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The Delaware Court of Chancery on Wednesday ruled that drugmaker Gilead Sciences Inc. can avoid a $50 million milestone payment to shareholders of a company it bought in 2011, finding that a drug it acquired from Calistoga Pharmaceuticals Inc. did not win the kind of broad approval needed to trigger the post-closing bonus.

In a 78-page memorandum opinion, Chancellor Andre G. Bouchard rejected Shareholder Representative Services’ argument that a European regulatory body had granted “disease-level” approval for Zydelig, used to treat patients suffering from some types of blood cancers.

Instead, Bouchard said, the trial record was “replete with evidence” that the European Commission had approved the drug only for a small “subpopulation” of patients with rare genetic mutations also suffering from chronic lymphocytic leukemia.

“Gilead did not seek approval of [Zydelig] as a first-line treatment for the disease CLL, and the record shows that it did not receive such an approval,” Bouchard wrote.

The ruling allowed Gilead, a Delaware company based in California, to avoid paying the last of three milestone bonuses negotiated during the merger.

As a part of the $375 million purchase, Gilead had agreed to pay Calistoga shareholders $175 million if the company’s premier cancer drug secured specific regulatory approvals. In 2014, Gilead made two bonus payments totaling $125 million after the U.S. Food and Drug Administration approved Zydelig for CLL patients who relapsed after using other drugs. However, the company refused SRS’s demand to hand over the final installment when European regulators later that year signed off on Zydelig’s marketing for patients with mutations that made tumors particularly resistant to existing treatment.

SRS, representing Calistoga stockholders’ remaining rights, sued in January 2015, asserting a single claim for breach of contract over Gilead’s refusal to pay the third milestone. Gilead countered, seeking a declaration that the European Commission’s approval did not trigger its obligation. The European approval, the company argued, targeted just a handful of patients and not the wider swath of cancer sufferers contemplated in the agreement.

Bouchard’s opinion turned primarily on the meaning of one word that appeared just five times in the 84-page merger agreement. In court filings, both sides disagreed over the meaning of “indication,” a term known to have multiple meanings in the pharmaceutical industry.

While Gilead equated the term with “disease,” SRS said it referred more broadly to a label that describes “the particular patient population” suffering from a disease, which a drug can treat.

Noting that the word was ambiguous, Bouchard turned mostly to the parties’ extensive negotiating history to determine its meaning. SRS, he said, had offered “little concrete evidence” to support its position, and he noted that even its key witnesses had waffled early on as to whether the European Commission’s approval cleared a path to the third milestone.

“In sum, the drafting history of the merger agreement shows that the parties always were talking about regulatory approval of [Zydelig] for a disease when they were negotiating over the milestone payments,” he said. “By contrast, the drafting history does not reflect that the parties were discussing regulatory labels when negotiating the triggers for the milestone payments.”

As a result, the third milestone could only be triggered by disease-level approval. The European approval, he said, fell short of qualifying as a first-line CLL treatment because it addressed only the “dire needs of a specific subpopulation” of patients with CLL.

Attorneys from both sides were not immediately available to comment.

SRS was represented by David S. Steuer, Steven Guggenheim, Bradley D. Sorrels, Shannon E. German, Jessica A. Montellese and Evan L. Seite of Wilson Sonsini Goodrich & Rosati.

Gilead was represented by Lisa S. Glasser, Jason Sheasby, Gary N. Frischling and Harry A. Mittleman of Irell & Manella and Brian C. Ralston and Aaron R. Sims of Potter Anderson & Corroon.

The case is captioned Shareholder Representative Services v. Gilead Sciences.

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