Court Opinion

ID: 4152684
Source: CourtListenerOpinion
Date Created: 2017-03-15 15:06:16.855765+00
Date Added: 2024-06-11T14:30:31.397965
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
___________________________________________
                                            )
SHAREHOLDER REPRESENTATIVE                  )
SERVICES LLC, in its capacity as the        )
Stockholders’ Agent for the former          )
securityholders of Calistoga                )
Pharmaceuticals, Inc.,                      )
                                            )
            Plaintiff,
                                            )
       v.                                   ) C.A. No. 10537-CB
                                            )
GILEAD SCIENCES, INC. and GILEAD            )
BIOPHARMACEUTICS IRELAND                    )
CORPORATION,                                )
                                            )
            Defendants.                     )
___________________________________________ )
                                            )
GILEAD SCIENCES, INC. and GILEAD
                                            )
BIOPHARMACEUTICS IRELAND
                                            )
UC,
                                            )
            Counterclaimants,               )
                                            )
       v.                                   )
                                            )
SHAREHOLDER REPRESENTATIVE                  )
SERVICES LLC, in its capacity as the        )
Stockholders’ Agent for the former          )
securityholders of Calistoga                )
Pharmaceuticals, Inc.,                      )
                                            )
            Counterclaim-Defendant.
                                            )
__________________________________________

                   MEMORANDUM OPINION

                  Date Submitted: January 10, 2017
                   Date Decided: March 15, 2017
Bradley D. Sorrels, Shannon E. German, and Jessica A. Montellese, WILSON
SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; David S. Steuer,
Steven D. Guggenheim, and Evan L. Seite, WILSON SONSINI GOODRICH &
ROSATI, P.C., Palo Alto, California; Attorneys for Plaintiff.

Brian C. Ralston and Aaron R. Sims, POTTER ANDERSON & CORROON LLP,
Wilmington, Delaware; Jason Sheasby, Gary N. Frischling, and Harry A. Mittleman,
IRELL & MANELLA LLP, Los Angeles, California; Lisa S. Glasser, IRELL &
MANELLA LLP, Newport Beach, California; Attorneys for Defendants.

BOUCHARD, C.
      This post-trial decision holds that Gilead Sciences, Inc. is not required to pay

a $50 million milestone payment under the terms of a merger agreement pursuant to

which Gilead acquired Calistoga Pharmaceuticals, Inc. in 2011. The core of the

dispute boils down to the meaning of essentially one word—“indication”—as used

in an 84-page merger agreement.

      As part of the merger consideration, Gilead agreed to make three payments to

the former securityholders of Calistoga if its main compound at the time—CAL-

101—achieved certain milestones. In August 2014, Gilead paid $175 million in

satisfaction of the first two milestones after receiving certain regulatory approvals

for CAL-101 from the United States Food and Drug Administration.

      In September 2014, the European Commission approved CAL-101, in

combination with another drug, as a first-line treatment for patients with chronic

lymphocytic leukemia in the presence of genetic abnormality known as 17p deletion

or TP53 mutation who are unsuitable for chemo-immunotherapy. The question

before the Court is whether that approval satisfies the third milestone, one of the

triggers for which is “the receipt of Regulatory Approval of CAL-101 in the United

States or the European Union, whichever occurs first, as a first-line drug treatment

(i.e., a treatment for patients that have not previously undergone systemic drug

therapy therefor) for a Hematologic Cancer Indication.”

                                          1
      The parties agree that the term “indication” has multiple meanings in the

oncology industry that are context specific. Plaintiff Shareholder Representative

Services LLC contends that, as used in the merger agreement, “indication” means

“the approved use of a drug in a population of patients with a particular disease” and

thus that the milestone at issue can be triggered by a regulatory approval of CAL-

101 as a first-line therapy for a subpopulation of people suffering from a disease,

such as CLL patients with 17p deletion or TP53 mutation. Gilead, by contrast,

contends that “indication” means “disease” and thus that the milestone at issue can

be triggered only by a disease-level regulatory approval of CAL-101.

      For the reasons explained below, after finding that the word “indication” is

ambiguous when construed within the four corners of the merger agreement, I find

that the overwhelming weight of extrinsic evidence supports the conclusion that the

shared intention of the parties at the time of contracting was that the word

“indication” means “disease” and that the milestone at issue could only be triggered

by a disease-level regulatory approval.        Finally, I find that the European

Commission’s approval of CAL-101 was not a disease-level approval and thus that

the milestone in question is not due.

I.    Background

      The facts recited in this opinion are my findings based on the testimony and

documentary evidence of record from a four-day trial held in September 2016 during

                                          2
which four fact and two expert witnesses testified. Plaintiff’s expert was Dr. Susan

G. Arbuck, a consultant who provides strategic research and development services

for drug development. Gilead’s expert was Dr. Claire Dearden, the Clinical Director

of the Haemato-Oncology Department and the Specialist Haematological

Malignancy Diagnostic Service at the Royal Marsden Hospital & Biomedical

Research Center in London, United Kingdom. I accord the evidence the weight and

credibility I find it deserves.

       A.     The Parties

       Before the merger, Calistoga Pharmaceuticals, Inc. (“Calistoga”) was a

privately-held biotechnology company that developed and held a portfolio of

proprietary compounds for the treatment of inflammatory and autoimmune diseases

and hematologic cancers.

       Defendant Gilead Sciences, Inc., a Delaware corporation with its principal

place of business in California, is a biopharmaceutical company that develops and

commercializes drugs for the treatment of life-threatening diseases and illnesses.

Defendant Gilead Biopharmaceutics Ireland Corporation, a company formed under

the laws of Ireland, was a wholly-owned subsidiary of Gilead Sciences, Inc.1 In this

1
 On September 22, 2014, Gilead Biopharmaceutics Ireland Corporation was renamed
Gilead Biopharmaceutics Ireland UC. JX702-004.

                                         3
opinion, I refer to Gilead Sciences, Inc. and Gilead Biopharmaceutics Ireland

Corporation together as “Gilead.”

         On February 21, 2011, Gilead and Calistoga executed an Agreement and Plan

of Merger (the “Merger Agreement”) pursuant to which Gilead acquired Calistoga.

Under Section 9.3(a) of the Merger Agreement, plaintiff Shareholder Representative

Services LLC (“SRS”), a Colorado limited liability company, was appointed as the

agent for the former securityholders of Calistoga for the purpose of, among other

things, enforcing the terms of the Merger Agreement.

         B.     Calistoga Initiates a Sale Process

         In the fall of 2010, Calistoga began considering various potential strategic

alternatives, including licensing the commercial rights of its drugs, an initial public

offering, and a sale of the company. 2 By the fourth quarter of 2010, Calistoga

decided to run a sale process.3 Around that time, it retained J.P. Morgan Securities

LLP (“JP Morgan”) to assist it in the sale process.4 Carol Gallagher, Calistoga’s

Chief Executive Officer, oversaw the sale process with assistance from Cliff Stocks,

Calistoga’s Chief Business Officer.5

2
    Tr. 140-41 (Gallagher).
3
    Tr. 190 (Gallagher).
4
    Tr. 142-43 (Gallagher).
5
    Tr. 155 (Gallagher); Tr. 43 (Miller).

                                            4
         By December 7, 2010, Calistoga had received offers from a number of

pharmaceutical companies including:         AstraZeneca, Human Genome Sciences,

Bristol-Myers Squibb, Daiichi Sankyo, and GlaxoSmithKline.6 Later that month,

Gilead expressed interest in acquiring Calistoga. 7 Gilead’s team was led by Dr.

Muzammil Mansuri, Executive Vice President of Strategy, Business Development,

and Licensing; and Sean O’Connell, Senior Director of Corporate Development.8

         C.      Calistoga Makes Due Diligence Presentations to Gilead

         At the time of the sale process, Calistoga held a portfolio of compounds.9

Only two compounds (CAL-101 and CAL-263) had been tested on human beings,

and only one (CAL-101) had demonstrated initial efficacy in humans.10

         CAL-101 had shown promise in early trials to treat blood cancers, including

two types of incurable B-cell malignancies known as chronic lymphocytic leukemia

(CLL) and indolent Non-Hodgkin’s Lymphoma (iNHL).11 CAL-101 also showed

potential as a treatment in solid tumors and inflammatory ailments.12 CAL-101 was

6
    JX057-004; Tr. 144 (Gallagher).
7
    Tr. 144-45 (Gallagher); Tr. 831-32 (O’Connell); Mansuri Dep. 66-67; JX066.
8
    Tr. 884 (O’Connell); JX712-005.
9
    JX371-007.
10
     Tr. 192-93 (Gallagher).
11
     JX068-002; JX068-013; Tr. 15-16 (Miller).
12
     JX068-065; Tr. 217 (Gallagher).

                                            5
later given the generic name idelalisib, and is now sold by Gilead under the trade

name Zydelig. 13 In this opinion, I use the terms “CAL-101,” “idelalisib,” and

“Zydelig” interchangeably.

         During due diligence, Calistoga provided Gilead with information about

CAL-101’s potential for treating hematologic cancers, with a particular focus on

CLL and iNHL. 14 Calistoga also explained to Gilead the clinical trials it was

conducting and planned to conduct for CAL-101 in support of regulatory approvals

of the drug.15 For example, in two January 2011 presentations, Calistoga outlined

its plans to obtain an accelerated approval of CAL-101 “for the treatment of patients

with iNHL refractory to rituximab and alkylating agents” by 2013; and to obtain full

approvals “for use in combination for the treatment of patients with previously

treated CLL” by 2015, and “for use in combination for the treatment of patients with

previously treated iNHL” by 2016.16

         In the United States, the term “accelerated approval,” which is known as

“conditional approval” in Europe, is a special process that allows a drug to be

approved more rapidly when there is a high unmet medical need.17 After one obtains

13
     See Tr. 5 (Miller), Stephens Dep. 17-18.
14
     Tr. 15-16 (Miller); Tr. 768-69 (Hawkins); see Tr. 13-14 (Miller); JX068.
15
     Tr. 24-28 (Miller); see e.g., JX068-017 (summarizing studies).
16
     JX068-050; JX084-004-05.
17
     Tr. 23 (Miller); Tr. 151-52 (Gallagher); Tr. 401-02 (Arbuck); Tr. 907-08 (O’Connell).

                                                6
an accelerated approval, additional studies still must be conducted to secure a full

and unconditional approval from the relevant regulatory authority.18

         The term “refractory” or “previously treated” refers to “the time of treatment

of the drug relative to previous therapies.”19 The cancers that are the subject of this

case typically are incurable and will return.20 After the first therapy of a patient—

known as the “first-line” or “frontline” treatment—a patient who relapses becomes

“refractory.” 21 The next line of therapy for a refractory patient is known as a

“second-line” treatment, which can progress to a third-line treatment and so on.22

         Early data for CAL-101 that Calistoga presented to Gilead suggested that the

drug was effective in all patients with CLL. 23 The presentation highlighted the

drug’s efficacy in one particular subgroup—CLL patients with genetic abnormalities

known as “17p deletion/TP53 mutation.”24 Patients with 17p deletion do not have

18
     Tr. 24 (Miller).
19
     Tr. 250 (Gallagher).
20
     Tr. 249 (Gallagher).
21
     Tr. 381 (Arbuck).
22
     Tr. 76 (Miller); Tr. 775 (Hawkins).
23
     JX068-027; JX068-029; Tr. 771 (Hawkins).
24
     JX068-027; Tr. 31-33 (Miller); Tr. 257 (Gallagher); see Milligan Dep. 68-69.

                                              7
the short arm of chromosome 17, on which the TP53 gene resides.25 Even if a patient

has the TP53 gene, the TP53 gene may have mutated and still not function.26

         The oncology community widely recognized that patients with the 17p

deletion or the TP53 mutation had tumors that were particularly resistant to then-

existing forms of treatment, such as chemotherapy and certain types of

immunotherapy.27 As a result, those patients were commonly considered to have the

worst prognosis among all CLL patients.28 Approximately 10% of newly diagnosed

CLL patients and 50% of relapsed/refractory CLL patients have 17p deletion or

TP53 mutation.29 Calistoga’s initial data for CAL-101 suggested that, unlike some

traditional regimens, CAL-101 circumvented the treatment-resistant characteristics

of the 17p deletion or TP53 mutation genetic abnormality.30

25
     Tr. 579-80 (Dearden).
26
     Tr. 580 (Dearden).
27
     Tr. 412-13 (Arbuck); Tr. 673 (Dearden); Milligan Dep. 68.
28
     Tr. 412-13 (Arbuck); JX1000-003; JX1002-003.
29
  See Tr. 428-29 (Arbuck) (testifying that around 10% of newly diagnosed CLL patients
have 17p deletion or TP53 mutation, and the number rises to 40-50% among relapsed and
refractory CLL patients); JX785-006 (Gilead marketing presentation stating that around 7-
13% of frontline CLL patients and 48-53% of relapsed/refractory CLL patients have 17p
deletion or TP53 mutation); Tr. 114 (Miller) (“about 5 to 8 percent of CLL patients will
exhibit 17p deletion or TP53 mutation if tested at the time of their first treatment”); Tr.
659-60 (Dearden) (acknowledging studies that found around 10-15% of CLL patients have
a defect in the TP53 gene at the time of diagnosis and that as high as 40-50% of refractory
CLL patients have this genetic abnormality).
30
     Tr. 32 (Miller); Tr. 771-72 (Hawkins).

