Jeff Himawan v. Cephalon, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFF HIMAWAN, JOSH TARGOFF )
and STEPHEN TULLMAN, as the duly- )
appointed Representatives of the former )
stockholders of CEPTION )
THERAPEUTICS, INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0075-SG
)
CEPHALON, INC. and TEVA )
PHARMACEUTICALS USA, INC., )
)
Defendants.
MEMORANDUM OPINION
Date Submitted: November 16, 2023
Date Decided: April 30, 2024
Richard L. Renck and Mackenzie M. Wrobel, DUANE MORRIS LLP, Wilmington,
Delaware; OF COUNSEL: John Soroko, Wayne A. Mack, Michael J. Rinaldi, and
Jessica Priselac, DUANE MORRIS, Philadelphia, Pennsylvania, Attorneys for
Plaintiffs.
J. Matthew Belger and Kevin R. Shannon, POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; OF COUNSEL: Jay P. Lefkowitz, P.C., Devora Allon,
P.C., John P. Del Monaco, and Alexandra I. Russell, KIRKLAND & ELLIS LLP,
New York, New York, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
In 2010, Defendant Cephalon Inc. purchased another Delaware corporation,
Ception Therapeutics, Inc. Plaintiffs are stockholders’ representatives of Ception.
Ception at the time had, essentially, a single asset, an antibody called Reslizumb
(“RSZ”) which showed some promise in treating a type of inflammation in the lungs
(“EA”) and esophagus (“EoE”). To oversimplify, white blood cells are part of the
body’s defense against infection. When the body overproduces certain types of these
cells, however, they can cause inflammation and harm. RSZ was, the parties hoped,
a way to limit overproduction of the cells. The parties’ intent was the
commercialization of RSZ to treat EA and EoE. This, in turn, would require
extensive development and FDA approval.
As described below, for the next year-and-a-half after the acquisition,
Cephalon continued Ception’s attempts to obtain FDA approval for sale of RSZ. To
oversimplify again, testing of RSZ for EA, while not entirely successful, showed
more promise than testing for EoE. In November of 2012, Cephalon told the FDA
that it was halting its attempts to commercialize RSZ for EoE.
In October of 2012, Cephalon was acquired by Teva Pharmaceutical
Industries Ltd. Teva adopted Cephalon’s opinion that RSZ for EoE was a failed
product, and pursued the commercialization of RSZ for EA, which was ultimately
approved by the FDA.
1
The Merger Agreement by which Cephalon acquired Ception provided for
payment of $250 million upfront to Ceptions’ stockholders. Also accruing to the
stockholders were “milestone” payments based on FDA and European approval of
RSZ for EA and EoE. The milestones, realized, could result in up to $200 million
for approval and commercialization for EA, and $200 million for EoE. The
development of RSZ, per the Merger Agreement, was entirely at the discretion of
Cephalon, subject to the obligation to use commercially reasonable efforts to reach
the milestones. This obligation was assumed by Teva when it acquired Cephalon.
The EA milestones were achieved, and Ception stockholders were paid the full
milestone payments, $200 million. The EoE milestones have not been reached.
Plaintiff stockholder representatives allege that Cephalon and Teva have
failed to use commercially reasonable efforts to commercialize the EoE function,
measured objectively as called for in the Merger Agreement, and that the
stockholders have been damaged as a result. They brought this action, which was
bifurcated as to liability and damages; what follows is my post-trial opinion on
whether Cephalon and Teva have breached the Merger Agreement requirement of
commercially reasonable efforts (“CRE”).
The parties largely agree as to the facts. They interpret the contractual
language differently. Plaintiffs see the CRE obligation as akin to a best efforts
obligation, under which Defendants must pursue commercialization, through the
2
milestones, at least, unless it would be unreasonable to do so. Defendants believe
the CRE clause only obligates them to act in good faith. Below, I assess Defendants’
actions in light of the language of the Merger Agreement, to see if they have
breached the CRE clause. I find they have not. My reasoning follows a statement
of the facts.
I. BACKGROUND1
A. The Parties
Plaintiff Ception was a corporation organized and existing under the laws of
the State of Delaware.2
Plaintiff Stephen Tullman is an appointed representative of the former
stockholders of Ception.3
Plaintiff Jeff Himawan is an appointed representative of the former
stockholders of Ception.4
1
Citations to the parties’ joint trial exhibits are referred to by the numbers provided by the parties
and cited as “JX __”. See Ex. A to Joint Pre-Trial Stipulation and [Proposed] Order, Dkt. No. 161.
Citations to the parties’ stipulated pre-trial order are cited as “PTO ¶ __”. Granted (Joint Pre-Trial
Stipulation and [Proposed] Order), Dkt. No. 172. References to the trial transcripts are cited as
“Tr. (WITNESS NAME) __:__”. Tr. of 9-19-2022 Trial — Volume I, Dkt. No. 186; Tr. of 9-20-
2022 Trial — Volume II, Dkt. No. 187; Tr. of 9-21-2022 Trial — Volume III, Dkt. No. 188; Tr.
of 9-22-2022 Trial — Volume IV, Dkt. No. 189; Tr. of 9-23-2022 Trial — Volume V, Dkt. No.
190.
2
PTO ¶ 1.
3
Id. ¶ 2.
4
Id. ¶ 3.
3
Plaintiff Josh Targoff is an appointed representative of the former
stockholders of Ception.5
Defendant Cephalon was a corporation and effective June 30, 2022, is a
limited liability company organized and existing under the laws of the state of
Delaware.6 Cephalon is an indirect wholly-owned subsidiary of non-party Teva
Pharmaceutical Industries Ltd. (“Teva Ltd.” or “Teva”) and has been since October
14, 2011.7
Defendant Teva Pharmaceuticals USA, Inc. (“Teva USA”) is a corporation
organized and existing under the laws of the State of Delaware. 8 Teva USA is an
indirect wholly-owned subsidiary of Teva Ltd.9
B. Ception Develops RSZ through License Rights
In 2004, Tullman and others formed Ception Therapeutics, Inc. (“Old
Ception”), which licensed from Schering Corporation and Celltech R&D Limited
the rights to Rezlizumab (“RSZ”).10 The company sought to develop and
commercialize RSZ as a treatment for eosinophilic asthma (“EA”) and for
eosinophilic esophagitis (“EoE”).11
5
Id. ¶ 4.
6
Id. ¶ 6.
7
Id. ¶ 7.
8
Id. ¶ 8.
9
Id. ¶ 9.
10
Id. ¶ 15.
11
Trial Tr. (Tullman) 16:11–14; JX830 at 4–6.
4
Eosinophils help the body fight off certain types of infections when
functioning properly.12 But, when above-average amounts of eosinophils appear in
the blood or certain parts of the body, they can cause inflammation and are associated
with a variety of disorders.13 EoE is a chronic disorder of the digestive system in
which large numbers of eosinophils are present in the esophagus. 14 EA is a type of
asthma that is caused by high levels of eosinophils in the airways of the lungs.15 RSZ
is a humanized monoclonal antibody that targets interleukin 5 (“IL5”) and inhibits
the growth of eosinophils by neutralizing circulating IL5 and preventing it from
binding to its receptor.16 To oversimplify, if the body’s defense mechanisms,
eosinophils, overpopulate, they are themselves harmful; in theory, RSZ controls this
overproduction of eosinophils.
