, is based on VRD-4187-specific data, and affects only Veridian.
For these reasons, we believe the present facts represent a stronger case for a Material Adverse Effect under Delaware law than the facts of Akorn.
VI. Analysis of MAE Carveout Inapplicability to the Clinical Hold
A. No Applicable Carveout for Company-Specific FDA Actions
The MAE carveouts set forth in SPA § 1.1 are not applicable to the FDA partial clinical hold on VRD-4187. We address each potentially relevant carveout in turn.
Carveout (iii) — Changes in Applicable Law. The FDA partial clinical hold on IND 154832 is not a "change in applicable law" within the meaning of carveout (iii). A clinical hold is an enforcement and regulatory action directed at a specific investigational product based on product-specific safety data; it is not a change in the statutes, rules, regulations, or legal standards applicable to the pharmaceutical industry. The regulatory framework governing clinical holds—21 C.F.R. § 312.42—has not changed; rather, the FDA has applied the existing regulatory framework to Veridian's specific product and reached the conclusion that VRD-4187 presents an unreasonable risk to clinical trial subjects. This is a company-specific application of existing law, not a change in the law itself. Delaware courts have consistently distinguished between changes in law (which may be carved out) and the application of existing law to a specific company's circumstances (which is not carved out). See Akorn, 2018 WL 4719347, at *106 (distinguishing "changes in law" from regulatory enforcement actions directed at the target).
Carveout (ii) — Conditions Affecting the Biotechnology or Pharmaceutical Industries Generally. The clinical hold is not a "condition affecting the biotechnology or pharmaceutical industries generally." It is a product-specific action directed at VRD-4187 based on VRD-4187-specific safety data from the Marlowe Asset Management-2 trial. The FDA did not impose a class-wide or industry-wide hold on bispecific T-cell engagers or on DLL3-targeting agents; it imposed a hold specifically on IND 154832 based on the specific safety profile of VRD-4187. While clinical holds do occur across the pharmaceutical industry, each hold is product-specific and company-specific, and the occurrence of holds generally does not transform any individual hold into an "industry condition."
Carveout (iv) — Pandemics. The pandemic carveout is plainly inapplicable. The clinical hold has no connection whatsoever to COVID-19 or any other pandemic, epidemic, or public health emergency.
Carveouts (i), (v), and (vi) — General Economic Conditions, Natural Disasters/War, Financial Markets. None of these carveouts has any conceivable applicability to the clinical hold or the adverse Marlowe Asset Management-2 data.
Carveout (vii) — Announcement or Pendency of the Transaction. The clinical hold and adverse clinical data are not attributable to the announcement or pendency of the Transaction. The Marlowe Asset Management-2 trial was ongoing before the SPA was executed, and the safety signal that gave rise to the clinical hold is attributable to the pharmacological properties of VRD-4187, not to any effect of the Transaction's announcement or pendency on the Company's business.
In short, none of the enumerated carveouts shields the clinical hold or the Marlowe Asset Management-2 data from the MAE analysis. The absence of a carveout for company-specific clinical trial results and FDA regulatory actions directed at the Company's specific product candidates is a deliberate feature of the SPA's risk allocation framework, and it operates exactly as intended in the present circumstances.
B. Disproportionate Impact Exception (Belt-and-Suspenders Analysis)
Even assuming, arguendo, that Veridian were to argue that the clinical hold is somehow an "industry condition" within the meaning of carveout (ii)—a characterization that we believe is untenable for the reasons stated above—the disproportionate-impact exception would apply to remove the carveout from operation.
The SPA provides that carveouts (i) through (vi) do not apply "to the extent that the relevant event, change, development, occurrence, condition, or effect disproportionately affects the Company relative to other comparably situated companies operating in the biotechnology industry." The clinical hold disproportionately affects Veridian for two fundamental reasons:
First, Veridian is a single-product, clinical-stage company whose entire valuation depends on VRD-4187. A clinical hold on VRD-4187 is effectively a hold on Veridian's entire business. By contrast, "comparably situated companies in the biotechnology industry"—whether defined as clinical-stage bispecific T-cell engager developers, DLL3-targeting companies, or clinical-stage oncology companies more broadly—are not, as a class, subject to clinical holds on their lead candidates. The vast majority of clinical-stage biotechnology companies are proceeding with their clinical development programs without regulatory holds.
Second, even among the subset of biotechnology companies that have experienced clinical holds historically, the impact on Veridian is disproportionate because Veridian has no other revenue-generating or late-stage assets to cushion the blow. A diversified pharmaceutical company with a portfolio of approved products and a deep pipeline might absorb a clinical hold on one product without existential consequences; Veridian cannot.
We are preparing a detailed Disproportionate Impact Exception Analysis memorandum, to be delivered on or about September 3, 2024, which will include a comprehensive comparator company analysis identifying a peer group of clinical-stage biotechnology companies and demonstrating that the clinical hold on VRD-4187 has a disproportionate impact on Veridian relative to that peer group.
C. Veridian's Likely Counter-Arguments on Carveouts
We anticipate that Veridian and its counsel at Zalcourt Archer & Cole LLP may advance the following arguments in an effort to bring the clinical hold within the scope of the MAE carveouts or to minimize its significance. We address each in turn.