                                              8
         D.     Gilead and Calistoga Exchange Drafts of the Merger Agreement

         On January 28, 2011, Gilead provided JP Morgan with a preliminary and non-

binding expression of interest to acquire Calistoga.31 Gilead’s preliminary offer

consisted of a cash payment of $310 million at closing and additional contingent

payments totaling $275 million based on the achievement of three milestones:

         a) One time payment of $100M payable after receipt of the first
            accelerated approval (i.e., “Subpart H” in US or “Conditional” in
            EU) of CAL-101 for indolent Non-Hodgkin’s Lymphoma (iNHL)
            or Chronic Lymphocytic Leukemia (CLL) provided such
            accelerated approval is obtained no later than December 31, 2013.
            For clarity, no such milestone payment will be payable if such
            accelerated approval is obtained after December 31, 2013.

         b) One time payment of $75 million upon dosing of first patient in a
            Phase III study of CAL-101 for first line treatment of patients with
            iNHL or CLL.

         c) One time payment of $100M payable upon obtaining first full
            regulatory approval of CAL-101 in US or EU for iNHL or CLL (in
            either relapsed/refractory or first line setting).32

After Gilead made its preliminary offer, the parties began an exchange of drafts of a

merger agreement,33 and occasionally engaged in conversations.

31
     Tr. 148 (Gallagher); JX160.
32
     JX160-003.
33
 The dates of the drafts discussed in this opinion refer to the dates they were exchanged,
which varies for some drafts by one day from the date that appears on the document.

                                            9
                1.    The February 1 Calistoga Draft

         On February 1, 2011, Calistoga sent Gilead a first draft of a merger agreement,

which contemplated an up-front payment of at least $300 million and four different

milestones totaling at least $300 million:34

          $100 million within “10 business days following the receipt of the
           first Regulatory Approval in the United States or an EU Country,
           whichever occurs first, of CAL-101 for a hematologic cancer
           indication.”35

          $75 million within “10 business days following the receipt of the
           second Regulatory Approval in the United States or an EU Country,
           whichever occurs first, of CAL-101 for a hematologic cancer
           indication.”36

          $50 million within “10 business days following the receipt of the
           first Regulatory Approval in the United States or an EU Country,
           whichever occurs first, of a P110 Delta Product, for an indication
           other than a hematologic cancer indication.”37

          $75 million within “10 business days following the Initiation of a
           Registration Study involving CAL-101 as a first line treatment for
           an oncology indication.”38

34
     JX175-016; Tr. 154 (Gallagher).
35
  JX175-053 § 9(bk)(i). If the first Regulatory Approval is obtained on or before June 30,
2014, then the first milestone payment shall be increased to $150 million. Id.
36
     JX175-053 § 9(bk)(ii).
37
  JX175-053-054 § 9(bk)(iii). “P110 Delta Product” was defined as “a pharmaceutical
product (i) the manufacture, use, importation or sale of which is covered by a Valid Claim
or (ii) is a P13K-delta inhibitor for which clinical trials for an oncology indication are
conducted prior to the fifth anniversary of the Closing Date.” JX175-013.
38
  JX175-054 § 9(bk)(iv). “Initiation of a Registration Study” was defined as “first dosing
of the first patient in such Registration Study.” JX175-012. “Registration Study” was
defined as a “human clinical trial of a P110 Delta Product on patients, which trial is

                                            10
         The first two of these milestones were each triggered by a “Regulatory

Approval” of CAL-101 for a “hematologic cancer indication,”39 which term was not

defined. 40 The draft defined “Regulatory Approval” as “all approvals, licenses,

registrations or authorizations by any Regulatory Authority necessary to market a

P110 Delta Product in such country or jurisdiction. For clarity, an Accelerated

Approval shall constitute a Regulatory Approval.”41 “Accelerated Approval” in turn

was defined as “a Regulatory Approval in the United States or an EU Country, based

on the results of a single Registration Study (such as Study 101-09), i.e., without a

second Registration Study being required to be completed prior to the receipt of such

Regulatory Approval.”42

         The February 1 draft of the merger agreement required Gilead to use

“Commercially Reasonable Efforts” to achieve all of the milestones “in a prompt

and expeditious manner.” 43 The term “Commercially Reasonable Efforts” was

defined to mean “the expenditure of efforts and resources, consistent with the usual

designed to establish substantial evidence of the efficacy and/or safety of the P110 Delta
Product to support Regulatory Approval of such P110 Delta Product . . . .” JX175-014.
39
     JX175-053-054.
40
     See generally JX175; Tr. 161 (Gallagher); Tr. 840 (O’Connell).
41
     JX175-015.
42
     JX175-007.
43
     JX175-056 § 9(bl)(iii)(B).

                                             11
practice of [Gilead], with respect to development and/or commercialization of its

other important pharmaceutical products with significant market potential being

actively and diligently pursued by [Gilead].”44

         After receiving Calistoga’s February 1 draft, Sean O’Connell, the lead

negotiator for Gilead,45 prepared a summary of Calistoga’s proposed milestones for

himself, which stated in relevant part as follows:

         (a) $100M upon first regulatory approval of CAL-101 in US or EU
         country (whichever occurs first) for hematological cancer
             ...
         (c) $75M upon first patient dosing in registrational [sic] study for CAL-
         101 for first line treatment
         (d) $75M upon second regulatory approval of CAL-101 in US or EU
         country (whichever occurs first) for hematological cancer
         (e) $50M upon first regulatory approval of a P110 Delta Product for an
         indication other than hematological cancer (e.g., CAL-101 for solid
         tumors or back-up compound for any non-hematological cancer
         indication)46

         On February 4, 2011, O’Connell sought clarification from Cliff Stocks,

Calistoga’s lead negotiator,47 concerning the operation of the first two milestones.

Stocks responded in an email the same day, explaining that each of the proposed

milestones would have “significant commercial value:”

         As one potential example, iNHL approval in the US and then in an EU
         Country would trigger the First and Second milestones, respectively.
44
     JX175-009.
45
     Tr. 829 (O’Connell).
46
     JX185-002 (emphasis in original); Tr. 841-42 (O’Connell).
47
     Tr. 73 (Miller); Tr. 829 (O’Connell).

                                             12
         As a second potential example, iNHL approval in the US and then CLL
         approval in an EU Country also would trigger the First and Second
         milestones, respectively. As a third potential, iNHL approval in the US
         and then CLL approval in the US also would trigger the first and second
         milestones, respectively. . . . We believe in any of these cases . . . the
         event would result in significant commercial value and therefore
         worthy of the milestone defined.48

                2.    The February 8 Gilead Draft

         Later on February 4, O’Connell wrote an email to another member of Gilead’s

deal team, asking for help to generate “a list of hematological cancers in order of

size (either patient number or size of market),” so he could “qualify the . . . milestone

payment obligations as only applying to the first or second approval for a ‘major’

hematological cancer so [Gilead is not] paying a big milestone for a tiny hemonc

indication.”49 “Hemonc” was O’Connell’s shorthand for “hematological.”50

         On February 6, a consultant from the Boston Consulting Group, which was

assisting Gilead, sent O’Connell an email attaching some slides summarizing

“estimated size of patient populations for all hematological cancers.” 51 The first

slide in the attachment listed certain blood cancers in descending order based on the

estimated incidence for each cancer in the United States in 2010.52 O’Connell drew

48
     JX196-001; Tr. 847-48 (O’Connell).
49
     JX192-001.
50
     See Tr. 854 (O’Connell).
51
     JX197-001; Tr. 851 (O’Connell).
52
     JX197-002.

                                            13
a line on the slide under “Chronic Myeloid Leukemia,” which was the last blood

cancer on the list with an incidence in the United States exceeding 4,000 in 2010,

and placed check marks next to nine of the blood cancers listed above the line.53

         The nine blood cancers O’Connell selected became Schedule 1.1 in a revised

draft of the merger agreement that Gilead sent to Calistoga on February 8, 2011.54

In this draft, which included an upfront payment of $310 million, Gilead replaced

the undefined term “hematologic cancer indication” in the milestone provisions of

the February 1 draft with the defined term “Specified Hematologic Cancer

Indication,” which referred to “any hematologic cancer indication specifically listed

on Schedule 1.1.”55 Schedule 1.1 in turn stated as follows:56

53
     See JX197-002; Tr. 852-53 (O’Connell).
54
     JX206-102; Tr. 852-53 (O’Connell).
55
     JX207-021 & 075-076 § 9.1; JX207-019.
56
     JX 207-100.

                                              14
O’Connell explained that his intent in compiling the Schedule 1.1 was to make sure

the milestones were triggered by “significant commercial events for Gilead.” 57

         In its February 8 draft, Gilead proposed several other changes to the milestone

provisions contained in Calistoga’s February 1 draft, three of which are relevant

here. First, Gilead revised the definition of “Regulatory Approval” to exclude

accelerated approvals so that they would not trigger any of the milestones.58 Second,

Gilead further narrowed the scope of milestone-eligible regulatory approvals by

requiring the regulatory approval to come from the United States or a “Major Market

Country,” which was defined to include only “France, Germany, Spain, Italy and the

U.K.”59 Calistoga previously had proposed that the required regulatory approval

could come from the United States or any “country that is a member state of the

European Union.” 60 Third, Gilead removed the obligation to use Commercially

Reasonable Efforts to achieve the third milestone once CAL-101 was approved for

a Specified Hematologic Cancer Indication in both the United States and a Major

Market Country.61

57
     Tr. 852 (O’Connell); see also Tr. 913 (O’Connell).
58
     JX207-019; see also Tr. 912 (O’Connell).
59
     JX207-014; JX207-075-076.
60
     JX175-011; JX175-053.
61
     JX207-079 § 9.1(b)(iii)(B).

                                             15
                3.     The February 12 Calistoga Draft

         On February 12, Calistoga sent Gilead a revised draft of the merger agreement

that pushed back against Gilead’s revisions to the milestone provisions in three

ways. First, Calistoga introduced a new Schedule 1.1, set forth below, 62 which

defined “Specified Hematologic Cancer Indication” as “[a]ny indication within the

following tumor types,” and thereafter listed eleven types of tumors. It is undisputed

that tumors are “cancers.”63

62
     JX223-017 & 089.
63
     Tr. Oral Arg. 26, 103 (Jan. 10, 2017).

                                              16
Second, Calistoga again revised the definition of Regulatory Approval to include

accelerated approvals. 64 Third, Calistoga reinstated Gilead’s obligation to use

Commercially Reasonable Efforts to achieve all milestones and added that Gilead

shall “refrain from taking any action the primary purpose of which is to avoid the

satisfaction of any Milestone.”65

         Significant to this case, when it revised Schedule 1.1 in its February 12 draft,

Calistoga relied on the WHO Classification of Tumours of Haematopoietic and

Lymphoid Tissues (the “WHO Classification”) to establish what “indications”

would trigger the regulatory milestones. 66 The WHO Classification, which is

compiled by the World Health Organization, is considered the authoritative source

of hematologic tumor classifications.67 Thus, although the subject was a matter of

considerable dispute before trial, the evidence at trial clearly establishes that

Calistoga effectively incorporated the framework of the WHO Classification into

Schedule 1.1 for purposes of defining when the regulatory milestone payments

would be due.68

64
     JX224-018.
65
     JX224-079 § 9.1(b)(iii)(B).
66
     See e.g., Tr. 262, 264, 273-74 (Gallagher); Tr. 55, 64 (Miller).
67
     Tr. 389-90, 537 (Arbuck); Tr. 569-70, 574 (Dearden).
68
  There are slight differences in wording between Schedule 1.1 and the top-level tumor
types in the WHO Classification, which Dr. Dearden credibly testified are likely the result
of the use of different versions of the WHO Classification. Tr. 597-99 (Dearden).

                                               17
         Specifically, in connection with preparing the February 12 draft to send to

Gilead, Dr. Gallagher asked Dr. Langdon Miller, Calistoga’s Executive Vice

President of Research and Development, to prepare “a list of possible indications or

possible diseases in which [CAL-101] might be used” that “would be used as part of

the definition of the milestone.” 69 Dr. Miller was assisted by Dr. Albert Yu,

Calistoga’s Vice President of Clinical Affairs and Chief Medical Officer.

         On February 11, 2011, Dr. Yu emailed Dr. Miller, attaching a document

entitled “REAL WHO Classification Lymphoma.”70 The next day, on February 12,

Dr. Miller emailed back to Dr. Yu, stating: “Just FYI. Here’s the final list sent to

Carol [Gallagher]. Myeloid list comes from an update published in Blood in 2009.

Thanks for the collective help on this.”71 The 2009 Blood article Dr. Miller referred

to in his email was an article entitled “The 2008 revision of the World Health

Organization (WHO) classification of myeloid neoplasms and acute leukemia:

rationale and important changes.”72 Table 2 of the article “lists the major subgroups

of myeloid neoplasms and acute leukemia in the WHO classification, and the

specific entities of which they are composed.”73

69
     Tr. 54 (Miller).
70
     JX217-001.
71
     JX226-001; Tr. 56-57 (Miller).
72
     Tr. 61 (Miller); see JX028.
73
     JX028-003; Tr. 62 (Miller).