Old Ception merged with Fulcrum Pharmaceuticals, Inc. on December 20,
2005, and as a result Old Ception and Fulcrum became wholly-owned subsidiaries
of “new” Ception.17 In 2007, RSZ was designated by the U.S. Food and Drug
Administration (“FDA”) as an orphan drug under the Orphan Drug Act, 21 U.S.C. §
360aa et seq., which provides incentives to companies to work to develop cures for
12
Id. ¶ 12.
13
Id.
14
Id. ¶ 13.
15
Pls.’ Verified Am. Compl. ¶ 36, Dkt. No. 137 (“Am. Compl.”).
16
PTO ¶ 14.
17
Id. ¶ 16.
5
rare diseases, including market exclusivity for seven years and various
developmental tax credits.18
As a biological product, RSZ would potentially qualify for a twelve-year
period of exclusivity under the Public Health Services Act, 42 U.S.C. § 262. 19 To
obtain FDA approval to market RSZ, Ception designed three clinical trials to
establish the efficacy and safety of RSZ for treating EoE (two of the trials) and EA
(one of the trials).20 Clinical Trial Res-5-0002 was a Phase IIb/III clinical trial of
RSZ as a treatment for pediatric EoE (the “EoE Study”), which sought to measure
improvement in two co-primary endpoints: (a) changes in esophageal eosinophil
levels and (b) changes in physicians’ assessments based upon the participant’s
reporting of symptoms, weight, dietary status, and overall well-being.21 Clinical
Trial Res-5-0004 was an open label extension study of RSZ in the pediatric subjects
who had participated in the EoE Study (the “Open Label Extension Study”). 22 The
Open Label Extension Study was designed to measure the long-term safety and
efficacy of RSZ in treating EoE.23
18
Id. ¶ 17.
19
Id. ¶ 18.
20
Id. ¶ 19.
21
Id. ¶ 20.
22
Id. ¶ 21.
23
Id.6
In November 2007, Ception initiated its EA Study.24 The following year on
March 24, 2008, Ception began its EoE Study.25 Prior to the study, Ception needed
additional funding to carry on with its clinical trials in order to bring RSZ to the
market.26 On January 13, 2009, Ception and Cephalon entered into an option
agreement (“Option Agreement”) whereby Cephalon paid $100 million for an option
to acquire all of the outstanding stock of Ception for a purchase price of $250
million.27 The Option Agreement included a pre-agreed form of merger agreement
(the “Form Agreement”) pursuant to which the acquisition of Ception was to be
made, without any further negotiation, if the option were exercised.28 The Option
Agreement also allowed Cephalon to observe the results from the ongoing trials.29
On October 20, 2009, Ception completed its EoE Study, which involved 228
children and adolescents, between the ages of 5 and 18.30 Some received RSZ, and
some a placebo, and the results of these populations were compared.31 After the
study ended, participants were given the option to move to the Open Label Extension
Study, which allowed them to continue receiving RSZ but not the placebo.32 A
24
JX18 at 6; JX12 at 18.
25
JX42; JX1094 at 3.
26
Trial Tr. (Tullman) 20:23–21:12.
27
PTO ¶ 24.
28
JX24.
29
Id.30
PTO ¶ 26.
31
JX42.
32
PTO ¶ 38.
7
month later, on November 23, 2009, Ception and Cephalon jointly announced
Ception’s EoE Study failed to meet its co-primary endpoint.33 The study
demonstrated that the system improvement endpoint did not have statistical
significance because all patients, even those treated with a placebo, reported
symptom improvement.34 Although Ception had missed one of its co-primary
endpoints, Ception agreed to extend Cephalon’s option period until after the EA
Study was completed.35
C. Cephalon Acquires Ception
The EA Study concluded in February 2010 and demonstrated that RSZ was
likely effective in treating EA.36 After the results of the EA Study, on February 23,
2010, Dr. Lesley Russell, Chief Medical Officer at Cephalon, issued a press related
stating:
“This study showed a strong treatment signal and compelling internal
consistency on the effect of [RSZ] on measurements of asthma and lung
function” and advising that “[t]hese data provide confidence that [RSZ]
shows a meaningful treatment effect in this patient population. We look
forward to advancing [RSZ] into Phase Three clinical trials.”37
Consequently, Cephalon exercised its option to acquire Ception and the
parties executed a merger agreement on March 10, 2010 (the “Merger
33
PTO ¶ 27; JX36.
34
JX42.
35
Trial Tr. (Tullman) 41:5–43:18.
36
JX108 at 1.
37
Am. Compl. ¶ 71; Ans. ¶ 71; JX43, Feb. 2010 Press Release.
8
Agreement”).38 Cephalon paid $250 million to Ception stockholders in
consideration of the Merger Agreement.39 Under Section 3.4(a) of the Merger
Agreement, Cephalon agreed to pay milestones tied to approval by regulatory
authorities of RSZ:
(i) FDA approval of RSZ for the treatment of EoE ($150 million);
(ii) the European Commission’s grant of marketing authorization of
RSZ for the treatment of EoE ($50 million);
(iii) FDA approval of RSZ for any asthma indication, including EA
($150 million); and
(iv) the European Commission’s grant of marketing authorization of
RSZ for the treatment of any asthma indication, including EA ($50
million) (the “Developmental Milestones”).40
Under Section 3.4(c) of the Merger Agreement, “(i) . . . control of the
Surviving Corporation . . . shall rest with Parent . . . and the [former stockholders]
shall have no right object to the manner in which business of the Surviving
Corporation is conducted . . . and (ii) Parent shall have complete discretion with
respect to all decisions related to the business of the Surviving Corporation . . . .”
(the “Discretion Clause”).41 The Discretion Clause further outlined Cephalon’s
obligations to Ception, as it provided that Cephalon did not have an obligation to (i)
conduct clinical trials; (ii) pursue regulatory approvals; (iii) maximize payment to
38
JX46.
39
Id.40
Id. at § 3.4(a)(A)-(B), (D)-(E).
41
Id. at § 3.4(c).
9
Ception stockholders; (iv) follow Ception’s business plan; or (v) consult with
Ception stockholders with respect to the business.42
The Discretion Clause, however, was subjected to a “commercially reasonable
efforts” clause (“CRE” or the “CRE Clause”) which required Cephalon to use
“commercially reasonable efforts to develop and commercialize . . . [RSZ] so as to
achieve the Developmental Milestones.”43 “Commercially reasonable efforts” was
defined as “the exercise of such efforts and commitment of such resources by a
company with substantially the same resources and expertise as [Cephalon], with
due regard to the nature of efforts and cost required for the undertaking at stake.”44
The parties consummated the Merger on April 5, 2010.45
D. Cephalon Undertakes RSZ for EoE
After the acquisition, Cephalon took actions to develop RSZ for EoE.46
Cephalon met with Dr. Tim Henkel, Ception’s Head of Research and Development,
to discuss the EoE program on April 7, 2010.47 At that meeting, Cephalon discussed
potential remedies to the failed EoE Study, as well as a protocol amendment to the
Open-Label Study.48 Cephalon created a plan to attempt to secure FDA approval for
42
Id.
43
Id. at 36.
44
Id. at § 3.4(a)(iii).
45
JX74 at 104.
46
JX874 at 2–3.
47
Id. at 2.
48
Id.
