The Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery awarding $45 million for a milestone payment even though the buyer had stopped efforts to develop and commercialize the drug, demonstrating that Delaware will enforce parties' negotiated bargains.1
The case arose from Shire Pharmaceuticals' 2012 acquisition of FerroKin Biosciences and its experimental iron chelation drug, deferitazole. As part of the acquisition, Shire agreed to make a $45 million milestone payment to the former FerroKin equity holders upon the initiation of Phase III clinical trials. Importantly, the purchase agreement contained a provision that deemed the milestone achieved as of December 31, 2015, regardless of whether Phase III clinical trials had actually been initiated by that date. However, Shire was not obligated to make the milestone payment if it failed to initiate Phase III clinical trials by that date "as a result of a Fundamental Circumstance," which the parties defined as a circumstance in which material safety or efficacy concerns made it impracticable to produce, sell or to obtain regulatory approval for the drug.
Deferitazole did not actually enter Phase III clinical trials by December 31, 2015, and Shire refused to pay the $45 million dollar milestone payment. In support of its argument that a Fundamental Circumstance relieved it of its obligation, Shire cited to safety concerns leading to a full clinical hold instituted by the FDA and efficacy concerns. However, the Court's decision turned on the fact that before Shire learned about the safety and efficacy concerns, it had already made irreversible business decisions that would cause it to miss entering the Phase III clinical trials by December 31, 2015. Specifically, Shire (i) chose to switch from a once-daily to a twice-daily dosing regimen in an upcoming drug study; and (ii) elected to delay the start of one necessary study until the completion of a separate, ongoing study. These development decisions caused Shire to internally acknowledge that deferitazole would not be ready to enter Phase III clinical trials until May of 2016, which was after the milestone deadline. Thus, the Court held that, even assuming the safety and efficacy concerns amounted to a Fundamental Circumstance, Shire's failure to initiate Phase III clinical trials by December 31, 2015 was not "as a result of" any alleged Fundamental Circumstance but, rather, was "'as a result of' a series of routine drug development delays and financially motivated business decisions" that it made prior to learning of the safety and efficacy concerns. Because of this, Shire was liable for the entire $45 million milestone payment, plus costs and attorneys' fees as provided for in the parties' agreement.
On appeal, Shire argued that awarding the $45 million milestone payment in the face of deferitazole's failure to complete development and achieve regulatory approval amounted to a "windfall" to plaintiff and claimed that it should not have to pay a milestone payment for a failed drug candidate. The Delaware Supreme Court disagreed, with Chief Justice Seitz commenting during oral argument that "[i]t seems like there's no windfall or unfairness here because that's what the parties agreed to. What they seem to have bargained for no matter what the circumstances, was a certainty of payment" under the terms of the purchase agreement. Accordingly, the Delaware Supreme Court affirmed the award against Shire.
The Takeaway. A court will not simply excuse a party from a milestone payment it bargained to make, even if the buyer ceases development of the drug or product. Further, courts will carefully analyze the factual circumstances for why certain milestones were not achieved to ascertain the real reason for the delay or failure. During the development process, parties should be cognizant that their own internal decision-making will be scrutinized and that subsequent safety or efficacy concerns may not absolve their obligation to make a milestone payment if they were already on a course to miss their targets.
Footnotes
1 Shire US Holdings, Inc. v. S'holder Representative Servs. LLC, 2021 WL 5370065, at *1 (Del. Nov. 17, 2021).
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