                                          18
         Dr. Miller testified at trial that the final list he sent to Dr. Gallagher was a

combination of the list Dr. Yu had sent him and the list he took from the 2009 Blood

article.74 Dr. Miller also testified that the “List of Hematological Malignancies” he

prepared is “a list of diseases within hematologic cancer tumor types,” which did not

include any “subpopulations of patients,” “any type of patient risk stratification

factors,” or any “genetic aberrations in CLL cells.”75

         On February 12, at 12:43 a.m., Dr. Gallagher emailed Calistoga’s legal and

financial advisors, attaching the “List of Hematological Malignancies” that Dr.

Miller had prepared.76 The email read: “Langdon went to the WHO listing which

is attached for a definition of hematological malignancies.”77 The Schedule 1.1 in

Calistoga’s revision of the merger agreement, which was sent to Gilead at 11:15 a.m.

on February 12, tracks the top-level headers in Dr. Miller’s list, such as “B-cell

neoplasms” and “T-cell and putative NK-cell neoplasms.” 78 It does not contain the

more specific diseases listed under the top-level headers, but instead uses the phrase

74
     Tr. 47-48, 64 (Miller).
75
     Tr. 57-58, 60 (Miller).
76
     JX227.
77
     JX227-001.
78
     JX223-001.

                                            19
“Any indication within the following tumor types” before the list of top-level

headers to capture the more specific diseases.79

                4.    The February 16 Gilead Draft

         After receiving Calistoga’s February 12 draft of the merger agreement,

O’Connell recognized that the new Schedule 1.1 reflected “the WHO accepted

classification system of hematological cancer diseases.” 80 O’Connell initially

thought it “looked familiar” based on his work in the field and then consulted with

Dr. Michael Hawkins, Gilead’s Senior Director of Oncology and the clinical advisor

on Gilead’s deal team, who “confirmed that it was the accepted list of hematological

diseases.”81

         Dr. Hawkins corroborated O’Connell’s testimony. He explained that, at some

point during the merger negotiations, someone on Gilead’s team provided him with

Calistoga’s proposed schedule and asked where it came from. 82 Dr. Hawkins

recognized that the list came from the WHO Classification because of the

nomenclature, and then went online and confirmed that there was a one-to-one

79
     Compare JX227-002-004 with JX223-089.
80
     Tr. 855-56 (O’Connell).
81
  Tr. 856 (O’Connell). Dr. Mansuri testified similarly in deposition. See Mansuri Dep.
42-43. Dr. Claire Dearden, Gilead’s expert, also testified that Part 1 of Schedule 1.1 was
“immediately recognizable” as tumor types defined within the WHO Classification. Tr.
595-98 (Dearden).
82
     Tr. 789 (Hawkins).

                                           20
correlation between the terms in Calistoga’s list and the terms in the WHO

Classification.83 Dr. Hawkins reported back that, “This looks to me like the WHO

classification.”84

         Recognizing that Calistoga had “[e]xpanded the definition of ‘Specified

Hematologic Cancer Indication’ to include all hematologic cancer indications” by

using the WHO Classification, O’Connell considered making a counter-proposal to

limit the hematologic cancer indications that could trigger the milestones to only

“those that satisfy a minimum number of annual cases.” 85 Gilead prepared an

internal draft reflecting this approach, but did not sent it to Calistoga. 86 Gilead

instead took a different approach.87

         Specifically, in a February 16 draft it sent to Calistoga, Gilead introduced a

new term—Hematologic Cancer Indication—which was defined as “any

hematologic cancer indication specifically identified in Part 1 of Schedule 1.1.” 88

Gilead then divided Schedule 1.1 into two parts. Part 1 was identical to the Schedule

83
     Tr. 789-90 (Hawkins).
84
     Tr. 790 (Hawkins).
85
     JX385-003 (original phrase was in all caps); Tr. 858-59 (O’Connell).
86
     See JX247-276 § 9.1(a)(i) & (ii).
87
     JX240.
88
     JX241-012.

                                             21
1.1 that Calistoga proposed in its February 12 draft.89 Part 2 was identical to the

Schedule 1.1 Gilead proposed in its February 8 draft. 90 Gilead also revised the

definition for Specified Hematologic Cancer Indication, which now meant “any

hematologic cancer indication specifically identified in Part 2 of Schedule 1.1.”91

         The February 16 draft included an up-front payment of $310 million and up

to $300 million in five milestone payments.92 The first and second milestones of

$100 million and $50 million, respectively, would be triggered by the first and

second Regulatory Approvals in the United States or in a Major Market Country of

CAL-101 for a Hematologic Cancer Indication,93 unless both approvals were in the

same location (i.e., both in the United States or in a Major Market Country), in which

case one of the two approvals must be for a Specified Hematologic Cancer Indication

to trigger the second milestone.94 Once again, Gilead removed accelerated approvals

from the definition of Regulatory Approval.95

89
     Compare JX241-095 with JX223-089.
90
     Compare JX241-095-096 with JX207-100.
91
     JX241-018.
92
     JX241-019; JX241-072-073 § 9.1(a).
93
     JX241-072-073 § 9.1(a)(i) & (ii).
94
  JX241-072-073 § 9.1(a)(ii). The remaining three milestones in this draft were dropped
from the later draft and are irrelevant to the analysis in this opinion.
95
     JX241-017.

                                          22
         Shortly before sending the February 16 draft to Calistoga, O’Connell sent

Stocks an email giving him “a heads up on the draft” and summarizing the proposed

second milestone as follows:

         $50M 2nd approval in any hematological indication but if it is for a
         second indication in the same territory as the 1st, one of the two
         indications would need to be in the narrower list of Specified
         Hematological Indication (i.e., CLL, iNHL and the other major hemonc
         cancers, as we tentatively agreed yesterday in Foster City)96

As O’Connell’s email to Stocks reflects, the intent of creating the term “Specified

Hematologic Cancer Indication” was to create a “narrower list” of “cancers” to

trigger the milestone when that term applied rather than the boarder term

“Hematologic Cancer Indication.”

               5.     The February 18 Calistoga Draft

         On February 18, 2011, the day after Gilead’s board of directors authorized the

purchase of Calistoga for up to $750 million in total consideration,97 Calistoga sent

Gilead a further revision of the merger agreement. The February 18 draft increased

the up-front payment from $310 million to $375 million and contained a new set of

three milestones totaling $225 million—down from $300 million in the prior draft.98

O’Connell summarized the terms of the milestones in an email to Stocks, stating that

96
     JX256-001.
97
     JX274-007. See also Milligan Dep. 84; Mansuri Dep. 111-12.
98
     JX277-018; JX277-072-073 § 9.1(a).

                                           23
if his summary was correct, “we are in agreement with the economic terms of the

agreement:”99

         (1) $100M upon first approval of CAL-101 in [the] US or EMA
             (centralized approval) for any hematologic indication (CRE[ 100 ]
             APPLIES)
         (2) NO EARLY APPROVAL MILESTONE[101]
         (3) $75M upon second approval of CAL-101 in [the] US or EMA,
             provided that if the second approval is in the same territory as the
             first, one of the approvals must be for a “specified” hematologic
             indication (CRE APPLIES)
         (4) $50M for the first to occur of the following: (i) approval of CAL-
             101 for solid tumors, (ii) approval of CAL-101 as a first-line
             treatment for any hematologic indication, OR (iii) if annual net sales
             of CAL-101 exceed $1B (NO CREs)102

         Calistoga made several other changes to the milestone provisions. First, it

revised the definition of Hematologic Cancer Indication in Part 1 of Schedule 1.1 to

add a twelfth category to the previous list of eleven tumor types, namely: “Any

Specified Hematologic Cancer Indication listed in Part 2 of this Schedule 1.1.”103

Second, it again defined Regulatory Approval to include an accelerated approval,

99
     JX304-001.
  “CRE” and “CREs” are acronyms for “Commercially Reasonable Efforts.” See Tr. 184
100

(Gallagher); Mansuri Dep. 120.
101
   In some of the earlier drafts of the merger agreement, the first milestone payment could
be increased to $150 million if the first Regulatory Approval was obtained on or before
June 30, 2014. See JX175-053; JX207-075; JX223-068; JX241-072.
102
      JX304-001.
103
      JX277-096.

                                            24
which term was not separately defined. 104 Third, it changed the geographical

limitation in the milestone provisions from “in the United States or in a Major

Market Country” back to “in the United States or in the European Union”—what it

proposed in its initial February 1 draft. 105 Finally, it agreed to limit Gilead’s

obligation to use Commercially Reasonable Efforts to the first two milestones,

although it still required Gilead to “refrain from taking any action the primary

purpose of which is to avoid the satisfaction of any Milestone.”106

         E.     The Parties Finalize and Execute the Merger Agreement

         On the evening of February 18, Calistoga informed Gilead that its “Board

supports management’s recommendation to move forward expeditiously with

Gilead to get to a deal announcement by Monday [February 21] night.” 107 On

February 21, the parties executed the Merger Agreement.

         The milestone provisions in the final Merger Agreement differed from

Calistoga’s February 18 draft in one significant respect: the requirement that Gilead

refrain from taking any action for the primary purpose of avoiding the third

104
      JX277-016-017.
105
      JX277-072-073 § 9.1(a).
106
      JX277-075-076 § 9.1(b)(iii)(B).
107
      JX307-001; Mansuri Dep. 114-16.

                                         25
milestone payment was removed.108 The final Schedule 1.1, which was renamed

“Section 1.1” in the Company Disclosure Schedule, reads as follows:109

108
      JX351-070-071 § 9.1(b)(iii)(B).
109
      JX350-002-003.

                                        26
Hereafter, I refer at times to the two parts of Section 1.1 of the Company Disclosure

Schedule as “Part 1” and “Part 2.”

      Under Section 9.1(a)(i) of the Merger Agreement, the first milestone payment

of $100 million (the “First Milestone”) became due fifteen business days after the

receipt of “the first Regulatory Approval in the United States or in the European

Union, whichever occurs first . . . of CAL-101 for a Hematologic Cancer Indication.”

Under Section 9.1(a)(ii) of the Merger Agreement, the second milestone payment of

$75 million (the “Second Milestone”) became due fifteen business days after the

receipt of the second “Regulatory Approval of CAL-101 in the United States or in

the European Union, whichever occurs first, for a Hematologic Cancer Indication,”

but if the second approval was obtained in the same location as the first approval,

and the First Milestone was “achieved for an indication other than a Specified

Hematologic Cancer Indication, then the [Second Milestone] shall not be satisfied

unless such second Regulatory Approval is received for a Specified Hematologic

Cancer Indication.”

      Under Section 9.1(a)(iii) of the Merger Agreement, the third milestone of $50

million (the “Third Milestone”) became due fifteen business days after the earliest

to occur of:

      (A) the receipt of Regulatory Approval of CAL-101 in the United States
      or the European Union, whichever occurs first, for a solid tumor
      indication, (B) the receipt of Regulatory Approval of CAL-101 in the
      United States or the European Union, whichever occurs first, as a first-
                                         27
         line drug treatment (i.e., a treatment for patients that have not
         previously undergone systemic drug therapy therefor) for a
         Hematologic Cancer Indication, or (C) Annual Net Sales of CAL-101
         achieving at least $1 Billion, so long as such Annual Net Sales are
         achieved on or before the first day of the first calendar quarter
         beginning after the Outside Date [i.e., the tenth (10th) anniversary of
         the Closing Date110].

         The Merger Agreement further provides that, if the First Milestone has been

met but the Second Milestone has not when CAL-101 achieves annual net sales of

at least $1 billion, then the Second Milestone shall be deemed to have been met.111

In other words, the achievement of annual net sales of at least $1 billion for CAL-

101 potentially could trigger both the Second and Third Milestones, provided that

they have not already been paid and the First Milestone has been met.

         In a presentation to Calistoga dated February 21, 2011, the day the Merger

Agreement was executed, JP Morgan estimated that there was a 63% chance that the

Third Milestone could be triggered by 2019.112

         On March 8, 2011, after the parties executed the Merger Agreement but before

the merger closed, representatives from Calistoga and Gilead met to discuss their

110
      JX351-068 § 9.1(a)(iv)(A).
111
      JX351-069 § 9.1(a)(iv)(C).
112
    JX345-004. In a footnote, JP Morgan suggested that it believed it was more likely for
Calistoga to trigger the third milestone by meeting the $1 billion annual sales requirement
than by obtaining a Regulatory Approval of CAL-101 for a solid tumor indication or as a
first-line treatment for a Hematologic Cancer Indication.