10
the EoE program with input from Drs. Henkel and Jeff Wilkins, both former Ception
employees.49 Cephalon spent months creating an alternative plan for FDA approval
which drew from participant data in the Open-Label Study50 and conducting
meetings to explore the clinical development of EoE to ameliorate data that the FDA
had concerns with.51 On September 2, 2010, Cephalon requested a pre-Biologics
License Application meeting (“BLA”) regarding EoE with the FDA to present its
plan.52
Cephalon and the FDA held the BLA meeting on December 14, 2010.53 Drs.
Henkel and Wilkins attended the meeting to help present the proposal to the FDA.54
Cephalon submitted proposals to gain FDA approval for EoE for RSZ all of which
were rejected.55 Cephalon first proposed to submit a pre-Biologics License
Application for RSZ under an FDA program for accelerated approval of biological
products.56 As part of that proposal, Cephalon sought to convince the FDA that it
should accept reduced eosinophil levels coupled with “the reintroduction of
previously restricted foods” as “reasonably likely to predict clinical benefit of [RSZ]
49
Id.; Trial Tr. (Wilkins) 357:19–358:4. Dr. Jeff Wilkins was also a former employee of Ception.
Trial Tr. (Wilkins) 247:16–17.
50
JX217; JX50.
51
JX50.
52
JX71 at 3.
53
Id.
54
Id.
55
Id.
56
Id.
11
in the treatment of children with [EoE] as a surrogate endpoint as proof of RSZ’s
efficacy.57 The FDA rejected this proposal because “there was insufficient evidence
to support histological changes in eosinophils alone as a surrogate endpoint
reasonably likely to predict clinical benefit.”58
Cephalon also proposed to amend the Open-Label Study to convert it into an
efficacy study, by (i) reintroducing foods into diets of patients treated with RSZ that
had not been previously tolerated and (ii) analyzing the percentage of patients able
to successfully adjust to their diet.59 The FDA also rejected this proposal since the
results would be considered exploratory in nature and would not be linked to a
clinical improvement in symptoms among patients.60 However, the FDA did note
that “post hoc efficacy endpoints in an on-going open label study may provide
important information that may aid in the design and planning of future studies.”61
Ultimately, the BLA meeting was unsuccessful,62 as the FDA made clear that
Cephalon must actually demonstrate symptom improvement in patients with a
57
Id. at 3–4.
58
Id.
59
Id. at 5.
60
Id.
61
Id.
62
There was significant disappointment coming out of the meeting. Trial Tr. (Wilkins) 308:17-
309:8.
12
validated PRO tool63 in order to receive approval, which Cephalon had not
demonstrated.64
Despite the FDA’s rejection of Cephalon’s proposals for RSZ for EoE,
Cephalon prepared a proposal for an enriched enrollment, randomized withdrawal
(“EERW”) study, which would include individuals who began in the original EoE
study and continued in the Open-Label Study.65 The goal of this study was to
indicate symptom improvement by analyzing patient results that were removed from
treatment in a randomized fashion compared to patients who continued to use RSZ.66
On May 4, 2011, the FDA rejected the plan to implement the EERW study, finding
that it was unclear if the new approach would accurately depict symptom
improvement.67 Notwithstanding this rejection, the FDA was encouraging, and
stated it “remain[ed] eager to work with [Cephalon] on further development of” RSZ
for EoE.68
The FDA provided general recommendations for Cephalon to gain FDA
approval and requested additional data from the EoE Study and Open-Label Study.69
63
Measuring symptom relief in a clinical trial is often done through a patient reported outcome
questionnaire, or a “PRO.” Trial Tr. (MacFarlane) 587:12–88:8. A PRO can be validated to ensure
accurate measurement. Id.
64
JX71 at 4.
65
Trial Tr. (Wilkins) 309:12–311:18.
66
JX100 at 2–3.
67
Id. at 1. The meeting originally was supposed to be in person, but a day before the meeting was
scheduled, Cephalon requested that the meeting take place over the phone. JX97.
68
JX71; Trial Tr. (Wilkins) 306:8–07:4.
69
JX71 at 2–4; JX112 at 6.
13
Cephalon conducted the requested analysis but could not “identify a clinical benefit
to treatment in a specific subpopulation with a predominant symptom of EoE” and
concluded that the “[l]ack of validated endpoint tool to measure clinical benefit
(PRO) limit[ed] further development.”70
Ultimately, on November 8, 2011, Cephalon notified the FDA that it was
discontinuing developing RSZ for EoE since it was not feasible to study the existing
patient population to support regulatory approval.71 The November 2011 letter to
FDA relayed Cephalon’s conclusions from its September 2011 analyses, including
that “defining a patient population using a single predominant symptom approach
will not result in a sample size that is large enough to re-randomize into a Phase 3
study.”72 The EoE Open Label Extension Study concluded in January 2012.73
E. Cephalon is Acquired by Teva
In the meantime, in October 2011, Teva acquired Cephalon, which became a
wholly-owned subsidiary of Teva.74 Consequently, Teva assumed all of Cephalon’s
contractual obligations under the Merger Agreement, becoming the decisionmaker
for programs undertaken from Ception.75 Immediately after the merger, Teva
representatives met with Dr. Tullman and others to discuss RSZ, including the EoE
70
JX112 at 8.
71
JX912 at 1.
72
JX118.
73
PTO ¶ 38.
74
JX120.
75
Dep. Rainville 275:2–13.
14
indication.76 Teva decided to focus on the development and commercialization of
RSZ for EA, because that use of RSZ had demonstrated positive clinical and
commercial results77 as compared to RSZ for EoE,78 and in view of the fact that
Cephalon had ended the EoE program.79 In support of this decision, Teva built a
manufacturing facility dedicated to the manufacture of RSZ in Ulm, Germany.80
Teva also invested almost $400 million in research, marketing, and developmental
costs on RSZ for EA.81 In sum, Teva spent an estimated one billion to bring RSZ
for EA to the market.82
In March 2016, Teva received FDA approval for RSZ for EA under the brand
name “CINQAIR,” and a few months later paid Ception stockholders $150 million
due as a milestone payment.83 Five months later, the European Commission granted
76
Trial Tr. (Tullman) 48:17–49:12.
77
Internal Teva forecasts demonstrate that Teva thought the commercial viability of the EA
indication estimated roughly $1.345 billion in revenue per year at its peak (assuming that Teva
could obtain approval of a subcutaneous form of RSZ). See JX180 at 22; see also Trial Tr.
(Fosbury) 160:16–161:6.
78
See JX108 at 1 (Castro, Mario et al., “Reslizumab for Poorly Controlled, Eosinophilic Asthma:
A Randomized, Placebo-controlled Study”).
79
Trial Tr. (Shah) 912:9–18 (testifying Teva’s clinical team was asked to focus on asthma); Trial
Tr. (Shah) 953:14–21 (testifying Teva invested almost $400 million in research and development
on asthma); Trial Tr. (Dethelfs) 1356:23–1357:6 (testifying that Teva built a manufacturing facility
dedicated to the manufacture of RSZ); id. at 1357:7–19 (testifying that Teva spent $400 million in
marketing, sales, and development costs for EA); id. (testifying that Teva spent an estimated one
billion dollars to bring RSZ for EA to market).
80
Trial Tr. (Dethelfs) 1356:23–1357:6 (testifying that Teva built a manufacturing facility
dedicated to the manufacture of RSZ).