"The clinical hold is temporary and will be resolved through Protocol v4.0." Veridian may argue that the clinical hold is a temporary regulatory action that will be lifted once the FDA reviews and accepts the Protocol v4.0 amendment, and that a temporary hold should not be treated as a Material Adverse Effect. This argument fails for multiple reasons. The hold is currently in effect with no certain timeline for resolution. The Protocol v4.0 submission has not been reviewed by the FDA, and there is no assurance that it will be deemed a "complete response" or that the FDA will accept it as a basis for lifting the hold. Historical data on clinical holds involving patient deaths suggests a median duration of nine to twelve months, with substantial variance. And even if the hold is ultimately lifted, the clinical implications extend far beyond the administrative lifting of the hold: the underlying safety data, the 50% dose reduction, and the resulting efficacy uncertainty will persist indefinitely. The "temporary" characterization fundamentally misapprehends the nature of the problem.
"The dose reduction is a routine clinical development adjustment." Veridian may seek to characterize the dose reduction from 1.5 mg/kg to 0.75 mg/kg as a routine clinical development adjustment of the type that occurs regularly in early-stage drug development. This characterization is misleading. A 50% reduction in the starting dose—implemented in direct response to seven treatment-related deaths and a 23.4% Grade 3 or higher CRS incidence—is not a routine dose optimization. It is a fundamental alteration of the treatment regimen driven by a serious safety crisis. The dose reduction fundamentally changes the risk-benefit profile of VRD-4187 and introduces unknown efficacy dynamics. Broadleaf's assessment supports the conclusion that the dose reduction may eliminate the already marginal and non-significant efficacy signal observed at the higher dose (ORR of 31.4% at 1.5 mg/kg, p = 0.58 vs. control). A "routine" dose adjustment does not arise from patient deaths and does not carry the risk of eliminating the drug's efficacy.
VII. Cumulative Effect Analysis
A. Aggregation of Events Under the MAE Definition
The MAE definition in SPA § 1.1 expressly provides for the consideration of events "individually or in the aggregate." This aggregation language is a standard feature of MAE definitions and has been consistently applied by Delaware courts to permit the buyer to present the totality of adverse developments as a cumulative whole, rather than requiring each individual event to independently satisfy the MAE standard. See Akorn, 2018 WL 4719347, at *85 (considering the "cumulative impact" of regulatory compliance failures and business performance decline).
In the present case, the following events should be considered in the aggregate in evaluating whether a Material Adverse Effect has occurred:
1. August 14, 2024 — DMC Interim Analysis. The Data Monitoring Committee for the Marlowe Asset Management-2 trial conducted its pre-planned interim analysis and revealed (a) a 23.4% incidence of Grade 3 or higher CRS in the VRD-4187 treatment arm (vs. 4.1% in the control arm), (b) seven treatment-related deaths in the VRD-4187 arm (3.6%) vs. one in the control arm (0.5%), and (c) a non-statistically-significant ORR of 31.4% (VRD-4187) vs. 28.9% (control) (p = 0.58). The DMC recommended immediate suspension of enrollment and dose modification.
2. August 22, 2024 — FDA Partial Clinical Hold. The FDA imposed a partial clinical hold on IND 154832, independently confirming the severity of the safety signal identified by the DMC and halting new enrollment in the Marlowe Asset Management-2 trial. The FDA's determination that VRD-4187 presents an "unreasonable and significant risk of illness or injury" to clinical trial subjects constitutes an independent, authoritative regulatory validation of the seriousness of the safety problem.
3. August 28, 2024 — Protocol v4.0 Amendment. Veridian submitted Protocol v4.0 to the FDA, incorporating mandatory tocilizumab prophylaxis and a 50% dose reduction (from 1.5 mg/kg to 0.75 mg/kg). While Veridian may characterize this as a proactive remediation measure, the protocol amendment is, in substance, an implicit acknowledgment by Veridian of the severity of the safety problem. A sponsor does not implement mandatory prophylaxis and cut the starting dose in half unless the safety profile of the drug is seriously compromised.
The cumulative effect of these three events is a fundamental impairment of VRD-4187's clinical development pathway—which is, for all practical purposes, Veridian's sole source of enterprise value. The DMC data revealed the safety problem; the FDA confirmed its severity and imposed a legal prohibition on further enrollment; and Veridian's own protocol amendment acknowledged the need for drastic changes to the treatment regimen that introduce new and untested variables into the clinical program.
B. Forward-Looking Assessment ("Would Reasonably Be Expected To Have")
The "would reasonably be expected to have" prong of the MAE definition supports—and compels—a forward-looking analysis of the expected consequences of the clinical hold and underlying data. The Delaware courts have recognized that this forward-looking language is meaningful and that it requires assessment of the probable future impact of the triggering events, not merely the impact that has already been felt. See Akorn, 2018 WL 4719347, at *89 (considering the "expected future trajectory" of the target's business in light of the adverse developments).
As of the date of this memorandum, the following consequences are reasonably expected:
• The clinical hold will persist for at least several months and potentially considerably longer. Based on historical precedent with clinical holds involving patient deaths, the median duration is approximately nine to twelve months. There is no basis for assuming a shorter timeline, and the complexity of the FDA's safety concerns (seven deaths, high-grade CRS) suggests that the review process may be protracted.
• Ev