                                            28
strategic plans after the merger. 113 A slide deck for the meeting identified a

“comprehensive” development program for CAL-101 that Calistoga was generating,

which included three registration studies.114

         F.     Gilead’s Development of CAL-101 after the Merger

         According to a Gilead internal document dated May 3, 2013, Gilead’s project

review committee had “previously approved two Phase 3 . . . trials [of idelalisib] in

previously untreated CLL patients,” 115 and Gilead’s idelalisib project team was

“requesting approval for a companion single arm Phase 2 study, in order to address

the del(17p) patient population which is unlikely to participate in the Phase 3 trials

due to concerns of lack of efficacy on either of the control arms.”116 Dr. Hawkins

explained the rationale for taking this approach, as follows:

         [The] concern was that if you only had the two Phase 3 studies and you
         didn’t have very many 17p patients in it, that the regulators might come
         back to you and say[:] “Well, you haven’t studied enough 17p patients.
         And so you can’t include them in your label,” even though you knew
         that the drug worked in that population. So to get around that, you
         create a Phase 2 study, a single-arm study, where all the patients get
         CAL-101.117

113
      JX371-001; Tr. 778-79 (Hawkins).
114
      JX371-032.
115
      JX434-022.
116
      JX434-001; JX434-022.
117
      Tr. 798 (Hawkins).

                                           29
The same internal document showed that the idelalisib project team planned to meet

with the FDA “to discuss the proposed development plan in untreated CLL (two

Phase 3 studies plus this proposed Phase 2 study). Included in this meeting will be

a discussion of whether data from the proposed Phase 2 study could support

accelerated approval in patients with untreated CLL with 17p deletion.”118

         On September 5, 2013, representatives of Gilead met with FDA officials “to

discuss Idelalisib for the treatment of previously untreated chronic lymphocytic

leukemia.” 119 When requesting this meeting, Gilead stated that the “Proposed

Indication” was “[f]or the treatment of previously untreated chronic lymphocytic

leukemia (CLL).”120

         According to the minutes of the September 5 meeting, Gilead asked if the

FDA had “any comments on whether [the Phase 2 study in subjects with previously

untreated CLL with 17p del and/or TP53 mutation] meets the requirements for

regular approval in patients with previously untreated CLL with 17p del and/or TP53

mutation.”121 The FDA officials responded that they “do not agree that the proposed

study design would be adequate for regulatory submission because it does not isolate

118
      JX434-023.
119
      JX457-001.
120
      JX443-003.
121
      JX457-008.

                                         30
the effect of idelalisib.”122 Gilead also asked whether the FDA “agree[d] that with

demonstration of efficacy of IDELA in the 3 proposed CLL registration studies, a

companion diagnostic for 17p del and/or TP53 mutation will not be required in the

post-approval setting.”123 The FDA referred Gilead to the previous response and

added that it was “unclear at this time whether a companion diagnostic [would] be

required for the indications described in this submission.”124

         G.     Gilead Receives Approval from the FDA and Pays the First and
                Second Milestones

         On July 23, 2014, Gilead announced that the FDA had granted approval for

CAL-101 under the trade name Zydelig.125 The FDA-approved label (the “FDA

Label”) states as follows:

         ---------------------INDICATIONS AND USAGE---------------------
         Zydelig is a kinase inhibitor indicated for the treatment of patients with:
          Relapsed chronic lymphocytic leukemia (CLL), in combination with
             rituximab, in patients for whom rituximab alone would be
             considered appropriate therapy due to other co-morbidities. (1.1)
          Relapsed follicular B-cell non-Hodgkin lymphoma (FL) in patients
             who have received at least two prior systemic therapies. (1.2)
          Relapsed small lymphocytic lymphoma (SLL) in patients who have
             received at least two prior systemic therapies. (1.3)

         Accelerated approval was granted for FL and SLL based on overall
         response rate. Improvement in patient survival or disease related
122
      JX457-008.
123
      JX457-009.
124
      JX457-009.
125
      PTO ¶ II.19; JX643 ¶ 5.

                                             31
         symptoms has not been established. Continued approval for these
         indications may be contingent upon verification of clinical benefit in
         confirmatory trials.126

It is undisputed that CLL, FL, and SLL are all B-cell blood cancers, and that CLL

and FL are both Specified Hematologic Cancer Indications under Part 2 of Schedule

1.1 of the Merger Agreement.127

         On July 24, 2014, the day after receiving the FDA Label, Gilead sent Calistoga

a notice that the First and Second Milestones had been satisfied, but the notice did

not specify which of the three approvals had triggered either the First or Second

Milestone.128 In August 2014, Gilead paid $175 million to the former Calistoga

securityholders in satisfaction of those milestone obligations.129

         H.    Gilead Receives Approval from the European Commission

         When Gilead sought regulatory approval of idelalisib in the United States, it

also sought regulatory approval in the Europe. On October 29, 2013, Gilead

submitted a “Marketing Authorization Application” for idelalisib to the European

Medicines Agency (“EMA”). 130           The application stated that the “proposed

126
      JX510-001.
127
      JX702 ¶ 5.
128
      See JX540.
129
      JX643 ¶ 28; JX702 ¶ 28.
130
      JX455.

                                           32
indications are treatment of refractory indolent non-Hodgkin lymphoma and, alone

or in combination, treatment of relapsed chronic lymphocytic leukaemia.”131

         On June 26, 2014, the Committee for Medicinal Products for Human Use

(“CHMP”), the scientific committee of the EMA, provided its preliminary review of

Gilead’s application. The CHMP noted the exceptional result of idelalisib among

patients with either 17p deletion or TP53 mutation, and asked Gilead “to discuss a

potential (explicit) inclusion of these patient groups in the indication for idelalisib,

ie as first line treatment.”132

         On June 28, 2014, Gilead responded to the CHMP’s preliminary review,

noting that:

         The development program for IDELA in CLL has to date reported on
         clinical outcomes from 153 subjects with either 17p deletion or TP53
         mutation; an additional 216 subjects are currently enrolled in the
         ongoing, randomized studies. Both treatment-naïve and relapsed,
         refractory subjects with these and other adverse genetic features have
         been successfully treated with IDELA monotherapy or with IDELA in
         combination with chemoimmunotherapy.133

Gilead also discussed four clinical studies in its response, based on which it proposed

“that the data summarized herein are sufficient to support the following proposed

indication statement:”

131
      JX455-002.
132
      JX505-049.
133
      JX508-005.

                                          33
         Zydelig is indicated in combination with rituximab for the treatment of
         adult patients with chronic lymphocytic leukaemia (CLL):
                     who have received at least one prior therapy, or
                     as first line treatment in the presence of high-risk features,
                      such as a 17p deletion or TP53 mutation.134

         On July 14, 2014, the Rapporteurs (i.e., reporters) for the CHMP issued an

assessment report in which they recommended following modified approval for

Zydelig:

         Zydelig is indicated in combination with rituximab for the treatment of
         adult patients with chronic lymphocytic leukaemia (CLL):
         -who have received at least one prior therapy, or
         -as first line treatment in the presence of 17p deletion or TP53 mutation
         in patients unsuitable for chemo-immunotherapy.135

On July 25, 2014, the CHMP recommended that the European Commission approve

Zydelig as a first-line treatment in combination with rituximab for CLL patients in

the presence of 17p deletion or TP53 mutation who are unsuitable for chemo-

immunotherapy.136

         An internal Gilead presentation in this timeframe noted that “17p deletion is

an important segment,” “[f]rontline is a smaller population,” and “[t]he fact that

Zydelig is ‘EVEN’ indicated for frontline (difficult patients) suggests that it should

be an excellent option for second/third.”137 Another internal Gilead presentation,

134
      JX508-006 (emphasis in original).
135
      JX518-004.
136
      See JX536; JX537.
137
      JX549-210.

                                             34
dated August 15, 2014, similarly noted that “[t]he first line indication in the hardest-

to-treat patients will have a positive halo effect on the attractiveness of Zydelig,”

and that going forward, “CLL relapse forecast should assume . . . [s]trong

competitive advantage for both Zydelig and irutinib in patients with 17pDel/TP53

which account for 31% of the whole relapse population: expect maximum

penetration in this segment at peak.”138

         On September 19, 2014, Gilead announced that it had received approval of

Zydelig from the European Commission.            139
                                                        The “Summary of Product

Characteristics” the European Commission issued in connection with its approval

states in relevant part:

         4.1 Therapeutic indications
         Zydelig is indicated in combination with rituximab for the treatment of
         adult patients with chronic lymphocytic leukaemia (CLL):
          who have received at least one prior therapy, or
          as first line treatment in the presence of 17p deletion or TP53
             mutation in patients unsuitable for chemo-immunotherapy.
         Zydelig is indicated as monotherapy for the treatment of adult patients
         with follicular lymphoma (FL) that is refractory to two prior lines of
         treatment.140

138
      JX556-077-078.
139
      JX591; JX702 ¶ 29.
140
      JX796-002.

                                           35
The part of this label authorizing the use of Zydelig “as first line treatment in the

presence of 17p deletion or TP53 mutation in patients unsuitable for chemo-

immunotherapy” is referred to hereafter as the “17p/TP53 Label.”

         I.     Disputes over the Third Milestone Payment Arise

         On July 15, 2014, Pat Kilgannon, a former Calistoga employee now working

at Gilead, asked Robert Christian, a member of Gilead’s Alliance Management team

tasked with interacting with Calistoga’s former securityholders, whether the

potential approval of Zydelig as a “first line treatment in the presence of high-risk

features, such as a 17p deletion or TP53 mutation in patients unsuitable for chemo-

immunotherapy” would trigger the Third Milestone.141 Later that day, Christian

forwarded the inquiry to O’Connell.142

         On July 28, 2014, Chris Letang, a managing director at SRS responsible for

monitoring the progress on achieving the milestones, emailed Dr. Topper,

Calistoga’s founder and Chairman, and Dr. Gallagher, both of whom are members

of the committee controlling this litigation on behalf of Calistoga’s former

securityholders. In his email, Letang recapped the terms of the Third Milestone,

stating that one of the triggers for the Third Milestone was “approval as a first-line

141
      JX520; Tr. 947 (O’Connell).
142
      JX520.

                                         36
drug treatment.” 143 The next day, Dr. Gallagher sent an email to her husband

containing a link to a Gilead press release announcing that the CHMP had

recommended the approval of the 17p/TP53 Label.144 The text of the email stated:

“Approval in EU as well!”145

         The Merger Agreement obligates Gilead to provide status reports to SRS

periodically concerning the progress of its development and regulatory activities.146

On August 18, 2014, Christian emailed Dr. Mansuri a draft of such a report, noting

in the text of his email that “[t]he Shareholder agent sent me an e-mail last week,

asking about the third milestone and its status.”147 Dr. Mansuri replied on August

25: “With regard [to] the final payment, can we not simply say we are looking at

this. I still have not had a chance to discuss with John Milligan and Norbert.”148

Milligan was Gilead’s President and Chief Executive Officer, and Norbert

Bischofberger was its Executive Vice President of Research and Development and

Chief Scientific Officer.

143
      JX567-003; Tr. 312-13 (Gallagher).
144
      JX544; JX536; Tr. 319 (Gallagher).
145
      JX544.
146
      See JX351-072 § 9.1(b)(iii)(F).
147
      JX564-002.
148
      JX564-002.

                                           37
         On August 27, 2014, Letang emailed Drs. Topper and Gallagher again,

attaching an update report from Gilead.149 Page 3 of the update report stated that:

“Plans for registration trials in patients with previously untreated CLL are being

implemented and include two phase 3 studies and one phase 2 study (described

below). As of 31 July 2014, 2 studies were open for enrollment.”150 Page 5 of the

update report noted the most recent positive opinion from the CHMP concerning

Zydelig:

          CHMP Positive Opinion on 24 July 2014—proposed label text
           below
           The approved indication is:
              o Zydelig is indicated in combination with rituximab for the
                 treatment of adult patients with chronic lymphocytic
                 leukaemia (CLL): who have received at least one prior
                 therapy, or as first line treatment in the presence of 17p
                 deletion or TP53 mutation in patients unsuitable for chemo-
                 immunotherapy.151

The same day, Dr. Topper forwarded Letang’s email, including the attached update

report, to another partner in his venture capital firm, noting: “Phase 3 upfront trials

are enrolling[.] That is one of the triggers for the rest of the milestones[.]”152

149
      JX567-001; JX567-007-013.
150
      JX567-009.
151
      JX567-011.
152
      JX567-001.

                                           38
         On September 19, 2014, the day the European Commission approved the

17p/TP53 Label, Dr. Topper sent an email to the partners in his venture capital firm

entitled “zydelig was approved in EU today.” The text of the email stated: “No

milestone, but good progress to next one.”153

         Also on September 19, Dr. Topper sent an email to some of Calistoga’s former

executives announcing that “Zydelig was just approved in the EU today.”154 Dr.