81
Trial Tr. (Shah) 953:14–21 (testifying Teva invested almost $400 million in research and
development on asthma); Trial Tr. (Dethelfs) at 1357:7–19 (testifying that Teva spent $400 million
in marketing, sales, and development costs for EA).
82
Id.
83
PTO ¶¶ 42–44.
15
marketing authorization to RSZ for EA, and Teva paid Ception stockholders another
$50 million.84 Having successfully secured approval and marketing authorization
for RSZ as a treatment for EA, the asthma-related Developmental Milestone
payments, $200 million in total, were paid to former Ception stockholders.85
As a part of its approval, the FDA required that Teva include a “black box”
warning on the label for RSZ, which warned that CINQAIR may cause anaphylaxis,
a potentially deadly condition.86 This designation affected RSZ’s commercial
prospects, as there are many other treatments for EA on the market that did not
include such designation.87 CINQAIR/RSZ was also only approved to be
administered in its intravenous form, which required patients to receive the drug at
medical facilities through a catheter at appointments that could last up to 20-50
minutes.88 Other competing drugs in the market did not require intravenous
administration, and patients could take the drug by intramuscular injection, without
the assistance of a supervised medical facility.89 Ultimately, CINQAIR proved to
84
Id.
85
Id.
86
JX996 at 1.
87
Trial Tr. (Fosbury) 170:15–171:23; Trial Tr. (MacFarlane) 790:14–16.
88
Trial Tr. (MacFarlane) 788:7–10.
89
Id. at 858:24–859:3.
16
be a commercial failure, as it did not significantly compete well with other products
for EA on the market.90
F. Teva’s Efforts for EoE after Acquiring Cephalon
Shortly after acquiring Cephalon in 2011, Teva kept in contact with
physicians that shared their thoughts on RSZ treating other disorders and considered
the viability of EoE.91 Teva ultimately concluded that there was no path forward for
EoE from a regulatory perspective.92 Through 2015, Teva continued to believed that
EoE was not worth pursuing because there was not a successful path to secure FDA
approval, since a PRO tool, a patient reported outcome questionnaire used to
measure symptom relief, did not demonstrate symptom improvement.93
Teva also determined the pursuit of EoE impractical in light of related
milestone payments. For instance, Dr. Kurt Brown, a Clinical Program Leader at
Teva, emailed Francine Del Ricci, a former high-ranking Cephalon executive who
transitioned to Teva and became the manager of the Teva’s relationship with the
former Ception stockholders, about RSZ for EoE writing “scientifically we agreed
EoE is now a viable indication to pursue; but . . . I am assuming that a potential $200
90
JX884 (Morgan Stanley, “Specialist Prescribing Dynamics: Focus on Severe Asthma,” June 19,
2019, 6); JX883 (Morgan Stanley, “Specialist Prescribing Dynamics: Focus on Severe Asthma,”
December 4, 2019, 6); JX837 (Morgan Stanley, “Specialist Prescribing Dynamics: Focus on
Severe Asthma,” May 30, 2022, 7-8); JX846 (Expert Report of Frederic Selck at Figure 3).
91
JX165.
92
JX144.
93
Trial Tr. (Shah) 924:8–19, 922:20–923:12.
17
[million] EoE milestone payment may be the ‘killer’ for an EoE program?”94 In
addition, in a conversation between Ms. Del Ricci and Dr. Tushar Shah, former
Global Head of Respiratory of Cephalon, Dr. Shah expressed that Teva’s obligation
to pay EoE related milestones was detrimental to the EoE program. 95
During its development of RSZ for EA, however, Teva monitored the
regulatory landscape of EoE.96 After receiving regulatory approval for EA, in
February 2016, Teva began to assess the entire RSZ brand, including considering
moving into the EoE indication.97 In the meantime, on October 14, 2016, Himawan
wrote Teva about his concerns on the lack of development of EoE.98 Ms. Del Ricci
wrote to Himawan, in pertinent part:
Cephalon has the obligation under its March 10, 2010 Merger
Agreement with Ception to use commercially reasonable efforts to
develop and commercialize [RSZ]. However, the Merger Agreement
goes on to provide that Cephalon will have “complete discretion with
respect to all decisions relating to the research, development,
manufacture, marketing, pricing and distribution of [RSZ] . . . and shall
have no obligation to conduct clinical trials related to, or otherwise
pursue regulatory approvals of, any indication for [RSZ] . . . or
otherwise take any action to protect, attain or maximize any payment
to be received by the holders of Stock Certificates and Stock
Agreements pursuant to this Section 3.4.”
94
JX236.
95
Del Ricci Dep. at 177:3–8.
96
Trial Tr. (Shah) 943:12-944:14; see also Trial Tr. (Harvey) 1303:2-23 (recapping Teva’s efforts
to monitor EoE indication).
97
See generally JX895 (Reslizumab Brand Overview); see also Trial Tr. (Fosbury) 163:2-169:11
(testimony regarding pipeline assessment).
98
JX323 at 3.
18
In any event, it would not be commercially reasonable for Cephalon to
develop [RSZ] for [EoE] for numerous reasons, including the need to
commit substantial resources that such an undertaking would require in
light of other ongoing development and portfolio-building initiatives of
the company.99
In December 2016, Teva hired RxC, a third-party biopharma strategy
consulting firm that specializes in pharmaceutical life cycle planning and new
product commercialization, to conduct an opportunity assessment of RSZ for EoE.100
The purpose of the opportunity assessment was to “assess the clinical and regulatory
viability of anti-IL5 therapy to treat Eosinophilic Esophagitis (EoE) patients.”101
On April 26, 2017, RxC reported its findings to Teva.102 RxC concluded that
the probability of starting a successful new trial of RSZ for EoE was low because of
difficulties in creating a successful clinical trial framework and RSZ’s failure to
show improvement in patients with EoE.103 RxC also found that the commercial
viability of RSZ for EoE provided limited upside.104 In evaluating other companies’
development of treatment for EoE, RxC found that those companies had made little
progress.105 For instance, at the time of its analysis no other company obtained FDA
99
JX326
100
See Trial Tr. (Fosbury) 177:9–17; see also Trial Tr. (Jayanthi) 1117:2–5.
101
See JX700 at 7.
102
Id.
103
Id. at 23.
104
Id. at 20.
105
Id. at 24–29.
19
approval for treating EoE.106 In sum, RxC reported that successfully developing
RSZ for EoE for regulatory approval was unlikely.
Teva also considered the commercial profile of RSZ in determining whether
to restart development in the EoE indication. Teva determined that the fact that RSZ
required administration by infusion, and the requirement that it display a black box
warning label, made RSZ a highly challenged commercial product in any
indication.107 In Teva’s view, it was not commercially reasonable to continue further
RSZ development, including in EoE, if Teva could not obtain a viable subcutaneous
route of administration for RSZ.108 Eventually, in 2018 Teva learned that its clinical
trials of the subcutaneous form of RSZ had failed to demonstrate clinical efficacy in
patients with EA.109 Based on these conclusions, as well as RxC’s independent
evaluation, Teva made the decision to not restart development of RSZ for EoE.
G. Procedural Background
Plaintiffs initiated this action against Cephalon, Teva Ltd., and Teva USA on
February 1, 2018, for (i) breach of contract against Cephalon; (ii) breach of implied
covenant of good faith and fair dealing against Cephalon; and (iii) tortious
106
Id.