Roger Ulrich, Calistoga’s Chief Development Officer, emailed back, asking what

the Third Milestone conditions were.155 In reply, Dr. Topper wrote: “One of three[:]

1B in sales[;] Approval in an upfront indication for heme malig[;] Approval of a non

hem onc indication (solid tumors e.g.)[.] I think first two are likely to happen, given

it is phase III in upfront now[.]”156

         Still on September 19, Kamal Puri, a former Calistoga employee now working

at Gilead, asked several former Calistoga executives in an email whether the

17p/TP53 Label would trigger the Third Milestone.157 At 2:44 p.m., Dr. Gallagher

replied: “The last milestone will most likely be achieved by a sales goal so a few

153
      JX589 (emphasis added).
154
      JX585-001.
155
      JX585-001.
156
      JX585-001.
157
      JX587.

                                          39
years away perhaps.”158 At 3:24 p.m., Dr. Yu informed Dr. Gallagher that he had

“[j]ust got a message from Leanne that Gilead is indicating the frontline label in

subset of CLL patients does not meet milestone” and asked Dr. Gallagher for her

thoughts on the subject.159 At 3:35 p.m., Dr. Gallagher replied to Puri’s email again,

stating: “I forgot about the front-line path for the milestone. I haven’t heard through

the official channels yet.”160

         Later on September 19, Dr. Gallagher emailed Letang, stating that since the

17p/TP53 Label “is a front-line label in a heme malignancy, it seems that this

approval could trigger the third milestone.”161 Letang agreed to “take a closer look”

and to get back to Dr. Gallagher.162 On September 20, Dr. Topper also emailed

Letang, stating: “With the approval of Zydelig in the EU, for in part, the up front

treatment of 17p negative or p53 mutant patients with heme malignancy, it would

seem pretty clear that milestone 3 has been satisfied. . . . My suggestion is that we

notify Gilead that we believe the milestone has been triggered.”163

158
      JX587; Tr. 321-22 (Gallagher).
159
      JX854.
160
      JX586.
161
      JX583-002.
162
      JX583-001.
163
      JX592-001.

                                          40
         On September 24, 2014, Letang emailed Cryn Nutt, corporate counsel at

Gilead, stating Calistoga’s belief that “the new approvals [in Europe] . . . would

appear to trigger the third ($50M) milestone.” Letang further stated that he “was

hoping to connect with [Nutt] or someone at Gilead to confirm that this milestone

was achieved and begin to work through the mechanics for the distribution of the

milestone payment.”164

         On October 7, 2014, Christian notified Letang that Gilead did not believe the

Third Milestone had been triggered because “the intent of the agreement was that

the approval needed to be for a broad indication, not a smaller subset of an indication,

for it to trigger the milestone.”165 To date, Gilead has not made the Third Milestone

payment.

II.      Procedural Posture

         On January 14, 2015, SRS filed a complaint against Gilead asserting a single

claim for breach of the Merger Agreement for failure to pay the Third Milestone as

a result of the European Commission’s approval of the 17p/TP53 Label.

         On February 27, 2015, Gilead filed an answer and three counterclaims, which

it later amended. The first counterclaim seeks a declaration that the European

Commission’s approval of the 17p/TP53 Label did not trigger the Third Milestone.

164
      JX607-004.
165
      JX609-001; see also Letang Dep. 134-35.

                                            41
The second and third counterclaims, which were asserted in the alternative to the

first counterclaim, sought reformation of the Merger Agreement on the grounds of

mutual and unilateral mistake. On December 11, 2015, Gilead notified the Court

that it had dropped its two reformation counterclaims and associated affirmative

defenses.

       On January 13, 2016, SRS filed a motion for judgment on the pleadings on its

claim for breach of the Merger Agreement and Gilead’s remaining counterclaim for

declaratory relief. On May 25, 2016, after briefing and argument, I deferred

resolution of the motion for judgment on the pleadings until after trial because the

scientific and technical nature of the subject matter at issue in this case prevented

me from being able to resolve the matter on the pleadings.

III.   Analysis

       A.    Legal Standard

       To succeed at trial, “Plaintiffs, as well as Counterclaim-Plaintiffs, have the

burden of proving each element, including damages, of each of their causes of action

against each Defendant or Counterclaim-Defendant, as the case may be, by a

preponderance of the evidence.” 166 “Proof by a preponderance of the evidence

166
  inTEAM Associates, LLC v. Heartland Payment Systems, Inc., 2016 WL 5660282, at
*13 (Del. Ch. Sept. 30, 2016).

                                         42
means proof that something is more likely than not.”167 This standard applies to both

SRS’s claim for breach of the Merger Agreement for failure to pay the Third

Milestone, and Gilead’s counterclaim for a declaration that the Third Milestone was

not triggered by the European Commission’s approval of the 17p/TP53 Label.168

            “A contract’s express terms provide the starting point in approaching a

contract dispute.”169 If, on its face, the “contract is unambiguous, extrinsic evidence

may not be used to interpret the intent of the parties, to vary the terms of the contract

or to create an ambiguity.”170 If a contract is ambiguous, however, the Court may

consider extrinsic evidence, including “evidence of prior agreements and

communications of the parties as well as trade usage or course of dealing.”171

            Under Delaware’s objective theory of contracts, “a contract is not rendered

ambiguous simply because the parties do not agree upon its proper construction.

Rather, a contract is ambiguous only when the provisions in controversy are

reasonably or fairly susceptible of different interpretations or may have two or more

167
      Id.
168
  See Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016 WL 4401038, at *17 (Del.
Ch. Aug. 18, 2016).
169
      Ostroff v. Quality Servs. Labs., Inc., 2007 WL 121404, at *11 (Del. Ch. Jan. 5, 2007).
  GMG Capital Inv., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 783-84 (Del.
170

2012) (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232
(Del. 1997)).
171
      Eagle Indus., 702 A.2d at 1233.

                                              43
different meanings.”172 In considering extrinsic evidence, the Court should uphold,

“to the extent possible, the reasonable shared expectations of the parties at the time

of contracting.”173 “In giving effect to the parties’ intentions, it is generally accepted

that the parties’ conduct before any controversy has arisen is given ‘great

weight.’”174

         Importantly, ascertaining the shared intent of the parties does not mandate

slavish adherence to every principle of contract interpretation. As this Court recently

stated:     “Contract principles that guide the Court—such as the tenet that all

provisions of an agreement should be given meaning—do not necessarily drive the

outcome. Sometimes apparently conflicting provisions can be reconciled, but in

order to prevail on a contract claim, a party is not always required to persuade the

172
  Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992).
173
      Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003).
174
    Ostroff, 2007 WL 121404, at *11; see also Radio Corp. of Am. v. Philadelphia Storage
Battery Co., 6 A.2d 329, 340 (Del. 1939) (“It is a familiar rule that when a contract is
ambiguous, a construction given to it by the acts and conduct of the parties with knowledge
of its terms, before any controversy has arisen as to its meaning, is entitled to great weight,
and will, when reasonable, be adopted and enforced by the courts. The reason underlying
the rule is that it is the duty of the court to give effect to the intention of the parties where
it is not wholly at variance with the correct legal interpretation of the terms of the contract,
and a practical construction placed by the parties upon the instrument is the best evidence
of their intention.”).

                                               44
Court that its position is supported by every provision or collection of words in the

agreement.”175

         B.     The Term “Indication” is Ambiguous as used in the Merger
                Agreement

         The provision of the Merger Agreement at the center of this dispute is the

Third Milestone, which states that:

         Within fifteen (15) Business Days following . . . (B) the receipt of
         Regulatory Approval of CAL-101 in the United States or the European
         Union, whichever occurs first, as a first-line drug treatment (i.e., a
         treatment for patients that have not previously undergone systemic drug
         therapy therefor) for a Hematologic Cancer Indication . . ., [Gilead]
         shall notify [SRS] that the [Third Milestone] has been satisfied and pay
         or cause to be paid to the Company Securityholders in accordance with
         Section 9.1(b) Fifty Million Dollars ($50,000,000), as such amount
         may be adjusted pursuant to Section 9.1(b).176

It is undisputed that the 17p/TP53 Label constituted a “Regulatory Approval of

CAL-101 in the European Union,” but it is heavily disputed whether CAL-101 was

approved “as a first-line drug treatment (i.e., a treatment for patients that have not

previously undergone systemic drug therapy therefor) for a Hematologic Cancer

Indication,” and in particular, what the word “indication” means as used in this term.

         “Hematologic Cancer Indication” is defined in the Merger Agreement to mean

“any hematologic cancer indication specifically identified in Part 1 of Section 1.1 of

175
  Cyber Hldg. LLC v. CyberCore Hldg., Inc., 2016 WL 791069, at *7 (Del. Ch. Feb. 26,
2016).
176
      JX351-068 § 9.1(a)(iii)(B).

                                           45
the Company Disclosure Schedule.” 177 Part 1 of Section 1.1 of the Company

Disclosure Schedule in turn states that “Hematologic Cancer Indications” means

“[a]ny indication within the following tumor types,” the first of which is “B-cell

neoplasms,” and the last of which is “[a]ny Specified Hematologic Cancer Indication

listed in Part 2 of this Schedule 1.1.”178

         “Specified Hematologic Cancer Indication” is defined in the Merger

Agreement as “any hematologic cancer indication specifically identified in Part 2 of

Section 1.1 of the Company Disclosure Schedule.”179 Part 2 of Section 1.1 lists nine

specific diseases, including “Chronic Lymphocytic Leukemia,” or CLL.180

         The definitions in the Merger Agreement are only the starting point, rather

than the end, of the parties’ dispute. As witnesses for both SRS and Gilead testified,

in the oncology industry, the meaning of the term “indication” is context specific.181

Depending on the context, for example, it could refer to a “disease,” a “tumor,” “an

indication for starting treatment in a patient,” or “a regulatory approval.”182

177
      JX351-011.
178
      JX350-002 (emphasis added).
179
      JX351-016.
180
      JX350-002.
181
   See, e.g., Tr. 88 (Miller); Tr. 336 (Gallagher); Tr. 386; 502 (Arbuck); Tr. 613 (Dearden);
Tr. 889 (O’Connell).
182
      See, e.g., Tr. 88 (Miller); Tr. 386-87, 502 (Arbuck); Tr. 889 (O’Connell).

                                               46
         Gilead contends that in the context of the Merger Agreement the only

reasonable interpretation of the word “indication” is that it means a “disease.”183 By

contrast, SRS contends that the only reasonable interpretation of the word is “the

approved use of a drug in a population of patients with a particular disease.” 184

Thus, according to SRS, the term “indication” does not describe a disease but instead

“refers to the label or indication statement that Gilead receives from a regulatory

authority such as the EMA or FDA,” which describes “the particular patient

population with that disease that a drug can be used to treat.”185 Despite their sharp

disagreement, SRS and Gilead both argue that the Merger Agreement is

unambiguous and that the plain language of the contract supports their respective

interpretations.

         “Indication” appears five times in Schedule 1.1, and the parties agree that it

has the same meaning in all five places.186 The parties also agree that Part 2 of

Schedule 1.1 (set forth below) is a list of blood cancers or diseases.187

183
      Answering Post-Trial Br. 45.
184
      Opening Post-Trial Br. 1.
185
      Opening Post-Trial Br. 44; see also Reply Post-Trial Br. 2.
186
  Tr. Oral Arg. 16; Answering Post-Trial Br. 46-47; see also Tr. 523-24 (Arbuck); Tr.
601-02 (Dearden).
187
  Tr. 166; 273 (Gallagher); Tr. 602 (Dearden); see also Answering Post-Trial Br. 45;
Reply Post-Trial Br. 7.

                                              47
Building on this point of agreement, Gilead argues that, since “Specified

Hematologic Cancer Indications” is defined as “any hematologic cancer indication

specifically identified in Part 2” and since Part 2 consists of a list of diseases, it

logically follows that the term “Hematologic Cancer Indications” as used in Part 1

also must refer to diseases.

         SRS advances two arguments in response to Gilead’s plain meaning

argument. First, SRS argues that to interpret “indication” to mean “disease” would

render the very same word superfluous as used in the phrase “Hematologic Cancer

Indications,” contrary to the principle of contract construction that each word in a

contract must be given meaning and effect. It is undisputed that a “hematologic

cancer” is a “blood cancer,” which is a disease.188 Therefore, according to SRS, if

“indication” also means “disease,” it adds nothing to the phrase “Hematologic

188
      Tr. 718 (Dearden).

                                         48
Cancer Indication.” In essence, SRS argues that people in the oncology industry do

not use the phrase “hematologic cancer disease” or “cancer disease” because that

would be repetitive.

       Although this argument has some appeal to a law-trained judge accustomed

to applying interpretative principles to construe a contract, the reality of life is that

human language is not perfect.189 In this case, for example, O’Connell, Gilead’s lead

negotiator, used the term “hematologic cancer diseases” at least ten times in a

natural, unforced manner when responding to questions at trial.190 As reflected in

numerous publications, moreover, people in the oncology industry in fact do use the

phrase “cancer diseases” or “hematologic cancer diseases,” including in peer-

reviewed journals, to describe the disease of cancer or blood cancer.191 Thus, I am

189
   See Atlantic Northern Airlines v. Schwimmer, 96 A.2d 652, 656 (N.J. Supr. 1953)
(“Language is only too often an imperfect and uncertain means of communicating ideas
and concepts.”).
190
   See e.g., Tr. 846; 852; 859-60; 864; 919; 920; 956 (O’Connell). O’Connell also used
“hematological cancer” and “hematologic cancer indication” interchangeably in Gilead’s
internal documents concerning the milestones. See, e.g., JX185-002.
191
   Gilead’s Objs. to New Reply Evid. 2-3 (citing nine different publications). Although
Gilead submitted these publications after the close of the evidence, I take judicial notice of
them in the interests of fairness because they were submitted in response to certain
dictionary definitions SRS relied on for the first time in its post-trial reply brief and because
the contents of these publications are not subject to reasonable dispute. Khanna v. McMinn,
2006 WL 1388744, at *30 (Del. Ch. May 9, 2006) (“[T]he Court may take judicial notice
‘of matters that are not subject to reasonable dispute.’”).

                                               49
not persuaded that it would be unreasonable to construe “indication” to mean

“disease” based on SRS’s surplusage argument.192

         SRS next argues that Gilead’s interpretation of “indication” to mean “disease”

makes no sense when the initial clause of Part 1 is read together with the last bullet

point in Part 1. More specifically, according to SRS, it would be nonsensical “to

read the reference in the disclosure schedule to ‘[a]ny indication within . . . any

Specified Hematologic Cancer Indication listed in Part 2 of this Schedule 1.1’ as

meaning ‘[a]ny [disease or blood cancer] within . . . any Specified Hematologic

Cancer Indication’” because “Part 2 of the Company Disclosure Schedule lists only

‘diseases’ such as CLL” but “there are no diseases ‘within’ CLL.” 193 Although a

highly technical point, this discrepancy illustrates an apparent inconsistency when

Gilead’s proffered interpretation is applied to all uses of the word “indication” found

in Schedule 1.1.

         SRS’s plain meaning argument, on the other hand, suffers from more

profound problems. To start, there is no obvious textual anchor in the Merger

Agreement from which to import into the word “indication” the concept of a

regulatory label reflecting an “approved use of a drug in a population of patients

192
   See Cyber Hldg. LLC, 2016 WL 791069, at *7 (“in order to prevail on a contract claim,
a party is not always required to persuade the Court that its position is supported by every
provision or collection of words in the agreement.”).
193
      Opening Post-Trial Br. 53 (emphasis added) (citation omitted).

                                              50
with a particular disease,” as SRS advocates. Additionally, it is difficult to see how

such a construction can be reconciled with the fact that Part 2 of Schedule 1.1

concededly defines “Specified Hematologic Cancer Indications” to mean a specified

list of diseases.

         SRS counters that it is consistent for Part 2 to be a list of blood cancers and

for “indication” to mean an approved label or an indication statement, since a label

normally would identify both the type of disease and the population of disease

sufferers the drug is approved to treat.194 This contention is unconvincing. It is true

that a drug label would identify the specific disease the drug is approved to treat, but

that does not turn the label into a disease. The definition of Specified Hematologic

Cancer Indication in the Merger Agreement is clear in my view.               It is “any

hematologic cancer indication specifically identified in Part 2 of Section 1.1 of the

Company Disclosure Schedule.” What is identified in Part 2 is a list of diseases, not

labels that describe diseases.

         For the reasons discussed above, I find the word “indication” to be ambiguous

when considered within the four corners of the Merger Agreement. This result is

hardly surprising given the shifting positions both parties have taken in this

litigation. In its motion for judgment on the pleadings, for example, SRS advanced

194
      Reply Post-Trial Br. 7-8.

                                            51
a seemingly different interpretation, arguing that the term Hematologic Cancer

Indication meant “[t]he basis for initiation of a treatment or of a diagnostic test.”195

For its part, Gilead did not display much confidence in the plain meaning of the term

at the outset of this case when it asserted, albeit in the alternative, that the Merger

Agreement should be reformed because of a mutual or unilateral mistake—claims it

has since abandoned.196 Given the ambiguity, I turn to extrinsic evidence to interpret

the term.

         C.    The Parties’ Negotiation History Demonstrates that “Indication”
               Means “Disease” in the Merger Agreement

         When the extrinsic evidence in the record is considered, in particular the

negotiation history concerning the Merger Agreement, the overwhelming weight of

the evidence demonstrates in my opinion that the parties mutually understood when

they entered into the Merger Agreement that the term “indication” meant “a

disease.” I begin by recapping the evolution of the terms “Hematologic Cancer

Indication” and “Specified Hematologic Cancer Indication” as the parties negotiated

the milestone structure in the Merger Agreement.

         On January 28, 2011, Gilead made its preliminary offer to Calistoga,

proposing three milestones, two of which were based on regulatory approvals of

195
      JX729-027-028 n.9.
196
      JX702-037-040.

                                          52
CAL-101 for one of two specific blood cancers, i.e., indolent Non-Hodgkin’s

Lymphoma (iNHL) or Chronic Lymphocytic Leukemia (CLL).197 On February 1,

Calistoga sent Gilead the first draft of the merger agreement, introducing a new set

of four milestones, the first two of which would be triggered by regulatory approvals

for a “hematologic cancer indication,” which term was not defined.198

         On February 8, Gilead responded with a revised draft of the merger agreement

in which it replaced the undefined term “hematologic cancer indication” with a

defined term “Specified Hematologic Cancer Indication,” which referred to “any

hematologic cancer indication specifically listed on Schedule 1.1.” 199 Gilead’s

proposed “Schedule 1.1” was a list of nine blood cancers O’Connell had compiled

with the assistance of the Boston Consulting Group for the purpose of limiting the

milestone payments to “major” blood cancers.200

         On February 12, Calistoga sent Gilead another draft of the merger agreement,

replacing Schedule 1.1 in Gilead’s last draft with a new list of eleven tumor types

that came under the heading “Specified Hematologic Cancer Indications.” 201

Significantly, as discussed above, the trial record clearly establishes that Calistoga

197
      JX160-003 (emphasis added).
198
      JX175-053-054 § 9(bk)(i)&(ii).
199
      JX207-075-076 § 9.1(a); JX207-019.
200
      JX206-102; Tr. 852 (O’Connell).
201
      JX223-089.

                                           53
derived its list of eleven tumor types from the top level categories of diseases in the

WHO Classification, which lists numerous other diseases under these eleven

categories. These subcategories of diseases were not listed by name in Calistoga’s

February 12 revision of Schedule 1.1, but to ensure that the disease subcategories

would trigger a milestone payment, Calistoga inserted a clause before the list of

eleven tumor types stating: “Any indication within the following [eleven] tumor

types.” Dr. Gallagher, the person who oversaw Calistoga’s sale process, confirmed

at trial that the “within the following tumor types” language “was intended to sweep

in the subcategories of diseases.”202

         When Gilead received Calistoga’s February 12 draft, it recognized that

Calistoga’s revision of Schedule 1.1 tracked the WHO Classification and thus that

Calistoga was seeking to expand Gilead’s prior list of nine blood cancers “to include

all hematologic cancer indications” in the WHO Classification.203 On February 16,

Gilead went back with a compromise in order to narrow the triggers for the second

milestone that was under discussion.

         Specifically, in its February 16 draft, Gilead divided Schedule 1.1 into two

parts, Part 1 being the last schedule Calistoga had proposed on February 12, and Part

202
      Tr. 271 (Gallagher); see also Tr. 67-68 (Miller).
203
      JX385-003.

                                               54
2 being the nine blood cancers Gilead had proposed on February 8.204 The draft

introduced a new defined term “Hematologic Cancer Indication,” meaning “any

hematologic cancer indication specifically identified in Part 1 of Schedule 1.1,” and

changed the definition of “Specified Hematologic Cancer Indication” to mean “any

hematologic cancer indication specifically identified in Part 2 of Schedule 1.1.”205

Under the February 16 draft, if both the first and the second regulatory approvals

were in the same location (i.e., the United States or a Major Market Country), then

in order for the second milestone to be triggered, one of the two approvals had to be

for a Specified Hematologic Cancer Indication.206

         On February 18, Calistoga sent another draft to Gilead, proposing a new set

of three milestones and adding what became the twelfth and final bullet to the

definition of Hematologic Cancer Indication in Part 1 of Schedule 1.1, namely to

include “[a]ny Specified Hematologic Cancer Indication listed in Part 2 of this

Schedule 1.1.”207 Although the record provides no definitive evidence of the reason

for this late change to Schedule 1.1, the timing of its addition—coming two drafts

after Calistoga already had introduced into Part 1 of the schedule the “within the

204
      JX241-095-096.
205
      JX241-012; JX241-018.
206
      JX241-072-073 § 9.1(a)(ii).
207
      JX277-096.

                                          55
following tumor types” language to pick up the subcategories of diseases for the first

eleven bullets—suggests to me, and I so find, as Dr. Gallagher testified,208 that it

was added simply to make clear (for the avoidance of any doubt) that the Specified

Hematologic Cancer Indications “listed in Part 2” also were included in Part 1. The

final Merger Agreement maintained the milestone structure and Schedule 1.1 from

the February 18 draft.209

         In sum, the drafting history of the Merger Agreement shows that the parties

always were talking about regulatory approval of CAL-101 for a disease when they

were negotiating over the milestone payments. By contrast, the drafting history does

not reflect that the parties were discussing regulatory labels when negotiating the

triggers for the milestone payments. Indeed, to find that “indication” means “label”

or “label approval” would contradict Dr. Gallagher’s testimony that “the ‘within the

following tumor type’ language was not intended to depart from the scientifically

recognized definition of diseases,” that “no one at Calistoga evinced, in words or

deeds, to Gilead that the purpose of Section 1.1 was to depart from the scientifically

recognized definition of diseases,” that she “never told anyone at Gilead that the

purpose of the ‘any hematologic indication’ language in Schedule 1.1 was to sweep

  Tr. 273 (“Q. And the purpose of the last bullet point in part 1 is to confirm that it also
208

sweeps in the specific blood cancers listed in part 2, correct? A. Yes.”); see also Arbuck
Dep. 81.
209
      JX350-002-003; JX351-067-068 § 9.1(a).

                                            56
in any patient with any genetic mutation that may also have a blood cancer,” and

that it “was not the intent of Calistoga to depart from the scientific[ally] accepted

definition of ‘tumors’ when it prepared Schedule 1.1.”210

         In addition to the merger agreement drafts, other contemporaneous

communications between SRS and Gilead show that both parties used “indication”

as synonymous for “disease” during their negotiations.           For example, when

O’Connell sought clarification from Stocks concerning the operation of the

milestones in the first draft of the merger agreement that Calistoga had prepared,

Stocks focused on approvals for diseases (e.g., iNHL and CLL) as the triggers for

the first two milestones:

         As one potential example, iNHL approval in the US and then in an EU
         Country would trigger the First and Second milestones, respectively.
         As a second potential example, iNHL approval in the US and then CLL
         approval in an EU Country also would trigger the First and Second
         milestones, respectively. As a third potential, iNHL approval in the US
         and then CLL approval in the US also would trigger the first and second
         milestones, respectively.211

As another example, in a February 16 email to Stocks to give him “a heads up” on

Gilead’s forthcoming revisions to the merger agreement, O’Connell characterized

the trigger for second milestone as an approval for a blood cancer:

         $50M 2nd approval in any hematological indication but if it is for a
         second indication in the same territory as the 1st, one of the two
210
      Tr. 271-72 (Gallagher).
211
      JX196-001 (emphasis added).

                                           57
         indications would need to be in the narrower list of Specified
         Hematological Indication (i.e., CLL, iNHL and the other major hemonc
         cancers, as we tentatively agreed yesterday in Foster City)212

         Calistoga also used “indication” to refer to “diseases” in some of the

presentations and regulatory materials it sent to Gilead during the negotiations.213 In

fact, Dr. Gallagher expressed no surprise to the prospect of being shown

“presentation after presentation in which ‘indication’ was used as synonymous with

‘blood cancer’ at Calistoga,”214 and testified that when using the word “indication”

in a presentation to refer to blood cancers, Calistoga was “trying to use it in the way

that folks generally in the industry use it.”215

         In contrast to the abundance of evidence supporting Gilead’s position, SRS

could point to little concrete evidence in its favor. Gilead’s February 16 draft of the

merger agreement defined the term “Phase II Trial” as “a randomized controlled

clinical human study conducted to evaluate the effectiveness of a drug for a

particular indication or indications in patients with the disease or condition under

study.”216 Pointing to this definition, SRS argues that Gilead “specifically used the

212
      JX256-001 (emphasis added).
213
   See, e.g., JX123-018; JX874-009 § 2.2; JX377-007 § 2.2; JX086-011 § 3; JX086-046
§ 10.1.7 (“in the indications indolent B-cell NHL, MCL and CLL”); JX086-152 § 4; Stocks
Dep. 25-26; Tr. 507-11 (Arbuck).
214
      Tr. 245 (Gallagher).
215
      Tr. 240-43 (Gallagher) (discussing JX183-014).
216
      JX241-016.

                                             58
term ‘particular indication or indications’ to describe the use of a drug in a patient

population with a disease.”217 This definition, however, actually makes as much, if

not more, sense if “indication” means “disease” than if it means “label,” because

people normally talk about the “effectiveness of a drug for a particular [disease] or

[diseases],” as opposed to the “effectiveness of a drug for a particular [label] or

[labels].”