107
Trial Tr. (Dethlefs) 1398:4–20.
108
Id.
109
See Trial Tr. (Dethlefs) 1402:23–1403:12. As Dr. Dethlefs explained, the subcutaneous
formulation was so important to the commercial success of the product, that Teva would never
have moved forward with the EoE indication without first securing the subcutaneous formulation.
Id. at 1387:23–1388:11 (describing subcutaneous approval as a “prerequisite” to EoE
development); id. at 1402:23–1403:12.
20
interference with contract against Teva Ltd. and Teva USA.110 Defendants filed their
Motion to Dismiss on February 28, 2018.111 I heard oral arguments on the Motion
to Dismiss on September 21, 2018,112 and granted it in part, but denied Defendants’
Motion to Dismiss the breach of contract claim against Cephalon.113
Thereafter, on November 30, 2021, Plaintiffs sought leave file to file an
Amended Complaint to include a breach of contract claim against Teva Ltd. and
Teva USA under a theory of successor liability.114 On June 6, 2022, Teva USA and
Plaintiffs executed a Guarantee Agreement, where Teva USA agreed to guarantee
any judgment entered against Cephalon in this action.115 Plaintiffs also agreed not
to name Teva Ltd. in the Amended Complaint.116 Plaintiffs filed the Amended
Complaint on July 11, 2022.117 On August 25, 2022, Defendants filed their Answer
to the Amended Complaint.118 Defendants filed a Motion in Limine to Exclude
Testimony of Kathryn MacFarlane Regarding Likelihood of Regulatory Approval
110
PTO ¶¶ 4–5.
111
Mot. to Dismiss Verified Compl., Dkt. No. 17.
112
Judicial Action Form for Oral Arg. held 09.21.18, Dkt No. 38.
113
Himawan v. Cephalon, Inc., 2018 WL 6822708, at *1 (Del. Ch. Dec. 28, 2018) (“Mem. Op.”).
114
Pls.’ Mot. for Leave to File Verified Am. Compl., Dkt. No. 104.
115
Granted (Stipulation and [Proposed] Order Resolving Pls.' Mot. for Leave to File Verified Am.
Compl.), Dkt. No. 139.
116
Id.117
Pls.' Verified Am. Compl., Dkt. No. 137.
118
Defs.' Answer to Am. Verified Compl., Dkt. 154.
21
on September 12, 2022,119 and Plaintiffs filed their opposition on September 16,
2022.120
I held a trial in this action on September 19, 2022 through September 23,
2022.121 The parties stipulated to bifurcating post-trial briefing into two phases, with
Phase I determining commercially reasonable efforts and whether there was a breach
and Phase II determining the consequences of that breach.122 I heard post-trial oral
argument on November 16, 2013.123 This opinion addresses the briefing and
evidence presented at trial concerning Phase I, that is, whether Defendants breached
the CRE Clause.
II. ANALYSIS
The issue before me is whether Defendants used commercially reasonable
efforts, as defined and cabined by the Merger Agreement, to develop RSZ for EoE.
Plaintiffs seek monetary relief in the amount of the Developmental Milestone
payments related to EoE and a reversionary grant of rights to RSZ, among other
119
Defs.' Mot. in Limine to Exclude Testimony of Kathryn MacFarlane Regarding Likelihood of
Regulatory Approval, Dkt. No. 165.
120
Pls.’ Opp’n to Defs.’ Mot. In Limine, Dkt. No. 174. I reserved ruling on the Motion in Limine
at trial. I decline to rule on the Motion in Limine, as I did not rely on the expert report in making
my decision.
121
Trial before Vice Chancellor Sam Glasscock dated Sept. 19, 2022 through Sept. 23, 2022, Dkt.
No. 183.
122
Granted (Defs.' [Proposed] Order Governing Post-Trial Submissions and Briefing), Dkt. No.
185.
123
Post Trial Oral Arg. before Vice Chancellor Sam Glasscock, Dkt. No. 222.
22
requests.124 Plaintiffs have the burden of proving that it is more likely than not that
Defendants breached the CRE Clause by not exercising commercially reasonable
efforts.125
A. Defendants Utilized Commercially Reasonable Efforts to Develop RSZ for
EoE
Plaintiffs assert, correctly, that the CRE Clause puts forth an “objective
standard” while affording Defendants “discretion to decide how to proceed with
RSZ,” subject to and “cabined by the objective standard.”126 Plaintiffs also point out
that the CRE Clause did not impose a time limit or terminate upon the happening of
a specific event.127
Plaintiffs construe these strictures in the Merger Agreement to impose an
obligation on Defendants through the CRE Clause “to take all reasonable steps to
solve problems” encountered when fulfilling the associate promise, and to
“consummate” the promise to obtain regulatory approval for RSZ for EoE.128
Plaintiffs contend that the indication for EoE was viable and that there was a path
124
Am. Compl. ¶ 42.
125
Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018).
126
Pls. Opening Post-Trial Br., Dkt. No. 194 (citing Himawan, 2018 WL 6822708, at *6) (“PL PT
OB”).
127
Post Trial Oral Arg. 53:16–54:5.
128
PL PT OB 43 (quoting Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264, 272 (Del.
2017); Menn v. ConMed Corp., 2022 WL 2387802, at *34–35 (Del. Ch. June 30, 2022); Akorn,
Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *87, 91 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d
724 (Del. 2018)).
23
forward to secure regulatory approval for RSZ for EoE.129 As such, Plaintiffs argue
that Defendants’ abandonment of RSZ for EoE is a breach of the Merger
Agreement.130 Plaintiffs point to non-action of Defendants to support its assertion.131
For instance, Plaintiffs point out that Teva did not continue developing RSZ for EoE
after it acquired Cephalon,132 but waited six years after acquisition to assess its
viability, to Ception stockholders’ detriment.133 Plaintiffs contend that Defendants
did not do the following for RSZ for EoE within this six-year period: (1) conduct a
“rigorous or analytical review;”134 (2) continue or restart development;135 (3) budget
for or expend any funds on development;136 (4) monitor developments or activities
of competitors;137 (5) regularly assess viability of all potential indications
annually;138 and (6) consider Ception stockholders’ inquiries.139
Regarding the Discretion Clause, which gave Defendants sole discretion over
Ception’s former affairs, Plaintiffs contend that the CRE Clause imposes an outward
restraint on Defendants’ ability to exercise their discretion.140 Put another way,
129
PL PT OB 3–4.
130
Id. at 49–57.
131
Id. at 20–35.
132
Id. at 28.
133
Id. at 37–40.
134
Id. at 20.
135
Id. at 20–22.
136
Id. at 22–23.
137
Id. at 23–24.
138
Id. at 24–25.
139
Id. at 26–27.
140
Id. at 47–49.