         SRS next points to some slide presentations during the parties’ negotiations

where the term “indication” was used to refer to “the approved use of a drug” in the

context of regulatory approval. 218 But as discussed above, the parties also used

“indication” to refer to “disease” in those presentations as well as in regulatory

materials Calistoga shared with Gilead.219 Thus, this evidence is non-conclusive and

just highlights a point on which both parties agree—that use of the term “indication”

in the oncology industry is context specific.

         The fact that SRS failed to identify any better evidence to support its

interpretation is hardly surprising, considering Dr. Gallagher’s admission that she

could not recall any time during the negotiations when Calistoga told Gilead that

“indication” meant “a label that you would receive for the specific patient population

217
      Opening Post-Trial Br. 56.
218
      Opening Post-Trial Br. 56-60.
219
      See supra note 213.

                                          59
that you would treat with the hematologic cancer.”220 Nor could she recall any time

during the negotiation when Calistoga used the term “indication” to refer to any

genetic subpopulations.221

         In an attempt to make up for a scarcity of helpful evidence from the

negotiation history, SRS argues that the Court should construe the milestone

provisions in the context of regulatory approval of a drug, and cites to parts of the

record where people testified that in the regulatory approval context, “indication”

could mean the indication statement in a drug label. Putting aside that SRS used

“indication” to refer to “disease” in some of its own regulatory materials that it

shared with Gilead during the negotiations, as discussed above, 222 this argument

misses the mark. The milestone at issue here is triggered by a regulatory approval,

but the appropriate context in which the contract provision should be construed is

the context in which the Merger Agreement was negotiated, which is evinced, first

and foremost, by the parties’ contemporaneous communications, such as their

exchange of drafts of the merger agreement.223

                                      *****

220
      Tr. 233 (Gallagher).
221
      Tr. 256-57 (Gallagher).
222
   See JX086-011 § 3; JX086-046 § 10.1.7 (“in the indications indolent B-cell NHL, MCL
and CLL”); JX086-152 § 4.
223
      See Tr. 246 (Gallagher).

                                         60
         For all the reasons discussed above, the overwhelming weight of the extrinsic

evidence demonstrates in my opinion that the parties mutually understood when they

entered into the Merger Agreement that the term “indication” meant “a disease.”

         D.     The Third Milestone Can Only Be Triggered by a Disease-Level
                Approval

         SRS next argues that even if the word “indication” means a blood cancer or

disease, the Third Milestone was still triggered because the Merger Agreement does

not specify that a Regulatory Approval must cover an entire population of disease

sufferers to qualify for the milestone. More specifically, SRS argues that even

though the 17p/TP53 Label limited the patient population to those with “17p deletion

or TP53 mutation [who are] unsuitable for chemo-immunotherapy,” Zydelig still

was approved as a first-line treatment for CLL.224 The parties do not dispute that

CLL is a blood cancer within the tumor type B-cell neoplasms listed in Part 1 of

Schedule 1.1 as well as a Specified Hematologic Cancer Indication listed in Part 2

of Schedule 1.1.225 Thus, according to SRS, the 17p/TP53 Label triggered the Third

Milestone under both Parts 1 and 2.

         I disagree with SRS’s position for two basic reasons. First, the negotiation

history of the milestone provisions, the subsequent conduct of SRS’s own witnesses,

224
      Opening Post-Trial Br. 61.
225
      JX702 ¶ 5.

                                           61
and the structure and operation of the milestone provisions all support the conclusion

that the form of regulatory approval necessary to trigger a milestone payment must

be a disease-level approval. Second, the 17p/TP53 Label does not satisfy the

disease-level approval requirement in the Third Milestone.

                1.        The Parties’ Negotiation History Demonstrates, and Their
                          Subsequent Conduct Confirms, that only a Disease-Level
                          Regulatory Approval Could Trigger the Third Milestone

         Simplifying its second line of argument to its essence, SRS contends that the

“key is . . . are the people being treated with this drug for diseases [that are] listed”

in Schedule 1.1. 226 In other words, under SRS’s logic, as long as Zydelig was

approved to treat a subpopulation of CLL patients, no matter how small that

subpopulation may be, the Third Milestone payment would be due. Fatal to SRS’s

position, however, is that this argument finds no support in the parties’ negotiation

history.

         As discussed in detail above, the extrinsic evidence demonstrates that the

parties were discussing disease-level regulatory approvals throughout their

negotiations over the milestones.227 No evidence was presented suggesting that they

discussed approvals for subpopulations of disease sufferers when negotiating the

milestones. As Dr. Hawkins testified, that subject “never came up” during the

226
      Tr. Oral Arg. 49.
227
      See supra Section III.C.

                                            62
negotiations.228 Rather, the consistent focus of the parties’ discussions was on which

diseases would trigger the milestones.             Indeed, by incorporating the WHO

Classification—an authoritative list of hematologic tumors—into Part 1 of the

Schedule 1.1, and by agreeing to a specific list of diseases in Part 2, the parties

effectively excluded subpopulation approvals as a trigger for a regulatory milestone.

In short, for the same reasons I have concluded that the term “indication” means

“disease” in the Merger Agreement, the form of regulatory approval required to

trigger a milestone payment under the Merger Agreement logically must be a

disease-level approval.

         SRS points to evidence that Calistoga “repeatedly rejected Gilead’s efforts to

limit the application of the milestones as (a) applying only to major hematological

cancers; (b) as applying only to approvals in ‘Major Market Countries;’ and (c) as

not including accelerated or conditional approvals.”229 This evidence is beside the

point. The fact that SRS was successful in expanding the list of blood cancers that

could trigger a milestone (from the two initial diseases Gilead proposed (iNHL and

CLL) to all of the blood cancers in the WHO Classification), and in broadening the

scope of the necessary Regulatory Approval (to include more countries and

accelerated approvals), may have enlarged the number of opportunities to trigger a

228
      See Tr. 795 (Hawkins).
229
      Opening Post-Trial Br. 62 n.26; see also Reply Post-Trial Br. 18-19.

                                              63
milestone payment in certain respects, but that does not change the fact that the

necessary approval had to occur at the disease level.

         The conduct of Calistoga’s principals before the dispute in this action arose

confirms my finding that both parties understood that the milestones could only be

triggered by a disease-level regulatory approval. Dr. Gallagher (who oversaw the

merger negotiations) and Dr. Topper (Calistoga’s founder and Chairman at the time

of the merger) both worked with SRS to oversee this litigation on behalf of

Calistoga’s former securityholders.230 Significantly, for the two-month period from

July 29, 2014, when the CHMP publicly recommended the 17p/TP53 Label, until

September 19, 2014, when Gilead publicly announced the European Commission’s

approval of the 17p/TP53 Label, they both believed that the Third Milestone was not

due. 231 Indeed, neither of them concluded that the Third Milestone had been

triggered even after first learning about the European Commission’s approval of the

17p/TP53 Label.

230
      Tr. 315 (Gallagher).
231
   Dr. Gallagher admitted that she did not inform anyone between July 29, 2014 and
August 27, 2014 that she believed the Third Milestone was triggered. Tr. 319-20
(Gallagher). Dr. Topper similarly admitted that, on August 27, 2014, after reading a Gilead
update report disclosing both CHMP’s positive opinion on Zydelig and the fact that Gilead
was conducting two phase 3 studies and one phase 2 study in patients with previously
untreated CLL, he looked to the phase 3 trials, rather than the 17p/TP53 Label, as the
potential trigger for the Third Milestone. JX567; Topper Dep. 25-26.

                                            64
         On September 19, 2014, upon learning about the European Commission’s

approval, Dr. Topper specifically said in an email entitled “zydelig was approved in

EU today” that “No milestone, but good progress to next one.”232 Later that day, in

emails responding to two separate inquiries from former Calistoga employees as to

whether the 17p/TP53 Label triggered the Third Milestone, both Drs. Topper and

Gallagher, who had been reminded about the terms of the Third Milestone in an

email from SRS as recently as July 28, 2014,233 took the same position.

         At 2:38 p.m., Dr. Topper, after summarizing the three triggers in the Third

Milestone in his email, did not say that the milestone had been triggered because of

the 17p/TP53 Label, but that it was “likely” the milestone would be satisfied in the

future because of the pending Phase III study: “I think first two [triggers] are likely

to happen, given it is phase III in upfront now.”234 At 2:44 p.m., Dr. Gallagher also

did not say that the milestone had been triggered because of the 17p/TP53 Label, but

that it “most likely” would be triggered under the $1 billion sales subpart of the

milestone: “The last milestone will most likely be achieved by a sales goal so a few

years away perhaps.”235

232
      JX589 (emphasis added).
233
      JX567-003.
234
      JX585-001 (emphasis added).
235
      JX587; Tr. 321-22 (Gallagher).

                                          65
         Dr. Gallagher attempted to minimize this evidence at trial, testifying

emphatically that shortly after sending her 2:44 p.m. email she pulled out a copy of

the Merger Agreement at her home office and reviewed the milestone provisions,

which prompted her to send out another email at 3:35 p.m. saying she “forgot about

the front-line path for the milestone.”236 Putting aside that the meaning of the 3:35

p.m. email is inconclusive, Dr. Gallagher’s explanation for why she sent it strains

credibility given her previous testimony that she had not read the Merger Agreement

on September 19, 2014, and that she was out of town that day and thus could not

have reviewed it then at her home as she claimed so confidently at trial.237

         Noting that the reactions of Drs. Topper and Gallagher discussed above

occurred several years after the Merger Agreement was signed, SRS argues that this

evidence is not useful to the interpretation of the Merger Agreement. Although

contemporaneous evidence is far more probative of the shared expectations of

contracting parties as a general matter, that does not mean that a party’s subsequent

conduct has no probative value. Indeed, this Court has stated that, “[i]n giving effect

to the parties’ intentions, it is generally accepted that the parties’ conduct before any

controversy has arisen is given ‘great weight.’”          238
                                                                That proposition rings

236
      JX586, Tr. 353-58 (Gallagher).
237
      Tr. 363-64 (Gallagher).
238
   Ostroff, 2007 WL 121404, at *11. In support of its position, SRS relies on Eagle Indus.,
Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997). There, the Supreme Court

                                            66
particularly true here, where the party whose conduct is at issue acts in a manner

directly contrary to their personal financial interests.

         In any event, even if I were to completely disregard this evidence, it would

make no difference. The extensive evidence concerning the negotiation of the

milestone provisions is more than sufficient by itself in my opinion to support the

conclusion that the parties both understood that a disease-level approval was

necessary to trigger the Third Milestone. The Topper/Gallagher admissions are

merely corroborative. Also corroborative are reasonable inferences concerning the

commercial logic of the Third Milestone that can be drawn from its structure and

operation, which I address next.

                2.     The Structure and Operation of the Milestone Provisions
                       Further Corroborates that the Regulatory Approval Must Be
                       at the Disease Level

         SRS argues that the Third Milestone “was a great deal for Gilead” even if it

could be triggered by a regulatory approval in a subpopulation of disease sufferers

as evidenced by the fact that Gilead was not obligated to use “Commercially

Reasonable Efforts” to meet the Third Milestone and was not even prevented from

taking any action for the primary purpose of avoiding the Third Milestone.239 In

did not proscribe reliance on all subsequent conduct evidence, but commented only that
“backward-looking evidence gathered after the time of contracting is not usually helpful.”
Eagle Indus., 702 A.2d at 1233 n.11 (emphasis added).
239
      See JX351-070 § 9.1(b)(iii)(B).

                                           67
SRS’s words, Gilead “had the liberty under the contract to actually [step] in front of

the train and stop the third milestone from happening.”240

         The problem with this reasoning is that if the Third Milestone could be

triggered by a subpopulation approval, then the First and Second Milestones

logically also could be triggered by subpopulation approvals, since they similarly

were conditioned upon a regulatory approval of CAL-101 for a Hematologic Cancer

Indication.241 But Gilead was obligated to use Commercially Reasonable Efforts to

achieve the first two milestones and to refrain from taking any action the primary

purpose of which was to avoid the satisfaction of the first two milestones.242

         There are genetic mutations within CLL that are present in only 0.44% of CLL

patients.243 Thus, under SRS’s reasoning, Gilead negotiated a Merger Agreement

that potentially obligated it to pay $175 million if it received regulatory approvals

for the treatment of patients who have CLL and a mutation present in 0.44% of

CLL.244 Not only is this interpretation contrary to reasonable business expectations,

240
      Tr. Oral Arg. 42; Opening Post-Trial Br. 66.
241
      JX351-067-068 § 9.1(a)(i)-(ii).
242
      JX351-070 § 9.1(b)(iii)(B).
243
      JX705-023.
244
   SRS contends that Gilead “had no obligation to pursue a milestone that it did not believe
would result in [significant commercial gain]” because Commercially Reasonable Efforts
was defined as efforts “consistent with the usual practice of [Gilead], with respect to
development and/or commercialization of its other important pharmaceutical products with
significant market potential being actively and diligently pursued by [Gilead].” Reply

                                              68
it contradicts the express language of the Merger Agreement, which states that “[t]he

parties acknowledge and agree that [Gilead’s] achievement of the Milestones are

material factors in determining the valuation of [Calistoga by Gilead].”245

         The structure of the Third Milestone itself suggests that the parties did not

contemplate it would be triggered by a frontline approval for treatment of a

subpopulation of disease sufferers. As set forth below, the Third Milestone could

be triggered by the earliest to occur of three events:

         (A) the receipt of Regulatory Approval of CAL-101 in the United States
         or the European Union, whichever occurs first, for a solid tumor
         indication, (B) the receipt of Regulatory Approval of CAL-101 in the
         United States or the European Union, whichever occurs first, as a first-
         line drug treatment (i.e., a treatment for patients that have not
         previously undergone systemic drug therapy therefor) for a
         Hematologic Cancer Indication, or (C) Annual Net Sales of CAL-101
         achieving at least $1 Billion, so long as such Annual Net Sales are
         achieved on or before the first day of the first calendar quarter
         beginning after the Outside Date [i.e., the tenth (10th) anniversary of
         the Closing Date].246

Post-Trial Br. 17. But this would not necessarily shield Gilead from the risk of milestone
payments for approvals in a tiny population. If, for example, Gilead pursued a disease-
level approval, but the Regulatory Authority only granted an approval for treatment of a
small subpopulation of the disease sufferers because of weakness in its data or for some
other reason, Gilead could be required as a practical matter to make the milestone payments
under SRS’s theory even if the approval was not commercially valuable. See Arbuck Dep.
88, 190 (“[I]f the European Union asked you to do something, you’d do what they ask you
to do. . . . [A]nd for sure if they asked us to submit language to get an indication, we would
do that.”).
245
      JX351-072 § 9.1(b)(iii)(E).
246
      JX351-068 § 9.1(a)(iii).

                                             69
         As Calistoga’s lead negotiator Stocks testified, each of the three subparts were

“intended to recognize value inflections that could lead to significant commercial

reward.” 247 Obtaining an approval for a solid tumor in satisfaction of the first

subpart would be highly valuable because it would expand the drug’s use “to a

completely different class and universe of cancers.”248 The commercial value of

achieving annual net sales of at least $1 billion in satisfaction of the third subpart is

self-evident.249 Given Stocks’ testimony, which accords with common sense and

which I credit, one reasonably would expect that satisfaction of the second subpart—

Regulatory Approval of CAL-101 as a first-line drug treatment for a Hematologic

Cancer Indication—also was intended to reward an event of significant commercial

success. Yet the record is devoid of any hard evidence that a first-line regulatory

approval for a small subpopulation of disease sufferers would yield such a result.

         SRS’s best evidence on this point is Dr. Gallagher’s testimony that “having

any first-line approval gives a halo effect to the drug, to be able to then continue to

broaden the use” because even though the drug “may be indicated for this small

247
      Stocks Dep. 52.
248
   Yu Dep. 70; Tr. 872 (O’Connell) (“[S]olid tumors is very large diseases, much larger
than hematological diseases in terms of patient numbers. So it meant a significant
commercial gain, really an upside for Gilead that we hadn't even anticipated.”); Tr. 803-04
(Hawkins).
249
      Yu Dep. 70.

                                            70
patient population . . . it tells physicians that there’s a positive risk/benefit profile

that would then have them think about using it in other first-line indications.”250 Dr.

Gallagher also acknowledged, however, that the parties put in the “$1 billion annual

sales” trigger of the Third Milestone as a “backstop” or “schmuck insurance” for

protection for “a small approval.”251 Although not dispositive, the existence of such

a backstop cuts against the notion that the second subpart of the Third Milestone was

intended to trigger an immediate payment for a sub-disease level approval (i.e.,

before a meaningful amount of sales is achieved), particularly if, as Stocks testified,

each of the three subparts was intended to capture events that one reasonably would

expect to lead to a significant commercial reward.

                3.        SRS’s Other Subpopulation Arguments Also Fail

         I next address two remaining arguments SRS advances in support of its

subpopulation approval argument. First, SRS contends that the FDA Label that

triggered the First and Second Milestones was itself a subpopulation approval.252

The FDA Label approved Zydelig for the treatment of patients with:

250
      Tr. 188-89 (Gallagher).
251
   Tr. 210-12, 359-60 (Gallagher); See also Tr. 873-76 (O’Connell). Indeed, under Section
9.1(a)(iv)(C) of the Merger Agreement, if the First Milestone has been met but the Second
Milestone has not been met when CAL-101 achieves annual net sales of at least $1 billion,
then Gilead would be obligated to make both the Second and Third Milestone payments.
252
      Tr. Oral Arg. 57.

                                            71
          Relapsed chronic lymphocytic leukemia (CLL), in combination with
           rituximab, in patients for whom rituximab alone would be
           considered appropriate therapy due to other co-morbidities. (1.1)
          Relapsed follicular B-cell non-Hodgkin lymphoma (FL) in patients
           who have received at least two prior systemic therapies. (1.2)
          Relapsed small lymphocytic lymphoma (SLL) in patients who have
           received at least two prior systemic therapies. (1.3)253

In other words, the FDA Label contained three approvals. The first approval was

for the treatment of relapsed CLL patients with certain co-morbidities; the second

approval was for the treatment of FL patients who were receiving third-line or later

therapies; and the third approval was for the treatment of SLL patients who were

receiving third-line or later therapies.

         SRS asserts that the concept of “relapse” or “third-line” denotes

“subpopulation” in the same sense as genetic mutations such as 17p deletion or TP53

mutation. 254 This argument is disproved by both the language of the Merger

Agreement and trial testimony.

         The Third Milestone expressly separates the concepts of “lines of therapy”

and “Hematologic Cancer Indication” by requiring “receipt of Regulatory Approval

of CAL-101 . . . as a first-line drug treatment . . . for a Hematologic Cancer

Indication.”255 As Dr. Gallagher admitted, when “the parties were thinking about

253
      JX510-001.
254
      See Opening Post-Trial Br. 62.
255
      JX351-068 § 9.1(a)(iii)(B) (emphasis added). See also Tr. 617-18 (Dearden).

                                             72
hematologic cancer indication, whatever it meant, it was defined separately from the

line of treatment.”256

         Gilead’s lead negotiator O’Connell explained that he understood lines of

therapy to be a description of usage rather than a subpopulation of patients because

at each stage of therapy, the same patient is being treated.257 Drs. Hawkins and

Dearden concurred.258 SRS’s witnesses also do not seriously dispute the point. Dr.

Miller expressly agreed that the same patient could receive different lines of

treatment,259 and Dr. Arbuck agreed that first line, second line and later lines are

“usage descriptors.”260 Therefore, even though the second and third approvals under

the FDA Label were for patients who were receiving third-line or later treatments,

these two approvals were still at the disease level.

         The first approval under the FDA Label, on the other hand, was limited to

relapsed CLL patients “for whom rituximab alone would be considered appropriate

therapy due to other co-morbidities” and thus might be considered a subpopulation

approval. But as SRS itself acknowledged, it did not know whether the first approval

256
   Tr. 250-51 (Gallagher). See also Stocks Dep. 40-41 (line of therapy “doesn’t have
anything to do with tumor type”).
257
      Tr. 835-36 (O’Connell).
258
      Tr. 774-75 (Hawkins); 633 (Dearden).
259
      Tr. 76 (Miller).
260
      Tr. 493-94 (Arbuck).

                                             73
was a basis for triggering either of the first two milestones because the notice Gilead

sent out announcing satisfaction of the first two milestones did not specify which of

the three approvals in the FDA Label triggered them.261

         Second, SRS contends that the parties’ inclusion of “accelerated approval or

conditional approval” in the definition of “Regulatory Approval” shows that Gilead

contemplated paying milestones for a subpopulation of disease sufferers.262 SRS

acknowledges, however, that “accelerated or conditional approval is granted upon a

showing of unmet medical need.”263 It has no direct correlation with whether the

approval sought is for a disease or a subpopulation.264 Indeed, in the FDA Label that

Gilead received, the FDA granted disease-level accelerated approvals of Zydelig for

third-line treatment of two diseases: follicular B-cell non-Hodgkin lymphoma (FL)

and small lymphocytic lymphoma (SLL).265

                                       *****

261
      Tr. Oral Arg. 58; see JX540.
262
      Opening Post-Trial Br. 63.
263
   Opening Post-Trial Br. 63 (emphasis added); see also Tr. 23 (Miller); Tr. 151-52
(Gallagher); Tr. 401-02 (Arbuck); Tr. 907-08 (O’Connell).
264
      Tr. 784 (Hawkins).
265
   JX510-001. Another example is that the drug Imbruvica recently received accelerated
approval as a second-line treatment for “Mantle cell lymphoma (MCL),” a blood cancer.
JX841-001.

                                          74
         In view of the extrinsic evidence as well as the structure and operation of the

milestone provisions discussed above, I conclude that to trigger the second subpart

of the Third Milestone, the required regulatory approval must be at the disease level.

                4.     The European Commission Did Not Approve CAL-101 as a
                       First-Line Drug Treatment for the Disease CLL

         Having determined that the required form of regulatory must be a first-line

disease-level approval, the final issue is whether the17p/TP53 Label constitutes such

an approval.         SRS contends that the European Commission’s approval

“unquestionably” was for a “first line treatment for the disease CLL.”266 The record,

however, is replete with evidence to the contrary.

         In a March 18, 2016 report concerning certain safety issues related to

idelalisib, the EMA’s Pharmacovigilance Risk Assessment Committee observed that

“[p]reviously untreated CLL” is “[n]ot an authorized indication for CLL.” 267

Reviewing this report, SRS’s expert, Dr. Arbuck, agreed that the EMA was

observing that “Idelalisib in Europe was not previously approved as front line or for

previously untreated CLL patients.” 268           Dr. Miller testified similarly, stating

266
      Opening Post-Trial Br. 61.
267
      JX723-005.
268
    Tr. 460. Dr. Arbuck re-characterized her testimony at trial to suggest that the report
meant that idelalisib had not been approved for “all” persons with CLL. Id. 466-67. Even
if true, it would not matter because, as discussed above, only a disease-level approval could
trigger the second subpart of the Third Milestone.

                                             75
explicitly that “Zydelig has not been approved in Europe for the disease of CLL.”269

Both witnesses also admitted that there is no disease recognized as “within” CLL.270

         Both sides agree that a first-line approval is “the culmination of a complex

regulatory program proceeding through trials that appropriately demonstrate safety

and efficacy as treatment for the disease” and makes the drug a “gold standard.”271

Gilead received the 17p/TP53 Label, however, in a situation very different from the

typical first-line drug approval process.          For example, although Zydelig had

demonstrated effectiveness in CLL patients, including those with 17p deletion or

TP53 mutation, Gilead had not even completed the “pivotal” phase 3 studies in

previously untreated CLL patients when the 17p/TP53 Label was approved.272 As

the CHMP’s Rapporteurs noted in their July 14, 2014 assessment report, “the front-

line experience for idelalisib in del17p / TP53 is limited to 9 patients” and the follow-

up period was only 6 to 12 months.273 In other words, as expert witnesses from both

sides testified, the efficacy and safety data for Zydelig was insufficient to support a

regulatory approval as a first-line treatment for the disease CLL.274

269
      Tr. 114 (Miller) (emphasis added). See also Tr. 112 (Miller).
270
      Tr. 67 (Miller); 527-29 (Arbuck).
271
      Tr. 79-80 (Miller), 804 (Hawkins), Tr. 649 (Dearden); see also JX372-031.
272
   See JX567-001, JX567-009, Bischofberger Dep. 78-79; Tr. 624 (Dearden) (describing
“Phase 3 randomized trials” as being “pivotal”).
273
      JX518-003; see also Tr. 626-27 (Dearden).
274
      See Tr. 624-25, 633-34, 637 (Dearden); Tr. 482, 478-79 (Arbuck).

                                              76
         The European Commission nevertheless granted the 17p/TP53 Label not as a

first-line treatment for the disease of CLL, but to address the dire needs of a specific

subpopulation of patients with CLL. As Gilead’s expert Dr. Dearden credibly

explained, the EMA was,

         making an exceptional circumstance for an exceptional population of
         patients who not only have this genetic abnormality, but also were
         unable to receive other treatments, that they don’t have options. That
         couldn’t be more different from the situation of a regular CLL patient,
         who has in the first-line a number of excellent options for treatment that
         have been well defined through pivotal registration Phase 3 randomized
         trials.275

         In sum, when Gilead submitted its application to the EMA on October 29,

2013, it sought approval of CAL-101 for treatment of “relapsed chronic lymphocytic

leukaemia.”276 Gilead did not seek approval of CAL-101 as a first-line treatment for

the disease CLL, and the record shows that it did not receive such an approval.

IV.      Conclusion

         For the reasons explained above, SRS has failed to prove by a preponderance

of evidence that the 17p/TP53 Label triggered the Third Milestone under the Merger

Agreement, and Gilead has proven by a preponderance of evidence that it did not.

Accordingly, SRS’s motion for judgment on the pleadings is DENIED. Gilead is

entitled to judgment in its favor on its counterclaim for declaratory judgment and on

275
      Tr. 624 (Dearden).
276
      JX455-002 (emphasis added).

                                            77
SRS’s claim for breach of contract.      The parties are directed to submit an

implementing form of final order and judgment within five business days.

      IT IS SO ORDERED.

                                       78