24
Plaintiffs argue that “the future development of RSZ for EoE was not a matter left
solely to Defendants’ discretion or business judgment.”141
In addition to pointing out the arguable lethargy of Defendants, Plaintiffs also
seek to compare Defendants efforts to pharmaceutical companies that have
developed and commercialized pharmaceutical products, which include: (i) Amgen
Inc.; (ii) AstraZeneca Pharmaceuticals LP; (iii) Bristol-Myers Squibb Company; (iv)
GlaxoSmithKline; (v) Sanofi-Regeneron; and (vi) Takeda, some of the largest
pharmaceutical companies in the world.142 Plaintiffs put forth Teva’s purported
status as a major pharmaceutical enterprise143 together with the amount it spends on
research and development144 to support this comparison.145 According to Plaintiffs,
while Defendants’ efforts for RSZ for EoE was stagnant, these competitors “surged
ahead and devoted resources to the development of EoE treatments and progression
of their clinical programs.”146 For example, Plaintiffs point to Sanofi-Regeneron’s
development and commercialization of Dupixent, a biologic for the treatment of
EoE, even after receiving mixed results in its initial Phase 2 study for EoE.147
141
Id. at 47.
142
Id. at 60; JX832 at 35; Trial Tr. (MacFarlane) 706:22–707:1.
143
JX1222 (stating Teva has “significant innovative research and operations supporting our
growing portfolio of specialty and biopharmaceutical products”); JX1223 (“Today, Teva is among
the top 15 global pharmaceutical companies–a world leader in generic and specialty medicines”);
Tr. (Dethleds) 1338:22–24 (stating that Teva is the largest customer of the FDA).
144
JX832 at 44–45.
145
PL PT OB 61.
146
Id. at 61–64.
147
Id. at 62.
25
Sanofi-Regenerson achieved this result after following the FDA’s
recommendations,148 which Plaintiffs argue indicates that Defendants could have
achieved the same result if it followed through with their obligations.149
Defendants in turn argue that their efforts were in fact objectively
commercially reasonable.150 Regarding Cephalon’s efforts, Defendants state that
Cephalon fulfilled its obligation by hiring former Ception employees, developing
plans to salvage the EoE program, and meeting with the FDA three times.151
Concerning Teva’s efforts, Defendants state that Teva acted reasonably by
prioritizing the EA indication over the EoE indication.152 Defendants also argue it
was justifiable for Cephalon to terminate the development of EoE because of clinical
study failures.153
Defendants likewise contend that it was commercially reasonable for Teva to
decline to restart the development of EoE since the assessment by their advisor, RxC,
determined that RSZ for EoE was not viable and the indication for EA with RSZ
was a commercial failure.154 Defendants further point out that the Merger
Agreement gives them sole discretion to develop, cabined only by an objective
148
JX832 at Section 4.2.
149
PL PT OB 62.
150
Defs.’ Opening Post-Trial Br. 25–28; 31–32, Dkt. No. 195 (“DEF PT OB”).
151
Id. at 26–28.
152
Id. at 31–32.
153
Id. at 28–30.
154
Id. at 32–38.
26
reasonableness standard that allows them to consider all business factors and
circumstances,155 and that, if the parties desired the buyer to use best efforts to
commercialize RSZ for EoE, they could have so agreed.156
Defendants argue that Plaintiffs’ “similarly situated companies” are not valid
comparators to Defendants’ efforts.157 Defendants assert that resources such as
revenue and research and development budgets of the Plaintiffs’ purpored “similarly
situated companies” were significantly higher than Cephalon in 2010158 and Teva in
2017.159 Nevertheless, Defendants contend that their efforts were commercially
reasonable compared to those non-comparable “similarly situated companies” since
the companies’ EoE therapies did not include anti-IL5 antibodies, and many of
Plaintiffs’ comparators acted the same way Defendants did in rejecting development
of that form of treatment.160 Further, in regard to “similarly situated companies” that
did in fact develop a monoclonal antibody that targets IL5, Defendants assert that
they did so after successfully prioritizing developing the treatment for EA, similar
155
Id. at 30 (quoting Himawan, 2018 WL 6822708, at *7).
156
Post Trial Oral Arg. 76:6–77:19.
157
DEF PT OB 39–45.
158
Id. at 41; see Trial Tr. (MacFarlane) 716:20–720:2; see also JX999 at 2 (2009 Pharmaceutical
Executive top-50 list) (demonstrating that Cephalon’s revenue in 2010 was $2.2 billion as
compared to “similarly situated companies” whose revenue ranged from $48.322 billion to $14.2
billion).
159
DEF PT OB 42; JX769 at 13, 16–19 (2018 Pharmaceutical Executive top-50 list)
(demonstrating that demonstrating that Teva’s budget for research and development in 2017 was
$1.778 billion as compared to “similarly situated companies” whose budgets ranged from $9.017
billion to $3.067 billion).
160
DEF PT OB 45–50.
27
to Teva.161 Defendants also state their actions were commercially reasonable as
compared to other companies that Plaintiffs did not include in their comparison
because those companies stopped EoE development after it failed to show symptom
improvement in clinical trials.162
To prevail on a claim for breach of contract, the plaintiff must establish by a
preponderance of the evidence that: (1) a contract existed between the parties; (2)
the defendant breached his obligation imposed by the contract, and (3) plaintiff
suffered damages as a result of the defendant's breach.163 “When the contract is clear
and unambiguous, [Delaware courts] will give effect to the plain-meaning of the
contract's terms and provisions.”164
The contractual language here gives the Defendants “complete” discretion
over the development of the RSZ assets they acquired via the merger. That
discretion is cabined, however, by the commercially reasonable efforts clause, which
is a defined term in the Merger Agreement. Commercially reasonable efforts are
“the exercise of such efforts and commitment of such resources by a company with
substantially the same resources and expertise as [Cephalon], with due regard to the
nature of efforts and cost required for the undertaking at stake.”165 The question is,
161
Id. at 51–53.
162
DEF PT OB 53–56.
163
See VLIW Tech., LLC v. Hewlett–Packard, Co., 840 A.2d 606, 612 (Del. 2003).
164
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159–60 (Del. 2010).
165
JX46 at § 3.4(a)(iii).
28
then, have Defendants taken those steps that a reasonable decision-maker would
make under the facts pertaining to the development of RSZ for EoE? If yes, there is
no breach.
I note that in my decision rejecting the Defendants’ motion to dismiss in this
matter, I suggested that one way to give meaning to the unusual language of the CRE
Clause was to compare the efforts of similarly-situated pharmaceutical companies
and their actions in the real world. After trial, I find this method unworkable; no
exemplar companies operate under the actual conditions of Defendants, who, I note,
are also different from one another as to their circumstances. I find that the best
interpretation of the contract is that the parties meant to impose the CRE requirement
on the buyer, as it found itself situated, but that the requirement went beyond buyer’s
subjective good faith. It imposed an objective standard—this is the meaning of the
imposition of a requirement to “exercise . . . such efforts and commitment of such
resources [as] a company with substantially the same resources and expertise as” the
buyer.
Plaintiffs point to cases where the subject of a reasonable-efforts or best-
efforts clause is aimed at completing the steps necessary to a merger that is the
subject of the agreement.166 I do not find those cases particularly helpful, because
166
Plaintiffs cite various decisions, which in their view provide the objective standard to cabin
Defendants’ actions. PL PT OB 43 (citing Williams Cos. v. Energy Transfer Equity, L.P., 159
29
the full language of the Merger Agreement here stresses the complete discretion of
the buyer to develop, or not, the assets purchased. Limiting that discretion to require
objective commercial reasonableness, given the facts as they exist, only means, in
my view, that Defendants may not avoid the earn-outs in in a way that is
commercially unreasonable. “Due regard” for the “efforts and costs” means that
Defendants may eschew development where the circumstances reasonably indicate,
as a business decision, that they not go forward. This includes all the costs and risks
involved, including the milestone payments and the opportunity costs faced by
Defendants, as evidenced by the provision that the reasonableness be measured
against the actions expected of a company with “substantially the same resources
and expertise” as the buyer. That is, if a reasonable actor with faced with the same
A.3d 264, 272 (Del. 2017); Menn v. ConMed Corp., 2022 WL 2387802, at *34–35 (Del. Ch. June
30, 2022); Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *87, 91 (Del. Ch. Oct. 1,
2018), aff’d, 198 A.3d 724 (Del. 2018)). These sorts of cases, however, involve efforts clauses in
the pre-merger context, where business considerations are within a different context compared to
post-merger circumstances.
In these contexts, commercially reasonable efforts clauses mandate that a party must pursue
the contractual outcome unless it would be commercially unreasonable to do so, as the clause
relates contractual closing itself, and promotes deal certainty. For example, in Williams
Companies, Inc. v. Energy Transfer Equity, L.P., a merger agreement set forth two milestones to
be achieved after signing a merger agreement but before the merger was to be consummated. The
merger agreement contained provisions that required the parties to use “commercially reasonable
efforts” to obtain one of the milestones and to use “reasonable best efforts” to consummate the
transaction. Plaintiffs brought suit after one milestone failed to occur as a result of the market
taking a downturn, resulting in the acquiring company refusing to complete the merger. The court
interpreted the provision contained in the merger agreement, “[the parties] shall cooperate and
each use its commercially reasonable efforts to cause (i) the Merger to qualify for [tax free
treatment under Section 721],” placed an affirmative obligation on the acquiring company to take
all reasonable steps to complete the milestone and complete the merger. Here, the provisions are
reversed; the buyer has complete discretion over development, cabined only by CRE.
30
restraints and risks would go forward in its own self-interest, the buyer is
contractually obligated to do the same.
This approach is typified in ev3, Inc. v. Lesh, where a merger agreement
provided for payments to a target company’s stockholders, upon achievement of
regulatory milestones, FDA approval and marketability, of a medical device at the
acquiring company’s sole discretion, which was cabined by exercising such
discretion in good faith.167 After it became apparent that the milestones were not
going to be achieved, the target company’s stockholders brought a breach of contract
action against the buyer for failure to fund and pursue the regulatory milestones.168
The acquiring company asserted that the development costs for the medical device
to secure regulatory approval were astronomical, and concluded further investment
required to secure FDA approval and efforts to bring it to the market was not
worthwhile.169
The Court held that it would not “constitute bad faith . . . to refuse . . . to
proceed . . . if the pursuit, after taking into account the milestones and development
costs, was not expected to yield . . . a commercially reasonable profit . . . .”170 The
court, however, held that it would constitute bad faith if the expected profit to the
167
114 A.3d 527, 533 (Del. 2014).
168
Id. at 528.
169
Id. at 533.
170
Id. at 541.
31
medical device at issue were in fact commercially reasonable and the company
delayed development in order to avoid payment to former stockholders of the target
company.171
I adopt here the reasoning of eV3, with the caveat that the provision in
question there required subjective good faith, as opposed, here, to objectively
reasonable efforts.
The parties disagree whether a similarly-situated hypothetical company used
to measure CRE means a smaller company like Cephalon, the buyer, or a medium-
sized company like Teva, which assumed the CRE obligations. I need not resolve
that question, because the record fails to demonstrate that a company even with
Teva’s resources—taking into account the low probability of achieving approval of
an EoE treatment, the costs thereof, and the low probability of profitable
commercialization—would find it in its economic interests to go forward to approval
and commercialization of RSZ for EoE.
It is notable that Defendants did undertake approval of RSZ for EA, where the
preliminary test results were more favorable than for EoE,172 that they were
171
Id. at 541 (emphasis added).
172
Compare JX108 (demonstrating that RSZ was likely effective in treating EA); JX43, Feb. 2010
Press Release (advising that “[t]hese data provide confidence that [RSZ] shows a meaningful
treatment effect in this patient population), with JX36 (stating that RSZ for EoE failed to meet its
second co-primary endpoint).
32
successful in doing so, and the milestone payment were made to Plaintiffs. The
different circumstances regarding EoE led to a different result.
Plaintiffs point out that my reading of the CRE Clause173 gives sellers little
protection, since it is invoked only to disallow actions of the buyer that would be
against the buyer’s self-interest.174 But this reading gives the Plaintiffs all that the
sellers bargained for. Cephalon purchased an option to buy Ception to acquire its
rights to RSZ. The initial test of RSZ for EoE was not successful, but the subsequent
test for EA, also not fully a success, showed more promise. Cephalon then exercised
its option. It purchased Ception and RSZ for a cash payment, with the discretion to
develop RSZ as it saw fit, cabined only by objective commercial reasonableness. If
it proved commercially reasonable to undertake the commercialization, and if
Cephalon were successful in such an undertaking, the sellers would be entitled to
milestone payments. But Cephalon was not required to take actions not in its self-
interest, measured objectively. Ception was free to have bargained for more, but
173
At the motion to dismiss stage, I held that the CRE Clause could be subject to two reasonable
interpretations, (1) a hypothetical company and (2) yardstick standard. Mem. Op., 2018 WL
6822708, at * 8. Under the hypothetical company approach, the language would define the CRE
Clause as those efforts “a company with substantially the same resources and expertise as
[Cephalon]” would expend under the circumstances at hand. Id. In contrast, a yardstick approach
would define the CRE Clause as those efforts compared to actions of other similarly situated
companies. Id. For the reasons given, I have analyzed Defendants’ actions under the former
standard.
174
Unlike in eV3, there is no endpoint after which commercialization would not trigger the
milestone payments.
33
this was the bargain the parties actually struck. I now turn to the facts demonstrated
at trial that support my finding that the Defendants did not breach.
1. Defendants Exercised Reasonable Commercial Efforts
a. Cephalon’s Actions and Subsequent Decision to Terminate
Developing RSZ for EoE was Commercially Reasonable
I find that Cephalon’s actions were commercially reasonable since RSZ for
EoE was not likely to receive regulatory approval. After Cephalon acquired Ception
in 2010, it took actions to develop RSZ for EoE. In response to the initial failed
study, Cephalon met with a former Ception employee to discuss potential remedies.
Afterward, Cephalon hired two former Ception employees, and used their input to
identify and execute a path to achieve regulatory approval. Over months, Cephalon
created an alternative plan for FDA approval which drew from the continued Open-
Label Study and conducted meetings to ameliorate data that the FDA had concerns
with.
At the end of creating its plan, Cephalon requested a BLA meeting to present
the plan. At this meeting, Cephalon proposed to (i) designate a surrogate endpoint
as proof of RSZ’s efficacy and (ii) to amend the Open-Label Study to convert it into
an efficacy study. The FDA rejected the first proposal because “there was
insufficient evidence to support histological changes in eosinophils alone as a
surrogate endpoint reasonably likely to predict clinical benefit.” In a similar vein,
the FDA rejected the second proposal because such a conversion would be
34
exploratory in nature. Most importantly, the FDA made clear that Cephalon was
unable to receive regulatory approval since Cephalon had not actually demonstrated
symptom improvement in patients pursuant to a validated PRO tool.
Cephalon then prepared a proposal for an enriched enrollment, randomized
withdrawal study, which would analyze actual users and non-users of RSZ in a
randomized fashion. Cephalon met with the FDA on May 4, 2011, to present its
proposal. The FDA once again rejected Cephalon’s proposal, because it was unclear
if the new approach would accurately depict symptom improvement. Cephalon
attempted to implement the FDA’s recommendations provided at the second meeting
but concluded that the lack of a validated endpoint tool limited further development.
Ultimately, Cephalon decided that it was not feasible to continue the study and
terminated it. In total, Cephalon spent in excess of $7.5 million in its efforts to
develop RSZ for EoE.
The evidence demonstrates that Cephalon took actions which were
commercially reasonable to pursue development of RSZ for EoE. Cephalon created
a plan to develop RSZ for EoE regulatory approval–with the assistance of Ception’s
former employees–that failed. It proposed three separate plans to the FDA, all were
rejected. At this point in time, Cephalon had paid Ception stockholders $250 million
in stockholder consideration. It had an incentive to develop and market RSZ for
EoE, if commercially viable. Taking into consideration the failed FDA meetings–
35
even those before Cephalon acquired Ception–I find it commercially reasonable for
Cephalon to have discontinued development for EoE at the time it did so.
I find that the actions of pharmaceutical companies that faced similar
circumstances to Cephalon tend to support Cephalon’s decision to terminate
development of RSZ for EoE.175 For example, Oxygen, a pharmaceutical company,
conducted a clinical study of a drug for treatment of EoE in 2011.176 The study failed
because patient-reported outcomes did not differ significantly between the treatment
and placebo groups, which is similar to circumstances that Cephalon faced.177 As
such, Oxygen is no longer developing its compound for EoE in the United States or
European Union.178 Similarly, another pharmaceutical, Allakos, launched a clinical
trial of its anti-Siglet-8 therapy, lirentelimab, for the treatment of EoE, but the
treatment failed to show symptom improvement.179 Allakos also terminated
development for EoE after the failure of its trial.180
175
As Plaintiffs point out, these exemplar companies are not precise analogs of the Defendants,
which is the mirror image of the Defendants’ dissatisfaction with Plaintiffs’ comparable
companies. I cite these examples only to bolster my finding of commercial reasonableness, not as
determinative of themselves.
176
Trial Tr. (MacFarlane) 873:20–874:4.
177
Id. at 873:20–875:23; JX1115 at 9.
178
Id. at 875:21–876:2.
179
Trial Tr. (Harvey) 1266:12–1267:2; JX823 (Doomsday for Allakos Article) (“Yesterday
Allakos was worth $4.4[ billion]. Today its valuation is a minute fraction of that after the
catastrophic failure of Lirentelimab.”).
180
Id.36
Plaintiffs argue that the FDA’s recommendations and guidelines to secure a
path to regulatory approval suggest a commercially reasonable path to
commercialization existed. Although the FDA gave recommendations and
guidelines, each time RSZ for EoE was up for approval it was rejected. The FDA’s
language, in the minutes of its meeting with Cephalon on developing RSZ for EoE,
indicated that it looked forward to working together with Cephalon; this does not in
my mind change the CRE analysis.181 This anodyne encouragement does not support
a finding that the FDA actually believed that there was a clear path for regulatory
approval for RSZ for EoE. As the record evidences, the FDA does not have the
authority to completely reject BLA submissions by companies, and thus must
“present some path forward, even if that path forward isn’t really viable or really
isn’t a realistic path forward.”182
More fundamentally, the fact that the FDA was willing to work with
Cephalon, like the fact that there were undoubtably more actions Cephalon could
have undertaken and more resources it could have expended, is not the measure of
CRE here. Under the Merger Agreement, Cephalon was not obligated to move the
Earth to securing regulatory approval of RSZ for EoE. It only had to employ those
effort as were commercially reasonable.
181
See Trial Tr. (Wilkins) 308:19–309:8; Trial Tr. (Shah) 993:9–999:18.
182
Trial Tr. (Harvey) 1243:10-20.
37
b. Teva’s Actions to Prioritize RSZ for EA and its Decision to
Decline to Restart Development of RSZ for EoE was
Commercially Reasonable
When Teva acquired Cephalon, it took on the CRE obligation of the Merger
Agreement. At that time, the decision to terminate had been taken by Cephalon, thus
Teva did not acquire Cephalon with an on-going RSZ-for-EoE program in
development.183 Teva did not restart the program. From 2011 to 2017, however,
Defendants prioritized and expended substantial resources to develop RSZ for EA,
under the brand name CINQAIR, securing two milestones, which resulted in a $200
million Development Milestone payment to Ception stockholders. The FDA’s
approval, however, came with two caveats, (i) CINQAIR was to be administered
intravenously while other competitors provided dosages available in a more
convenient form, and (ii) a “black box” warning had to be affixed on every bottle of
RSZ. These caveats, in turn, affected the commercial success of CINQAIR. After
the commercialization of RSZ for EA proved to be unsuccessful, Teva turned its
attention to RSZ for EoE. But, after conducting a third-party review and assessing
the commercial profile of RSZ from the EA indication, Teva declined to restart
developing RSZ for EoE.
183
The parties are in dispute on when termination occurred, but I find that termination occurred
before Teva acquired Cephalon. JX118 (stating the EoE program was terminated not put on hold);
JX90 at 55 (stating that Teva did not have the right to be involved in decisions before closing);
Trial Tr. (Shah) 912:9–18 (stating due diligence was performed on RSZ for EA because EoE had
been discontinued).
38
I find that this prioritization objectively commercially reasonable because the
record evinces that the EA indication was promising clinically and commercially.
These facts, in comparison to the situation with EoE, which at the time had not
secured regulatory approval and for which there was no clear path for regulatory
approval, support Teva’s decision to prioritize a more promising indication to
achieve marketable success. I also find that the success of the first indication
supports a finding that Teva’s decision to decline to restart development was
objectively commercially reasonable. In these particular circumstances, it was
commercially reasonable for Teva to decline to invest substantial resources
developing an indication like EoE, given the regulatory hurdles facing that indication
and the likely restrictions—black box warning and infusion administration—that
made EoE unlikely to be a commercial success. Since pursuit of the development
of the EoE indication was not commercially reasonable, Teva’s actions fell within
its “complete” discretion over development of RSZ.184
Finally, Plaintiffs argue that Teva’s inaction, for six years, to pursue or even
evaluate development of RSZ for EoE, is itself commercially unreasonable.
Plaintiffs argue that Defendants failed to (1) conduct a “rigorous or analytical review
(2) continue or restart development; (3) budget for or expend any funds on
development; (4) monitor developments or activities of competitors; (5) regularly
184
See ev3, 114 A.3d 541.
39
assess viability of all potential indications annually; and (6) consider Ception
stockholders’ and experts’ inquiries. But the burden is on Plaintiffs to demonstrate
that these failures are commercially unreasonable; otherwise, such inaction was
within Defendants’ complete discretion with respect to RSZ. Given the facts as set
out above, I find that Plaintiffs have not met that burden.
III. CONCLUSION
For the foregoing reasons, I find that Defendants used commercially
reasonable efforts to develop RSZ for EoE. The parties should submit a form of
order consistent with this Memorandum Opinion.
40